personal finance | january 4, 2021
How to Be Proactive With Your Medicare Options
The choices you make can have a major impact on the services you receive and your overall costs of health care.
Roger Young, CFP®
Senior Financial Planner
Nearly all Americans will participate in mandatory enrollment for Medicare when they reach age 65.
Begin your planning process no later than six months before you turn age 65. The key is shopping around before you make decisions so that you’ll be able to choose the options that are right for you.
The program details, including premiums, usually change annually and can have a big impact on your health care costs, so it’s important to stay up-to-date by visiting Medicare.gov periodically.
Thanks for taking the time to explore practical information about Medicare. If you are approaching eligibility, you want to be proactive to get the most out of your benefits. There’s a temptation to be passive. We expect the program to take care of our health care needs when we hit 65. We’ve been making Medicare payroll contributions for years, and the government knows our birthday. So doesn’t Medicare just “kick in?” Is there really anything to do in advance? The answer is yes.
I'm Roger Young, a senior financial planner at T. Rowe Price. My team helps educate people on financial and retirement topics. I have done research on health care costs in retirement and ways to pay for those expenses.
We believe that Americans can make better decisions concerning their health and medical care when they know their options. People approaching age 65 must ultimately make decisions in consideration of the available options and their individual circumstances. Because the health care system and Medicare are constantly changing, be sure you and your advisors have current information to make informed decisions. While the right course of action is very personal, there are some general guidelines we believe can help you.
First, a little background. Medicare is a federal program created in 1965 to ensure access to health care for retirees. Many workers had employee health benefits when the law was passed, but very few had private coverage beyond the standard retirement age, typically 65. There have been important enhancements to the benefits over the years, as well.
The program is funded by a payroll tax withholding from workers’ earnings and by monthly premiums for different program options. In addition, some costs are shared with you, the beneficiary.
Workers pay a 1.45% hospital insurance tax on all covered income, plus a higher amount for high-income workers. That’s also commonly known as the Medicare portion of your FICA payroll tax. We’ll talk later about the premiums and other costs for different parts of the Medicare program.
While there are several government programs to help older Americans, Medicare is unique.
Social security payments are made to Individuals and can be used for virtually any purpose. Medicare, on the other hand, pays only for health services, and the payments are made directly to hospitals, doctors, and other service providers—not to individual patients.
Medicare is also different from Medicaid. Medicaid pays for health care services provided to low-income individuals of any age who meet specific qualifying tests. Medicare is the same across the country, but Medicaid eligibility and benefits vary from state to state, often quite significantly.
Medicare beneficiaries might qualify for Medicaid benefits, but only when they have depleted their financial resources—an outcome we want to help you avoid!
Finally, Medicare is also different from the Affordable Care Act, also known as the ACA or Obamacare, which was intended to reduce the number of uninsured Americans.
While the Affordable Care Act remains in place, some aspects of it have been repealed and its future is uncertain. Public support for Medicare, on the other hand, is almost universal. We expect Medicare will be around for a long time.
So now that we’ve covered differences with other programs, let’s explain what Medicare is. Nearly all Americans enroll in Medicare when they reach age 65. It’s important to remember that early retirement does not allow you to enroll in Medicare before age 65. If you retire before turning 65, you will most likely need to purchase your own health insurance to bridge the gap until you reach your 65th birthday.
There are two reasons people may enroll in Medicare at ages other than 65. First, Americans under age 65 with certain chronic medical conditions can become categorically eligible for the program’s benefits at younger ages. Their enrollment process will normally be initiated by a health professional, social worker, or provider organization or the government for people receiving Social Security disability.
Second, individuals aged 65 and older who are still are covered under an employer’s health plan may consider deferring Medicare coverage. This situation is rather complicated, so be sure to talk with your human resources office before you turn 65 if it applies to you. Failing to take this action can result in some unpleasant surprises later.
But in general, 65 is the key age to remember.
The choices you make in your initial enrollment and each year can have major impact on the services you receive and your overall costs of your health care. This is why we suggest you take the time to learn about them at least six months before you turn 65. There are four components to Medicare. Let’s discuss each of the four and how they form the building blocks of your personal Medicare program.
Part A is Medicare’s original insurance plan for inpatient hospital care. This also includes medical care in skilled nursing facilities and hospices—as well as some home health services. However, Medicare does not cover custodial or long-term care—help with daily activities like bathing, dressing, and eating. Most seniors will not need to pay premiums for Part A coverage if they are eligible for Social Security. The benefits are generally quite comprehensive, but beneficiaries are required to make some copayments for each episode of care. The vast majority of hospitals participate in the Medicare A program. If you’re receiving Social Security benefits at least four months before age 65, you will probably be enrolled automatically in Part A. If you haven’t been receiving Social Security, you will need to actively sign up. Even if you’re still working, it almost always makes sense to sign up for Part A.
