Medicare: A Practitioner’s Guide

Having a comprehensive and affordable health insurance strategy is more than just a critical component in your retirement plan; it’s a critical component in your quality of life.

By Judah Day

The Importance of Medicare

When it comes to planning your retirement, there is no shortage of components to consider. Making an income plan, deciding when and how to file for Social Security, and minimizing the impact taxes may have on your retirement assets are just a few of the issues you will need to address. Crafting a retirement plan that is capable of supporting your lifestyle and rewarding the years you spent in the workforce is no easy task. In fact, it is a financial challenge unlike any you’ve ever faced before.

The hallmark of a successful retirement is developing a financial plan that ensures your money will last as long as you do. During this unique period in your life, how you distribute your money matters far more than how much of it you have or how adeptly you save it. While it’s easy to become entangled in the many different financial issues your plan will encompass, none of this will matter if your plan doesn’t address your health needs and concerns. Having a comprehensive and affordable health insurance strategy is more than just a critical component in your retirement plan; it’s a critical component in your quality of life.

There are many different ways to accomplish this but for many retirees Medicare is the most important. Medicare guarantees health insurance for people older than 65, with certain disabilities or with certain diseases. Of the nearly 51 million Americans who were Medicare recipients in 2012, about 41 million of them were over age 65, which makes Medicare a crucial factor of retirement planning.¹

Similar to Social Security, Medicare is a federal social insurance program that you have paid into over the course of your career. And, like Social Security, getting the most out of what you have put in requires careful planning, research and the help of a professional. For millions of retirees, having an effective Medicare strategy often means the difference between either insulating their retirement savings from medical costs – or quickly depleting them. The importance of understanding your Medicare coverage cannot be understated: it’s more than just your financial well being at stake; it’s your physical and mental well being, as well.

The AB(CD)s of Medicare

Medicare coverage is divided into four parts, Parts A, B, C and D, which are then essentially split into two basic categories: Original Medicare (Parts A and B) and additional coverage (Part C and/or D). When it comes to selecting the Medicare coverage that’s best for you, it’s important to understand the differences between these two categories.

Original Medicare, Parts A and B, is coverage that is provided directly by the federal government and these are the portions of Medicare to which most working Americans are automatically entitled to once they turn 65 years old. Enrollment in Parts A and B is automatic for anyone who is 65 years old and already receiving Social Security or Railroad Retirement Board benefits, diagnosed with ALS (Amyotrophic Lateral Sclerosis, also known as Lou Gehrig’s disease), or under age 65 and receiving disability benefits. For individuals entitled to Medicare but who are not eligible for automatic enrollment because they don’t trigger a qualifying event, they can sign up for Original Medicare during an enrollment period and it’s critical for them to do so as delaying may result in late penalty fees.²

As with Social Security, a certain portion from each one of your paychecks is automatically deducted to pay for Medicare, and this money is used to fund Original Medicare, particularly Part A. When the Medicare tax has been withheld from your pay for at least 40 calendar quarters, then you will be eligible for free Part A coverage. Although Part B is not free, its monthly premium is determined by income level. Parts C and D, on the other hand, are completely separate from Original Medicare, and provide additional or supplemental coverage that is offered via Medicare-approved private insurance companies. To enroll in Part C or D, you must decide which policy’s coverage and monthly premium is right for you, and then purchase the policy from that carrier during an enrollment period.

Extent of Coverage:

Each part of Medicare offers different medical coverage at varying costs.

Part A is hospital insurance – it covers the costs of health care at medical facilities, and offers coverage for medically necessary inpatient care at hospitals, skilled nursing facilities, hospices and limited home health services. While most people don’t pay a premium for Part A because they have already paid enough into the system, that does not mean that the coverage provided by Part A is free.

For a hospital stay in 2015, you will pay:

$1,260 deductible per benefit period
$0 for the first 60 days of each benefit period
$315 per day for days 61-90 of each benefit period

For any hospital stay lasting more than 90 days, Medicare will only pay for a portion of those additional days if you use one of your 60 “lifetime reserve days,” at a cost to you of $630 per day. If a hospital stay extends beyond 90 days in a benefit period and your lifetime reserve days, you will be responsible for all costs.

For a skilled nursing facility stay in 2015, you will pay

$0 for the first 20 days of each benefit period
$157.50 per day for days 21-100 of each benefit period
All costs for any day of care beyond day 100 of the benefit period³

Part B is medical insurance that covers the costs of two types of services: medically necessary and preventative. Medically necessary services consist of services or supplies that are required to diagnose or treat a medical condition and that meet certain medical care practice standards. Preventative services include health care services to avert illness or assist in early detection. These services would include clinical research, ambulance services, durable medical equipment, mental health care, outpatient and inpatient care, second opinion before surgery, and a small selection of outpatient medication.

