TURNING 65 – Medicare II: Choosing Plans and Filling the Gaps

Third in a series of articles about necessary steps to take involving federal entitlement programs as age 65 nears

Medicare has expanded since it was enacted in 1965 and continues to evolve. The many changes over the years have benefited recipients, taking us further from the pre-Medicare days when approximately 40 percent of people over the age of 65 went without health insurance.

The added components, however, mean it takes more than a signature to get the right coverage combination in retirement. Along the way, Medicare’s original Parts A (hospital insurance) and B (medical insurance) have been buttressed by Part C (Medicare Advantage, 1997), Part D (drug coverage, 2006) and Medigap (supplementary private plans, 1980), forcing seniors to make important choices.

Taking only Parts A and B will leave you with less coverage than you would be accustomed to under your employer’s group coverage. Traditional Medicare does not cover, among other things, most prescription drugs, co-payments, deductibles or medical care overseas. With those gaps in mind, about 81 percent of enrollees in Original Medicare have some type of supplemental coverage, according to a 2017 analysis by Kaiser Family Foundation.

What is the “best” plan to have? There is no one-size-fits-all combination. Best plans are a function of your circumstances, what medications you take, any pre-existing condition you may have and how you use health care. Just be sure to understand your options.

Consider Medigap and Part D for supplemental coverage

If you do opt for additional insurance beyond Original Medicare, you likely want a Medigap plan and/or a Part D plan for prescription drugs. The resulting coverage in most cases should be quite comprehensive – as good as you had through your employer. Medicare Advantage, as we discuss later, has some limitations that may make it less than the optimal choice for those who can afford more.

MEDIGAP: More than a quarter of Original Medicare enrollees also buy Medicare Supplement Insurance policies, or Medigap. These policies are for “extra” health insurance purchased from a private company to pay costs not covered by Original Medicare, such as co-payments, deductibles and emergency medical care outside the United States during the first 60 days of a trip.

They do not cover dental care, eyeglasses, hearing aids, long-term care, prescription drugs, private-duty nursing or vision care. Many people buy Medigap in tandem with Part D for prescription drug coverage.

Medigap policies are available only to people who already have Medicare Parts A and B. The cost can vary widely, as each insurance company sets its own premiums. There are 10 different standardized plans – adding Parts F, G, K, L, M and N to the alphabet stew (plans E, H, I and J are no longer available to new subscribers) – and one high-deductible option. These standard plans offer different levels of health coverage but the benefits of each are the same across all insurers; only the premiums vary. As an example, all F plans offer identical coverage; the only difference is the premiums charged by each insurance company within each state. The Medicare site advises how to compare the different plans.

Be aware that a pre-existing condition can result in a waiting period under Medigap. Traditional Medicare cannot deny coverage for pre-existing health problems. But in some cases, Medigap insurers can impose a six-month waiting period for a pre-existing condition – refusing to cover out-of-pocket costs for that time before beginning coverage.

PART D: Medicare’s prescription drug program is a popular option, chosen by 43 million of the 60 million people enrolled in Medicare in 2018. Monthly premiums average $41, although they can be twice that amount. Copayments are required. The standard deductible in 2018 is $405, although many plans have no deductible.

Each of the dozens of Part D plans available in every state or region has a formulary, or list of medicines covered, and sets the amount it charges for each one, with costs varying widely. But you do not have to select a plan yourself. Call Medicare (1-800-MEDICARE) during the annual enrollment period and tell the agency what medicines you take. A Medicare representative will enter your list into a database and enroll you in the plan that best suits your needs.

Decide if you want Medicare Advantage (Part C) as a supplement to Original Medicare instead

Under the Medicare Advantage program, beneficiaries enroll in a private health plan such as an HMO or PPO and receive all Medicare-covered Part A and B benefits and typically Part D benefits. Usually a lower-cost option, the plan may carry no premium whatsoever beyond the cost for Part B (Part A is free, assuming you or your spouse paid Medicare taxes for at least 10 years). The standard premium for Part B in 2018 is $134 a month, with higher-income enrollees paying more; premiums range as high as $428.60 for individuals making more than $85,000 or married couples making more than $170,000.

