As an advisor that specializes in working with retirees, it seems that some of the most commonly asked questions deal with the topic of Medicare. How does it work? When do I need to file? What plan should I choose? What does it cover? What is it going to cost? And so on. So, instead of searching all over the web trying to find answers to these questions, I thought it would be helpful to provide all the answers in one place that you could use a reference when making the Medicare decision.
I tried to title each section clearly so you can get the answers that you need quickly. Feel free to skip sections as you see fit. Given the opaque nature of the topic, please share this with your family and friends that are between ages 55 and 70. Due to some of the ways in which the Medicare premium is calculated, there are certain actions you can take starting at age 55 or so that can have a positive impact on your overall Medicare costs. Crazy, right? That’s why planning is so important. I hope you find this to be a useful resource. Let’s get started.
Who is Covered by Medicare?
Before we get to the basics of Medicare, it’s important to know who is eligible for Medicare coverage. Medicare covers:
- People who are 65 or older
- Certain younger disabled people
- People that have End-Stage Renal Disease
For the purposes of this article, I’ll be referring to people who fall into the first category of age 65 or older.
What is Medicare?
Medicare is a federal health insurance program. When most people that I talk to refer to Medicare, they are talking about all that encompasses Medicare, but it’s actually broken into parts. The first part is called “Original Medicare” which includes Parts A and B. Part A and Part B are designed to cover part of the expenses related to hospital visits and most other medical services. On the surface, based on this statement, it would seem that all you might need is Part A and Part B, but that is highly unlikely. Let me explain.
Gaps in Original Medicare Coverage
There are gaps in the Part A and Part B system coverage. It’s actually called co-insurance meaning you are taking on part of the risk in your healthcare. In fact, if all you had in retirement was Parts A & B, you would be subjecting yourself to significant (virtually limitless) risk. What do I mean?
As an example, let’s say you are retired and decided to own just Parts A & B. Then, unexpectedly, you are diagnosed with cancer. As you probably know, there are significant costs ahead such as the surgery that often accompanies a diagnosis, plus the cost of on-going treatments. People on Original Medicare must pay the initial $1,316 deductible per benefit period. Then, there are some additional nuances to the remaining deductible, but beyond that, you would be on the hook for 20 percent of the cost of most kinds of outpatient treatments, doctor visits and the like. And unlike the insurance plan through your employer that you are accustomed to, there is no cap on the 20 percent portion that you are liable for. So, if you were diagnosed with cancer or any other condition, and your bills for the year beyond your deductible are $100,000 (which doesn’t take long), you would be on the hook for $20,000. You’ve no doubt seen bills from your healthcare provider and know that the bills can start adding up quickly.
The way you limit this risk is by choosing between two main options. A Medicare Supplement (aka Medigap) or a Medicare Advantage (aka Part C) plan. Deciding between these two will be one of the most important Medicare-related decisions you’ll face. In the case of both Medigap and Medicare Advantage plans, you are guaranteed acceptance into either program during your initial enrollment period. Also, in both cases, you will need to pay your Part A (most people get this for free) and Part B premium.
Medigap vs Medicare Advantage Plan
Medigap plans are offered by private insurance companies and cover most or all of Original Medicare’s out-of-pocket expenses. Once Original Medicare has paid your claims, the shortfall is sent to your Medigap plan which will then pay its portion of the bill which is 100 percent of the shortfall in many cases including all deductibles, premiums, and copayments. Medigap has standardized plans in 47 states with Massachusetts, Minnesota, and Wisconsin offering their own plans.
Medigap plans typically come with higher premiums than Medicare Advantage Plans, but have few, if any, out-of-pocket expenses.
The plans are categorized by letter – A, B, C, D, F, G, K, L, M, and N. Each plan with the same letter offers the same benefits regardless of state. This is a link to the Medicare.gov website that explains the differences between each type of Medigap Plan.