Part B, the second part of the original 1965 Medicare law, pays for doctors’ services. It also covers a wide variety of medically necessary services, tests, supplies, and equipment not covered by Part A. Part B is optional and, unlike Part A, requires a monthly premium for most people. In addition, you share in costs in two ways. First, Part B has a deductible that you pay before the benefits kick in. That deductible is fairly small—currently around $200 per year. Second, after meeting the deductible, you typically pay 20% of costs, which can be much more significant. Fortunately, preventive services generally don’t require any copayment, so you have the incentive to take care of yourself. A majority of physicians and other practitioners—but not all—accept patients under Medicare Part B. As with Part A, you need to actively sign up if you haven’t been receiving Social Security. Together, Part A and Part B are known as original Medicare.
At this point, let’s talk briefly about supplemental coverage that isn’t technically part of the Medicare program. Many people want additional insurance to reduce the risk of large out-of-pocket expenses not paid by Medicare. This need can be met with Medicare Supplement Insurance, also known as Medigap. This insurance is an option for people who have both Part A and Part B. It primarily pays for cost-sharing components and coinsurance. While the plans are offered by insurance companies, they are highly regulated. The plans are standardized, so one Medigap Plan L, for example, has essentially the same benefits as another company’s Plan L. Your premium will be lower if you choose a plan type where you bear a larger share of the medical expenses. Shopping around will help you decide whether to purchase a Medigap plan and, if so, which one to choose. The best time to initially shop for these plans is at age 65 when you are signing up for Parts A and B.
Now let’s get back to the third component of Medicare. Medicare Part C—the C stands for Choice—was created in 1997 as an alternative to original Medicare, Parts A and B. Called Medicare Advantage plans, Part C policies are offered by private companies approved by Medicare. They often include prescription drug coverage and some services not covered by original Medicare, such as vision, hearing, and dental. They give beneficiaries an opportunity to save money—sometimes quite a bit. Annual out-of-pocket costs are capped and can be lower than original Medicare. The trade-off is usually that you agree to a limited network of hospitals and doctors. Advantage plans vary considerably between and within geographic markets where they are available. Part C is not for everyone. But if one or more Advantage plans are available in your area, you should consider this option. Make sure that the limited number of service providers and related financial obligations are acceptable to you. And be mindful of its limitations. For example, if you sign up for Part C and, later, you want to switch to traditional Medicare, you may not be able to buy a Medigap policy.
Original Medicare coverage did not include prescription drug coverage. Part D—D for Drugs—was created in 2003 because medications had become a significantly larger portion of medical costs. Part D is optional. It’s important to consider, but complicated. The good news is that you will likely be offered a range of choices and premiums. Keep in mind that drugs are categorized into “tiers” that can have very different costs in different plans. Some drugs may not be covered at all in certain plans. As a result, you and your caregiver may need to get special approval for drugs from higher tiers or ones that are not on a list called the formulary. While the government ultimately pays some of the costs, pharmacy benefit management companies, known as PBMs, generally offer the specific plans and administer the details. Before signing up, it’s a good idea to call or go online to make sure your current prescriptions are covered at a reasonable cost.
Considering all of this complexity, you should plan to spend significant time exploring your options.
Now that we’ve described all four parts of the program, let’s talk a little about enrollment. Straddling your 65th birthday, there is a seven-month period called the initial enrollment period. It starts three months before your birthday month, and ends three months after your birthday month. If you wait until after that period to sign up for Part B, Part C, or Part D, you could face significant penalties. For Part B, the penalty increases your monthly cost for as long as you have Part B coverage. As I mentioned before, if you’re still in an employer’s plan, or your spouse’s, you can defer Plan B enrollment—and that avoids the penalty.
There are also annual open enrollment periods. You can make many changes regarding Medicare Advantage and prescription drug plans in the October 15 to December 7 time period. Some other actions, including Part B enrollment, can be made during the January 1 to March 31 general enrollment period. Be sure to double-check whether the specific change you want to make is available in these periods.
Earlier, I mentioned that Medicare is funded partly by premiums you pay. Medicare’s annual premiums vary from year to year and depend on your income. If your income is above certain levels, you pay an income-related adjustment. The thresholds are shown on the screen. There’s a two-year lag, so your income today affects your premiums two years later. The amount you pay can go up or down over time. Unlike tax brackets, the thresholds don’t automatically change with inflation. In fact, the surcharges have recently increased significantly for people at some income levels. And unlike income taxes, where an extra dollar of income costs you less than a dollar, going one dollar above a Medicare threshold could cost you over $1,000 in Medicare premiums. So if you could be in this situation, be sure to discuss it with your tax adviser or financial planner.
