My wife and I are both closing in on Medicare eligibility at age 65. So, I thought it was time to take a hard look at it so that we can make the right decisions at the right time. In this article, I will share what I've learned so far.
Our situation is similar to many others'. We are currently covered by an employer health plan, but at some point, once we enter retirement, that will no longer be the case. I will probably still be employed when my wife becomes eligible for Medicare so that is something that must factor into our decisions.
Here's how it works: The US Government subsidizes medical insurance for certain disabled individuals and everyone who has reached 65 years of age. (This generally applies only to citizens and legal immigrants.) Medicare has "Parts". The parts aren't numbered one through four; they are identified as Part A, Part B, Part C, and Part D. In addition, the coverage for each of these Parts has deductibles and upper limits. The deductibles can be reduced and the limits can be increased by Medicare Supplemental Insurance (usually called Medigap insurance).
In general, the four Parts and Medigap programs are as follows:
Part A: Hospital Charges
This is for hospital charges, but not for your doctor's charges or medications (drugs). It has a deductible and a limit on coverage (most medical insurance does). Currently, you can receive this coverage without additional charge if you (or your spouse) have paid into Social Security for at least 40 quarters. Having this coverage generally limits your exposure to outrageous hospital charges. Unless you have fewer than 40 quarters of earnings, all the costs of Part A are paid by the Federal Government.
It is important to note that Part A does not cover long-term care expenses. Separate, private insurance is needed for that.
Part B: Medical Insurance
This pays for doctors' bills. It also has a deductible as well as limits on coverage. This Part is optional, and you will be charged monthly for this coverage (currently $121.80 per month for new enrollees). Nearly everyone covered by Part A chooses to be covered by Part B as well. You may not sign up for Part B if you have other insurance (such as an employee plan), are participating in more innovative medical plans, or have other characteristics that I don't know about. The Federal Government pays about 75% of the costs of Part B, and individuals pay about 25% through their monthly charges.
Part C: "Medicare Advantage" Insurance
These are like HMOs which include Part A and Part B coverage (and may include Part D). These programs are under scrutiny because (although they generally provide better preventive care), they cost the government more than the conventional Part A and Part B coverage. Far more people are enrolled in Part A and Part B than are enrolled in Part C as it is generally less expensive.
Part D: Medications (drugs)
Part D has many providers who offer differing coverages and costs. The offerings and costs vary by geographic region, specifics of the plans, and their costs. About 75% of the "standard coverage" costs of Part D are paid by the Federal Government, and the states also pay some of the costs. If you use a lot of prescriptions, you will definitely need to pay attention to this Part.
This is a predefined set of programs, specified by the government, which are offered by private insurance companies. The individual pays for the costs of these programs and the charge for the same program may be more or less from one company than from another. (I'm not sure why there is such variation, but I will shop for a good, inexpensive option when the time comes.)
Everyone will need to decide whether to select a "Medicare Advantage" program (Part C) or just take Parts A and B. (By the way – and very importantly – if you delay enrolling in Part B and don't have equivalent or better insurance, you'll be penalized at the rate of 10% for each year of delay.) Since my wife and I are about six months out from our first decision (her initial enrollment period, or IEP), we are starting to consider our options.
As a general rule, when you or your spouse reach age 64 years, 9 months – your IEP – you really should contact the Social Security Administration, either by phone or online, whether or not you intend to apply for any of the Medicare Parts. You will need to take steps to avoid being hit with those penalties for Part B and Part D. In addition, if you have employer medical insurance like I do, you need to find out the latest information about handling which insurance is primary and which is secondary, and what kind of certificate(s) you may need.
You will probably want to select an insurance plan for drug (Part D) coverage. Failure to obtain coverage when you become eligible will result in an increased monthly charge if you need it later (1% of the average monthly charge for each month of delay). In general, each insurance company covers different drugs with different co-pays (although there is a large amount of overlap). Some of the plans have an annual deductible, and some don't. Some cover the "doughnut hole" (a gap in coverage as your annual drug costs increase) and some don't. Very frequently, the companies want you to obtain the medications directly from their internal (mail-order) pharmacies. In general, participants have been reasonably pleased with the Part D (even though there was some confusion during its start-up).
In addition to understanding the characteristics of each of Medicare's Parts, you'll need to look at the Medigap Programs. There are currently ten different Programs defined (Plans A thru N), but even after choosing a Medigap Program you'll need to select an insurer. The chart below from Medicare Supplement Solutions provides a summary of the various Medigap programs and the different options and coverage levels. Plan F is highlighted as it is the most comprehensive, but is also going to be the most costly. (I will delve deeper into health care and Medicare costs in my next article.)
If you're close to retirement, you'll probably need to make decisions about the Parts of Medicare; private insurance is just too expensive to choose as an alternative unless it's covered by a current or previous employer (or someone else). The effects of your choices will have a large impact on your lifestyle, so you need to begin studying them immediately.
Our "special situation"
My wife and I are in what Medicare calls a "special situation." I am still working and I have an employer-sponsored health insurance plan that covers both of us. In this case, my wife can enroll in Medicare Part A at no charge, and since she does not have the required 40 Quarters, she can do so based on my work record. However, she is not required to take Part B during her Initial Enrollment Period (IEP) if I am still working and maintain coverage as a result of that current work. She would only delay Part B if my current employer insurance (also called group insurance) is the primary payer on her health care expenses (meaning Medicare would pay after the employer insurance pays on a claim). I will need to talk to my employer when she becomes eligible to sign up for Medicare (approx. two months from now) to see how my employer insurance will work with Medicare. Here's a very helpful chart from an article on Kiplinger.com:
In all likelihood, my employer plan will be the primary payer, which means that my wife will probably delay enrollment in Part B. If so, she (and possibly me in the future) qualifies for a Special Enrollment Period (SEP). During this period, we can enroll in Part B without penalty at any time while I am still working and for up to eight months after I stop working. This is a great provision that provides a lot of flexibility going forward.
If I were to retire before age 65, and continue my insurance via COBRA until I am eligible for Medicare, I will have to remember that COBRA is not considered "current employer insurance", and we will not have a Special Enrollment Period to enroll in Medicare beyond the eight months I would be given after I stopped working. If I have COBRA and delay enrollment in Part B (which I wouldn't since COBRA tends to be very expensive) I will have to pay a penalty when I sign up.
In the next article, I will take a look at medical expenses in retirment and how to plan for them.