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Medicare, though flawed, is crucial for most retirees

For many, Medicare enrollment is a welcome part of retirement. It's a chance to say good-bye to health-maintenance organizations and their narrow networks of doctors.

"Medicare provides an important layer of protection for a household's net worth if you handle it correctly," said certified financial planner Jae Oh, founder of GH2 Benefits and author of "Maximize Your Medicare: Understanding Medicare, Protecting Your Health, and Minimizing Cost."

"When you turn 65, you as a buyer have unrestricted consumer options," he added.

Elderly retiree medicare
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Even so, many retirees find the Medicare program confusing. Many believe erroneously that it will cover all their health-care costs. In fact, a 65-year-old couple retiring today can expect to spend $394,000 on medical expenses that aren't covered by Medicare, according to HealthView Services' 2015 Retirement Health Care Costs Data Report (to download the report, click here.)

What's more, the Republican majorities in the U.S. House of Representatives and Senate have vowed to make drastic changes to the Medicare program, perhaps turning it into a voucher program or even raising the retiree contribution.

"People need to start becoming aware that their benefits could be cut," said Elaine Floyd, a CFP and director of retirement and life planning with Horsesmouth, which provides training to financial advisors.

Here's a rundown of the costs of Medicare. But be aware that it could change as the new Congress takes up Medicare reform.

The alphabet soup

There are two basic parts of Medicare: Part A and Part B.

If you've accumulated at least 40 work credits, the equivalent of about 10 years of employment, your Part A coverage is taken care of. If that's not the case, then you'll have to buy it separately.

Part B, on the other hand, pays for doctor's visits, lab work and tests. Part B, which is based on income, is paid for via retirees' Social Security checks. For people with income of less than $85,000 (double the amount for married couples filing jointly), premiums cost $134 for 2017. It tops out at $428.60 for those earning more than $214,000.

For prescription drug coverage, retirees must buy a separate plan, known as Medicare Part D. Plans change every year on which drugs are covered and which ones get preferential coverage.

"The drug companies play these games every year," said Peter Murphy, an advisor who conducts workshops on Medicare and Social Security. "That's why it's so important to monitor them closely."

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As valuable as Medicare is, it's by no means comprehensive, said Floyd.

Take Part A, which pays for hospitals and skilled nursing care. It comes with a $1,316 deductible, the amount you must pay before Medicare will pick up the tab. While there is no charge for hospital stays up to 60 days, for stays between 61 and 90 days, you must pay $329. For stays beyond 90 days, the charge is $658 a day.

For Part B, in addition to a deductible of $183, there is also a 20 percent co-insurance.

A supplemental plan can help pay for the gaps.

There are two varieties of supplemental plans. The first is a Medigap policy, a series of standardized plans that are federally mandated. The plans range in from A to N, with Plan F being the most comprehensive and the most expensive.

"If you have Plan F and you go into the hospital, everything is taken care of as long as you use a doctor who accepts Medicare," said Murphy. "You don't have to pay a dime unless you make a phone call or turn on the TV."

Because plans are standardized, Plan F from one insurance company must cover the same thing as any other Plan F policy. But there might be a difference in price. Murphy tells of a client who recently shopped for a Medigap policy, only to turn up one plan costing $106 a month and another $240. Naturally, she chose the cheaper plan.

Because of the cost, Plan F may not be the best option for everyone, Murphy notes.

Cheaper Medicare Advantage plans hook retirees up to their existing HMO networks. Though the networks may be limited, the plans might also throw in extras, such as vision, dental and hearing, prescription drug coverage — and even gym memberships.

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"Every Medicare Advantage plan must have an out-of-pocket maximum," said Oh of GH2 Benefits. "There are plans that cost $0 that will at least put a cap on the out-of-pocket."

But Floyd of Horsesmouth worries that Medicare Advantage has too many unknowns. Contracts must be renewed each year, and they can change drastically from one year to the next.

"Some people do just fine on a Medicare Advantage plan if they like their doctor and their network," she said. "I just worry that the Medicare Advantage market could become unstable and the premiums go up and down, they might narrow their networks, or take benefits away."

The enrollment period for signing up for Medicare starts the three months before you turn 65, the month of your birthday and then the three months after, for a total of seven months. If you fail to enroll during that time, there will be penalties.

Boxed in by penalties

For Part B, the penalty is a 10 percent increase in your premium for each 12-month period you wait beyond your open enrollment period. For example, if you wait for two full years to enroll, your penalty will be 20 percent higher than if you had enrolled when you were first eligible. And that penalty is permanent.

"It actually increases over time," noted Oh of GH2. As Medicare premiums go up each year, the penalty does, too.

And if you miss the window for signing up for a supplemental plan, you could also be looking at big penalties. "You could be denied for the rest of your life," said Floyd, because then insurers have the right to ask medical-related questions.

Medicare is the core of most people's health care in retirement. But it's not a one-stop program. Like anything else related to retirement, it requires a lot of research and constant vigilance to make it work for you.

— By Ilana Polyak, special to CNBC.com