Nearing 65? Don't Get Caught By Medicare's 'Money Traps'

by: Tipswatch

Summary

Medicare isn't free and in fact may end up costing more than you expect.

High-income earners may face substantially higher prices for Medicare coverage, as much as $8,800 a year in extra costs for a couple.

Which Medigap plan is best? If you want comprehensive coverage and travel overseas, choose Plan G over Plan F.

If you are just cresting over the age of 60 and anticipating a blissful life of retirement and excellent medical benefits at age 65, I have some bad news for you: Medicare isn't free. In fact, it's very likely that Medicare will cost you more per month than your premium for company-provided health insurance.

However, you'll finally be able to ditch that high-deductible health insurance plan and get much more comprehensive coverage under Medicare. So it's worth the cost. At age 65, plan on paying at least these costs if you choose to go with original Medicare, a supplement policy and a drug plan:

  • $134 a month (at least) for doctor and outpatient coverage under Medicare Plan B.
  • $110 (at least) for a comprehensive Medicare Supplement plan, also called Medigap.
  • $15 a month (at least) for Medicare prescription drug coverage, called Part D. Plus extra costs for the drugs you purchase.

That adds up to $259 a month, at least, for comprehensive coverage. But your costs could end up being substantially higher - $650 a month or more - under certain circumstances. If you are closing in on 65, now's the time to begin researching and preparing for Medicare-enrollment decisions.

Realize that Medicare costs vary for men and women and from state to state and company to company and probably will increase as you age. In this article, I have used 2018 pricing for a 65-year-old male in North Carolina. Your prices will vary, but the concepts for avoiding 'money traps' apply to everyone.

My Medicare adventure begins August 1, 2018. Here are the 'money traps' I've discovered along the way.

Two years out, beware of the IRMAA

Most people don't realize that the income they earn at age 63 is going to affect the amount they pay for Medicare when they turn 65. In fact, this can be a huge shock. The standard cost for Medicare Part B in 2018 is $134 a month, but that can zoom up to $428.60 a month for a high-income earner.

This extra charge - should we call it a tax? - on high earners is called the Income Related Monthly Adjustment Amount (IRMAA). To determine if you are subject to IRMAA, Medicare uses the modified adjusted gross income (MAGI) reported on your IRS tax return from two years ago. So for a person starting Medicare in 2018, the government will look at the 2016 tax return.

What is MAGI? Take a look at your income-tax return and add together lines 37 (adjusted gross income) and 8B (tax-exempt interest). Here are the Medicare income breakdowns for 2018 and costs for Medicare Part B, based on MAGI reported on the 2016 tax return:

Medicare IRMAA The brutal part: If your IRS-reported MAGI is just $1 above the income limit, you immediately move to the higher costs. There's no phase-in. If you have a spouse also enrolling in Medicare, you face double those higher costs. That could add up to more than $7,000 in annual extra costs for a couple.

And this is just for Part B coverage. There is also a surcharge added to Part D (drug coverage), known as Part D-IRMAA. Here are those costs for 2018:

Drug Plan IRMAA Add it up: A high-income couple (based on income two years ago) could face extra Medicare charges of about $8,800 a year. So here's the warning: Watch your income level in the year you turn 63, and try to avoid rising above a level that will increase the IRMAA costs. That might mean avoiding a large capital gain, for example, or deferring as much income as you can, or putting off distributions from an IRA or 401(k). Even a maturing U.S. Savings Bond could push you over the limit.

The good news: You can appeal

Medicare, which is managed by the Social Security Administration, will lower or eliminate your IRMAA if you can show that you have experienced a life-changing event or have filed an amended tax return. Here are conditions that the SSA will consider:

  • You married, divorced, your marriage was annulled, or you became widowed;
  • You or your spouse stopped working or reduced work hours;
  • You or your spouse lost income-producing property due to a disaster or other event beyond your control;
  • You or your spouse experienced a scheduled cessation, termination, or reorganization of an employer’s pension plan; or
  • You or your spouse received a settlement from an employer or former employer because of the employer’s closure, bankruptcy, or reorganization

In my case, I was laid off from my newspaper job in October 2016 and received a buyout. I retired at that point but the buyout pushed our 2016 MAGI slightly above one of the IRMAA tiers. After I applied for Medicare in June, I received a letter from a local SSA office explaining I would be paying the Income Related Monthly Adjustment Amount. But the letter also listed the 'life-changing events' and I realized I might qualify to have the IRMAA reduced.

I called the SSA and - after a 40-minute wait on hold - told them I wanted to appeal. They said to find and fill out Form SSA-44 and mail it along with a copy of our 2017 IRS return to my local Social Security office, which sent the original IRMAA letter. I did that, and a few weeks later, I received word that the SSA had reduced our Part B and D extra charges.

Filing an appeal is well worth your time if you can show a life-changing event (loss of job, for example) and your IRS return backs up your claim of lower income in the next year.

