In our Navigating the Maze of Medicare Series, we have discussed the type of coverage offered by both Medicare Parts A and B, along with the financial component. However, we have noted that Medicare does not offer absolute cost absorption – there are many gaps in Medicare’s coverage that require its enrollees to pay out of pocket, or consider another option – Medigap or supplemental Medicare insurance (they are synonymous, so we will refer to them as Medigap throughout the rest of this article). In Part III of this series, we will discuss this type of coverage on a general level, explain drug coverage options, and also highlight tips for what type of coverage best suits you. In Part I, we explained the services/products that Medicare covers within both Parts A and B. If you missed Part II, we explained the financial aspects of Medicare Parts A and B.
Open Enrollment Eligibility
To begin, in order for you to enroll in a Medigap policy, you need to be eligible for Medicare (you are probably saying “duh!”). For those not under a group health plan, open enrollment generally will begin on the first day of the next month one a) turn’s age 65 AND b) enrolls in Medicare Part B. Once you have met BOTH of these requirements, your open enrollment period begins, and you have 6 months to purchase a supplement in your state.
If you covered by a workplace health plan, things are a bit more complicated, but the same rules in fact do apply. For those who are a) age 65 or older, b) are on a work health plan and c) are losing coverage or desire to retire, your open enrollment period may have been delayed depending on whether you delayed signing up for Medicare Part B. For those of you who are 65 or older that did delay signing up for Medicare Part B until just before/after you lose a workplace health plan or retire, your 6 month open enrollment period will begin once you sign up for Medicare Part B. HOWEVER, if you are age 65 or older, still plan on continuing to work, and for whatever reason decided to sign up for Medicare Part B while still being covered by a work health plan, the 6 month clock to sign up for a Medicare supplement will begin once you have signed up for Medicare Part B. Thus, under most circumstances, it is critical that you do NOT sign up for Medicare Part B if you plan on continuing to work, as you may miss your open enrollment period for a Medicare supplement.
Why is it important to purchase a supplement during your open enrollment period? Under either situation (turning age 65 or losing your work health plan/retiring), so long as you are still within your open enrollment, the insurance company cannot refuse to sell you a plan/raise your premium due to past or present health conditions, and they must cover pre-existing health conditions as well. However, if you ARE outside your open enrollment period, you may be subject to full underwriting, and they very well could a) deny you a policy, b) raise your premiums beyond what you would have paid within the open enrollment period, or c) not cover you for pre-existing health conditions. Thus, it is CRITICAL that you make sure to sign up within your open enrollment period!
Medigap Plan Alphabet Soup
Medigap plans have been standardized by the Centers for Medicare and Medicaid Services (CMS), which currently have ten plans, labeled A through N. While these plans were “created” by the government, they are sold by private insurance companies. Each of the different plans offer varying levels of benefits, but the benefits you receive are (for the most part) proportional to your premium paid.
The benefits offered by each Medigap plan can be somewhat complex. Luckily, Medicare’s governmental website (Medicare.gov) shows each plan side by side.
An important point to make is that these plans are pretty standard state by state. However, three states – Massachusetts, Minnesota, and Wisconsin – have differing benefits, so if you live in one of those states, some of the information in the above may be different.
It used to be the case that Medigap policies had benefits which included drug coverage, but the government made a change and disallowed this from occurring any further. Thus, in order to have supplemental drug coverage, one must purchase a Medicare Part D drug plan. This type of policy is best utilized as a stand-alone policy, which is operated by private insurers with oversight by the US government.
In terms of eligibility, anyone who is entitled to Medicare Part A AND/OR enrolled in Part B may join a Part D prescription drug plan (this generally is the case when someone is age 65 or older OR has signed up for Part B). Thus, there are two instances where you may sign up. Initially, you will have an initial enrollment period, which begins 3 months before you turn age 65 and ends 3 months after such month (for a total of 7 months). You also have an annual election period, which is your yearly opportunity to sign up for a Part D policy if you don't already have it. During this time, you can enroll in a Medicare Prescription Drug Plan for the first time.
