July 27, 2020
If you’re like most Americans, you’re getting a wonderful present for your 65th birthday: government-subsidized health insurance for the rest of your life.
The bad news is that Medicare won’t cover a significant chunk of medical expenses. Some choices await that will determine how much you’ll pay and what sort of care you’ll get.
The biggest decision is whether to buy a Medicare supplemental insurance plan or to enroll in a Medicare Advantage plan. The supplemental plans pay thousands of dollars in deductibles and co-pays that Medicare would otherwise leave to you. Medicare Advantage plans have lower premiums, but limit the doctors you can see and treatments you can receive.
Don’t dawdle. During the first six months after you enroll in Medicare Part B—which pays for doctors and other services—supplemental plans must accept you without considering pre-existing conditions. If you miss that window, they have the right to charge extra for health problems or deny coverage.
The graying of the baby-boom generation means that roughly 300,000 Americans were going on Medicare every month even before the coronavirus caused thousands of older workers to lose their jobs and health insurance. These seniors are being asked to navigate a confusing new landscape that blends public and private insurance coverage with complicated trade-offs between premiums and out-of-pocket costs.
Barron’s talked to financial planners, Medicare consultants, insurance brokers, and Medicare enrollees to create a guide for this labyrinth.
If you’re already receiving Social Security benefits, enrollment in Medicare is automatic at age 65. Otherwise you must enroll within a seven-month period of turning 65, which includes the month you turn that age, and the three months before and after. Even if you’re getting Cobra coverage, where you remain on the health plan of a former employer or enrolled in a retiree health-care plan, you must sign up for Medicare or face penalties.
One big exception: If you’re still working at a company with at least 20 employees and covered by a health-care plan there, you don’t need to sign up. After your employer health insurance ends, you have eight months to do so.
Medicare is heavily subsidized but hardly free. The monthly premium starts at $144.60 a person for singles earning up to $87,000 and couples earning up to $174,000 a year. The premium rises in a series of income brackets to a $491.60 individual monthly premium for singles earning more than $500,000 or couples earning more than $750,000 a year. The highest-income earners also pay a $76.40 monthly surcharge for their drug plan.
If you exceed an income bracket, your premiums will jump substantially in the future. You can save yourself a lot of money by delaying a stock sale or holding off spending from a tax-deferred account to lower the income for a particular year.
Costs of Delaying
Medicare increases your monthly premium by 10% for each year that you miss its deadlines. That increase applies for the rest of your life.
It’s a similar deal for Medicare Part D, which covers prescription drugs. Here, the government will increase your lifetime premium 1% for each month you’re late signing up.
David Mendels, a financial advisor, had one client who was in her late 60s and had enrolled for Medicare, but not for any supplemental coverage or drug plan. She was healthy, didn’t see a doctor often, shopped around for inexpensive drugs, and figured it was cheaper than paying premiums for supplemental coverage.
Mendels told her she was taking a big risk. She ended up enrolling in an Advantage plan that includes drug coverage. Mendels says clients too often focus on saving a little money on premiums when they should worry about the costs of major illness.
“My concern always is not the nickels and dimes, but the megabucks,” he says. “Even though the megabucks are unlikely, they’re what is going to kill you.”
What Isn’t Covered
Basic Medicare leaves beneficiaries exposed to tens of thousands of dollars in potential costs if they don’t have supplemental coverage.
Suppose you break your hip and have only Medicare. You must pay a $1,408 deductible for hospitalization. On top of that, Medicare will pay doctors treating you only 80% of the amount it allows for that procedure; you’re responsible for the other 20%.
Now suppose that you have to go to a skilled-nursing facility to start walking again. Medicare will cover the first 20 days at 100%. If you need more time than that, you’ll get hit with a $176-a-day co-pay. Unlike most insurance plans, there are no out-of-pocket limits for what you have to pay under Medicare. That broken hip could cost you a lot of money unless you’re enrolled in a supplemental plan or Medicare Advantage.
“Either one will cap costs,” says Tom Jordan, a Medicare and long-term care specialist. He says about 70% of his clients enroll in supplemental plans and most of the rest in Advantage plans. Most of the clients picking supplemental plans also enroll for Medicare Part D prescription-drug plans, while those who sign up for Advantage plans typically get drug coverage as part of the plan.
Getting the Doctor You Want
Rich Hartunian, 68 years old, of Boonton, N.J., just retired from information technology. He was leaning toward enrolling in a Medicare Advantage plan because of the simplicity. Then he talked to a local health-care consultant, Mary Jeanne Cullen, provided by his financial planner.
Hartunian had been treated a few years earlier for a health problem at Memorial Sloan Kettering Cancer Center in New York City, and he still goes to the center for follow-up visits. Cullen told Hartunian that the Advantage plan wouldn’t allow him to keep going to Sloan Kettering. That was a deal breaker.
Hartunian and his wife signed up for a supplemental plan that allows him to go to all hospitals that accept Medicare, Sloan Kettering among them. Their premiums for that supplemental plan, a supplemental drug plan and for Medicare itself total around $350 a month apiece. However, they have no out-of-pocket costs.
“You really have to do your homework on who accepts what,” Hartunian says.
Cullen says she puts almost all her clients in supplemental plans unless they can’t get into one because of their health or age. Cullen, 68, is in a supplemental plan herself.
The government regulates what coverage insurers must include in various supplemental plan options, labeled by letters of the alphabet. That means that consumers can focus on costs since all insurers offer an identical product.
Downside of Supplemental Plans
If you enroll in a supplemental plan, your premium will rise as you get older in most states. Typically, a client in his or her 80s will be paying 50% more than a 65-year-old, says David Armes, a financial planner who specializes in Medicare.
There are exceptions. Several states—New York and Massachusetts among them—mandate community ratings where insurers must charge everyone in the plan the same rate regardless of age or health.
The result is that customers in these states can stay on cheaper Advantages plans, but switch to supplemental plans when their health declines and they need more-specialized care. Trying that strategy in states without community ratings like California or New Jersey is risky.
“You’re rolling the dice” by waiting to join a supplemental plan until you’re older, says Armes.
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