Even though Medicare is a critical part of health care for all Americans over the age of 65, making sense of the alphabet soup of Medicare plans presents a challenge annually. At the most basic level, individuals need to make sense of four key components of their Original Medicare (not Medicare Advantage) insurance coverage.
Recurring After Enrollment
The first insurance component is Medicare Part A, which for anyone with more than 40 quarters of covered work does not require any ongoing premium. Part A is coverage for hospitalization only. Beyond enrolling in Part A, there is no ongoing need to re-evaluate or make any changes.
The second part of the Medicare puzzle is Part B, which is for outpatient coverage. Unlike Part A, there is an ongoing monthly premium for Part B, which for 2020 will be $144.60. For most insureds, this amount is automatically deducted from their Social Security benefit. Once you are signed up for Part B, there is also no ongoing need to re-evaluate or make any changes.
Requiring Annual Review
The next piece of the puzzle is Part D, which provides coverage for prescription drugs. This is an area which does require at least an annual review in order to make sure that the plan that you are using is the best one for you given any medications that you might be taking. It’s not uncommon for the insurance companies offering this coverage to change their drug formularies from year to year. Such changes can either drastically increase the price that you pay for a given prescription, or even drop a particular drug altogether which results in you paying the full retail cost of the medication.
Fortunately, Medicare’s website makes it relatively easy to create an account and add all the prescription drugs that you are taking in order to determine which plan best meets your needs. It’s important to note that the best option isn’t always just the cheapest monthly premium. You should sort by total cost which includes both the monthly premium as well as the estimated cost of drugs for the year. Selecting the wrong coverage has the potential to be very costly, so it is worthwhile to spend some time looking at your coverage every year during the open enrollment period.
The final piece to consider is a Medicare Supplement policy, sometimes known as a Medigap policy. There are ten potential plans to choose from ranging from those that only provide very limited coverage to the most comprehensive Plan F, which essentially pays for all co-pays and deductibles that you would otherwise have to pay out of pocket.
One important thing to note is that for newly eligible Medicare enrollees beginning in 2020, Plan F will no longer be an option. The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) put an end to plans that pay the Medicare Part B deductible beginning in 2020. This means that the next best option for those wanting the most comprehensive coverage will become Plan G.
Medicare’s website also has a comprehensive comparison of Medicare Supplement policies with links to the various providers to help make sense of Original Medicare insurance. Changing Medicare Supplement policies is possible, but it could come with additional underwriting or having to wait up to six months for new benefits to be covered. Simply changing insurance companies, while keeping the same plan, is also possible and is an easier process with no exclusion of pre-existing conditions.
Income Related Monthly Adjustment Amounts (IRMAAs)
In addition to paying premiums for Part B, Part D and a Medicare Supplement, Medicare beneficiaries with higher adjusted gross income (AGI) should be aware of “Income-related Monthly Adjustment Amounts” (IRMAAs). These apply to both Part B and Part D. For the wealthiest individuals who file jointly, it can drive Part B premiums from $144.60 per month up to $491.60 per month! For Part D, the wealthiest individuals will pay a Part D surcharge of $76.40 per month.1
The data used to determine if you are subject to the IRMAAs is from your tax return filed two years before the current year. For 2020, your 2018 income tax return will be used. This can often lead to issues if someone has retired in the interim and their income has dropped significantly, or they have had some other major life change. The good news is that Medicare does allow individuals to file an SSA-44 which is titled “Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event”. If approved by Social Security, this can reduce or eliminate the amount of the IRMAA that an individual would otherwise have to pay if their situation has changed from the tax return they filed two years ago.
Transitioning from Private Health Insurance to Medicare
There is a lot of homework to be done as you transition from private health insurance to becoming a Medicare recipient. In addition to the initial applications and securing coverage, it certainly warrants examining the Part D coverage on an annual basis during the Medicare Open Enrollment Period (October 15 – December 7).
Medicare recipients can avoid costly mistakes by spending a few minutes reviewing their coverage and making sure they are still in the best option. It’s also worth a review of your tax return from two years prior to determine if there was an unusual income event that could otherwise result in paying the income related adjustment for both Part B and Part D. So set an annual reminder and spend some time reviewing these things to make sense of Original Medicare insurance and potentially avoid 12 months of regret. A Certified Financial Planner™ professional can also help you review and assess options and potential issues and make the best decision with the information that is available.
For additional information on Medicare, contact CI Budros Ruhlin Roe.
1 Source: https://www.medicare.gov/your-medicare-costs/part-b-costs
Scott R. Kidwell, CFP®, RICP®
Follow Scott Kidwell on twitter at @BRR_ScottK