You may also be wondering how your premiums get paid. If you enroll for Medicare at age 65 but have not yet elected to enroll for Social Security—a decision that can be delayed until age 70—you will simply pay a monthly or quarterly bill for your Medicare coverage. If you are already on Social Security, your Part B Medicare premium will be deducted from your monthly Social Security payment. You can also choose to have Medicare Advantage or prescription drug coverage premiums withheld from Social Security payments, but be aware that there can be delays getting this started. One potential benefit of paying through your Social Security is that Part B premium increases may be capped.
By now, you may be thinking that Medicare is not as simple as you had expected it to be. However, its complexity is also one of its strengths. You have flexibility to customize Medicare, but you will need to invest time in the planning process to best meet your needs.
As we suggested earlier, you should start planning at least six months before your 65th birthday. The first task should be a visit to www.medicare.gov, the official U.S. government website for Medicare. It’s the authoritative source for current information. Remember, rules and other details can change, so you need a trustworthy source.
Plan to spend a few hours browsing through the various sections and making notes on areas that are specifically relevant to you. The Sign Up/Change Plans tab has step-by-step guidance to get started.
If you have questions that are not clearly answered on the website, call 800.MEDICARE (800.633.4227). Remember that your key objectives are to identify deadlines that you need to meet and choices that you need to make by the deadlines. There are four key decisions. First, if you’re still working, should you delay enrollment? As I mentioned earlier, you should probably still enroll in Part A, but your employer’s coverage might be preferable to Part B. Second, do you want Original Medicare, Parts A and B, or Medicare Advantage, Part C. Remember that your Medicare Advantage options depend heavily on where you live. Third, consider Part D drug coverage. There’s a good chance you’ll want this coverage, unless you’ve chosen a Medicare Advantage plan that includes it. And fourth, if you go with Original Medicare (A and B), consider a Medigap plan to supplement that coverage.
Once you have an adequate understanding of your deadlines and options, you may want to work with a professional, licensed insurance agent who specializes in Medicare plans. (You will likely receive many solicitations from agents in the mail as you approach 65.) As we have discussed, Medigap, Medicare Advantage, and prescription drug plans are all offered by private companies, not the government.
As you go through the process, don’t forget that your personal options and best choices may vary significantly from those of your spouse and friends. You should also do a Web search to evaluate consumer ratings of competing plans you consider. And remember, retirees are targets for a lot of misleading information and even fraud. If you are approached with something that seems too good to be true, it probably is too good to be true. So do your homework regarding providers.
No matter who you work with, remember that the health care landscape is likely to continue changing dramatically. That includes both medical science and how services are paid for.
As life expectancy increases, the focus of medicine is shifting from acute care of life-threatening problems to long-term management of chronic diseases. New technologies are revolutionizing medicine. Telemedicine and remote monitoring enable patients to be treated at more convenient locations and times. Patients increasingly have access to information but are expected to pay a larger share of medical costs.
While many of these changes are positives, you simply cannot expect Medicare and supplemental policies to meet all your needs. It is important to set aside savings to pay for future health care costs. There is still a safety net for health services, including Medicaid, but none of us should count on the availability of free care in the future.
We recommend that you thoroughly evaluate all of your expenses, including health care, as you approach retirement age. Health care typically isn’t a retiree’s biggest expense, but it’s the one that tends to increase the most over the course of retirement. You can pay for your share of medical expenses with the same resources you use for other expenses, including Social Security, pensions, and retirement savings. In addition, if you have a high-deductible health plan during your working years, you can contribute to a health savings account, or HSA, which has very attractive tax benefits. Your HSA funds can be used tax-free in retirement to pay for qualified medical expenses like Medicare premiums and out-of-pocket costs. Be aware, however, that Medigap premiums are not considered a qualified expense for HSAs. Also note that you cannot contribute to an HSA while on Medicare.
One last topic to cover is long-term care. As I mentioned earlier, Medicare does not cover custodial or long-term care expenses. That is true whether it’s in a nursing facility or in your own home. This is another reason to save as much as you can for retirement. If you are considering long-term care insurance, explore the pros and cons very carefully. Be cautious about the long- term viability or rating of the insurance companies, how they define the benefits, and their ability to increase premiums.
And of course, in addition to preparing financially for future health care, there are many other steps to a healthy lifestyle. You may want to prepare your home for aging in place. You can advocate for better senior services in your community. You’re surely aware of other good practices--staying physically and mentally active, eating well, avoiding vices like smoking and heavy drinking, and remaining socially active with friends and neighbors.
Thanks for joining us. We hope this video has helped you understand Medicare and that you’re better prepared to take full advantage of your benefits. Please look for other educational resources on the T. Rowe Price website and reach out if you have questions.
This material is provided for general and educational purposes only and not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.
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