If you are approaching age 65, it's time to familiarize yourself with your Medicare options and enrollment process. Most people see a reduction in healthcare costs once they transition to Medicare, but it can be tricky to understand which plan options are best for you. Read on for a primer on options, deadlines, and issues to consider as you become eligible.
What Is Medicare?
Medicare is a government-funded national health insurance program that was established in 1966. It is designed to offer coverage to individuals including:
- Those who are 65 or older
- Individuals under 65 with qualifying disabilities
- Individuals with End-Stage Renal Disease (ESRD)
Medicare is broken down into several parts that cover specific services. Part A and Part B are part of the “original” Medicare plan, while Parts C and Part D offer optional additional coverages.
When And How to Apply
It's crucial to understand the timeline to sign up, as missing the applicable deadline can result in significant and permanent late enrollment penalties.
If you started Social Security benefits before age 64 and 8 months:
- You will automatically be enrolled in Medicare Parts A and B at age 65, and should receive your Medicare card in the mail three months before your 65th birthday. See information about Parts C and D below.
If you did NOT start Social Security benefits before age 64 and 8 months:
- If you are retired, or plan to continue employment at a company with fewer than 20 employees, you should sign up for Parts A and B at SSA.gov, or your Social Security office. You must sign up for Parts A and B during your 7-month "Initial Enrollment Period" to avoid late enrollment penalties; this period includes the three months before the month you turn 65, your birthday month, and the three months after your birthday month. See Parts C and D below.
If you are approaching 65, but plan to continue employment at a company with 20 or more employees:
- You may be able to delay signing up for Parts A and B without incurring late enrollment penalties when you sign up later. If you wish to delay Medicare, it's good practice get written confirmation from your group benefits manager that your company health plan qualifies as creditable health insurance for this purpose.
- If you are eligible for premium-free Part A, you may wish to sign up at age 65 even though you are not required to do so, as this coverage may pick up some hospital expenses not covered by your employer-based coverage. However, it is important to note that if you sign up for Part A, you can no longer contribute to an HSA, as Medicare is not a high-deductible health insurance plan. To avoid a tax penalty, you should stop contributing to your Health Savings Account (HSA) at least 6 months before you apply for Medicare.
- If you delay signing up at age 65 due to continued employer-based coverage, you will have an 8-month "Special Enrollment Period" after you separate from service to sign up for Part B without penalties.
How Does Medicare Work?
Read on for a breakdown of Medicare components, what each covers, and your coverage options.
Part A: Hospital Insurance
Part A covers hospital-related expenses such as:
- Inpatient hospital care
- Skilled nursing facility costs
- Lab tests
- Some home health care services
As long as you or your spouse worked (and paid Medicare taxes) for at least 10 years, you will pay no premium for Medicare Part A. If you or your spouse do not meet this criteria, your monthly Part A premium will be $240 or $437 (in 2021), determined by your work history.
Though Part A is premium-free for most participants, there are costs if you require hospital services. Each hospital stay is currently subject to a $1,484 deductible for days 1-60. That is, your deductible for each hospital stay is $1,484 whether it is one or sixty days. Days 61-90 are subject to a $371 per day co-pay. Again, this is for each hospital admission. You are also entitled to sixty "lifetime reserve days" of hospital care, with a $742 co-pay per day. These "reserve" days are cumulative - that is, they do NOT re-start with each hospital stay, but are counted over one's lifetime. Beyond your lifetime reserve days, you are responsible for all hospital costs.
It is important to note that Medicare Part A does NOT cover long term care.
Medicare Part A will cover a maximum of 100 days of nursing home care (provided certain conditions are met). Under the current Part A rules, you would pay $0 for days 1-20 of care in a skilled nursing facility (SNF). For days 21-100, a $186 daily coinsurance payment is required.
Given the limitations of Part A, many people consider other options, such as long-term care insurance, to manage the costs of potential extended care.
