If you’re nearing age 65, there is one deadline that you don’t want to miss – and that’s the one to enroll in Medicare. Even if you’re still working and nearing age 65, it’s crucial that you understand your options; otherwise, you could possibly face stiff penalties. You have a 7-month enrollment window in which to sign up, starting three months before your 65th birthday until three months after. This year’s election period begins October 15 through December 7, 2021 when more than 61 million Medicare beneficiaries make supplemental medical and drug coverage decisions that begin on January 1, 2022. We’ll fill you in on the basics of Medicare, what your options are, and how you can find additional information.
Medicare is health insurance for people age 65 and older, people who have been on Social Security disability for 24 months, and people with certain chronic medical conditions, such as end-stage renal disease or amyotrophic lateral sclerosis (ALS). You often hear about the different “parts” of Medicare:
Parts A and B (commonly referred to as Original Medicare or basic coverage) are what you must enroll in when you become eligible near the 7-month window around your 65th birthday. In addition to original Medicare, there are two additional Parts, C and D. Part C is optional supplemental coverage, and Part D is required prescription drug coverage. We discuss these additional parts later in this article.
If you miss the critical enrollment deadlines required for Parts A, B, and D, you could face permanent premium increases imposed when you eventually enroll. If you plan to work after age 65 and are covered under your employer’s group health plan, you can qualify for an exception and delay your enrollment until you’re no longer working for that employer. Keep in mind that retiree coverage, COBRA, VA coverage, and individual health coverage (like those offered through the Health Insurance Marketplace) do not qualify for an exception for enrolling in Parts A and B, although VA drug coverage renders Part D enrollment optional.
There are several ways Medicare costs are considered. If you’re working or have at least a 10-year work history, you don’t pay premiums for Part A since it’s funded entirely by payroll taxes. Medicare enrollees who don’t have enough work history to qualify may need to pay a Part A premium, but this is rare. Medicare Part A covers inpatient hospital care, skilled nursing facility care, hospice care, and some home health care services.
Medicare Part B covers physician services, outpatient hospital services, certain home health services, durable medical equipment, and certain medical and health services not covered by Medicare Part A. You must pay monthly premiums for Medicare Part B and meet certain annual deductibles. Medicare premiums, deductibles, and coinsurance rates are adjusted every year, according to the Social Security Act. The 2021 standard Medicare Part B premium amount is $148.50 and the annual deductible for all Medicare Part B beneficiaries is $203. After you meet this deductible for the year, you typically pay 20% of the Medicare-approved amount for most doctor services, outpatient therapy, and durable medical equipment.
As you see from the chart above, if your modified gross adjusted income reported on your tax return from two years ago is above a certain amount, you’ll pay the standard premium amount plus an Income Related Monthly Adjustment Amount (IRMAA) – essentially an extra charge on top of the standard premium. Medicare determines the IRMAA annually from a two-year lookback and notifies beneficiaries in January of each year. If you’re subject to required minimum distributions from your traditional individual retirement account (IRA) or an employer-sponsored retirement plan, you should take the IRMAA into consideration. As you can see, the Part B premium certainly deserves some attention since it may impact other financial decisions during retirement. Your wealth adviser can help you think through these implications.
As mentioned, Medicare Parts A and B cover about 80% of your care costs, leaving you on the hook for the remaining 20%. Medicare Part C, also called Medicare Advantage, is an optional “all in one” alternative to original Medicare (Parts A and B) and includes Part D. Medicare Advantage effectively replaces Parts A and B with a single policy that covers hospital, physicians, supplemental, and drug costs. With few exceptions, you don’t shop for a separate drug plan when you buy into Medicare Advantage. All Medicare Advantage plans provide, at a minimum, the same benefits as Original Medicare, as well as additional benefits not offered through Medicare coverage. For example, many Medicare Advantage plans offer fitness memberships for no additional premium while some even throw in vision and hearing benefits.
Medicare Part D helps pay for prescription drugs. While this is optional, we highly encourage you to enroll in Medicare Part D when you’re first eligible. Otherwise, you’ll likely to pay a late enrollment penalty. You can add Medicare Part D to Parts A and B (Original Medicare) – you must have Medicare Part A and/or B to join a separate Medicare drug plan. You can also get Part D as part of Medicare Advantage.
