Update Your Medicare Game Plan

Act now. Big policy changes mean you could save money by rethinking your choices.

Medicare is changing, and so should your strategy for choosing your health-care coverage. The new health-care-reform law freezes subsidies for Medicare Advantage plans, which means that most of these all-in-one policies will change and some will disappear altogether. In addition, the "doughnut hole" in Medicare Part D prescription-drug plans, which can leave you with a bill for thousands of dollars of drug costs each year, will gradually be eliminated. And starting next year, some high-income seniors will pay extra for Part D coverage.

You have from November 15 to December 31 to pick a Part D or Medicare Advantage plan for 2011. While you're at it, review how you fill other gaps in your health-care coverage under these new rules.

Compare all-in-one plans. Medicare Advantage plans, which provide all-inclusive health and drug coverage, are likely to raise their premiums and increase cost sharing to make up for the declining subsidies and added coverage requirements in 2011. Some plans are likely to eliminate extra benefits, such as gym memberships and vision care.

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Almost one-fourth of Medicare beneficiaries are enrolled in Medicare Advantage plans, according to the Kaiser Family Foundation. The rest stick with traditional Medicare, and thus they must pay monthly premiums for Part B. Many also buy supplemental medigap policies to cover deductibles and co-payments and separate Part D plans to pay for prescription drugs.

During this open-enrollment period, review your Medicare Advantage options and focus on the total out-of-pocket cost, including premiums and co-pays, for the types of drugs and medical services you use. "A lower premium may not save you money because the benefits may be cut," says Ross Blair, president and chief executive of Plan-Prescriber.

Making the right choice now is more important than ever because you will not get a second chance to switch Medicare Advantage plans for 2011. That's because the traditional second open-enrollment period, from January through March, has been eliminated -- which is likely to cause confusion, says Fred Karutz, of Silverlink, a consulting company that helps seniors make decisions about their health benefits.

If you have been covered by a Medicare Advantage private fee-for-service plan, which allows you to use any doctor or hospital that accepts Medicare, you need to be extra vigilant. Many of these plans have gone out of business over the past few years, and more are sure to follow. If your plan shuts down, you may be automatically enrolled in traditional Medicare or your insurer could make it easy to switch to another Medicare Advantage plan (assuming one is available), but your choice of doctors may be more limited.

Reshop your medigap policy. Your other option for filling the gaps in Medicare is to buy a medigap policy and a separate Medicare Part D drug policy. Medigap policies tend to be more expensive than Medicare Advantage plans, but the policies let you use any doctor or hospital that accepts Medicare. Two new medigap plans introduced this year provide a good balance of coverage and cost, particularly for refugees from the Medicare Advantage exodus.

Until recently, insurers sold 12 standardized plans, which were labeled A through L. Although prices might have varied from insurer to insurer, each company's Plan A, for example, offered the same coverage. But those options changed on June 1, when insurers were no longer permitted to sell plans E, H, I and J to new customers. (If you have one of those policies, you may keep it, but you might not want to.)

The two new plans, M and N, are similar to the most popular medigap policy, Plan F, with a few cost-sharing differences. But Plan N is usually the best deal. Like Plan F, Plan N covers 100% of the $1,100 Part A deductible, but unlike Plan F, it doesn't cover the $155 Part B deductible. Plus, Plan N requires co-pays for visits to the emergency room and doctors' offices.

Even so, the premiums for Plan N are generally so much lower than for other medigap policies that you may still come out ahead. For example, the least-expensive Plan F for a 70-year-old man in Miami costs $211.50 per month, according to PlanPrescriber.com. But Plan N is only $169.20 per month, so you'd come out ahead for the year even if you visited a doctor 12 times at $20 a pop and went to the ER twice.

Alan Mittermaier, president of HealthMetrix Research, which provides rankings of Medicare Advantage plans, says that Plan N can be a good alternative to Medicare Advantage, especially if you are switching from a private fee-for-service plan. You can still use any doctor, and you'll pay similar cost-sharing fees.

But beware of "excess charges." Doctors are allowed to charge a patient up to 15% of the Medicare-covered charge. Plan F covers such excess charges, but plans M and N do not. If your doctors charge extra, your costs could really add up.

There is no open season for medigap coverage. You may apply for a new policy at any time during the year. However, you might be rejected or charged more because of your age or health, unless you're within six months of your initial enrollment in Medicare Part B. But don't let that stop you from making the switch to a new plan; several insurance companies will offer you the new policies regardless of your health.

Review your Part D options. Medigap policies don't cover prescription drugs, so you'll need to get a separate Part D policy. In 2010, the doughnut-hole coverage gap kicks in when your prescription-drug expenses total $2,830 for the year (including both your share and the insurer's share of the costs). At that point, you generally have to pay all of your drug bills yourself until the total cost of your medicines for the year reaches $6,440. After that, the insurer picks up most of the bill.

If you have been paying extra for some drug coverage in the doughnut hole, it's time to review your Part D options. You may be able to switch to a more basic -- and less expensive -- policy and still end up with similar coverage because of the new discounts in the doughnut hole. The gap starts to shrink in 2011. Patients caught in the doughnut hole next year will get a 50% discount on brand-name drugs, and the prescription-drug funding gap will gradually disappear by 2020. Seniors will also get a break in the doughnut hole on less-expensive generic drugs -- they'll pay 93% of the cost rather than the full 100% in 2011.

Also, premiums for the most-popular plans have increased significantly over the past few years; the plan that was the best deal a few years ago may now be one of the more expensive ones. Average premiums for Part D are expected to rise by just $1 in 2011, to $30 per month, according to the Centers for Medicare & Medicaid Services. But that's cold comfort for the millions of seniors who have seen their Part D premiums skyrocket over the past few years.

Consider the premiums as well as the coverage for your specific drugs. A plan with a low premium could cost you more in the long run if you have high drug co-payments. Ask your doctor whether you can switch to generics or other lower-cost drugs. And be aware that the plan with the best deal for brand-name drugs might be different than the best plan for generics (the Doughnut Hole Calculator can help you find generic substitutes).

Starting in 2011, individuals who earn more than $85,000 per year (or $170,000 if married filing jointly) will have to pay a high-income surcharge for Part D premiums.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.