How Much Does Medicare Really Cover? The Truth About Healthcare Costs in Retirement
Many retirees assume that Medicare will cover most of their healthcare expenses, but the reality is more complicated. While Medicare provides essential coverage, it has significant gaps that can leave retirees with unexpected and costly medical bills. If you are planning for retirement, understanding what Medicare actually covers and what it does not is crucial for avoiding financial surprises. Knowing the limits of Medicare helps you prepare for potential out-of-pocket costs and build a more accurate retirement healthcare plan.
Medicare Covers a Lot, But Not Everything
Medicare is made up of several parts, each designed to cover specific healthcare needs during retirement:
Part A Hospital Insurance: Covers inpatient hospital stays, skilled nursing facility care, hospice care, and limited home healthcare. However, it does not cover long-term care or custodial care.
Part B Medical Insurance: Covers doctor visits, outpatient services, preventive care, and durable medical equipment. It does not include dental, vision, hearing aids, or routine foot care.
Part C Medicare Advantage: Offered through private insurance companies, these plans bundle Parts A and B and often include prescription drug coverage. Many also provide additional benefits such as dental and vision, but they typically have provider network restrictions.
Part D Prescription Drug Coverage: Helps pay for prescription medications, but comes with separate premiums, copayments, and drug formularies that may not cover every medication you need.
Even with all these options, retirees still face out-of-pocket costs for deductibles, copays, and services that Medicare does not cover. Understanding these gaps is key to building a healthcare plan that fits your retirement goals.
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The Rising Cost of Healthcare in 2025
Healthcare costs are projected to increase at their highest rate in 13 years, with commercial healthcare spending expected to rise 8.0% for group plans and 7.5% for individual plans in 2025. Factors driving this trend include inflation, rising prescription drug costs, and increased behavioral health utilization. With fewer cost-saving measures in place, both providers and patients will feel the financial strain.
Hidden Costs of Medicare
Many retirees underestimate how much healthcare will truly cost during retirement. According to Fidelity Investments, a 65-year-old couple retiring in 2024 will need approximately $165,000 for healthcare expenses alone, not including long-term care. Yet a common misconception persists that Medicare covers all medical needs in retirement.
Here is where Medicare falls short:
High Out of Pocket Costs: Medicare Part B requires a monthly premium starting at $185 per month in 2025, along with a 20 percent coinsurance for most services. These recurring expenses can add up quickly over time.
Prescription Drug Costs: While Medicare Part D helps reduce prescription costs, retirees must still pay out of pocket until they reach the catastrophic coverage phase, when only limited cost-sharing applies.
Long Term Care: Medicare does not cover long-term nursing home stays or in-home custodial care. The average cost of a private nursing home room is around $116,796 per year, which can rapidly deplete retirement savings if left unplanned.
Dental, Vision, and Hearing: Medicare excludes routine dental care, dentures, eye exams, glasses, and hearing aids. These essential services are often paid entirely out of pocket by retirees.
Delaying Medicare Enrollment Can Cost You
If you delay enrolling in Medicare when you first become eligible, you could face permanent penalties and significant coverage gaps that increase your healthcare costs in retirement. Understanding these rules early can help you avoid unnecessary expenses and protect your long-term financial health.
1. Late Enrollment Penalties Can Add Up
Medicare imposes financial penalties for late enrollment in Parts A, B, and D. These penalties are permanent and continue for as long as you have Medicare coverage.
Part A Penalty: Most people qualify for premium-free Part A based on their work history. However, if you need to purchase it and delay enrollment, your premium increases by 10 percent for twice the number of years you were eligible but did not sign up.
Part B Penalty: If you fail to enroll in Part B when first eligible, your monthly premium increases by 10 percent for every full 12-month period you go without coverage. This penalty remains in effect for life.
Part D Penalty: If you go 63 or more consecutive days without creditable prescription drug coverage after becoming eligible, you will pay a permanent penalty equal to 1 percent of the national base premium for each month you delayed enrollment.
2. Limited Enrollment Periods Mean Delays in Coverage
Medicare has specific enrollment periods, and if you miss them, you might have to wait months before your coverage starts:
The Initial Enrollment Period (IEP) is a seven-month window that includes the three months before, the month of, and the three months after your 65th birthday. If you miss this, you may have to wait until the General Enrollment Period (GEP) (January 1–March 31), with coverage starting July 1.
If you or your spouse have employer coverage, you may qualify for a Special Enrollment Period (SEP) to sign up later without penalties. However, COBRA, retiree coverage, and VA benefits do not count as creditable coverage to delay Medicare without penalties.
