It's Time to Review Your Medicare Options

Health reform changes coming for Medicare, Medigap, Medicare Advantage, and prescription drug plans.

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Medicare coverage should be a key component of every one's retirement planning. A 65-year-old couple will pay, on average, $250,000 in future out-of-pocket healthcare costs. Unforeseen medical expenses are the leading cause of personal bankruptcy. In practice, most people give Medicare little thought until they near their 65th birthday.

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The first sobering reality about Medicare is that it leaves people exposed to enormous healthcare costs. Basic Medicare includes hospital in-patient coverage (Part A) and out-patient coverage for physicians, equipment, and other medical services (Part B). Health reform is adding more preventive services to Part B. But consumers remain on the hook for 20 per cent of many Medicare expenses plus deductibles, co-pays, and other fees, often with no cap on maximum payments. Medicare generally does not cover dental, vision, hearing, or long term care. Signing up for Medicare thus should be the beginning of the health insurance process for older Americans, not the end.

A second reality is that Medicare is not one program but several. It includes government and private insurance plans. They can be combined in seemingly infinite ways. State rules can have a big impact on Medicare benefits. There is a lot of homework to do, but it can pay off in better and less expensive coverage.

Begin your research by finding out the details of any workplace health benefits you are eligible to receive when you retire. The percentage of employers offering such benefits plunged to 29 percent last year from 66 percent in 1988, according to the Kaiser Family Foundation.

"Roughly a third of all people on Medicare have an employer plan that supplements Medicare," notes Tricia Neuman, vice president and director of Kaiser's Medicare Policy Project. The best employer plans wrap their coverage around basic Medicare and fill in most of its gaps. If you can get retiree health coverage, take it. You also should determine if these benefits are sufficient or if you should obtain other Medicare policies or private supplemental insurance.

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If you do retire when you turn 65 and stop receiving company health insurance as an active or retired employee, you may be able to continue receiving some benefits if your spouse has workplace health insurance. If you're not covered when you turn 65, you are legally required to have basic Medicare. Part A of Medicare is free but Part B has monthly premiums. If you've elected to begin receiving Social Security (eligibility begins at age 62), Part B premiums are deducted from your Social Security payments.

"The first thing you need to do is make sure you're properly enrolled in Medicare," says Joe Baker, president of the nonprofit Medicare Rights Center. The enrollment window opens three months before your 65th birthday and extends for the next seven months. Enrollment "just doesn't happen automatically. You usually need to get yourself down to Social Security. Many people erroneously decline Part B coverage," Baker says. "But then they find out they should have enrolled" and may face penalties. Penalties can take the form of higher Medicare premiums for the rest of your life, he notes, so take this process seriously.

Another increasingly likely scenario -- thanks to the Great Recession -- is that you will work past 65 and continue private health insurance. Employer insurance plans can change for 65-year-old employees who continue working. For example, your employer's plan may combine Medicare with supplemental coverage from work.

People without retiree health benefits must decide whether to supplement basic Medicare with what's called Medigap insurance or with a Medicare Advantage plan (MA). Medigap policies supplement basic Medicare. MA plans include basic Medicare plus additional coverages.

Medigap plans are sold by private insurers. There are 10 sets of prescribed coverages -- A, B, C, D, F, G, K, L, M, N (gaps between letters reflect discontinued plans). The plans fill holes in basic Medicare to different extents. The primary variables involve deductibles for Part A and B coverages, coverage of the 20 percent co-insurance payment, emergency care fees, and medical treatment outside the U.S., which is not covered by basic Medicare.

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Baker says F is usually considered the most complete Medigap policy, with correspondingly higher premiums. But you might be able to find a less expensive Medigap solution that works for your needs and your budget. While the coverages within each "letter" plan are the same, premiums differ. Medicare has online tools to identify Medigap policies sold where you live.

Once you've identified a Medigap plan, you also should check out MA plans available in your state and see how they compare. MA evolved from the government's effort to support health maintenance organizations (HMOs) and their managed care service model. If you've used HMOs before, you might be comfortable with MA. It might save you money compared with Medigap, and even offer you some covered health services you can't find in Medigap. Also, insurance plans other than HMOs can be found in MA. Unlike Medigap, there is a lot of difference among MA plans, so you'll need to shop carefully. Unlike Medigap, MA plans often include prescription drug coverage.

Beyond covered services, experts note the biggest difference between Medigap and MA is that Medigap policies let you use any doctor you wish who participates in Medicare. With MA plans, you generally have to stay in the plan's network of providers. Another difference, Neuman notes, is that new federal rules and health reform provisions will cause private insurers to change MA plans. Before signing up for MA, see if there are any restrictions on your right to buy a Medigap policy later should your MA coverage change or no longer be offered.

The last piece to your Medicare puzzle is prescription drug coverage, also called Medicare Part D. It has been offered as a stand-alone Medicare policy by private insurers since 2006. Part D premiums vary, as can charges for the same drugs. Each plan offers its own list of covered drugs (called a formulary) and the plans usually have several pricing tiers, each with different co-pays, which contain increasingly expensive drugs.

The other major issue with basic Part D plans is a coverage gap known as the donut hole. In 2010, Part D stops providing coverage when drug costs have reached $2,830, and insurance doesn't resume until your total out-of-pocket spending has reached $4,550. The donut hole will go away bit by bit each year under health reform, and will be eliminated after 2019. Some retiree health plans include drug coverage. Employers need to certify their programs are at least comparable with Part D.

While you may be buying Medicare and its related plans when you're 65, experts note, you should consider your possible medical needs when you're 85. It can be expensive to switch plans later, or even impossible. The health reform act denies private insurers the right to use pre-existing conditions as a basis for rejecting coverage. That prohibition does not apply to private policies that supplement Medicare, Baker says. Age and physical condition can be used to reject or restrict older persons from getting supplemental policies, but not when they first become eligible for Medicare. Some states have consumer safeguards that disallow such coverage denials.

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