Maureen Baxter, CLU®, ChFC ® and Steven Joshua Samuel JD MBA AIF ®
“Total projected lifetime health care premiums (Medicare Parts B and D, supplemental insurance, and dental insurance) for a healthy 65-year-old couple retiring this year are expected to be $321,994 in today’s dollars.” It’s more important than ever to understand health care costs and choices in planning for .
In this article, Maureen Baxter, a Commonwealth Financial Network Colleague (with some editing by Steven Joshua Samuel) will explain the basics of Medicare and how it coordinates payments with other plans.
Medicare Alphabet Soup
Familiarizing yourself with Medicare’s terminology is a great first step:
- Part A: Generally covers inpatient hospital services
- Part B: Usually covers doctor and outpatient services
- Part C: Known as Medicare Advantage and is an alternative to original Medicare Parts A and B plus D (This plan is similar to a preferred provider or HMO coverage. It typically offers drug coverage, as well as vision and dental care. Your client must first enroll in original Medicare to be eligible for Part C Medicare Advantage coverage. The cost of the plan may be the same as that of original Medicare, but there could be additional charges depending on the plan selected.)
- Part D: Prescription coverage
WHO MAY ENROLL IN MEDICARE AND WHEN
Individuals age 65 or older are eligible for Medicare. Medicare requires enrollment at triggering events, as well as at specific times throughout the year. If you are receiving retirement benefits under the social security program, you will be enrolled automatically in Medicare at age 65. If you are covered by a group health plan with 20 or more employees, you may opt out of Part B and Part D coverage without penalty.
A specific triggering event—for example, if you are Medicare-eligible and lose group employer coverage—requires that you enroll during the special enrollment period. Enrolling within eight months of a triggering event will avoid Part B penalties but may not prevent coverage gaps. It is best to start the enrollment process at least three to four months before a triggering event in order to avoid gaps in coverage or missing a penalty deadline.
A key factor in determining a Medicare penalty is whether an individual has “creditable coverage.” So, it’s worth taking a closer look at what this means and the potential financial costs.
Creditable Coverage and the Medicare Penalty
Individuals approaching age 65 should verify that their current insurance is considered creditable coverage for Medicare purposes to avoid permanent surcharges. For example, if you are 65 or older, COBRA coverage, group employer plans for businesses with fewer than 20 employees and retiree health plans are NOT considered creditable coverage for Medicare Part B. This means they do not avoid the Part B enrollment penalty. These plans, however, may qualify as creditable coverage to avoid the Part D enrollment penalty.
Here’s a breakdown of the permanent premium surcharges:
- Part B. Individuals pay a surcharge of 10% of their Part B premium for each 12-month period they fail to enroll.
- Part D. The penalty is 1% of the “national base beneficiary premium” per month. In 2018, the national base beneficiary premium will be $35.02 per month. This 1% penalty is applied to the total number of months an individual is without creditable coverage. This surcharge is added to the Part D premium.
Individuals who are covered under original Medicare Parts A and B plus D, might consider the purchase of Medigap coverage. Medigap, also known as Medicare Supplement Insurance, offers supplemental coverage for expenses that traditional Medicare does not cover. This includes vision care, dental care, medical coverage during international travel and copays.
Medigap plans are required to provide specific core coverage. In addition, they are regulated under state law to offer additional supplemental coverage. The coverages and costs vary between plans. There are multiple plans to choose from, each identified by a letter (e.g., Plan A through D or Plans F, G, K, L, M, and N). Unless there is a change in law, effective 2020, the popular Plan F, as well as Plan C, will no longer be available to new enrollees.
Who Pays First?
The coordination of claim payments between Medicare and other health insurance coverage is another factor that can directly affect a client’s health care costs. The Centers for Medicare & Medicaid Services brochure, Your Guide to Who Pays First (available at www.medicare.gov/Pubs/pdf/02179-Medicare-Coordnation-Benefits-Payer.pdf), outlines coordination of benefits for Medicare-eligible individuals. It indicates when Medicare is the primary or secondary payer for services under different retiree health plans.
Let’s look at some common scenarios and how Medicare coordinates payments.
Employer health plans. If an employer has fewer than 20 employees, Medicare is the primary payer and the employer coverage is the secondary payer. As such, individuals who are 65 and covered under a spouse’s employer plan or are still working and covered under an employer plan should enroll in Part B. If the plan is not considered creditable coverage for part D prescription coverage, those persons should enroll in Part D.
If an employer has 20 or more employees, the employer plan is the primary payer and Medicare is the secondary payer.
Keep in mind that there are special rules for persons with disabilities. You should contact Medicare to clarify coordination of benefits.
TRICARE Government Health Coverage for Military Members and Dependents. If you are 65 and covered under TRICARE, Medicare is the primary payer for Medicare-covered services and TRICARE is generally secondary, unless services are received in a military hospital.
