To the uninitiated, medicare is an alphabet soup of parts and plans. Do you want your basic Medicare—parts A and B—with a dollop of Part D and a medigap side order of Plan G, or go for an all-in-one Medicare Advantage plan instead?
As if those choices aren’t cryptic and confusing enough, thanks to Medicare’s byzantine rules and draconian penalties, the decisions that newcomers make early on, including when they first enroll in the program, can have lasting effects in the form of higher premiums or coverage restrictions down the road.
“People have to make some of the most consequential decisions about Medicare right when they know the least about Medicare,” says David Lipschutz, associate director at the Center for Medicare Advocacy.
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Throw in a pandemic, a struggling economy and some big changes to the program in 2020, and even seasoned Medicare beneficiaries have plenty to chew on. Rates for 2021 have yet to be announced, but over the summer, Republicans called for freezing 2021 premiums at 2020 levels in their economic stimulus bill. The freeze is no freebie; beneficiaries must repay any shortfall from the premium freeze with monthly surcharges averaging $3.
Social Security’s annual cost of living adjustments (or the lack of them) are another piece of the premium puzzle. Some beneficiaries, but not all, are protected from rising Medicare premiums in years when COLAs, which Kiplinger’s forecasts at 1.2% for 2021, are too meager to keep up with rising premiums.
The Main Course: Medicare Part B
The premiums in question are for Medicare Part B, which pays for physician services, diagnostic tests, physical therapy and other outpatient care. The standard Part B monthly premium is projected to rise to $148.50 in 2021, up from $144.60 this year. That base premium gradually increases depending on income because of Medicare surcharges, also known as income-related monthly adjustment amounts. Rates and income thresholds for Part B are set by the federal government and typically announced toward the end of the year for the following year.
Part B, along with Part A, which covers inpatient care at a hospital or skilled nursing facility, are the meat and potatoes of Medicare coverage. Most people don’t pay a Part A premium because they’ve been funding it through payroll taxes during their working years.
The two parts together sound comprehensive but, in fact, leave gaping holes in coverage, with prescription drugs, hearing aids and routine dental, vision and foot care not included. What’s more, when Part B kicks in, it only pays for 80% of medical costs, leaving you to shoulder the remaining 20%, and that’s after any copayments and deductibles. Part A pays for all hospital costs only for the first 60 days and that’s after a $1,408 deductible. “If you have catastrophic needs, it can get very expensive,” says Jim Blankenship, author of A Medicare Owner’s Manual: Your Guide to Medicare Benefits (independently published, $12.88) and a certified financial planner in New Berlin, Ill.
Medigap on the Side or a Medicare Advantage Entree?
Beneficiaries can plug coverage holes and limit out-of-pocket costs with a medigap plan or abandon traditional Medicare for an all-in-one Medicare Advantage plan. Medigap plans fall under the traditional Medicare umbrella, letting you go to any doctor or hospital that accepts Medicare. Administered by private insurers rather than the federal government, Advantage plans work like managed care, with fixed networks of providers and hospitals. Patients pay more for out-of-network care and may need referrals to see a specialist.
As a result, Advantage plans, also known as Medicare Part C, generally have lower premiums and higher out-of-pocket expenses than medigap policies while offering one-stop shopping. Advantage insurers not only administer parts A and B, covering the same benefits as traditional Medicare, including any preexisting conditions, but may also offer extras that medigap plans don’t—like routine dental and vision care or prescription drug coverage. The range of offerings, premiums, copayments and deductibles can make Advantage plans hard to compare so use total out-of-pocket expenses as a baseline and confirm that your doctors participate in the plan’s network.
But the tradeoff for one-stop shopping may be quality of care or even access to it. “People with chronic conditions tend to disproportionally disenroll from Medicare Advantage” because of limited choices within a network and the high cost of going outside it, says Lipschutz. The research, he says, shows that “people typically do better in traditional Medicare.”
For that, you need medigap, which is a Medicare supplement plan. There are currently about 10 types of medigap plans, each beginning with a letter. The lettered plan you choose determines the extent of coverage for out-of-pocket costs in parts A and B. Although offered through private insurers, medigap policies are standardized so that coverage is identical for all plans with the same letter, making an apple-to-apple comparison of prices easy. Medigap is also portable and a better choice for snowbirds than an Advantage plan with a physician network restricted to one locale.
The most comprehensive and popular medigap coverage is Plan F. It pays all out-of-pocket costs, including Part B deductibles, but as of this year, Plan F and any other deductible-paying plan, like Plan C, are off limits to new Medicare enrollees.
Existing enrollees and “people who had those plans can continue to get them, but I expect they will be priced out as the number of participants declines and premiums rise,” says Blankenship.
A close substitute to Plan F, Plan G covers everything except the Medicare Part B deductible, which in 2020 was $198. Monthly premiums for Plan G in 2020 range between $90 and $170, depending on your age and state, according to MedicareFAQ, an insurance agency that sells supplemental Medicare plans.
Preexisting conditions are covered, and no underwriting is needed for a medigap plan when beneficiaries sign up within six months of enrolling in Medicare Part B. But choosing a different medigap plan or switching from an Advantage to a medigap plan later on can require medical underwriting, particularly if you’re selecting more generous coverage. At that point, the medigap insurer can charge more for the policy and impose a waiting period before covering health care costs. There is no underwriting for Medicare Advantage plans.
If you’re going with medigap, Blankenship advises, “choose the plan that has the most coverage for your needs earlier in the process because it’s easier to move down in coverage than to move up.”
