Understanding Medicare costs and coverage

Health care

Making sense of the various parts of Medicare, what they cover – and often what they do not cover – as well as the costs and co-pays you are responsible for, is crucial to managing health care expenses after you turn 65.


Medicare basics

The federal Medicare program represents an important resource to help manage care for Americans age 65 and over. Yet the program is not all-inclusive and contains many cost-sharing provisions such as premiums, deductibles and copays. These can lead to large out-of-pocket surprises for those unfamiliar with the program’s structure and limits. Supplemental insurance can help, but weighing your options requires first understanding the costs and gaps of traditional Medicare (A and B).

Your share of costs

Average annual out-of-pocket expenses1
your share of costs

Coverage, costs and key gaps of traditional Medicare

Part A covers short-term hospitalization, hospice and some home care

  • Required for age 65 and over
  • Spending cap: None
  • Premiums: None
  • Coverage: Limited to 90–150 days per benefit period
  • Deductible: $1,340
  • Copay: 20 percent of the cost of services

Part B covers preventive care for doctor’s visits and outpatient care

  • Premiums: $134–$428 per month (depending on income)
  • Deductible: $183/year
  • Copay: Typically 20 percent of the cost of services

Gaps in Part A and Part B

  • Prolonged hospitalization and long-term care
  • Prescription drugs
  • Dental care and dentures
  • Hearing and vision coverage

Medicare gaps: Which path will you take?

With limits to the scope of traditional Medicare, enrollment in supplemental insurance has become more popular than ever. By understanding the role private insurance may play, you can select the coverage that helps you manage costs, coverage and care as you age. Understanding the choices includes knowledge of two specific paths to coverage.

Path 1Medicare Parts A and B, with options to add Part D and private Medigap coverage
Part A Limited-duration stays in the hospital, hospice, nursing facilities and home care
Part B Supplemental preventive care for doctor’s visits and outpatient services
+ Part D Prescription drug benefit administered by private insurance companies
+ Medigap Supplemental insurance designed to fill some of the gaps of Parts A, B and D
Best fit
if you
  • Don’t mind higher premiums
  • Seek freedom to select doctors and clinics
  • Prefer low out-of-pocket costs
  • Are managing a chronic condition
69% of enrollees choose Medigap or traditional Medicare most with some supplemental coverage2
Path 2Medicare Advantage Plan
Part C Medicate Advantage plans (also called Part C) behave more like employer-sponsored health insurance, combining coverage for hospital stays and preventive and outpatient care in a single plan administered by an insurance company
+ Part D Most plans include optional prescription drug coverage
+ Options Some plans add services for vision, hearing and others
Best fit
if you
  • Prefer a structure like an employer-sponsored plan
  • Are flexible in selecting providers
  • Seek cost-effiency with catastropic coverage
  • Don’t mind copays, deductibles and managing costs
31% of enrollees choose a Medicare Advantage Plan. This number is growing.2

Growth in Medicare premiums

Equally important as understanding the scope of Medicare and coverage gaps is planning for premium expenses. Sparked by a dramatic rise in enrollees and associated expenses, Medicare premiums continue to rise faster than Social Security’s cost-of-living adjustment (COLA). While many existing enrollees are protected from this scenario through the “hold harmless provision,” others like future filers and high income earners will bear the brunt of increased costs for the program.

Bridging the gap: Retiring before 65

When retirement comes early or is unexpected, it raises additional issues to consider. With corporate downsizing, business transitions and other factors, this is increasingly a reality for many older workers.


Leave the workforce
earlier than planned3


Cite health as the
reason for retirement4

When retirement comes early, bridging the gap between employer care and Medicare is important. Several options may be a fit:

Transition to your spouse’s plan

If available, your likely least expensive option is to transition to your spouse’s employer-sponsored plan. Plans generally allow changes outside of open enrollment for a variety of circumstances, such as job loss.

COBRA benefits

COBRA coverage allows you to stay on your existing plan for up to 18 months following your last day of work. This can be expensive, however, as you’ll pay the entire premium – including the employer portion. This can lead to rates that may be four times higher than you are used to paying.

Affordable Care Act (ACA) exchange plans

Depending on your household income, plans on the ACA exchange may be subsidized, which can lead to more cost-effective options, albeit with smaller provider networks that can limit your flexibility. 

Private health insurance

Some retirees opt for private insurance, seeking flexibility in deductibles, provider networks and other factors. The benefit here is the ability to find a plan that works for you, but costs and availability can vary greatly.

IRMAA: Paying a premium for your premiums

Higher-income individuals pay significantly more for Medicare Parts B and D than other enrollees, due to Income-Related Monthly Adjustment Amounts (IRMAA). These adjustments can lead to an additional $370 a month per person in premiums for the exact same coverage. Eligibility is determined annually based on the Modified Adjusted Gross Income reported on your tax return (two years trailing). This makes managing income, including qualified distributions from 401(k)s and IRAs from age 63 on, important as even one dollar above a new threshold triggers the higher rates.

Steep rise in premiums for higher-income earners5

steep rise in premiums
Take action
  • Understand your options and gaps within Medicare and the impact those may have on your care, and renew annually
  • Model health care costs into your retirement plan, including common scenarios such as a knee or hip replacement, chronic illness, and a long-term care event
  • Factor the impact of IRMAA into your income and health care plans

Read more from our RBC Wealth Insights report Taking control of health care in retirement

HealthView Services, 2017.

Medicare Advantage 2016 Spotlight: Enrollment Market Update, Henry J. Kaiser Family Foundation, 2016.

60% of Americans retire earlier than they planned, Newsday, 2016.

Why so many workers retire earlier than planned, CBS News, 2014.

2018 Medicare Parts A & B Premiums and Deductibles Announced, Centers for Medicare & Medicaid Services, 2017.

RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.

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