The Inflation Reduction Act's impact on Medicare benefits

Health care is oftentimes the largest expense incurred by retirees. Therefore, decisions regarding when to stop working, at what age to claim Social Security benefits and how to generate ongoing income can all factor into how you will pay your health care expenses.

A recent study estimated that an average retired couple aged 65 in 2022 may require approximately $315,000 saved (after taxes) in order to cover their health care costs in retirement - and this figure does not include paying for potential long-term care needs. (These could be in excess of $100,000 per year, depending on the type of care you need and how long it is required.)

Even as a Medicare beneficiary, you could still find that you have some substantial out-of-pocket health care expense responsibilities, such as:

• Deductibles, copayments and coinsurance costs
• Monthly premiums for Medicare Part B, Part D and Medicare Advantage (including added premium cost if you obtain coverage after your enrollment “window” has passed)
• Medicare supplement insurance premiums
• Nursing home, assisted care and home health care services

So, in many ways, your health care needs can impact your financial security in the future. With that in mind, it is best to be prepared. This includes knowing where you could curb some of your costs and how to pay for other potential health care related expenses in the future without taking money away from their originally intended purpose.

For instance, the Inflation Reduction Act can save money for Medicare enrollees by improving access to affordable treatments, as well as by strengthening the overall Medicare program. As an example, the benefits included in the Inflation Reduction Act can be a game changer for people who have health issues that require drug intervention. The first step is to understand how Medicare works and what each part of the program covers.

Medicare came about as a part of the Social Security Act in 1965. This federal health insurance for people aged 65 or older (and some who are under 65 and qualify due to certain health conditions) offers a wide range of benefits.

The original Medicare program included Part A for hospital insurance and Part B for medical insurance. Throughout the years, though, there have been numerous changes made to Medicare and its coverage.

Today, the program consists of the following:

• Medicare Part A - Medicare Part A helps to cover the cost of inpatient care in hospitals as well as some nursing home facility expenses. This portion of Medicare may also provide benefits for home health care needs and hospice care services.


• Medicare Part B - Medicare Part B covers medical insurance for items such as services from doctors and other health care providers, outpatient care, home health care, durable medical equipment (like walkers, wheelchairs and hospital beds) and some preventive services like vaccines and annual wellness visits. Because the program began with just Parts A and B, these two coverage options together are often referred to as Original Medicare.


• Medicare Part C (i.e., Medicare Advantage) - In lieu of selecting Original Medicare for your health care coverage, you could instead choose a Medicare Advantage Plan. These plans are also referred to as Medicare Part C. Medicare Advantage plans are offered through insurance companies that are approved to sell them. Many Medicare Advantage plans offer coverage for items that are not provided through Medicare Part A or Part B, such as dental and/or vision insurance. They may also include prescription drug benefits. However, these plans may also work in a similar manner as Health Maintenance Organizations (HMOs) or Preferred Provider Organizations (PPOs), which may require you to only use medical professional in a specific network. You may also need to obtain a referral before seeing a specialist if you have a Medicare Advantage, or Medicare Part C, plan.


• Medicare Part D - Medicare Part D covers costs for prescription medications. You can purchase a Medicare prescription drug plan through insurance companies that offer them. The items that are covered - along with the premium cost - can differ from one insurer to another. So, it is important that you do some comparison shopping before you commit to a Medicare Part D policy. Many Medicare beneficiaries who have Original Medicare coverage (Medicare Part A and Part B) will also obtain Medicare Part D for prescription drug benefits.

Those who are enrolled in Original Medicare (i.e., Medicare Parts A and B) may also have the opportunity to purchase a Medicare Supplement insurance plan. These plans can pay for some of the out-of-pocket costs or gaps in Medicare's coverage, such as various copayments and deductibles. Therefore, Medicare Supplement insurance is often referred to as Medigap.

As of 2022, there were 10 Medigap plans to choose from. Based on the plan you choose, this supplementary medical insurance can help you reduce your costs by paying for items like:

• Medicare Part A coinsurance
• Medicare Part B coinsurance or copayment
• Skilled nursing facility coinsurance
• Medicare Part A deductible
• Medicare Part B deductible
• Foreign travel emergency costs

The Inflation Reduction Act was signed into law on Aug. 16, 2022. This legislation was designed in part to help older Americans and retirees pay for health care costs that have risen due to inflation.