The cost of Part B varies according to income level, although most people will pay the standard monthly premium amount of $104.90 and have a $147 yearly deductible. Individuals who have an annual income greater than $85,000 and couples who have a joint annual income greater than $170,000 will have an extra charge added to their premium due to their high income level.⁴

Part C is Medicare Advantage (MA) Plans, which are policies offered by Medicare-approved private insurance carriers to provide you with all the same benefits as Parts A and B, and many plans may offer extra benefits by providing prescription drug coverage and/or coverage for additional services such as vision, hearing, dental, and/or health and wellness programs. If you select a Medicare Advantage Plan, you will still be enrolled in the Medicare program, but your medical coverage will be administered by your plan, not by Original Medicare. In other words, Medicare will pay your MA Plan’s insurance carrier a set amount for your care each month, instead of directly paying your healthcare provider (as is the case if you have Original Medicare). Consequently, while the coverage and cost of MA Plans will vary, they will only do so to a certain extent as they all provide the same baseline coverage (the benefits of Parts A and B) and either you or your MA Plan will still need to pay the premium associated with Part B.⁵

Part D is prescription drug coverage that is offered through private Medicare-approved insurance companies. Every Medicare Prescription Drug Plan has its own list of drugs, called a formulary, for which it will provide coverage. A formulary is divided into different tiers according to the cost of the drug: drugs on a lower tier will generally have lower copayments than drugs on a higher tier.

As Parts C and D are provided by private insurance companies, the monthly premiums of these policies depend on the extent of their coverage and can vary between companies. However, although the cost varies from plan to plan, the payment structure for Part D often can create a gap in coverage. Essentially, you pay monthly premiums for Part D all year, and with most plans you pay 100 percent of your drug costs until you reach your deductible amount. After your deductible, the cost of your drugs is split between you and your plan. However, once you and your plan have spent $2,960 on covered drugs, you’ve entered the coverage gap, and now will have to pay 65 percent of the price of generic drugs and 45 percent of the price of brand- name drugs. You will not exit the coverage gap until you’ve spent out-of-pocket $4,700 on prescription drugs. At that point, you will qualify for “catastrophic coverage” and will only have to pay a small copayment for covered drugs for the rest of the year.⁶

Medigap

Just like with any insurance policy, there may be times when the Medicare plan you’ve chosen doesn’t provide you with the coverage you need. To help limit the potentially devastating consequences of this fact, you can purchase a Medicare Supplement Insurance (Medigap) policy from a private insurance carrier to help bridge potential holes in your coverage. A Medigap policy can be used to help pay for some of the healthcare costs, such as copayments, coinsurance and deductibles, that Original Medicare doesn’t cover, or it can be used to provide you with coverage for services that aren’t included in Original Medicare, such as international travel medical care.A Medigap policy can only be used in conjunction with Original Medicare. Whereas a Medicare Advantage Plan is meant to provide you with Medicare benefits through private means, a Medigap policy is meant to complement your Original Medicare coverage. Just as its name implies, a Medigap policy is not a standalone form of coverage, instead it is a way to help fill a particular coverage gap.

If you have Original Medicare and choose to purchase a Medigap policy, then your Medicare policy will pay its Medicare-approved portion for covered health care costs and your Medigap policy will pay its share. Bear in mind that a Medigap policy won’t provide you with impenetrable coverage: there are many services the policies won’t cover, such as long-term care, vision or dental care, hearing aids, eyeglasses, or private-duty nursing.7

As Medigap policies are offered through private insurance carriers, the cost and extent of the coverage they offer varies greatly. Each insurance company determines its own premium, and many insurance companies will charge different premiums for identical coverage. It’s crucial to understand the method by which an insurance company prices, or “rates,” its Medigap policies, as there are three ways to do so. When shopping for a Medigap policy, it’s not only important to make sure you’re comparing policies that offer the same type of coverage but also policies that have the same type of pricing as the way a Medigap policy is rated can have profound impact on your bottom-line.

A Medigap policy that is community-rated or No-Age-Rated means the premium for a Medigap policy is the same across the board – regardless of the policyholder’s age. The monthly premium can still go up but, if it does, it won’t be an age-related increase.
An Issue-Age-Rated Medigap policy means the monthly premium is determined by how old the policyholder is when s/he purchased the Medigap policy and will not increase with age.
An Attained-Age-Rated Medigap policy means the monthly premium is based on the policyholder’s current age and will increase as s/ he gets older.⁸

As you begin to consider whether a Medigap policy may be right for you, the Medicare website lists the below eight items as important facts to consider:

You must have Medicare Part A and Part B.
If you have a Medicare Advantage Plan, you can apply for a Medigap policy, but make sure you can leave the Medicare Advantage Plan before your Medigap policy begins.
You pay the private insurance company a monthly premium for your Medigap policy in addition to the monthly Part B premium that you pay to Medicare.
A Medigap policy only covers one person. If you and your spouse both want Medigap coverage, you’ll each have to buy separate policies.
You can buy a Medigap policy from any insurance company that’s licensed in your state to sell one.
Any standardized Medigap policy is guaranteed renewable even if you have health problems. This means the insurance company can’t cancel your Medigap policy as long as you pay the premium.
Some Medigap policies sold in the past cover prescription drugs, but Medigap policies sold after January 1, 2006 aren’t allowed to include prescription drug coverage. If you want prescription drug coverage, you can join a Medicare Prescription Drug Plan (Part D).
It’s illegal for anyone to sell you a Medigap policy if you have aMedicare Medical Savings Account (MSA) Plan.

As you can see, both the cost and coverage of Medicare varies greatly, depending on what type of plan you select. Maintaining the vitality of both your physical health and your retirement assets requires developing a strategy to manage your insurance costs in the most efficient manner possible. When it comes to selecting the right plan, it’s critical to work with a financial professional who can help ensure you select the plan that provides the necessary coverage at the appropriate cost. Your healthcare plan and coverage need to be as unique as you are: make sure you work with a professional who will take the time to craft a strategy that will help protect both your health and retirement.