As you approach age 65, there are very important decisions that you will have to make regarding your Medicare coverage. Whether you decide to retire prior to age 65, continue to work past age 65, or have retiree health benefits, you will have to make decisions regarding your Medicare coverage and for many of those decisions you only get one shot at making the right one. The wrong decision can cost you tens of thousands, if not hundreds of thousands of dollars, in retirement via:
- Gaps in your coverage leading to unexpected medical bills
- Over coverage: Paying too much for insurance that you are not using
- Penalties for missing key Medicare enrollment deadlines
The problem is there are a lot of options, deadlines, rules to follow, and with rules there are always exceptions to the rules that you need to be aware of. To make an informed decision you must understand Medicare Part A, Part B, Medicare Supplemental Plans, Medicare Advantage Plans, Part D drug plans, and special exceptions that apply based on the state that you live in.
I urge everyone to read this article whether it’s for you, your parents, grandparents, friends, or other family members. You may be able to help someone that is trying to make these very important healthcare decisions for themselves and it’s very easy to get lost in the Medicare jungle.
Initially my goal was to write a single article to summarize the decisions that retirees face with regard to Medicare. I realized very quickly that the article would end up looking more like a book. So instead I’ve decided to separate the information into series of articles. This first article will provide you with a general overview of Medicare but at the bottom of each article you will find links to other articles that will provide you with more information about Medicare.
With that, let’s go ahead and jump into the first article which will provide you with a broad overview of how Medicare works.
What is Medicare?
Medicare is the government program that provides you with your healthcare benefits after you turn 65. Medicare is run by the Social Security administration, meaning you contact your Social Security office when you have questions or when you apply for benefits.
While there are a lot of decisions that have to be made about your Medicare benefits, all of the benefits are built on the foundation of Medicare Part A and Medicare Part B. Medicare Part A and Part B together are referred to as “Original Medicare”. You will see the term Original Medicare used a lot when reading about your Medicare options.
Medicare Part A
Medicare Part A covers your inpatient health services such as:
2) Nursing home (Limited)
4) Home health services (Limited)
As long as you or your spouse worked for at least 10 years, Medicare Part A is provided to you at no cost. During your working years you paid the Medicare tax of 1.45% as part of your payroll taxes. If you or your spouse did not work 10 years or more then you’re still eligible for Medicare Part A but you will have to pay a monthly premium. There are special eligibility rules for individuals that do not meet the 10 year requirement but are either divorced or widowed.
Medicare Part A Is Not Totally “Free”
While there are no monthly premium payments that need to be made for enrolling in Medicare Part A there are deductibles and coinsurance associated with your Part A coverage. While many of us have encountered deductibles, co-pays, and coinsurance through our employer sponsored health insurance plans, I’m going to pause for a moment just to explain three key terms associated with health insurance plans.
Deductible: This is the amount that you have to pay out of pocket before the insurance starts to pay for your healthcare costs. Example, if you have $1,000 deductible, you have to pay $1,000 out-of-pocket before the insurance will start paying anything for the cost of your care.
Co-pays: Co-pays are those small amounts that you have to pay each time a specific service is rendered such as a doctor’s visit or when you pick up a prescription. Example, you may have to pay $25 every time you visit your primary care doctor.
Coinsurance: This is cost sharing between you and the insurance company that’s expressed as either a percentage or a flat dollar amount. Example, if you have a 20% coinsurance for hospital visits, if the hospital bill is $10,000, you pay $2,000 (20%) and the insurance company will pay the remaining $8,000.
Maximum Out Of Pocket: This the maximum dollar amount that you have to pay each year out of pocket before your health care needs are 100% covered by your Medicare or insurance coverage. If your insurance policy has a $5,000 maximum out of pocket, after you have paid $5,000 out of pocket for that calendar year, you will not be expected to pay anything else for the remainder of the year. Monthly premiums and prescription drug costs do not count toward your maximum out of the pocket threshold.
Medicare Part A Has The Following Cost Sharing Structure For 2019:
As you will see in the table above, while you don’t have a monthly premium for Medicare Part A, if you are hospitalized at some point during the year, you would have to first pay $1,364 out of pocket before Medicare starts to pay for your health care costs. In addition, there is a flat dollar amount co-insurance, which is in addition to the deductible, and that amount varies depending on when the health services are performed during the calendar year.
Medicare Part B
Medicare Part B covers your outpatient health services. These include:
1) Doctors visits
2) Lab work
3) Preventative care (flu shots)
4) Ambulance rides
5) Home health care
6) Chiropractic care (limited)
7) Medical equipment
Unlike Medicare Part A, Medicare Part B has a monthly premium that you will need to pay once you enroll. The amount of the monthly premium is based on your adjusted gross income (AGI). The higher your income, the higher the monthly premium. Below is the 2019 Part B premium table.