3. Delaying Medicare Can Lead to Higher Out-of-Pocket Costs
If you delay Medicare, you may have to rely on expensive private insurance or pay for medical expenses out of pocket. Key risks include:
Higher premiums and deductibles once you do enroll.
Gaps in coverage, leaving you vulnerable to unexpected medical bills.
Employer coverage may not pay for your healthcare expenses if you are eligible for Medicare but did not sign up.
Long-Term Care Isn’t Covered by Medicare
A common misconception is that Medicare covers long-term care, but it does not. If you need extended care in a nursing home, assisted living facility, or in-home custodial care, you will likely have to pay out of pocket or rely on long-term care insurance or Medicaid.
1. What Medicare Covers for Skilled Nursing and Rehabilitation
Medicare only covers short-term skilled nursing facility (SNF) care under specific conditions:
You must have had a hospital stay of at least three days.
You must require skilled nursing or therapy services (not just assistance with daily activities).
Coverage is limited to 100 days per benefit period, with full coverage for only the first 20 days. After that, you pay a daily copayment for days 21–100. Beyond 100 days, Medicare pays nothing.
2. Medicare Does Not Cover Custodial Care
Long-term care—also called custodial care—includes assistance with daily activities like bathing, dressing, eating, and mobility. Since this type of care is not medical in nature, Medicare does not cover:
Nursing home stays beyond 100 days.
Assisted living facility costs.
In-home personal care unless skilled medical services are also required.
3. How to Pay for Long-Term Care
Since Medicare does not cover long-term care, you need alternative options:
Long-Term Care Insurance: Can help cover the cost of home care, assisted living, and nursing homes, but premiums increase with age.
Medicaid: A state and federally funded program that covers long-term care, but you must meet strict income and asset limits.
Personal Savings: Many retirees must pay out of pocket, which can quickly deplete retirement funds. The average cost of a private nursing home room is $116,796 per year.
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How to Prepare for Medicare Gaps
Given these limitations, retirees need a strategy to manage healthcare costs. Here are some options:
Consider Medigap Supplemental Insurance
Medigap policies help cover Medicare out of pocket costs such as deductibles and copays.
Policies vary in coverage, so comparing plans is essential.
Cannot be used with Medicare Advantage.
Look into a Health Savings Account HSA
If you have a high deductible health plan before retirement, you can save tax free for future medical expenses.
At age 65, HSA funds can be used for Medicare premiums, long term care, and out of pocket medical costs.
Note that once you are enrolled in Medicare, you generally cannot contribute new funds to a HSA.
Evaluate Long Term Care Insurance
Covers nursing home, assisted living, or in home care.
Buying a policy before retirement typically in your 50s or early 60s results in lower premiums.
Use Telehealth and Preventive Services
Medicare covers telehealth visits through March 2025, reducing costs for routine medical checkups.
Taking advantage of preventive care such as flu shots and cancer screenings can help detect health issues early and lower long term expenses.
Plan for Unexpected Costs
Emergency funds for medical expenses can prevent financial strain.
Consider setting aside six months to a years worth of living expenses.
The Bottom Line
Medicare is an important part of retirement healthcare, but it does not eliminate out of pocket costs. Understanding its limitations and preparing accordingly can help retirees manage their healthcare expenses without jeopardizing their financial security. By exploring Medigap, HSAs, long term care insurance, and preventive healthcare, you can reduce the financial risks associated with medical costs in retirement.
Planning ahead ensures you are not caught off guard by unexpected medical expenses because when it comes to retirement, hoping Medicare will cover everything simply is not enough.
Reference
PwC. (2025). Medical Cost Trend: Behind the Numbers 2025. Retrieved from https://www.pwc.com/us/en/industries/health-industries/library/assets/pwc-behind-the-numbers-2025.pdf.
Investopedia. (n.d.). Retirement Health Care Costs: How to Prepare. Retrieved from https://www.investopedia.com/retirement-health-care-costs-how-to-prepare-8601902.
Medicare.gov. (n.d.). Medicare & You. Retrieved from https://www.medicare.gov/publications/10050-medicare-and-you0.pdf
Schwab. (n.d.). Health Care Costs in Retirement: Are You Prepared? Retrieved from https://www.schwab.com/learn/story/health-care-costs-retirement-are-you-prepared?fbclid=IwY2xjawIkGI1leHRuA2FlbQIxMAABHYxu38AuUOdD912gE2OiWnEdVH8f1z-c38uGbLWjnSo19W2CScKmsE-DWg_aem_E8OPk321ouC9Xoq3t4CxSA.