Like Medicare Part B, you pay a monthly premium for Part D, and many of its plans require an annual deductible. As noted above, if you receive your Part D coverage bundled in an Advantage Plan, there is no separate premium for drug coverage. We hate to mention IRMAA again, but you might also pay a higher Medicare Part D premium if your income is above a certain limit. The premiums and deductibles vary depending on the plan you choose. Each Part D plan has a “tiered formulary,” which is a list of drugs covered by the plan. Generic drugs are cheaper and have lower copays than brand-name drugs. No Part D plan covers all drugs. Every plan covers at least two drugs in each “therapeutic category,” so you should look through a prospective plan’s formulary to ensure your drugs are covered and how much they will cost under the plan. The medicare.gov website (www.medicare.gov) has a tool to help calculate your expected costs under each plan. Compare the costs for the generic prescriptions and look for plans that offer low or zero copays.
As we mentioned, Original Medicare (Parts A and B) doesn’t fully cover your cost of medical care. It’s actuarily designed to cover about 80% of the costs, leaving you on the hook for the remaining 20%. This is where Medigap comes in – and where things can get complicated!
If you elect to enroll in Medicare Parts A and B, you should also add “supplemental coverage” to defray your 20% out-of-pocket costs. Here you have two options: You can choose Medicare Advantage (Part C) or a Medigap plan – you can’t have both at the same time. Regardless of your choice, you must enroll and stay enrolled in both Parts A and B to own either supplement plan. If you’re fortunate to have retiree health insurance benefits from a prior employer, those benefits often provide excellent supplemental coverage.
Medicare Advantage and Medigap offer different approaches to supplementing Original Medicare. While they are both purchased through private insurance companies, Medigap plans have strictly defined coverages labeled by their identifiers (Plan A through Plan N). Medicare periodically changes Medigap plans based on changing demands for health care, but all plans of similar label are identical, regardless of which insurance company provides the policy. This means you have identical coverage under plans of the same label (A-N), no matter which company you purchase it from because Medicare determines the coverage, not the insurance company. This is one of the few consumer products you can buy strictly based on cost and get the same benefits regardless of the provider. Remember, if you purchase a Medigap plan then you will also need to purchase a separate drug plan because Medigap plans may not include prescription drug coverage.
So, how do you decide between a Medigap plan and Medicare Advantage for your supplemental coverage? This is a very personal decision and there’s no objective checklist to help you choose so it’s very important to do your homework before choosing. Here are some advantages and disadvantages for each option.
When assessing a Medigap supplement option, three 3Cs to consider are: cost, coverage, and consistency. People who consider themselves healthy, with little need for doctor visits and the ability to cover the out-of-pocket costs, might prefer Medicare Advantage and its low-premium structure. Those who have complicated care needs or prescription drug needs, might accept the higher premium without the cost-sharing. Some people also like to pay a single premium, even if it’s higher, and not worry about additional costs when they see their doctor. Again, we recommend you do your research before selecting.
Keep in mind that, although you can switch from Medicare Advantage to Medigap, the change could entail medical qualification, called underwriting. There is no guaranteed issue of Medigap insurance after your initial enrollment window. Also, if you want to cancel your Medigap policy, contact your insurance company. In most cases, if you drop your Medigap policy to join a Medicare Advantage Plan, you won’t be able to get it back. It’s critical to do your homework before deciding on supplemental coverage!
There are excellent free references for those who prefer to do their own research. Visit www.medicare.gov and download the free Medicare and You 2021 handbook which offers a detailed explanation about all things Medicare. You can also use the site to research medical and drug plans offered in your area and enroll in Medicare coverage.
Financial Retirement Planning: Social Security & Medicare podcast episode
What You Need to Know About Medicare podcast episode
For more personal assistance, seek out insurance agents who provide Medicare Advantage plans. These individuals must pass an academic test every year to certify through the Center for Medicare and Medicaid Services (CMS). CMS strictly regulates the distribution of Medicare Advantage and prescription drug plans, so agents in this field are well versed to assist you. Your wealth adviser is also equipped to help if you desire objective advice from a fiduciary with no financial interest in your decision.
U.S. Centers for Medicare and Medicaid Services, 1/19/21.
“2021 Medicare Parts A & B Premiums and Deductibles,” U.S. Centers for Medicare and Medicaid Services, 11/6/20.
“Medicare and You 2021,” U.S. Centers for Medicare and Medicaid Services, 12/20.
“Meeting with Agents One-on-One,” medicare.gov.
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All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the content provided comes from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors. Tax law and the laws governing Medicare/Medicaid are complex and subject to change. Readers should consult with their attorney and/or qualified tax advisor when making decisions regarding these matters.
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