Medicare Part D risks happen because, although enrolling in the program is meant to alleviate the drain increasing drug costs can be on your retirement savings, it’s not a perfect solution. For some retirees who develop serious health conditions, it could be more of a harm than a help. If you’re newly retired or approaching retirement, here’s what you need to know about how Medicare Part D can affect your net worth.
Medicare Part D Risk: It May Not Cover Every Drug
Healthcare can be an expensive proposition for aging Americans, particularly where prescription medications are concerned. The Bureau of Labor Statistics estimates that seniors aged 65 to 74 spend an average of 12% of their household income on healthcare each year. According to data from the Truveris National Drug Index reported by the American Pharmacists Association, prescription drug prices rose by 8.77% in 2016 – and over the past three years, the average annual price increases amounted to 9.98%.
Medicare Part D plans are offered by individual insurers. Each has its own list of medications that are and aren’t covered. Certain types of drugs, including medications used to treat cancer, may be excluded from Part D coverage. If you have Medicare Part A, these drugs may be covered if you’re being treated on an inpatient basis. You could also use Medicare Part B coverage to pay for the cost of these medications if they’re not self-administered, but enrollment in Part B is optional.
Retirees who are still covered by an employer’s health insurance or another supplemental policy may choose to delay Part B enrollment. That means they’d be responsible for paying for some of their drug costs out of pocket unless the medications are administered as part of an inpatient hospital stay. (For more, see Medicare 101: Do You Need All 4 Parts?)
High-Cost Drugs and the Doughnut Hole
One of the most unfortunate aspects of Medicare Part D for retirees is the dreaded doughnut hole. This is essentially a gap in your Part D coverage in which you’re responsible for paying your prescription drug expenses directly. It’s only once you hit the annual spending limit that you reach your plan’s catastrophic coverage level, which causes Medicare to start picking up the cost again.
The amount of time you’re forced to spend in the doughnut hole ultimately depends on the amount of your annual premium and the cost of the medications you’re taking. For example, let’s assume that you’re undergoing treatment for cancer and your doctor prescribes a pricey medication that’s going to cost you approximately $5,000 a month. You enroll in a Medicare Part D plan during open enrollment, with coverage beginning in January 2018. You have a $405 deductible and a $33.60 monthly premium.
Because the medication is so expensive, you would enter the doughnut hole in January and emerge from it in early February, but you’d still be responsible for paying approximately $5,902 for the year, including your premium. If you’re taking multiple medications, the out-of-pocket costs can climb even higher, further eroding your savings. (For more, see Getting Through the Medicare Part D Maze.)
The initial enrollment period for Medicare Part D generally begins the year you turn 65, although you may be eligible earlier if you have a disability. If you wait to enroll, however, you could be subject to a penalty that would increase the annual cost of coverage. The penalty rate is 1% of the national base beneficiary premium, which is set to drop from from an average of $34.70 to $33.50 beginning in 2018, assessed for each month that you go without Medicare Part D coverage. The longer you put off enrolling, the more you’ll be required to pay once you’re covered. Again, that means your bottom line takes the hit.
You can avoid the penalty if you still have health insurance from a current or former employer or other "credible" source. Click here for details from the Medicare website.
The Bottom Line
Getting around the various pitfalls of Medicare Part D can be difficult. Implementing a plan around these obstacles before you reach retirement can help you safeguard your assets. Contributing to a health savings account, for instance, is one way to anticipate prescription drug costs that may not be covered by Part D (see How to Use Your HSA for Retirement). The better prepared you are, the less risk you run of having to spend down your wealth in order to qualify for Medicaid.