The Basics of Medicare
On a few occasions, people have asked me about Medicare; what it is, when should they enroll, and how do they do it?
Medicare is a national health insurance program that is subsidized by the Federal government for Americans age 65 and older, as well as those that qualify for disability by the Social Security Administration. It covers around 60 million people and is funded by a combination of the payroll tax, beneficiary premiums and surtaxes from beneficiaries, co-pays and deductibles, and revenue from the U.S. Treasury.
Financial Coverage Against Catastrophic Loss
The overall concept for insurance is to provide financial coverage against catastrophic loss. You have homeowner’s insurance to cover your house, auto insurance to cover your vehicle and any losses due to the vehicle, life and disability insurance to protect the family if the income-earner dies or becomes incapacitated, and health insurance to cover major medical costs. Typically, health insurance is subsidized by an employer for many Americans. However, this often goes away when you retire. Hence, you need to understand how Medicare works to be able to make smart choices and have a plan in place for your healthcare coverage when you retire. This is particularly important as the cost of health care is one area where your budget will increase after you retire. You need to be prepared for this as you approach your 65th birthday.
The Four Parts of Medicare
There are four major parts to Medicare, labeled A through D:
Part A covers inpatient hospital expenses, skilled nursing care, hospice, and some additional care.
Part B covers typical medical services from doctors and qualified care professionals, outpatient care, some home health services, preventative care, and some medical equipment.
Part D covers many prescription drugs, though some are covered by Part B.
Part C is ordinarily offered as Medicare Advantage (MA) plans that combine Parts A and B in an HMO (health maintenance organization) or PPO (preferred patient-provider) network of healthcare providers and often includes Part D coverage. Additionally, these MA plans can include extra coverage for other services, such as vision, dental, hearing, and wellness. MA plans serve as an alternative to the original Medicare and are required by law to provide the same services as Medicare Parts A and B. However, MA plans oversee how they deliver their services.
A Medigap plan is a supplemental insurance you can get in addition to Medicare Parts A and B. A Medigap plan pays for many of the expenses or coverage “gaps” that are not included by Medicare. Such gaps can include deductibles and co-payments, which could run into thousands of dollars that otherwise do not get covered. Medigap insurance is sold by private insurance companies, and there are 11 different standard plans that can be sold in most states. These Medigap plans vary through different levels of coverage for different types of benefits and are categorized by letter designation (A through N).
In general, retirees will want to explore one of two strategies: (1) Enroll in Original Medicare, which includes Parts A, B, and D, accompanied by the addition of a Medigap policy to fill out their healthcare coverage. Note that often those gaps in healthcare coverage can be pretty wide, and you don’t want to leave a gaping hole in your healthcare coverage. You’ll want to look seriously into getting Medigap coverage; (2) Enroll in a Medicare Advantage plan that can serve as an adequate proxy for strategy (1) and fulfill your healthcare insurance needs. You may want to explore additional coverage, such as dental, vision, hearing, etc.
To reiterate, those who enroll in the Original Medicare Plan will have access to Medicare Part A for free upon meeting eligibility requirements (basically you or your spouse paid into FICA over a long enough period). Additionally, they can choose Parts B and D for a monthly premium, as well as a Medigap Plan to cover co-pays and deductibles. Alternatively, enrollees can select a Medicare Advantage plan if they feel that it is better suited for their healthcare needs.
When to Enroll
There are several times when you can enroll in Medicare. Understanding when to enroll and the best time to do so is critical to making sure you get good coverage at the optimal price. For those who will turn 65 soon, there are several different classes of enrollments periods, and they depend on your situation:
- Initial Enrollment Period (IEP): The first time you can sign up for Medicare (a seven-month period, including three months before the month of your birthday, the month of your birthday and three months after the month of your birthday). You may join Medicare Parts A, B, C, and D during this time.
- Special Enrollment Period (SEP): Under special circumstances, you can delay your enrollment period after 65, if you have coverage through an employer, union, or spouse’s job. Your special enrollment period for Medicare parts A and B would then be while you’re still covered by your employer and up to 8 months after either your employment or healthcare coverage ends (whichever comes first). Your special enrollment period for Medicare Parts C and D would be up to 63 days after your coverage ends (must be enrolled in parts A & B).