A Filled Medicare Doughnut Hole Tastes Sweeter
Medicare’s prescription drug coverage is known as Part D. If you choose a medigap plan or an Advantage plan that has no drug coverage, you will also need to purchase a standalone Part D plan to cover medications. The average basic premium in 2021 will be $30.50. As with Part B, the premium rises with income.
Whether you get prescription drug coverage through an Advantage or standalone plan, Part D has two phases: initial and catastrophic, each with different thresholds to meet before medications are covered. “The rules and requirements are the same whether you’re looking at Medicare Advantage or standalone plans,” says Juliette Cubanski, deputy director of the Program on Medicare Policy for the Kaiser Family Foundation.
Between these two phases is a gap in the middle—the famous doughnut hole. Falling into the doughnut hole used to be a form of prescription drug purgatory, where beneficiaries footed the entire bill for medications until the catastrophic phase of Part D offered a measure of salvation. That hole, however, has been filled in steadily over the past several years so that, as of 2020, the cost burden for beneficiaries is lighter.
Using 2021 numbers, here’s how Part D works. Formularies and initial deductibles, which Medicare caps at $445, vary with each insurer’s plan. When shopping for plans, make sure “their formulary incudes your medications,” says Blankenship. “Then look at costs.”
Deductibles may be less than the cap or nonexistent. Some plans will also cover low-cost medications immediately while leaving the deductible in place for brand-name drugs. Once the initial deductible is met, you pay either a copayment or a percentage of the cost. Many insurers also tie costs to tiered coverage that is more generous for generic drugs and brand-name pharmaceuticals with set prices that the insurer negotiated.
The first phase ends when a plan’s total payouts hit the initial coverage limit—$4,130 in 2021. At that point, you’re in the doughnut hole, but it’s a sweeter place than before, with beneficiaries paying only 25% of the plan’s negotiated prices for generic and brand-name drugs, instead of 100%. Pharmaceutical companies eat 70% of the cost with insurers paying the remaining 5%.
You emerge from the doughnut hole and into the catastrophic phase when your total out-of-pocket costs hit $6,550, the maximum spending limit for beneficiaries in 2021, which is $200 higher than 2020’s cap. Any deductible paid in the initial phase counts toward that annual maximum as does the 25% you contributed while in the doughnut hole and the 70% that pharmaceutical companies paid on your behalf.
Under catastrophic coverage, you pick up the tab for whichever is greater: 5% of the retail price of your medications, or $9.20 for brand-name drugs and $3.70 for generics.
Medicare's Maalox Moments
One of the costliest Medicare traps to fall into is missing your initial enrollment deadline, and it’s easy to do. Having been told that it’s better to postpone claiming Social Security, most Americans don’t realize that the reverse is true for Medicare, where you are penalized if, at age 65, you don’t have qualifying health coverage and don’t enroll on time.
If you’re already claiming Social Security benefits by that age, you’re enrolled in Medicare parts A and B automatically. The trap mainly ensnares those who aren’t taking Social Security, which is increasingly more common as the full retirement age for claiming benefits has been rising steadily from 65 to 67, depending on the beneficiary’s birth year.
Your initial enrollment period begins three months before the month you turn 65 and lasts for seven months. Use the first three months of that initial enrollment period so that the timing of your effective coverage isn’t delayed, says Casey Schwarz, senior counsel for education and federal policy for the Medicare Rights Center.
During initial enrollment, you can sign up for parts A, B or both online through Social Security. If you sign up for Part B and want supplemental coverage, this is also the window when you can choose a medigap plan without underwriting.
If you are still working and getting insurance through your employer or a spouse's employer, you may be able to delay Medicare enrollment without penalty, but COBRA doesn't count. In fact, if you have COBRA, you "may be paying for coverage that doesn't pay for care," Schwarz says. "COBRA or retiree coverage operates as a secondary payer so the insurer could decline to pay." Also, if you delay enrolling because you continue to work, be aware that a policy from an employer with fewer than 20 employees might not pay for expenses that could be covered by Medicare, leaving you underinsured.
Most people with qualifying coverage through an employer should enroll in Part A, which is free. Once you enroll in Medicare you can no longer contribute to a flexible spending account or a health savings account, though you can tap them to pay for medical costs.
If you don’t have eligible employer coverage and don’t enroll in Medicare during that initial seven-month window, parts B and D each impose separate penalties. For Part B, you’ll be hit with a 10% increase in the monthly premium for each 12-month period that you were eligible to enroll but didn’t. The penalty, Medicare says, lasts “for as long as you have Part B”— in other words, for life. Although Part D is optional, the premium increases 1% for each month you delay enrolling; it too lasts for life.
Anyone 65 or older who lost a job (and with it qualifying health coverage) through an employer has eight months to enroll in Medicare to avoid penalties.
During the pandemic, most people were forced to enroll online, but earlier this year that wasn't an option for anyone needing only Part B, a problem that has been corrected, Schwarz says.
Medicare's general annual enrollment occurs each year from Oct. 15 to Dec. 7. That's when existing beneficiaries can change plans with coverage beginning Jan. 1. This includes switching from traditional Medicare to an Advantage plan or vice versa, changing an Advantage plan, switching or adding prescription drug coverage through a standalone plan, and adding or dropping drug coverage for an Advantage plan. You can switch medigap plans any time if the new insurer accepts you.
Those enrolled in an Advantage plan also have between Jan. 1 and March 31 each year to choose a different Advantage plan, return to traditional Medicare or change prescription drug coverage. Your new plan takes effect the month after you sign up for it.
If you miss your initial enrollment, you can sign up for Part A anytime, but for Part B you will have to wait until the January through March period to enroll.