Medicare Advantage Plans
Medicare Advantage plans work a lot like your employer-sponsored health care plan that has an accompanying deductible. Typically, services such as doctor visits, lab work, surgeries and other services are covered by a small co-pay. Each plan places a yearly limit on your total out-of-pocket expenses. Depending on the area that you live, these plans may come in the form of an HMO or PPO and require the use of their network of physicians. An HMO (as many Medicare Advantage plans are) requires seeing a primary care physician as a gatekeeper prior to seeking the help of a specialist. A PPO allows you to see a specialist at your discretion, albeit with additional costs.
Medicare Advantage plans often include prescription drug coverage, but you will want to verify that any specific drugs that you currently take are covered by the plan.
Advantages / Disadvantages of Medigap Plans
Advantages of Medigap Plans:
- You can receive care anywhere that Medicare is accepted (almost anywhere). As a result, you can go to any doctor or hospital in the country that accepts Medicare. Medigap will help cover the remaining Medicare out-of-pocket expenses.
- You do not need a referral to see a specialist.
- Less paperwork. Medigap will work on your behalf to send a payment to the doctor or facility without your involvement.
- It may cover emergency medical even when traveling out of the country.
- You can transfer to a Medicare Advantage plan anytime during any open enrollment period.
- Typically lower out-of-pocket expenses than a Medicare Advantage plan.
- All plans are standardized by law, so each Medigap of the same letter will cover the same benefits regardless of the insurance company selling it. Please note, however, that these companies can charge different prices for the same coverage, so it pays to shop around.
- Medigap does not provide prescription drug coverage, so you will need to purchase a Part D plan. The reason this could be construed as an advantage is because it provides you the flexibility to independently choose from any one of the 26 Part D plans to allow you to tailor-fit your plan to your needs. (See below for why this could be considered a disadvantage.)
Disadvantages of Medigap Plans:
- Medigap does not provide prescription drug coverage, so you will need to purchase a Part D plan. So, if you simply want an all-in-one solution, this is not it. (See above for why this could be considered an advantage.)
- Does not cover dental care or vision care.
- Premiums are generally higher than that of Medicare Advantage plans.
Advantages / Disadvantages of Medicare Advantage Plans
Advantages of Medicare Advantage Plans:
- Commonly covers dental and vision care.
- Most commonly, this coverage is for routine annual visits only.
- Has a familiar feeling of an employer-sponsored health plan in a lot of ways. (I fully acknowledge that this could be a negative for some people.)
- It is familiar in the sense that you’ll have deductibles, co-pays, drug coverage, physician networks, etc…just like most employer plans.
- Many plans include prescription drug coverage. So, if you want an all-in-one solution, this may be a fit. You’ll want to verify that the plan you are considering covers your current prescriptions before enrolling. (See below for why this could be considered a disadvantage.)
Disadvantages of Medicare Advantage Plans:
- The downside of having a prescription drug coverage as part of your Advantage Plan is that their formulary could change from year to year, meaning that prescriptions that were previously covered may not be covered year over year. This will be something you will want to check each and every year. (See above for why this could be considered an advantage.)
- Benefits are typically only provided in-network. This can be both a geographical and “best doctor” limitation. For example, if you live in an area with multiple health systems, you will likely be limited to the doctors in your network rather than wherever the “best doctor” practices.
- Generally, once you’ve passed the initial “trial period”, you cannot transfer to Medigap plans at will unless you can pass a medical underwriting.
- Benefits are more restrictive than Medigap plans.
- Because these plans are considered “managed care”, providers aim to keep their healthcare costs within budget by trying to prevent overuse. They do this by requiring prior authorization for various medical requests.
Who might consider Medigap?
The truth is only you can decide, so this is just food for thought. Here are some common reasons to consider a Medigap plan:
- You’re willing to pay a little bit more in premium to reduce your overall health care risks meaning that you want a more contained cost of healthcare. Because of the way that Medigap plans are structured, your primary expense is the premium since as a general rule, Medicare will pick up 80% and Medigap will pick up the other 20%. The only cost you’re generally left with is the Part D premium and copays for prescription drugs via your part D plan.
