Medicare And Investment Strategies: Exploring Pre-Payment Options

Medicare is a federal health insurance program for people aged 65 and over, funded through a combination of payroll taxes, general revenues, and premiums paid by beneficiaries. While most Medicare enrollees pay the standard premium amounts for Part B (outpatient care) and Part D (prescription drugs), there are strategies to avoid or minimize surcharges like income-related monthly adjustment amounts (IRMAA). These include focusing on controllable income streams, converting taxable assets to a Roth IRA, managing capital gains, and philanthropic contributions. Understanding these strategies can help individuals manage their healthcare costs and make informed financial decisions.

Medicare Part A, B, C, and D

Medicare is a health insurance program for people aged 65 and over. It is funded by the Centers for Medicare & Medicaid Services (CMS), a federal agency that runs the Medicare Program. There are four distinct types of coverage available: Medicare Parts A, B, C, and D. Each part covers different healthcare-related costs, and they are administered by a mix of CMS and private insurance companies.

Medicare Part A

Medicare Part A, also known as Hospital Insurance, is a basic insurance plan that covers inpatient hospitalization and skilled nursing care. It is offered at a low cost or free of charge to Americans aged 65 and over who have contributed to Social Security through taxes for at least 10 years, or who get retirement benefits from Social Security or the Railroad Retirement Board.

Part A covers:

• Hospital stays deemed necessary by a doctor
• Short-term stays in a skilled nursing facility or nursing home, following a hospital stay
• Home health care services ordered by a doctor, such as physical, occupational, and speech therapies
• Hospice care when doctors certify that the patient is expected to pass away within 6 months

While most people can get Part A without paying a premium, there is a deductible to be paid, after which the patient is responsible for a share of the costs (coinsurance).

Medicare Part B

Medicare Part B, or Medical Insurance, covers medically necessary and preventive services, as well as outpatient and doctor care. This includes:

• Medically necessary services and supplies
• "Durable" medical equipment
• Mental health services
• Getting a second opinion before surgery
• Limited outpatient medications
• Ambulance rides, including some non-emergency trips

Part B requires the payment of a premium, which can increase depending on the patient's income. Typically, the patient also pays 20% of the costs for each medical service (coinsurance).

Medicare Part C

Medicare Part C, or Medicare Advantage, includes the benefits of Parts A and B, and is offered by private insurance companies. It often includes additional coverage, such as:

• Prescription drug benefits (Part D)
• Vision and dental coverage
• Health and wellness programs

Medicare Advantage plans have smaller networks of doctors and hospitals than Original Medicare, and people in rural areas may have fewer plans to choose from.

Medicare Part D

Medicare Part D offers coverage for prescription drugs, with the specific prescriptions covered depending on the chosen plan. All Part D plans must offer a range of commonly used prescription drugs, as well as more specialized medications like cancer drugs and insulin.

Part D is offered by private insurance companies, and the costs vary depending on the chosen plan.

How to avoid extra costs

Medicare is funded by two trust fund accounts held by the U.S. Treasury. These funds come from payroll taxes, income taxes on Social Security benefits, and interest earned on trust fund investments. While Medicare Part A is free for most people, there are additional costs for Medicare Parts B and D, which cover medical insurance and prescription drugs, respectively.

• Focus on what you can control: Plan ahead and be mindful of where your income is coming from. Keep your income below the income-related monthly adjustment amounts (IRMAA) brackets, which are based on your modified adjusted gross income. Remember that the IRMAA determination is typically based on your tax return from two years prior, so if your income has dropped since then, you can appeal the decision by providing proof of a "life-changing event" such as retirement or the death of a spouse.
• Consider converting to Roth IRA accounts: Move your nest egg to a Roth IRA to avoid paying taxes on distributions later. While you'll pay taxes upfront on the conversion, qualified withdrawals from a Roth IRA are tax-free. This can help you avoid higher tax brackets or IRMAA brackets in the future. Additionally, Roth IRAs do not have required minimum distributions (RMDs) during the owner's lifetime, so you won't be pushed into a higher tax bracket unexpectedly.
• Keep an eye on capital gains: Evaluate and manage your capital gains, especially from investments in a brokerage account. While you can time the sale of appreciated assets, be cautious with mutual funds as they may surprise you with capital gains and dividends at the end of the year, feeding into the IRMAA calculation. Consider holding exchange-traded funds instead for their tax efficiency. Remember to utilise tax-loss harvesting to offset or reduce any gains.
• Tap your philanthropic side: If you're 70½ or older, consider making a qualified charitable distribution (QCD) directly from your IRA to a qualified charity. This strategy allows you to exclude the transferred amount from your taxable income while supporting a good cause. The maximum annual transfer is $100,000 per person, so a married couple can collectively transfer up to $200,000.
• Explore supplemental coverage: Consider enrolling in a Medicare Supplement Insurance (Medigap) policy or joining a Medicare Advantage Plan. These options provide supplemental coverage and can help protect you from unlimited out-of-pocket expenses.
• Seek state assistance: If you have limited income and resources, look into state programs that can help lower your Medicare costs. Contact your State Medical Assistance (Medicaid) office to learn about cost-saving initiatives, such as Supplemental Security Income, Insure Kids Now, or Medicaid itself.

