We all know the importance of healthcare. Even if you’re covered by good employer health insurance, most of us know the high costs of both health insurance and/or doctor or hospital visits in this country.
Since we specialize in working with clients close to or in retirement, Medicare is often a topic of conversation and always a part of our planning process.
Today, I am going to touch on some of the basics of Medicare. I am not a Medicare expert, so I recommend talking to a local Medicare specialist about your specific questions. And of course, I have local specialists I can refer to you, if need be.
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What Does Medicare Cover?
You should expect to have costs for the Medicare insurance itself and cost sharing as you incur medical expenses. This is sometimes a surprise to people. They assume Medicare will be free because of the taxes they have paid all these years.
Medicare works a lot like the health insurance you probably had before you retired, either though the Affordable Care Act or through an employer. As you use your benefits, you will have deductibles, co-insurance, and copays. Medicare will never pay 100% of your medical expenses.
Basic Parts of Medicare
Let’s familiarize ourselves with the basic parts of Medicare. There is Part A, Part B, Medigap, Advantage, and Part D.
Medicare Part A - This hospital insurance is free to most people over age 65 as long as they have worked long enough and paid into the Medicare system or if they are married to someone who has paid into Medicare. Part A is free because it is funded by Medicare payroll tax deductions.
Medicare Part B - This medical insurance provides coverage for doctor and outpatient expenses and costs a monthly fee for participants. Part B coverage is similar to an 80/20 health insurance plan you may have had through an employer.The standard cost of Medicare Part B in 2021 will be $148.50 per month. Those with higher incomes (over $176,000 for a couple) could pay more. The annual deductible for Part B for 2021 will be $203.
Medicare Parts A and B are considered original Medicare. The remaining parts are provided by private insurance companies using rules set by Medicare.
Supplemental, or Medigap, coverage - This additional coverage pays out-of-pocket expenses that Medicare doesn’t cover, including copays, coinsurance, and deductibles, for an additional monthly fee. You pay a little more for that supplemental coverage, but you know exactly what is going to be covered on the back end.
Medicare Advantage Plans (formerly Medicare Part C) - This private insurance plan includes both hospital insurance and medical insurance in one plan. Medicare Advantage plans are typically less expensive than Medicare Part B premiums because Advantage plans work with smaller networks of providers. These plans can also include drug benefits and extras like vision, dental, hearing, and even gym memberships.
Medicare Part D - This optional drug benefit helps cover the cost of prescriptions based on tiers, and there are also copays and deductibles to pay in addition to a monthly fee for Part D. This can be added to Medicare Parts A and B.
What to Expect as You Approach Age 65
You might be wondering when you should start looking into Medicare.
6 months before you turn 65 is a great time to start educating yourself about your Medicare options. The Medicare website at medicare.gov has a lot of information, and there are YouTube channels to help familiarize yourself with Medicare.
Then, your initial Medicare enrollment period begins 3 months before the month you turn 65. At that point you can go on to the Social Security website and enroll in Medicare.
If you are going to be using Medicare as your primary coverage, it is important to enroll as soon as you can. There could be penalties and waiting periods for enrolling in Part B after your initial enrollment period.
Then, while you are waiting for your Medicare card to arrive in the mail, you can talk to a local Medicare insurance agent who will assess your situation and walk you through your options for supplemental coverage and Advantage plans.
Those that have started collecting Social Security prior to age 65 are already in the system and will automatically be enrolled in Medicare at age 65. At that time, their Social Security payment will be reduced by the amount of their Part B Medicare premiums.
Once you are on Social Security, it is mandatory that your Medicare premiums be deducted from your Social Security payment.
If you have not yet begun to collect Social Security payments, you will typically be billed quarterly for Part B premiums. You can also sign up for Medicare Easy Pay to have your premium automatically deducted from your bank account each month until you join Social Security.
Primary Medicare Routes to Take
There are two primary routes you can take with Medicare.