As you will see on the chart, the minimum monthly premium is $135.50 per month which translates to $1,626 per year. The income threshold in this chart will vary each year.
Medicare 2-Year Lookback At Income
Medicare automatically looks at your AGI from two years prior to determine your AGI for purposes of Part B premium. In the first few years of receiving Medicare, this 2-year lookback can create an issue. If you retire in 2019, they are going to look at your 2017 tax return which probably has a full year worth of income because you were still working full time back in 2017. If you AGI was $200,000 in 2017, they would charge you more than twice the minimum premium for your Part B coverage.
I have good news. There is an easy fix to this problem. You are able to appeal your income to the Social Security Administration due to a “life changing event”. You can ask Social Security to use your most recent income and you typically have to provide proof to Social Security that you retired in 2019. They will sometimes request a letter signed by your former employer verifying your retirement date and a copy of your final paycheck. You will need to file Form SSA-44 (Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event Form)
How Do You Pay Your Monthly Premiums For Part B?
The Medicare Part B premiums are automatically deducted from your monthly Social Security or Railroad Retirement Benefit payments. If you are 65 and have not yet turned on Social Security, Medicare will invoice you quarterly for those premium amounts and you can pay by check.
Medicare Part B Deductibles and Coinsurance
In addition to the monthly premiums associated with Part B, as with Part A, there are deductibles and coinsurance associated with Part B coverage. Part B carries:
Annual Deductible: $185
Example: In January, your doctor tells you that you need your knee replaced. If the surgery costs $50,000, you would have to pay the first $185 out of pocket, and then you would have to pay an additional $9,963 which is 20% of the remaining amount. Not a favorable situation.
But wait, wouldn’t that be covered under Medicare Part A because it happened at a hospital? Not necessarily because “doctor services” performed in a hospital are typically covered under Medicare Part B.
The Largest Issue with Original Medicare is……..
It unfortunately gets worse. If all you have is Original Medicare (Part A & B), there is no Maximum Out of Pocket Limit. Meaning if you get diagnosed with a rare or terminal disease, and your medical bills for the year are $500,000, you may have to pay out of pocket a large portion of that $500,000.
Also, there is no prescription drug coverage under Original Medicare. So you would have the pay the sticker price of all of your prescription drugs out of pocket with no out of pocket limits.
Medicare Part C, Medicare Part D, and Medicare Supplemental Plans
To help individuals over 65 to manage these large costs associated with Original Medicare, there is:
Medicare Part C – Medicare Advantage Plans
Medicare Part D – Standalone Prescription Drug Plans
Medicare Supplemental Plans (“Medigap plans”)
Who Provides What?
Before I get into what each option provides, let’s first identify who provides what:
Medicare Part A: U.S. Government
Medicare Part B: U.S. Government
Medicare Part C – (Medicare Advantage Plan): Private Insurance Company
Medicare Part D – (Prescription Drug Plan): Private Insurance Company
Medicare Supplemental Plan (“Medigap”): Private Insurance Company
The Most Important Decision
Here is where the road splits. To help retirees manage the cost and coverage gaps not covered by Original Medicare, you have two options:
- Select a Medicare Advantage Plan
- Select a Medicare Supplemental Plan & Medicare Part D Plan
When it comes to your health care decisions in retirement, this is one of the most important decisions that you are going to make. Depending on what state you live in, you may only have one-shot at this decision. It is so vitally important that you fully understand the pros and cons of each option. Unfortunately, as we will detail in other articles, there is big push by the insurance industry to persuade individuals to select the Medicare Advantage option. Both the private insurance company and the insurance agent selling you the policy get paid a lot more when you select a Medicare Advantage Plan instead of a Medicare Supplemental Plan. While this may be the right choice for some individuals, there are significant risks that individuals need to be aware of before selecting a Medicare Advantage Plan.
Medicare Advantage Plans
VERY IMPORTANT: Medicare Advantage Plans and Medicare Supplemental Plans are NOT the same. Medicare Advantage Plans are NOT “Medigap Plans”.
Medicare Advantage Plans do NOT “supplement” your Original Medicare coverage. Medicare Advantage Plans REPLACE your Medicare coverage. If you sign up for a Medicare Advantage Plan, you are no longer covered by Medicare. Medicare has sold you to the private insurance company.