- General Enrollment Period (GEP): If you miss the IEP and SEP periods, you can enroll during the first three months of the year. This is known as the General Enrollment Period. It should be noted that if you need to enroll in Part A, you must enroll in Part B during this time. Coverage would begin in July of the same year.
- Open Enrollment Period (OEP): Also called the Annual Election Period (AEP), this occurs from October 15th through December 7th and is a period that allows you to switch, add or drop plans. Essentially, it serves as a period for plan re-evaluation. After changes are made, you can expect the changed coverage to begin January of the next year. Please refer to the link below (the first reference under References) to get details on the OEP.
- Medicare Advantage Open Enrollment Period (MAOEP): The enrollment period includes the first three months of the year and allows anyone enrolled in Medicare Advantage to change their plans. At the same time, there is an individualized Medicare Advantage Open Enrollment Period that’s limited to new Medicare beneficiaries with both Medicare Part A and B who enroll in an MA plan during their initial coverage election period. These individuals have the same three-month MA OEP to switch plans.
- Medigap Open Enrollment Period (MOEP): As previously mentioned, this is extra health insurance that you buy from a private company to pay health care costs not covered by Original Medicare, such as co-payments, deductibles, and health care if you travel outside the U.S. This period automatically starts the month you’re 65 or older and enrolled in Medicare Part B. It’s recommended that you buy a Medigap policy during your 6-month Medigap open enrollment period, because during this time, you can buy any Medigap policy sold in your state, even if you have health problems. Otherwise, if you try to get Medigap coverage after your open enrollment period, you will be subject to underwriting procedures, which could be costly or even result in a denial of coverage.
How to Enroll
Most people are eligible for Medicare when they turn 65. For those getting Social Security retirement or disability benefits when you are 65, you will be enrolled in Medicare Parts A and B automatically and should receive a “Welcome” package about three months before your 65th birthday.
If you are not collecting these retirement benefits, you need to contact Social Security at least three months before your 65th birthday and apply for Medicare. Three ways to apply for Medicare Parts A and B through Social Security include:
- Online (https://www.ssa.gov/benefits/medicare/)
- By Phone (800-772-1213)
- Visiting your local Social Security Office
Once enrolled, you should get a “Welcome” package and a Medicare card.
To get additional/other Medicare Coverage (Parts C, D, Medigap), you can utilize the government Medicare website https://www.medicare.gov/. Additionally, https://mymedicarematters.org from the National Council on aging provides useful resources.
Beware of Penalties, Fees, and Mistakes
Medicare comes with rules and risks associated with enrolling. Make sure you do your homework to avoid unnecessary and sometimes costly penalties. Here are a few tips:
- For most people, make sure that you or your spouse have contributed enough quarterly FICA payments so you can get Medicare Part A for free. Otherwise, you are required to pay a premium.
- Make sure you sign up during your Initial Enrollment Period or within the allotted time requirements within your Special Enrollment Period if you are employed and covered by your employer after 65. Otherwise, you could be subject to costly and lengthy late penalty premiums.
- Make sure you enroll in Medicare Part D within three months of when your enrollment in Parts A or B become effective, if you choose Original Medicare. Otherwise, you may end up paying a late penalty if you don’t qualify for the Special Enrollment Period or are eligible for extra help to cover costs.
- Don’t make the mistake of initially underfunding your healthcare because you feel healthy at 65. You need to plan your healthcare needs for the remainder of your life, and miscalculating your coverage can be a mistake. Don’t fall into the trap of later needing to switch Medigap plans or changing from a Medicare Advantage plan to a Medigap plan to supplement traditional Medicare, where you might be subject to underwriting, higher premiums or excluded entirely due to pre-existing conditions.
In this blog, I’ve tried to provide a basic understanding of Medicare, what it is, when to enroll, and how to enroll. Below are some references that I used for writing this blog. It’s important to pay attention to the details of your unique situation and develop a strategy using your Medicare lifeline to ensure healthcare coverage after retirement. Until next time.
- Health Insurance in Retirement: Medicare and Beyond by Steve Vernon, American Association of Individual Investors, AAII Journal, April 2019 edition. From the Book, Retirement Game-Changers: Strategies for a Healthy, Financially Secure, and Fulfilling Long Life, by Steve Vernon, Oxnard, CA: Rest-of-Life-Communications, 2018
All written content on this site is for information purposes only. Opinions expressed herein are solely those of QMI Capital Management LLC unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.