Most people know the basics of Medicare: that it is a benefit they will be entitled to upon reaching the age of 65 after having fulfilled the 40 quarters of work credit, and paying Medicare and social security taxes.
What people may not know, is that there are multiple parts of Medicare, and that there is an overwhelming amount of information that you need to know about Medicare so you don’t overpay. A small mistake signing up could result in penalties that continue throughout retirement – the problem is there is simply so much you need to be aware of!
Don’t believe me? The official U.S. government Medicare handbook is 120 pages long, and I assure you that it doesn’t read like your favorite novel!
To save you the pain of combing through the handbook for every little detail, this blog is meant to bring awareness to the potential penalties and financial pitfalls of Medicare, so you can avoid them.
Medicare Parts A, B, (C), and D
Medicare is segmented into 3 (or 4) parts: A, B, (C), and D.
Medicare Part A helps cover hospital insurance including inpatient care in hospitals, skilled nursing facility care, hospice care, and home health care. Medicare Part B helps cover services from doctors and health care providers, outpatient care costs, home health care, durable medical equipment, and many preventative services. Medicare Part D helps cover the cost of prescription drugs. Parts A, B, and D are the most common form of Medicare, and are referred to as “original Medicare”, but as you likely noticed I skipped over Medicare Part C.
Medicare “Part C” is more commonly known as Medicare Advantage, which includes the benefits and services of Parts A and B, and it usually includes Part D as well. The difference with Medicare Advantage (Part C), is that it is run by private insurance companies, and they offer familiar HMO, PPO, Private Fee-For-Service plans (PFFS), and Medical Savings Accounts (MSAs) to name a few. You can choose either original Medicare (Parts A, B, D) or Medicare Advantage (Part C), but not both.
If you are already receiving social security benefits by the time you reach age 65, you are automatically enrolled in Medicare Part A and Part B, however you must enroll in Part D yourself, if interested. If you are not already receiving social security benefits by the time you reach age 65, you need to enroll in Medicare Parts A and B yourself.
Outpatient/Doctor Care (Part B) Penalty
If you choose not to sign up for Part B, which is the outpatient/doctor’s office coverage when you enroll with Medicare Part A, then you may have to pay a late enrollment penalty for the rest of your life. Your monthly Part B premium may go up 10% for each 12-month period that you could have had Part B, but didn’t.
The cost for Part B coverage is based on your income level and how you file your tax return (individual, joint, married but filing separate, etc.). If you file a joint tax return and your income is $170,000 or less, then your monthly Part B premium is $135.50 (in 2019).
However, if you delay Part B coverage by only one year, that’s a 10% penalty x $135.50/month x 12 months, for a fee of $162.60 per year for life. However that’s only partially true because the Part B premium increases over time, so you will end up paying more than this $162.60/year projection, since it doesn’t account for any increases.
If we assumed the Part B premium stayed constant and you live to age 90, that would be 25 years of penalty, which equals $4,065 for only delaying Part B coverage by 1 year. If you delayed coverage by 2 years, the lifetime penalty is $8,130, while delaying 3 years would cost $12,195. Again, all three of these penalties will be higher since the Part B premium does increase over time.
Prescription Drug Coverage (Part D) Penalty
If you choose not to sign up for prescription drug coverage (Part D) when you first enroll in Medicare, you will likely pay a late enrollment penalty which will last for the rest of your life. Thus, your decision to delay Part D coverage will have an irrevocable penalty for each year you live and keep the coverage.
The penalty is calculated by multiplying 1% of the “national base beneficiary premium”, which in 2019 is $33.19, times the number of full, uncovered months you didn’t have Part D coverage, rounded to the nearest $0.10.
For example, if you delay Part D coverage by one year, that’s 12 months x 1% penalty x $33.19 = $4.00 per month, for a fee of $48 per year for life. There is a caveat however, in that the base beneficiary premium is adjusted year to year, so the late penalty is adjusted as well. For example, the base beneficiary premium for 2018 was $35.02, while the base beneficiary premium for 2019 was reduced to $33.19.
Thus, you won’t know the exact penalty you will pay for the rest of your life, just that you will pay one. If for example we assumed the base beneficiary premium stayed constant, and you live to age 90, that would be 25 years of penalty, which equals $1,200. If you delayed coverage by 2 years, the lifetime penalty is $2,400, while delaying 3 years would cost $3,600.