- You have significant assets.
- You have health concerns or ongoing medical issues. The premiums will be higher, but your out-of-pocket expenses will likely be lower. So, if you are someone with a lot of medical expenses, the higher premium Medigap policies can end up being a better deal.
- You want the flexibility of which doctor to see regardless of network.
- You like the fact that you do not need a referral to see a specialist.
- You intend to travel domestically or internationally through your retirement or if you intend to snowbird for part of the year. If this is the case, you will likely derive more benefit from a Medigap plan. This is due to the fact that under Medigap, you can see any doctor in the country that accepts Medicare, which is almost everywhere. By contrast, if you have a Medicare Advantage plan, any time you are away from your primary care area, each doctor visit will be an out-of-network visit, and therefore cost much more.
Who might consider a Medicare Advantage Plan?
I will reiterate that only you can decide, so this is just food for thought. Here are some common reasons to consider a Medicare Advantage plan:
- You want an all-in-one solution. Most plans offer a Part D as part of the plan (you will want to verify that your current prescriptions are covered by the plan you choose).
- You feel comfortable with your health plan through work and would like to keep a similar arrangement.
- You like having a primary care physician guide the care you receive.
- You are in particularly good health and aren’t anticipating significant medical expenses in the near future. This could amount to quite a savings due to the lower premium Medicare Advantage plan.
- You are not an active traveler domestically or internationally.
Can I have both a Medigap and Medicare Advantage Plan?
No, you cannot. Medigap plans do not work with Medicare Advantage plans.
What if I change my mind? Can I change plans if I decide the other plan is better for me?
If you decide that you do not like your Medigap plan, you can always choose to enroll in a Medicare Advantage plan during the annual seven-week Open Enrollment period from October 15 through December 7.
On the contrary, if you decide that you do not like your Medicare Advantage plan, there is typically (though not always) a 12-month “trial period” to decide that you’d prefer a Medigap policy. Important: Once the 12 month trial period ends, you would have to pass underwriting to enroll in a Medigap plan, which for most retirees, is unlikely.
This is why this initial decision is so important particularly if you are interested in Medigap. Knowing that you can always change to Medicare Advantage from Medigap, but not always the reverse makes the Medigap offering that much more appealing.
When do I need to enroll?
There is a seven-month window to enroll in Medicare without penalty. It is the three months prior to your birth month, your birth month, and the three months following your birth month. For example, if you were born on July 4th, then your enrollment period would be from April to October of the year in which you turn age 65.
There is an exception to this rule, and that is if you are still actively working and covered by an employer-sponsored health plan, which Medicare refers to as a Special Enrollment Period. This is an eight-month period that begins with the month your group health coverage ends or the month your employment ends, whichever comes first. Please note that this eight-month window does not apply if your employment or employer-sponsored health coverage ends during your initial enrollment period.
For those still working beyond their initial enrollment period: It may be worth considering and evaluating whether you should enroll in Medicare Parts A & B, and the plan of your choice (Medigap & Part D or Medicare Advantage) and dropping your health coverage through your employer. It is possible that the benefits are better utilizing Medicare and potentially at less cost than your traditional employer plan. You may want to verify with your employer that you can discontinue your coverage once you are enrolled in Medicare. In many cases, employers are happy to take your family off their health insurance roll. Please note, however, that if your spouse is not yet 65 or have minor children, continuing with your employer plan may be best.
For those already receiving Social Security benefits: You will automatically be enrolled for Part A and B upon reaching age 65.
How do I Enroll in Medicare?
Medicare makes the process of enrolling quite easy. You can enroll for Part A and/or Part B benefits in the following ways:
- Online at www.socialsecurity.gov
- By calling Social Security at 1-800-772-1213 Monday-Friday, from 7 AM – 7 PM. TTY users should call 1-800-325-0778.
- Go to your local Social Security office to enroll in person.
- If you are already receiving Social Security benefits, you should be automatically enrolled in Parts A and B. It’s always smart to confirm this with the Social Security Administration when you turn 65.