Prior to the passage of the Inflation Reduction Act, more than 5 million Medicare enrollees struggled to afford their prescription medications. In some cases, this could mean having to choose between buying food or medicine - but not both.

Retirees who are on a fixed income are oftentimes more likely to skip necessary medication due to the high cost. But the Inflation Reduction Act has made some changes to Medicare - some effective in early 2023 - so that many of these individuals can spend less on their necessary prescription drugs.

So, what can this new law mean for your financial future?

First, the Inflation Reduction Act could save money for those who have Medicare coverage. It can do so by improving access to affordable medical treatments, while at the same time, strengthening the Medicare program.

There are several areas where a significant amount of savings may be seen, such as:

• Lower costs for prescription medications
• Improved Medicare Part D prescription drug coverage
• Negotiated prices for medications
• Better access to vaccines for Medicare beneficiaries

Medicare can become stronger for current and future beneficiaries due to the Inflation Reduction Act, because this legislation makes health care more accessible, equitable and affordable.

The provisions of the Inflation Reduction Act apply to Original Medicare - as well as stand-alone Medicare Part D coverage. In addition, all Medicare Advantage (i.e., Medicare Part C) plans that offer prescription drug coverage have enhanced benefits effective Jan. 1, 2023.

While saving money on prescription medications and health care items and services can help to keep your retirement more financially secure, there are some other ways that you could also combat the erosion of your income and assets due to future inflation. One way is to enhance your incoming cash flow.

In the past, many people relied on only three sources of income in retirement. These included cash flow from:

• Employer-sponsored defined benefit pensions
• Social Security
• Interest/dividends/portfolio drawdowns from personal savings and investments

Although many companies have done away with the traditional pension plan, there are still some employees and retirees who have access to income from this source. The way in which you receive income from a defined benefit pension can often depend on the choices that you make.

For example, many people choose the single-life option. This pays a regular income stream to the worker/retiree for the remainder of their lifetime. But, while this option typically pays out a higher dollar amount, the income will usually stop upon the recipient's death - and this can leave a surviving spouse with a substantial drop in their future income stream.

Therefore, it is essential to review all of the income payout options that are available through a defined benefit pension plan before you make a commitment. You should also consider viable income replacement strategies if you and/or your spouse may be eligible for this type of retirement plan.

Social Security is another income generator for many retirees. The amount of income you receive from this source will depend on your employment earnings, as well as when you file for benefits. For instance, you will receive the total amount you are eligible for if you claim Social Security at your full retirement age. This can be between age 65 and 67, based on the year you were born.

Each year, Social Security recipients will typically receive a cost-of-living adjustment, or increase in their benefits in order to help keep pace with inflation. (Note, however, that Social Security cost-of-living increases are not guaranteed.) The amount of the increase can also fluctuate, based on the prior year's inflation rate.

Social Security Cost-of-Living Adjustments from 1975 to 2021

Personal savings and investments may also be used for generating retirement income - and if this is the case, you need to ensure that the amount of money you access rises accordingly with your future expenses and inflation.

Many people purchase annuities to supplement their income in retirement. These flexible financial vehicles are designed for paying out a regular amount of cash flow, either for a set time period - such as 10 or 20 years - or for the remainder of your lifetime, regardless of how long that may be. It is critical that you understand how to help protect yourself from inflation if you are depending on an annuity for a significant portion of the total.

The importance of annuities during inflation can come from a number of areas, such as:

• Providing a reliable, ongoing stream of income for retirees - possibly even cash flow that continues for life
• The opportunity to increase the amount of income from annuities over time

Knowing that an annuity will continue to pay you a steady stream of income - sometimes referred to as an income “floor” - you may be able to take more risk (and in turn, generate higher returns) with your other assets so that your purchasing power continues to rise going forward. (But if your other investments incur losses, the annuity can still ensure that you have at least some amount of income coming in regularly.)

Depending on the annuity, you may also have the option to add an inflation rider. This option will automatically increase the amount of income that is generated, based on certain factors, such as the Consumer Price Index.

The good news with regard to annuities is that this protected income will continue to flow in, regardless of what is happening in the stock market or even in the overall economy. This, in turn, can allow you to focus on other important aspects of retirement, such as spending time with loved ones.

Given its many options, choosing the right Medicare plan can be challenging. Like most other financial and health care coverage-related tools, though, there isn't just one single strategy that is best for everyone across the board. With that in mind, you should first determine what your particular needs are before you make a commitment to any type of plan.