Part B: Medical Insurance
Part B covers expenses such as:
- Physicians’ fees
- Outpatient hospital care
- Certain home health services
- Durable medical equipment
- Preventive health care, like immunizations
Part B costs are subject to a $203 annual deductible and 20% coinsurance. The base Part B monthly premium for 2021 is $148.50 for those with adjustable gross income of up to $88,000 ($176,000 if filing jointly), but is subject to an income-related surcharge, resulting in a monthly premium of up to $504.90 for those with over $500,000 of AGI ($750,000 if filing jointly).
Medicare Advantage (Part C) vs. Medigap
Original Medicare (Part A and Part B) pays about 80% of approved costs, while the remaining 20% of the bill is the individual’s responsibility. While coverage under the Affordable Care Act (ACA) limits annual out-of-pocket costs, there is no such annual limit with Medicare. Many people opt to add Medicare Advantage or Medigap insurance to pick up some of these out-of-pocket costs, as well as some items not covered by Original Medicare. Note that you can only purchase one or the other; Medigap and Medicare Advantage cannot be combined.
Sometimes called “Medicare Part C,” Medicare Advantage (MA) plans are often viewed as an all-in-one alternative to Original Medicare. With Medicare Part C, you still enroll in Parts A and B, but add a MA plan through a private insurer. Most MA plans also include prescription drug coverage, and some include dental, vision and hearing care. Medicare Advantage plans operate as HMOs or PPOs.
MA plans are offered by private companies approved by the federal government. Although these plans come with standardized minimum coverage, the amount of additional protection offered can differ. This is due to unique provider networks, premiums, copays, coinsurance and out-of-pocket spending limits. The National Committee for Quality Assurance (NCQA) offers ratings for plans by state.
Medigap coverage is supplemental insurance that works in conjunction with Parts A and B, offering coverage for such items as deductibles, copays, and coinsurance. There are ten standard plans offering different levels of coverage; Plan G is currently the most comprehensive option. Premium costs vary by insurance company and state; since plans are standardized, it makes sense to shop by cost. Medigap policies do not include prescription drug coverage; you must enroll in Part D for this benefit. Medigap plans also do not cover dental, hearing or vision care.
Which Is Best For Me?
If you value lower costs over choice, or have a chronic condition with high anticipated costs, Medicare Advantage may be the best option. If you're planning on lots of travel in retirement, and/or spend your time in more than one geographical area, Original Medicare plus Part D and Medigap coverage offers the most flexibility. Medigap allows you to see any doctor who accepts Medicare, while most Medicare Advantage plans restrict you to doctors in their network (or have higher cost-sharing for those out of network). Some Medigap plans even offer limited coverage for overseas care. However, Medicare Advantage may cover items not covered by Medigap, such as vision, hearing, and dental care. It pays to research your options. Keep in mind that while you are free to choose a new Part D or Medicare Advantage plan during annual open enrollment (October 15 to December 7), you may be subject to underwriting if you want to switch to a Medigap plan after your initial enrollment period, subject to state regulations.
A reputable insurance broker or State Health Insurance Assistance Program counselor may be able to help you sort through options and select a plan that will best suit your needs.
Part D: Prescription Drug Coverage
While MA plans often offer prescription drug coverage, insurers also sell Medicare Part D plans as a standalone product to those with Medicare Part A/Part B. Although Medicare Part D prescription drug coverage is optional, if you do not enroll when first eligible (or secure prescription drug coverage through a Medicare Part C plan), you will be subject to late enrollment penalties (though you can avoid these if you have creditable prescription drug coverage prior to enrolling in Part D). The average monthly Part D premium for those with an AGI of $88,000 or less ($176,000 if filing jointly) is $33.06, subject to surcharges for those with higher incomes.
Prescription costs are subject to a plan deductible (limited to $445 in 2021). Up to $4,130 of covered prescription costs (total paid by both you and the plan), your coinsurance is 25%; the coinsurance drops to 5% once you reach $10,048 of total covered prescription drug costs. It's wise to check the plan formulary to see what sort of coverage you can expect for any medications you currently take.
While sorting through Medicare options and enrollment procedures can feel overwhelming, it pays to do some research to determine which plan will best suit your needs. See our primer on Medicare open enrollment for more information and resources.
This content is intended for informational purposes only. Please consult your financial or legal professionals for specific information regarding your individual situation.