What is NOT covered by Medicare and the supplemental plan of your choice?
There are a few items that are not covered by Medicare:
- Long-term care.
- Custodial Care
- Nursing Home Care
- Alternative medicine
- Most care received outside of the United States
- Most cosmetic surgery – generally only covered if needed to improve the function of a malformed part of the body.
- Most dental care
- Most vision care
- Hearing aids
**Some of the items above may be covered, but you will want to check based on the plan you are considering.
How much does it cost?
Part A is free for most people, Part B is based on your income.
The table below shows the premiums due for Part B based on your modified adjusted gross income from two years ago (2016 tax year):
|If your yearly income in 2016 (for what you pay in 2018) was||You pay each month (in 2018)|
|File individual tax return||File joint tax return||File married & separate tax return|
|$85,000 or less||$170,000 or less||$85,000 or less||$134|
|above $85,000 up to $107,000||above $170,000 up to $214,000||Not applicable||$187.50|
|above $107,000 up to $133,500||above $214,000 up to $267,000||Not applicable||$267.90|
|above $133,500 up to $160,000||above $267,000 up to $320,000||Not applicable||$348.30|
|above $160,000||above $320,000||above $85,000||$428.60|
**If you pay a late enrollment penalty, the above amounts may be higher.
The above costs are per person and do not include the cost of the Medigap plan or Medicare Advantage Plan.
If you do not receive Social Security benefits, you will be directly billed for your Part B premiums. Or you can set it up through the Medicare Easy Pay program. Here is a link to the Medicare site where you can download the form for Easy Pay.
If you are receiving Social Security benefits, your Part B premiums will be automatically deducted.
If you have questions about your Part B premiums, call Social Security at 1-800-772-1213.
What should you expect to pay for a Medigap or Medicare Advantage Plan?
Premiums can vary significantly under both types of plans but typically range between $0 (at times) up to and beyond $300 per month depending on a variety of factors. Some offer discounts for spouses that are both enrolling. The only way to know this for sure is to get some premium quotes from a qualified impartial provider.
It is important to note that in Medigap and Medicare Advantage plans that the higher premium does not equate to better coverage. Do your research on individual plans to ensure you are getting the most benefits for the premium you are paying. It would also be important to note that these premium costs are not to be considered your all-in costs, as there could be potential deductibles, co-pays, and co-insurance that must be factored in to decide which plan could be a better fit from an overall cost and care perspective.
Part D – Prescription Drug Plan
Just like Part B, Medicare Part D premiums are based on your income. Below is a table showing the premium adjustment due for Part D that is based on your modified adjusted gross income from two years ago (2016 tax year):
|If your filing status and yearly income in 2016 was|
|File individual tax return||File joint tax return||File married & separate tax return||You pay each month (in 2018)|
|$85,000 or less||$170,000 or less||$85,000 or less||your plan premium|
|above $85,000 up to $107,000||above $170,000 up to $214,000||not applicable||$13.00 + your plan premium|
|above $107,000 up to $133,500||above $214,000 up to $267,000||not applicable||$33.60 + your plan premium|
|above $133,500 up to $160,000||above $267,000 up to $320,000||not applicable||$54.20 + your plan premium|
|above $160,000||above $320,000||above $85,000||$74.80 + your plan premium|
How IRA distributions and capital gains can impact your premium:
Because Part B and Part D premiums are based on modified adjusted gross income from two years prior (the tax year in which you turn 63 if you plan to enroll at 65), planning for Medicare may actually start at age 62 or earlier. So, if you have a portfolio with large capital gains or are completing Roth IRA conversions, you may want to consider revisiting your portfolio and legacy strategies while it can still make a difference for your future checkbook.
For example, over the last 8-10 years, we’ve seen significant gains in many taxable accounts, most of which are unrealized. So, if you were considering making some portfolio changes that might require some of those gains to become taxable, you may want to do that prior to the year in which you turn 63. You may also consider realizing some of those gains prior to age 63 if you are intending to use this portfolio for income purposes in retirement. Otherwise, you may run the risk of having higher Medicare premiums as a result.
