How to manage out-of-pocket costs in Medicare

A primer on Medigap and cost-sharing risk in Medicare Advantage

Medicare can cover most of your health care needs, but it doesn’t pay for everything. And one of the most significant financial challenges to watch out for are the out-of-pocket costs you can face aside from monthly premiums — including deductibles and other types of cost sharing.

Just how much you’ll pay, and when, depends on the type of Medicare enrollment that you choose: traditional Medicare or Medicare Advantage.

There’s no built-in annual out-of-pocket limit in traditional Medicare for outpatient and hospitalization services, but protection is available from supplemental insurance coverage. Some retirees get this from former employers, unions or Medicaid, but most often it means purchasing privately-offered Medigap supplemental plans.

The story is different in Medicare Advantage. These plans do come with out-of-pocket limits — but they can be high, ranging from roughly $5,000 to $9,000 annually depending on the services you use. What’s more, the out-of-pocket protection varies among plans. When serious medical conditions arise, out-of-pocket costs can be a significant financial hit or make it difficult to afford care altogether. (Starting this year, the Inflation Reduction Act of 2022 imposes a $2,000 cap on total out-of-pocket spending for drugs covered by Part D plans).

It’s important to understand the out-of-pocket trade-offs between traditional Medicare and Medicare Advantage. In my latest Retiring column for the New York Times (gift link), I examine how Medigap policies work and how to buy them — and how to evaluate what you might pay out-of-pocket in Advantage plans.

Um, no - there are not 150-year old Social Security recipients

The teenage DOGE geniuses that claimed to have found “150-year-old” Social Security fraudsters don’t seem to understand the antiquated software (COBOL) that still runs the SSA systems (unfortunately). Commenters on Paul Krugman’s Substack figured it out, though:

The fact that the SSA still runs on COBOL is just one example of the infrastructure decay that Congress has inflicted on the agency through years of budget starvation. If the current pattern of firings by the Trump administration continue, the agency’s ability to function will deteriorate further.

Krugman, a Nobel Prize-winning economist, also warns about tariffs, inflation and Treasury Inflation-Protected Securities (TIPS). The economy is flashing signs that inflation is going to heat up significantly - the Consumer Price Index rose during January at the fastest pace in 18 months. Normally, high inflation is a good reason to include TIPS in a retirement portfolio, because they come with built-in inflation protection.

But perhaps not this time around, according to Krugman:

But let’s be more precise here: TIPS protect you against future inflation that the U.S. government admits is happening. That has never been an issue in the past, because despite claims from right-wing conspiracy theorists, America has never cooked its economic books.

But there’s a first time for everything.

The Bureau of Labor Statistics - part of the Department of Labor - has long been regarded as a trustworthy source of economic data. But in recent years it’s been the victim of cook-the-book conspiracy theories. Krugman has long worried a populist government might corrupt the economic data the government it produces:

There’s also another thing populist regimes do when inflation runs hot: lie about it. While Trump isn’t a “populist” in the sense of caring about the working class, he does have a populist-style disdain for expertise. And one way to deal with bad economic numbers is to order the statistical agencies to produce better numbers. Most famously, in 2014 Argentina admitted that it had been deliberately understating inflation for the past 7 years.

Anyone who says “But they wouldn’t do that!” has clearly been living under a rock the past few weeks. We’re already seeing efforts to suppress bad news about infectious disease. Why assume that the same can’t happen to bad news about inflation? I’m just waiting for the day when Elon Musk declares that everyone who works at the Bureau of Labor Statistics is a Marxist who hates America.

Hence Krugman’s worry about TIPS. If inflation is under-reported, the TIPS market will fail to function properly. What happens then? All bets are off.

Of course, doctored inflation data also would impact the annual Social Security cost-of-living adjustment (COLA). The COLA is calculated by averaging together changes in the Consumer Price Index for the third quarter. There’s a good chance we could be in a hot inflation environment during that time this year.

What I’m reading

It’s a money game to them: A son takes on UnitedHealth over Medicare Advantage for denying care to his father. . . The 401(k) has reached a tipping point in its takeover of American retirement . . . U.S. health department condemns private equity firms for role in declining healthcare access . . .Nursing homes owe more to their residents . . . Considering RV travel in retirement? Here’s a first-hand account . . . Back up everything, even if Elon Musk isn’t looking at it . . . How to avoid hidden tax traps if you need to raid your retirement accounts.