Review your Part D Policy or your Medicare Advantage Policy Annually
Each year the costs and coverages for Part D prescription drug plans and the Medicare Advantage plans change, and if you don’t review the plan changes, you could end up paying a lot more for the plan.
Thankfully you can change either plan during the yearly enrollment period, which is from October 15th through December 7th. During this time, you can shop around for plans that offer coverage for lesser prices, and/or offer better services.
Many people do not check their plan’s costs and coverages each year, and as a result, they overpay for their plans year after year. Simply paying attention to your plan can save you a lot of money over the course of your retirement.
Medigap Supplemental Insurance
If Medicare Parts A, B, D, and Medicare Advantage weren’t enough to consider, there is also another policy called Medigap Supplemental Insurance.
Medigap policies help pay some of the health care costs for copayments, coinsurance, and deductibles that original Medicare (Parts A and B) doesn’t cover. Medigap is only available for original Medicare enrollees, because there are no out-of-pocket maximums with original Medicare, so Medigap policies help reduce these costs.
As a reminder, Medicare Advantage functions like traditional healthcare plans like HMOs or PPOs, which do have out-of-pocket maximums. Thus, if you enroll in Medicare Advantage, then you are not eligible to purchase a Medigap policy.
Medigap policies are sold by private insurance companies, and it is important to compare Medigap policies because the costs can vary and can go up as you get older.
The best time to buy a Medigap policy is during the open enrollment period, which begins when you are 65 or older, and enrolled in Part B. The open enrollment period is only six months, and if you don’t enroll during this period you may not be able to buy a Medigap policy at all, or if you can, the policy may cost more.
Challenge Your IRMAA Adjustment if you Just Retired
IRMAA stands for Income-Related Monthly Adjustment Amount. For single individuals who earned less than $85,000 in 2019, or for those filing a joint tax return and earned less than $170,000, there is no adjustment amount added to your Parts B and D premiums.
For people who earned more than these amounts, you will receive a “tax” for being wealthy. It is important to understand that the IRMAA penalty is calculated based on your income from two years ago. For example, if you retire in 2019 and enroll in Medicare, IRMAA is going to be assessed based on your earnings from 2017.
Since your retirement income may not be as much as your former working income, you have the right to challenge the IRMAA determination, and have it removed if your income is below the thresholds.
What if I’m still working at age 65 or older?
Most people will receive Medicare Part A without incurring a monthly premium, and for that reason, they should enroll in Medicare Part A when they turn 65, even if they’re still working and receiving healthcare through work.
However, the decision to enroll in Medicare Part B is dependent on the size of your employer.
If your employer has 20 or more employees, then you do not need to sign up for Part B when you turn 65, because your employer’s health plan will be the primary insurer. Upon retiring, you are given a special enrollment period of 8 months, where you can sign up for Part B without paying the 10% penalty, as highlighted earlier.
If you work for a company that has less than 20 employees, then you should enroll in Parts A and B when you first become eligible, because in this case, Medicare assumes the role as the primary insurer.
If for example, you did not enroll in Part B at the age of 65 (and you worked for a company with less than 20 employees) your company’s health care plan could refuse to cover you for services that Part B would have covered. Depending on the service provided, this could be very expensive, however these types of expenses can be eliminated altogether by simply signing up for Part B when you become eligible.
When it comes to considering enrolling in Part D prescription drug coverage while still employed, your employer’s insurance company should send you a letter informing you if it is “creditable” or not. If your company’s prescription drug policy is creditable, it means that it is equal to or better than the coverage that you could receive through Part D. Furthermore, if it is creditable, then there is no late penalty assessed if you delay enrolling in Part D until after you have retired.
Do Your Homework and Consult an Expert if Necessary
As you likely have come to understand, Medicare can be rather complex, so don’t be flustered if you still have questions. Thankfully the Medicare website, https://www.medicare.gov, provides a wealth of information; additionally, you can call 1-800-MEDICARE to speak with someone.
At Ruedi Wealth Management, we specialize in retirement planning, which means having a deeper knowledge about Medicare and its various forms and possible expenses. If you are interested in having someone partner with you as a comprehensive financial advisor during retirement, contact Ruedi Wealth Management to schedule a complimentary meeting.