It is really important for you to either a) sign up for a Medicare Part D plan once you are initially eligible or b) make sure to have “creditable” prescription drug coverage, otherwise you will face a penalty. This penalty begins after 63 days of your initial enrollment period, and looks at how many months you were without coverage and multiplies this by 1% of the “national base beneficiary premium” ($34.10 in 2016) to determine your penalty which will be added on to the cost you will pay. For instance, if you waited thirty months after 63 days post your initial enrollment period, you would pay a monthly penalty of $10.23 ($34.10 *1% * 30 months).
If you are still working and covered by a prescription drug plan, do not be alarmed (yet). So long as you have “creditable” prescription drug coverage, you will not have to face the penalty and may simply purchase a Part D plan when you retire. Many employer plans are considered creditable, but some are not. Thus, it is critical that you make sure that your employer plan is “creditable.” Your company should notify you each year to let you know whether your health insurance is considered creditable, so you should make sure this is the case, not only during your initial enrollment period, but also each year (to make sure it is still “creditable”).
In terms of coverage, each plan has differing benefits, and there are many different types of plans. Thus, while we cannot explain each plan type here, we can provide you with several tips to be aware of (outlined below).
We compiled a list of important tips that you should consider when thinking about Medigap:
- Sign up at Open Enrollment. We noted this before, but it is EXTREMELY important that you make sure you sign up at your appropriate open enrollment. Note that the clock to sign up generally begins the first day of the next month in which you a) turn 65 and b) sign up for Medicare Part B. If you are still working at age 65, it will be the first day of the next month after you sign up for Medicare Part B. This is critically important, as you may be precluded from purchasing a policy/being covered for pre-existing health conditions otherwise (or your premiums may skyrocket).
- Consider Price (You Get What You Pay For). Each Medigap plan type (denoted by the letters) has a certain degree of coverage, and the lower the coverage, the lower the price. The opposite holds true as well. You need to determine a plan that best suits you and what you can afford, but this is generally something we believe is critically important. Thus, it is not necessarily a type of insurance you should skimp on!
- Two Insurance Companies with the Same Medigap Plan/Pricing Method? Pick the Lowest Price. For the most part (aside from the 3 states mentioned above), the specifics of each Medigap plan will have the same benefits, even between insurance companies. Thus, if you decide you want a Medigap A plan, and you have two different insurers that price similarly, you should generally pick the one with the lower overall cost (we say “generally” since you do not want to choose a company that is in financial difficulties).
- …But Read the Fine Print on Price. Insurance companies, for the most part, use three different methods for pricing their policies, outlined below:
- Community-rated(also called no-age rated). The same premium is charged to everyone, regardless of age. Medigap experts say these plans are the least expensive over time, though not necessarily when you first purchase them.
- Issue-age-rated.The premium is based on your age when you buy the policy. It won't go up as you age, but will increase due to cost inflation.
- Attained-age rated. The premium starts low but goes up as you get older. Over time, this type of policy is the most expensive.
Thus, you could believe that a company has a low premium initially, but it could very well be that such a policy is more expensive overall. On the other hand, you could purchase a policy that has a high upfront premium, but may not be so high over time.
- Sign Up For Medicare Part D During Open Enrollment. As noted above, there is a penalty that is avoidable if you sign up for Medicare Part D at the appropriate timeframe (3 months before/3 months after the month you turn age 65).
- Creditable Group Health Plan. If you are covered by your group work health plan, you need to make sure that such plan is “creditable” for Medicare Part D purposes, both at the time of initial enrollment and each year you are still working.
- Talk to an Expert. This to me is the most important tip of them all. Medigap/Part D insurance is a very confusing area, and the best thing you can do is speak with a professional whose job it is to understand this area inside and out. We know of many experts, so if you need any help, please let us know!
Karen DeRose is a registered representative of Lincoln Financial Advisors.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. DeRose Financial Planning Group is not an affiliate of Lincoln Financial Advisors.