1. Original Medicare plus a Medicare Supplement and Part D
The first route is to stick with original Medicare (Parts A and B) where you get your benefits from the federal government.
Then you can add on a Medicare supplement through a private insurance company to cover most of your out of pocket expenses. Medicare Part B will cover 80% of eligible medical expenses and the remaining 20% would be billed to your Medicare supplement company. You pay a little more for that supplemental coverage, but you know exactly what is going to be covered on the back end.
If paying 20% of a $50,000 knee replacement or 20% of 8 weeks of cancer treatment would cause you to go into debt, adding the Medigap Medicare supplement would be well worth it.
Then you can add Medicare Part D, also through a private insurance company, to help pay for medications. Part D plans in 2020 are as low as $10 per month. Even if you have no medications right now, it would be beneficial to pick up that least expensive plan to save yourself from paying a penalty later on, and you will be covered if something happens later in the year and you need to start a medication.
2. Medicare Advantage
The second route is to get your Medicare Parts A & B benefits through a private insurance company that operates a smaller, local network in the area where you live. In this case, you are agreeing to get your medical benefits through a network, which you are probably already used to if you have had an HMO or a PPO insurance plan.
Medicare Advantage plans are generally cheaper because you are working with a network. So instead of having access to 1 million providers on Medicare, you have a smaller, local network, and you are working with an insurance company that negotiates rates with doctors to give you care at a lower cost. So you pay lower premiums, but you also pay for costs along the way in the form of copays.
You can also get prescription drug coverage through your Advantage plan and sometimes other services like vision, dental, hearing, and gym memberships.
Penalties for Medicare Parts B and D
What happens if you don’t enroll in Medicare Parts B or D right away?
Medicare Part B
You don’t have to immediately enroll in Part B coverage when you turn 65 if you already have creditable health coverage, such as through an employer or a spouse’s employer. Retirees working after age 65 and coming off an employer’s insurance plan will have 8 months to sign up for Medicare Part B if they haven’t already done so.
The way these plans are designed, it is important that people pay into the plans to keep them affordable for everyone. If you go more than 12 months without Part B coverage or other creditable coverage, there will be a 10% penalty on top of your Medicare Part B premium for the rest of your life once you do enroll.
The penalty increases by 10% for every 12 months, so if you wait 5 years until age 70 to enroll in Part B, you could pay a 50% penalty on top of your regular Part B premiums for the rest of your life.
In addition to the penalties, you will have to wait to join during an open enrollment period and your coverage may not start until the following July.
They have these penalties so people will join as soon as possible and not wait until they have a health issue to sign up. They don’t want people to game the system.
Medicare Part D
Part D prescription coverage is considered voluntary, but if you don’t have creditable coverage, such as through an employer or VA drug benefits, and you don’t enroll in Part D, there are penalties for signing up later.
The Part D penalty is 1% of the “national base beneficiary premium” ($3,306 in 2021) times the number of months you didn’t have prescription coverage. And that amount is permanently added to your Medicare Part D premiums.
You also may need to wait for an open enrollment period to join a Medicare prescription plan for coverage to start in January.
If you are working past age 65 and have creditable prescription coverage, you will be allowed a 2-month special enrollment period once you do retire to enroll in a Medicare prescription plan without penalties.
Insurance is a transfer of risk. When determining what coverage you need, pay attention to your current medical usage. Also consider your budget for paying the monthly premiums and think about if you would incur debt if tomorrow you were hurt and had to pay a $5,000 medical expense.
You will also want to consider travel. If you are a big traveler, you will probably want to go with original Medicare plus a supplement over a Medicare Advantage plan because the Advantage plan will only provide coverage in your local network.
Of course I recommend clients speak with a local Medicare professional to help them weigh the different options available to them and how those combine with their household financial plan.
Medicare 101: Do You Need All 4 Medicare Parts? from Investopedia
Medicare Basics: What to Expect as You Approach Age 65 from Retirement Starts Today podcast
Boomer Benefits on YouTube