This is the same story for folks that are planning to pass along as many IRA dollars as possible to their heirs that are taking advantage of IRA conversions. When converting your Traditional IRA to a Roth IRA, this is a dollar-for-dollar increase in your taxable income assuming an IRA basis of $0. Many investors and their advisors just focus on the conversion part and the tax bill to follow without considering the impact it could have on your future Medicare premiums.
If one of the two above situations fits your scenario, it’s important to note that this two-year lookback is an annual event, so your premiums could very well drop in future years once these gains leave the premium calculation.
Eventually, your Required Minimum Distributions (starting at age 70.5) may have an impact as well. So, if you are someone that may not need those distributions for income purposes, you may consider taking advantage of a strategy to reduce those future distributions via conversions in the early years, thereby possibly reducing your Medicare premiums in the process. This would all be dependent on your financial situation as well as where you fall on the Medicare premium chart above.
Using a Health Savings Account for Medicare:
For many individuals that have been in high deductible plans and saving in their HSAs to prepare for health expenses in retirement, it is important to know a few things.
For one, as soon as you start receiving any benefits from Medicare (even just Part A), you are no longer eligible to contribute to your HSA.
Secondly, you can use your HSA dollars to pay your premiums in retirement for Parts A, B, D and for your Medicare Advantage plans. You can also, of course, pay for your deductible, co-pays and other qualified expenses.
Even if your Medicare premiums are automatically deducted from your Social Security benefits, you can withdraw money from the HSA to reimburse yourself for the Part B premium.
Please note: You are NOT able to use your HSA dollars to pay your Medigap premiums.
Notes for Military Retirees:
First of all, thank you for your service! TRICARE for Life is a Medigap policy specifically offered to military retirees. For many military retirees that are still working at age 65, you’ll actually have to enroll in Part A and B in order to continue receiving benefits from TRICARE regardless of whether or not you are covered by an employer plan. In that case, you might actually consider leaving your work plan and just using Medicare and TRICARE for Life since you must be enrolled to receive benefits from TRICARE for Life anyway. On the upside, it’s likely that for many participants, you will likely see your healthcare costs fall significantly (due to not having to pay for employer-sponsored health insurance). You will want to consider your family circumstances and verify with your employer that you can drop your health coverage.
How to Choose Your Medicare Plan:
When making the choice between Medigap or Medicare Advantage Plans, consider the advantages and disadvantages above as well as the costs associated with each. Know the deductibles you should expect, monthly premiums, restrictions on doctors, hospitals, and pharmacies, as well as what your maximum out-of-pocket expenses could be. Choosing a plan for your healthcare through retirement is truly a personal choice and warrants a bit of homework and/or a consultation with an unbiased Medicare expert.
The State Health Insurance Assistance Program can act as a great source of information and assistance in deciding on a plan.
You may also consider utilizing the Medicare Plan Finder for a more DIY strategy. It is a helpful tool that lets you narrow down your plan choices by location, and a variety of other specifics. Here is a link to the Medicare Advantage Plan Finder. And here is a link to the Medigap Plan Finder.
Lastly, a request from Ashby:
This is my first attempt at a long-form post that is heavy in information specifically for people at or nearing retirement. I hope you found it helpful and informative. This is the type of article that I intend to publish moving forward. So, if you found this article to be valuable, please consider subscribing to my email list below or in the sidebar above. And as always, if you have a question that you’d like researched and written about, send me an email at daniels at shorebridgewm dot com. I can’t promise I’ll get to all of them (or quickly), but I will certainly do all I can to provide an answer in some fashion. Or, if you are interested in setting up a time to chat about your personal retirement situation, also send me an email at daniels at shorebridgewm dot com. Thanks for your interest in my work!
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Ashby Daniels and not necessarily those of RJFS or Raymond James. You should discuss tax or legal matters with the appropriate professional.