Original Medicare vs. Medicare Advantage

At first glance, Medicare Advantage plans (also known as Medicare Part C) look like a great deal: Lower premiums combined with built-in drug coverage and possibly some dental and vision benefits. These plans cover about 30% of all people on Medicare. But while original Medicare (combined with a Medicare supplement) allows you to use any doctor or hospital accepting Medicare, most Medicare Advantage plans control costs by using doctors and hospitals in a network. If you go outside that single network, you will pay more or possibly not be covered at all. You may also face copay and/or deductible charges when you visit the doctor, and have limited access to specialists.

So if you are comfortable with a limited network of doctors and hospitals, a Medicare Advantage plan may be a cost-efficient choice. But if you want ultimate flexibility - and especially if you travel a lot - go with the Medicare/Medigap option. Medicare Advantage plans often operate only in certain regions, and generally don't cover emergency medical expenses outside of the United States.

(Also, with a Medicare Advantage plan, you will still be participating in Medicare Part B and be subject to the IRMAA costs described above. Medicare Advantage takes over, but does not replace, Part B.)

My wife and I travel a lot and want flexibility in health care. So original Medicare plus Medigap was the right choice for us, and would probably end up costing less in the long run.

Medigap quest: Comprehensive coverage

When you are shopping for a Medicare Supplement plan, you'll find there are more flavors than variations of Nabisco Triscuits (11 versus 10, at last count). Shopping for Triscuits is confusing; same for a Medicare Supplement policy. An important thing to remember is that Medigap policies are offered by private insurance companies, but are standardized. Coverage is exactly the same for every company offering plans A through N.

You can find a good comparison of these plans on Medicare.gov.

Let's assume you want a comprehensive Medigap plan - without a lot of co-pays and deductibles - and you want emergency coverage when you travel outside the country. Traditional Medicare will not cover emergency medical costs outside of the United States, but some Medigap plans will, covering 80% of costs up to plan limits. Those plans are C, D, F, G, M and N. So let's look at those:

  • Plan F is the most comprehensive Medigap plan. It covers everything on the chart. (View the chart here). Thumbs up.
  • Plan G is exactly the same as Plan F, except it does not cover the annual $183 Part B deductible. Thumbs up.
  • Plan C is exactly the same as Plan F, except it does not cover Part B excess charges. (Medicare Part B covers doctor’s visits and outpatient services.) Is this 'excess charge' important? Possibly. Doctors who don't accept Medicare "assignment" are legally allowed to bill you up to 15% more than the Medicare allowable amount. You'd have to pay this cost out of pocket if you don't have Plan F or G coverage. Thumbs down.
  • Plan D doesn't cover the annual $183 Part B deductible or the Part B excess charges. Thumbs down.
  • Plan M doesn't cover the annual $183 Part B deductible or the Part B excess charges and only covers 50% of the Part A deductible ($1,340 in 2018). Thumbs down.
  • Plan N adds a copay for some doctor office and emergency room visits, and also doesn't cover the annual $183 Part B deductible or the Part B excess charges. Thumbs down.

Medigap Plans F versus G: Just run the numbers

So, to review, Plans F and G are the only options that cover emergency medical costs outside the United States, plus Medicare Part B excess charges.

Plan F is the most comprehensive and expensive Medigap plan, and it also has been the most popular, chosen by 55% of Medigap policy holders in 2015, according to a study by Gorman Health Group. It even comes in two variations: regular and high-deductible ($2,240 in 2018).

So if you want comprehensive coverage, should you choose regular Plan F? The answer is no. As of 2020, Medicare will be phasing out both Plans C and F, the only plans that cover the Part B (doctor costs) deductible. So while Plans C and F will still be offered to renewing customers after 2020, there won't be any new enrollees. This may mean that rates for Plans C and F will climb faster than other Medigap coverage in the future as the customer population ages.

But setting the phase-out aside, you shouldn't go with Plan F anyway. The better choice is Plan G, which is growing greatly in popularity. Its coverage is exactly the same as the super-comprehensive Plan F, except that it does not cover the $183-a-year Plan B deductible.

Do the math. If the annual Plan F premiums exceed the costs of Plan G by more than $183, Plan G is the no-brainer choice. I did the math, and I believe in almost every case, Plan G will cost less than Plan F over a year. Here are the numbers for a 65-year-old male in North Carolina:

Plan F versus G These are real savings, ranging from $85 to nearly $500 a year, depending on the insurer. Plan G is the new choice for people wanting a comprehensive Medigap policy.

Take a careful look at Medigap premiums

Although coverage under Plan G is exactly the same no matter the insurer, the prices insurers charge vary widely. These prices can be confusing, and in some cases, misleading. There are tools for comparing prices, including one on the government's excellent site, Medicare.gov. I did most of my research on the search tool provided by the North Carolina Department of Insurance.

After my initial search, I decided to go with Plan G coverage provided by Blue Cross/Blue Shield of North Carolina, at a cost of $111.75 a month. Good company, good price. And I was baffled that the price of the UnitedHealthcare / ARRP policy was listed at $193.50 a month. Why so high?