How to pay for Medicare

Medicare is funded by two trust fund accounts held by the U.S. Treasury. These funds can only be used for Medicare and come from a variety of sources, including:

• Payroll taxes paid by employees, employers, and the self-employed
• Income taxes paid on Social Security benefits
• Interest earned on trust fund investments
• Medicare Part A premiums from people who aren't eligible for premium-free Part A
• Premiums from people enrolled in Medicare Part B and Medicare drug coverage (Part D)

Most people don't get a premium bill from Medicare because their Medicare Part B premium is deducted automatically from their Social Security benefit payment. If you don't receive Social Security benefits, you'll get a premium bill from Medicare.

• Pay online through your secure Medicare account (the fastest way to pay)
• Sign up for Medicare Easy Pay, a free service that automatically deducts your premium payments from your savings or checking account each month
• Pay directly from your savings or checking account through your bank's online bill payment service (some banks charge a service fee)
• Mail your payment to Medicare using a check, money order, credit card, or debit card

All Medicare bills are due on the 25th of the month, and your premium is usually due the same month that you get the bill. If you miss a payment or pay late, your next bill will include a past-due amount.

Who is eligible for Medicare

Medicare is a federal health insurance program for people aged 65 and over. However, there are some circumstances in which you may be eligible for Medicare before turning 65.

Firstly, if you have a disability, you may be able to get Medicare earlier. If you are receiving Social Security disability benefits, you will automatically begin receiving Medicare Parts A and B after 24 months. If you have Lou Gehrig's Disease (ALS), you will receive Medicare Parts A and B as soon as you enrol in Social Security disability benefits.

Secondly, you may be eligible for Medicare before turning 65 if you have End-Stage Renal Disease (ESRD). Individuals are eligible for premium-free Part A if they receive regular dialysis treatments or a kidney transplant, have filed an application for Medicare, and meet one of the following conditions:

• Have worked the required amount of time under Social Security, the Railroad Retirement Board (RRB), or as a government employee.
• Are getting or are eligible for Social Security or RRB benefits.
• Are the spouse or dependent child of a person who has worked the required amount of time under Social Security, the RRB, or as a government employee, or are getting Social Security or RRB benefits.

Part A coverage will begin either the third month after the month in which a regular course of dialysis begins, the first month a regular course of dialysis begins if the individual engages in self-dialysis training, the month of the kidney transplant, or two months before the month of the transplant if the individual was hospitalized during those months in preparation for the transplant.

Finally, you may be eligible for Medicare before turning 65 if you are already receiving retirement benefits from Social Security. If you begin receiving Social Security retirement benefits between age 62 and up to four months before turning 65, you will be automatically enrolled in Medicare Part A and Part B when you turn 65. If you apply for Social Security three months before you turn 65 or later, you can sign up for Medicare when you apply for Social Security.

How is Medicare funded

Medicare is a federal health insurance program that covers nearly all Americans aged 65 and over, as well as some younger Americans with disabilities. As of 2023, there were 66 million individuals enrolled in Medicare, with 11% receiving assistance due to disability and 89% due to age.

The Centers for Medicare & Medicaid Services (CMS), a branch of the Department of Health and Human Services, is the federal agency that runs the Medicare Program. In 2022, Medicare covered over 65 million people, with total expenditures of $905 billion. This money comes from the Medicare Trust Funds, which are held by the U.S. Treasury and can only be used for Medicare.

Medicare is funded through two trust fund accounts: the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund. The HI Trust Fund is financed primarily through payroll taxes paid by employees, employers, and the self-employed. In 2022, payroll taxes accounted for 89% of Part A revenues. The SMI Trust Fund, on the other hand, is funded by premiums from people enrolled in Medicare Part B (Medical Insurance) and Medicare drug coverage (Part D), as well as funds authorized by Congress.

In addition to payroll taxes and premiums, there are other sources of funding for Medicare. These include income taxes paid on Social Security benefits, interest earned on trust fund investments, and Medicare Part A premiums from individuals who aren't eligible for premium-free Part A.

Medicare spending has been increasing over the years due to rising healthcare costs and the aging population. As of 2023, the federal government spent $832 billion on Medicare, and it is projected to reach 4.2% of GDP in 2034.

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