Many retirees assume Medicare will cover most of their healthcare expenses, but the reality is far more complicated. While Medicare provides essential coverage, it has significant gaps that can leave retirees facing 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.Here’s what you need to know to prepare.

Medicare Covers a Lot—But Not Everything

Medicare has multiple parts, each covering different healthcare needs:

Part A Hospital Insurance: Covers inpatient hospital stays, skilled nursing facility care, hospice, and limited home healthcare. However, it does not cover long term care or custodial care.
Part B Medical Insurance: Covers doctor visits, outpatient care, preventive services, and durable medical equipment. It does not cover dental, vision, hearing aids, or routine foot care.
Part C Medicare Advantage: Private insurance plans that bundle Parts A and B, often including prescription drugs and extra benefits like dental and vision, but with network restrictions.
Part D Prescription Drug Coverage: Helps cover the cost of prescription drugs but comes with premiums, copays, and formularies that may not include all drugs you need.

Even with these coverages, retirees still face out of pocket expenses for deductibles, copays, and services that Medicare does not cover at all.

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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 their healthcare costs. Fidelity Investments estimates a 65 year old couple retiring in 2024 will need about $165,000 for healthcare expenses alone, excluding long term care. Yet, a common misconception is 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, plus a 20 percent coinsurance for most services.
Prescription Drug Costs: While Part D helps, retirees still pay out of pocket until reaching the catastrophic coverage phase.
Long Term Care: Medicare does not cover long term nursing home stays or in home custodial care. The average cost of a private room in a nursing home is $116,796 per year.
Dental, Vision, and Hearing: Medicare excludes routine dental care, dentures, eye exams, glasses, and hearing aids, leaving retirees to pay out of pocket.

Delaying Medicare Enrollment Can Cost You

If you delay enrolling in Medicare when you are first eligible, you could face permanent penalties and coverage gaps that increase your healthcare costs in retirement. Here’s what you need to know about the consequences of delaying Medicare enrollment.

1. Late Enrollment Penalties Can Add Up

Medicare imposes financial penalties for late enrollment in Part A, Part B, and Part D:

Part A Penalty: Most people qualify for premium-free Part A based on work history. However, if you have to buy it and delay enrollment, your premium increases by 10 percent for twice the number of years you were eligible but didn’t sign up.
Part B Penalty: If you do not enroll in Part B when you are first eligible, you will pay an extra 10 percent for every full 12-month period you go without coverage. This penalty applies for as long as you have Medicare.
Part D Penalty: If you go 63 or more days without creditable prescription drug coverage after becoming eligible, you will pay a permanent penalty of 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.

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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.

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