Medicare Advantage Plans are not necessarily an “enhancement” to your Original Medicare Benefit. They are what the insurance industry considers an “actuarial equivalent”. The term actuarial equivalent benefit is just a fancy way of saying that at a minimum it is “worth the same dollar amount”. Medicare Advantage Plans are required to cover the same procedures that are covered under Medicare Part A & B but not necessarily at the same cost. The actuarial equivalent means when they have a large group of individuals, on average, those people are going to receive the same dollar value of benefit as Original Medicare would have provided. In other words, there are going to be clear winners and losers within the Medicare Advantage Plan structure. You are essentially rolling the dice as to what camp you are going to end up in.
If you enroll in a Medicare Advantage Plan, you will no longer have a Medicare card that you show to your doctors. You will receive an insurance card from the private insurance company. If you have a problem with your healthcare coverage, you do not call Medicare. Medicare is no longer involved.
Why Do People Choose Medicare Advantage Plans?
Here are the top reasons why we see people select Medicare Advantage Plan:
- Provide Maximum Out Of Pocket protection
- Prescription Drug Coverage
- Lower Monthly Premium Compared To Medicare Supplemental Plans
Medicare Supplemental Plans (Medigap)
Now let’s switch gears to Medicare Supplemental Plans, also known as “Medigap Plans”. Unlike Medicare Advantage Plan that replace your Medicare Part A & B coverage, with Medicare Supplement Plans you keep your Original Medicare Coverage and these insurance policies fill in the gaps associated with Medicare Part A & B. So it’s truly an enhancement to your Medicare A & B coverage and not just an actuarial equivalent.
There are different levels of benefits within each of the Medigap plans. Each program is identified with a letter that range from A to N. Here is the chart matrix that shows what each of these programs provides.
For example if you go with plan G which is one of the most popular of the Medigap plans going into 2020, most of the costs associated with Original Medicare are covered by your Supplemental Insurance policy. All you pay is the monthly premium, the $185 Part B deductible, and some small co-pays.
Like Medicare advantage plans, Medicare supplemental plans are provided by private insurance companies. However, what’s different is these plans are standardize. “Standardized” means regardless of what insurance company you select, the health insurance benefits associated with those plans are exactly the same. The only difference is the price that you pay for your monthly premium which is why it makes sense to compare the prices of these plans for each insurance company that offers supplemental plans in your zip code.
VERY IMPORTANT: Not all insurance companies offer Medicare Supplemental Plans. Some just offer Medicare Advantage Plans. So if you end up calling an insurance company directly or meeting directly with an insurance company to discuss your Medicare options, those companies may not even present Medicare Supplemental plans as an option even though that might be the best fit for your personal health insurance needs.
However, even if the insurance company offers Medicare Supplemental plans, you still shop that same plan with other insurance companies. They may tell you “yes we have a Medigap Plan G” but their Medigap Plan G monthly premium may be $100 more per month than another insurance company. Remember, Medicare Supplemental plans are standardized meaning Plan G is the same regardless of which insurance company provides you with your coverage.
Part D – Prescription Drug Plans
If you decide to keep your Original Medicare and add a Medicare Supplemental Plan, you will also have to select a Medicare Part D – Prescription Drug plan to cover the cost of your prescriptions. Unlike Medicare Advantage Plan that have drug coverage bundled into their plans, Medicare Supplemental Plans are medical only, so you need a separate drug plans to cover your prescriptions. It can be beneficial to have a standalone drug plans because you are able to select a plan that favors the prescription drugs that you are taking which could lead to lower out of pocket costs throughout the year. Unlike a Medicare Advantage plan where the prescription drug plan is not customized for you because it’s a take it or leave it bundle.
This article was a 30,000 foot view of Medicare Part A, B, C, D, and Medicare Supplemental Plans. There is a lot more to Medicare such as:
- Enrollment deadlines for Medicare
- How to enroll with Medicare
- Comparison of Medicare Advantage & Medicare Supplemental Plans
- Special Exceptions for NY & CT residents
- Working past age 65
- Coordinating Medicare With Retiree Health Benefits
And so many more considerations that will factor into your Medicare decision as you approach age 65 or leave the workforce after age 65.
VERY IMPORTANT: People have different health needs, budgets, and timelines for retirement. Medicare solutions are not a one size fits all solution. The decisions that your co-worker made, friend made, or family member made, may not be the best solution for you. Plus remember, Medicare is complex, and we have found without help, many people do not understand all of the options. I have met with clients that have told me that “they have a supplemental plan” only to find out that they had a Medicare Advantage plan and didn’t know it because they never knew the difference between the two when the policies were issued to them. It makes working with an independent Medicare insurance agent very important.
Please feel free to contact us with your Medicare questions and we would be more than happy to run free quotes for you to help you select the right plan at the right cost.
OTHER ARTICLES ON MEDICARE
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.