In North Carolina, 57 companies offer a Part G Medigap policy, and 55 of them use 'attained-age pricing,' meaning that the price is based on your current age and will rise as you get older, even before inflation is figured in. In many cases, these prices are set in five-year blocks, such as 65 to 69, 70 to 74, and so on. Or the prices rise a small amount each year.

After doing some deep diving, I realized the Blue Cross/Blue Shield premium (at current pricing) would rise from $111.75 at age 65 to $144.25 when I reached age 66 - a rather nasty 36% increase in one year. The $111.75 was a 'teaser' rate. Not good.

On the other hand, I learned that UnitedHealthcare is the sole carrier in North Carolina offering 'community rating' pricing, which means it charges the same rate to all policyholders, regardless of age. That price in 2018 in North Carolina is $193.50 a month. But ... UnitedHealthcare then discounts that price by 36% for a person enrolling at age 65. The discount drops to 33% at age 66, 30% at age 67, and so on, until the discount is eliminated at age 77.

This unique pricing by UnitedHealthcare means - in general - that policyholders will pay more than 'typical costs' in early years of enrollment and less than typical in later years. This pricing rewards longevity.

Also, it's important to ask the insurer what discounts are offered. For example, UnitedHealthcare has a 5% discount if two people in a family are covered under its Medigap plans, and a 2% discount for automatic drafting of the monthly payments. Blue Cross/Blue Shield of North Carolina doesn't offer these discounts. Mutual of Omaha has an even more generous discount - 12% - for anyone currently living with a significant other, even if the second person isn't yet enrolled in Medicare.

Here is my analysis of the current costs - in 2018 - for Plan G offered by UnitedHealthcare, BCBS/NC and Mutual of Omaha. Note that the total cost through age 89 is very close for UnitedHealthcare and Mutual of Omaha, but is substantially higher for BCBS/NC.

Comparing Plan G costs A final point: UnitedHealthcare dominates the Medigap market, with 34% of the policies and 4.3 million members, according to a 2016 study by Mark Farrah Associates. This is no doubt due to its partnership with AARP. Mutual of Omaha comes in second with 10% of the market.

The AARP partnership means that it is easy to get answers from UnitedHealthcare representatives, any day of the week. I had trouble reaching some other Medigap providers and even heard, "Our offices are closed, call again Monday morning after 9 a.m."

What about a drug plan?

It's important to sign up for Medicare Part D when you enroll in Medicare because you'd face a late-enrollment penalty if you delay signing up. The formula is complicated, but don't fall into that trap. Sign up.

If you don't take any prescription drugs, enroll in an inexpensive drug plan that has network pharmacies near your home. That might cost $13 or so a month, unless you face an extra IRMAA charge. Drug plans can be changed every year, and in fact, you should shop every year for a new plan that best meets your needs. The Medicare.gov site has a search tool that can estimate your costs under each plan, shows participating pharmacies and includes star ratings for each provider.

In my case, I take a single generic prescription drug that costs about $60 a year at retail. For that one drug, I'll be paying $13 a month for a Part D plan, another $13 for IRMAA in 2018-19 and maybe $4 for the drug, for a total of $300+ a year for my $60 drug. But you never know what will come. You need to have Medicare's drug coverage.

You can get help from a SHIP ...

As you approach age 65, you are going to be bombarded with mailings and phone calls pitching Medicare. If you search for information on company websites, they will almost always require you to enter an address and phone number before you continue, which will step up the mailings and calls.

Some of the mailed information is very good; this is how I got the first hint of the Blue Cross/Blue Shield 'teaser' rate. But the phone calls! In one day, I got seven telemarketer calls, before noon. I accidentally answered one in the car.

"Hello David, I am calling from Medicare Support," said the man with a heavy Eastern European accent.

Me: "Medicare Support, what is Medicare Support?"

Man: "It is to help you ..."

Me: "Why would I want Medicare Support, I'm 27 years old!"

Click.

In these months before age 65, don't answer your phone - landline or cell - if you don't know the caller. Telemarketers and scammers rarely leave a message.

A better idea. About six months before you enroll in Medicare, I highly recommend making an appointment to talk with a Medicare counselor in your state. Here is a list of these offices in each state. The program is generally called SHIP, but in North Carolina it's called SHIIP. It stands for State Health Insurance Programs or in North Carolina's case, Seniors' Health Insurance Information Program. SHIPs operate in all 50 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands.

The counseling is free. SHIP counselors are state-certified experts in Medicare and won't try to sell you on a particular product. They are there to provide advice and guidance toward sensible choices. My wife and I spent 90 minutes with a highly qualified counselor a few months ago and came away with a much clearer idea of the path ahead.

These choices aren't easy; in fact, the entire Medicare spectrum of issues is bewildering and daunting. This article doesn't cover them all, and your issues could be much different from mine. Good luck hunting!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.