There are specific rules for TRICARE-insured military members enrolled in specific plan types. Generally, if you are retired, you should enroll in Part B to remain eligible for TRICARE (including drug coverage). Speak with your benefits counselor for detailed information.
Federal employees health benefits (FEHB) plan. For a 65-year-old person covered under an FEHB plan and still an active employee, FEHB plan is primary payer and Medicare is secondary. Once you are no longer an active employee, the FEHB plan for Part B is not considered creditable coverage; then, Medicare is the primary payer. On the other hand, FEHB may be creditable coverage to avoid the Part D prescription plan penalty, as well as serve as the client’s supplemental gap plan. Again, it is important to check with a benefits counselor.
Retiree employer health plan. Medicare is the primary payer and the retiree health plan is secondary when a person is 65 and covered under a retiree employer health plan.
Once you are no longer an active employee, the retiree health plan for Part B is not considered creditable coverage; thus, Medicare is the primary payer. This plan may be creditable coverage to avoid the Part D prescription plan penalty and may serve as a supplemental gap plan. In any case, it is important to discuss your situation with a benefits counselor.
Health Savings Accounts
Once you enroll in Medicare Part A, you may no longer contribute to a health savings account. If you are considering collecting social security benefits, in general, they should stop making contributions six months before enrolling in Medicare Part A to avoid a potential health savings account contribution penalty.
What’s New for 2018?
Medicare premiums are means tested: the higher your modified adjusted gross income (MAGI), the higher your monthly premium. People with a higher MAGI pay a surcharge, known as the income-related monthly adjustment amount (IRMAA). In the case of IRMAA for Medicare, your MAGI generally includes all taxable income (e.g., retirement account distributions, capital gains and interest), plus dividends from tax-free bonds, interest from savings bonds used to pay higher education tuition and fees and foreign earned income excluded from gross income. For 2018, the premium cost will be based on your 2016 MAGI.
Hold harmless rule. The hold harmless rule protects current social security beneficiaries from increasing Medicare costs in a year where there is no or a very low cost-of-living adjustment. When this rule applies, any increase in premiums for Medicare is absorbed by a smaller group of recipients: new enrollees and current beneficiaries subject to IRMAA.
In 2018, the interaction between the annual cost-of-living increase for social security benefits and the hold harmless rule may result in a jump in premium costs for those already enrolled in Medicare. Social security recipients will receive a 2-percent increase in benefits for 2018. Therefore, the hold harmless rule will not apply, and the costs for Medicare increases will be spread across most current recipients. Those previously protected may see an average increase of $25 per month. Medicare beneficiaries who previously saw their costs spike will see a leveling of their premium costs.
MAGI threshold limits. There is a second change in 2018 that will affect higher-income recipients who fall under IRMAA. The top three MAGI threshold limits for IRMAA have been compressed (see Figure 1).
In 2017, the top Part B IRMAA threshold for a married couple filing jointly was a MAGI greater than $428,000. The monthly premium per person for a new enrollee was $428.60 per month. Compare this with 2018, where the top Part B IRMAA threshold for a married couple filing jointly will be a MAGI greater than $320,000. The monthly premium per person for a new enrollee will be $426.50 per month.
So, what does this mean? A new 2018 Medicare enrollee with a MAGI for tax year 2016 of $267,001 will be charged a higher premium due to the compression of the table: $348.30 per month versus $267.90 per month.
You may appeal the IRMAA surcharge amount for specific life-changing events. Specific life-changing events that qualify for appeal include death, divorce, loss of pension, loss of income-producing property, or an error in the determination records. Further information on the appeal process is available on the U.S. Department of Health & Human Services website (https://www.hs.bov/about/agencies/omha/the-appeals-process/part-b-premium-appeals/index.html).
Want to Know More?
There are a number of resources available for Medicare-eligible clients on the State Health Insurance Assistance Program (SHIP) website (www.shiptacenter.org). These programs offer free counseling from trained counselors who can guide you through your decision-making process for Medicare, as well as discuss specific coverage needs. Another useful resource is Medicare Interactive (www.medicareinteractive.org/), a free online tool that assists with Medicare decisions. The Medicare website also offers a comparison chart of basic options (https://medicare.com/medicare-suppliment/medigap-plan-benefits-chart/), as well as state-specific links for information on coverage, costs, and companies that offer plans in individual states.
We’ve Got You Covered!
Contact us for Medicare fact sheets outlining key components of the Medicare program. We’ll also do our best to answer your questions about this important topic.
Samuel Financial LLC is located at 858 Washington Street, Dedham, MA 02026 and can be reached at 781.461.6886. Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser. Fixed Insurance products and services offered through CES Insurance Agency.