Unlike Original Medicare, Medicare Advantage limits out-of-pocket costs to a maximum amount, which is $6,700 in 2018. Most Medicare Advantage plans also include dental and vision coverage. The major downside is that the plans, often HMOs, will likely limit your choice of doctors and hospitals. More prior authorizations may be required before physicians can make referrals.

Also, while the cost controls generally make it a less expensive alternative, the potential exists for higher costs than traditional Medicare for specific services in some circumstances. For example, some plans charge more for a short hospital stay, home health care or medical equipment such as oxygen.

If you are considering Medicare Advantage, it makes sense to check with your health care provider to see if they participate.

A detailed description of Medicare Advantage can be found at the official Medicare site. For an excellent rundown of the pros and cons of Original Medicare versus Medicare Advantage for various scenarios, go to the health insurance information site Medicareresources.org.

Beware the Medicare “doughnut hole”

Those who are on numerous prescriptions should know ahead of time about the Part D coverage gap, widely referred to as a doughnut hole. This means you must pay all costs above a specified amount out of pocket under Part D, up to a certain limit. Once you reach the plan’s out-of-pocket limit, “catastrophic coverage” kicks in.

In 2018, the coverage gap begins at $3,750 in payments for covered drugs, leaving a doughnut hole of as much as $1,250 in out-of-pocket costs before Medicare’s catastrophic coverage automatically takes effect at $5,000.

Supplemental plans can cover some of the extra coverage costs, but they are pricier than standard plans. Congress voted in March 2018 to eliminate the doughnut hole in 2019. In the meantime, patients who fall in the coverage gap are forced to decide between higher premiums or higher out-of-pocket costs.

Self-insuring is highly risky

You are never required to sign up for any part of Medicare. Those who are willing to take the risk and foot the bills from their own resources may self-insure (beyond Part A, which is generally free and which you will need for hospital costs). This option should be viewed with extreme caution even for the wealthy, however. Even those who arrive at 65 in excellent health can fall victim to sudden, unexpected medical events that result in huge bills and ongoing care.

If you decide later that you do need Medicare, you will be slapped with lifetime late-enrollment penalties for Parts B and D. You will face at least a six-month gap between when you apply and the date your policy takes effect. And you could have difficulty even obtaining a Medicare supplement plan.

The costs of Medicare should be more than manageable for those of means. For those with limited income and resources, help is available.

Still unsure how to proceed as eligibility age approaches? The official Medicare site contains a thorough discussion of eight things to consider when choosing coverage. Altair Advisers, too, is willing to pursue answers or provide guidance and recommend a health insurance specialist.

Summary points:
  • Parts A and B do not cover all health costs. Decide what other coverage you need from among Part D (prescription drugs), Medigap (extra health insurance purchased from a private insurer) and Medicare Advantage (a managed care plan financing at a minimum the same services as Parts A and B). Costs vary.
  • The combination of Original Medicare + Part D + Medigap provides comprehensive coverage comparable to what employers offer.
  • Medicare Advantage generally is less expensive but limits the choice of doctors and hospitals.
  • The Part D “doughnut hole” or coverage gap could cost a patient with high prescription drug costs as much as $1,250 in additional out-of-pocket costs in 2018.
  • Self-insuring (beyond Part A, which generally is free) is possible but highly risky because of open-ended cost exposure.
On the Web: 

Next: Optimizing Social Security benefits


GLOSSARY OF PLAN NAMES

MEDICARE PART A – Hospital insurance. Covers inpatient stays, care in a skilled nursing facility, hospice care and some home health care.
MEDICARE PART B – Medical insurance. Covers certain doctors’ services, outpatient care, medical supplies and preventive services.
MEDICARE PART C – Managed care plans provided by private companies that contract with Medicare, replacing and providing broader coverage than Parts A and B. Better known as Medicare Advantage.
MEDICARE PART D – Prescription drug coverage, offered by insurance companies and other private companies approved by Medicare.
MEDICARE ADVANTAGE – Name used most often for Medicare Part C
MEDIGAP – Health insurance coverage sold by private insurance companies designed to cover excess costs not covered by original Medicare; also called Medicare Supplement Insurance.
ORIGINAL MEDICARE – Term referring to Medicare Parts A and B; also called traditional Medicare.
MEDICAID – A joint federal and state program that helps with medical costs for some people with limited financial resources

The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice.  Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training.  While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.