Avoiding Costly Medicare Errors

The wild card in most retirement plans is medical spending. Too many people approach retirement believing Medicare and their last employer will cover most retirement medical costs. Even after people realize their full potential exposure to medical expenses, many miss critical opportunities to reduce their share of the costs and especially to reduce the uncertainty about how high their medical expenses could rise.

We’re approaching the critical time of year for controlling retirement medical expenses. Decisions you make now can substantially reduce your costs. For some people, missing a key deadline will tag them with higher costs for the rest of their lives.

Medicare is the main medical expense insurance plan for most retirees. It’s so important that new research from the Center for Retirement Research at Boston College concludes that many Americans now determine their retirement dates by their eligibility for Medicare or employer retirement health benefits.

Many retirees and especially pre-retirees don’t know enough about the program, which is revealed in many surveys. Many financial advisors don’t know much about it either.

Key mistakes involve the enrollment rules. Mistakes here can trigger extra premiums for the rest of your life or cause you to miss the opportunity to improve coverage or decrease costs.

You should know the Medicare enrollment periods, whether you’re already a beneficiary or are approaching the time when you’ll be eligible to join.

Let’s look first at the open enrollment period for those already enrolled in Medicare and those who want to enroll the first time outside their initial enrollment period.

Each year there is an open enrollment period during which you can switch from one plan to another in Parts C and D, switch from Part B to Part C (or vice versa), or enroll for the first time in any of the plans. In 2013 this period is from October 15 ? December 7 for Parts C and D. There’s another enrollment period from Jan. 1 ? February 14, 2013, during which you can switch from Part C to Part B and also join a Part D plan.

I urge you to do some research before and during the open enrollment period even if you are satisfied with your current plans. The harsh truth is that many people make less-than-optimum choices about Medicare plans. For example, research shows that most people in Part D plans aren’t in the optimum plan for them. By comparing the drugs they use with the coverage details of the plans available to them, most can save about $300 annually by switching to the optimum plan, according to a paper from the National Bureau of Economic Research.

Others might find they are better off in a Part C, or Medicare Advantage, plan than in traditional Medicare Part B. Still others would be better off in a different Part C or Medicare Supplement plan.

You could save a lot of money or find much better coverage by shopping around. Take a look at what’s available in your area in both your current type of plan as well as the alternatives. This information is available, usually sometime in September, on the Medicare web site. If you’re not a web user, you also can call the Medicare toll-free at 1-800-MEDICARE or receive help from your state’s Area Agency for Aging.

Those who aren’t yet enrolled in Medicare need to know the enrollment deadlines. Medicare has four parts. Part A covers primarily hospitalization. Part B is traditional Medicare, covering primarily doctors’ services and other non-hospital care. Part C is Medicare Advantage, which is an alternative to Parts B and D. Part D is prescription medicine coverage. Part A is free. The other parts carry premiums.

Unless you’re disabled, you aren’t eligible for Medicare until you turn 65. When you’re already receiving Social Security, you’ll be enrolled automatically in Parts A and B when you turn 65 and the premiums will be deducted from your Social Security benefits.

When you aren’t already receiving Social Security benefits at 65, you need to enroll during your “initial enrollment period.” Miss signing up during this period and you’ll pay higher premiums for life. Enrollment in Medicare actually is done through Social Security, whether or not you are receiving Social Security benefits. You can enroll online (accessing the enrollment process through either the Medicare or Social Security web sites), by contacting your local Social Security office, or by calling 800-772-1213. When you aren’t receiving Social Security benefits, you’ll be allowed to choose between several methods of paying premiums.

The initial enrollment period for all four parts begins three months before you turn 65 and ends three months after you turn 65, giving you a seven-month period. Medicare encourages you to enroll three months before 65 so your coverage will begin the first day of the month you turn 65, or the first day of the previous month if your birthday is on the first of the month. When you don’t apply before turning 65, your enrollment is delayed. The length of delay depends on how long you waited to enroll.

The initial enrollment period is extended in some cases.

For Parts A and B, the initial enrollment period is extended when you are employed, the employer has 20 or more employees, and the employer or union offers group coverage. In that case, you can delay enrolling until after your employment or the coverage based on it ends. To be sure, check with your medical plan administrator or Medicare to ensure you qualify for delayed enrollment. There’s no reason to delay enrolling in Part A, since there’s no premium for it. But you avoid Part B and D premiums when you delay enrolling in them.

When you’re employed and the employer has fewer than 20 employees, enroll in Medicare during the initial enrollment period. The employer medical plan usually will assume you join Medicare when first eligible, and it won’t cover expenses covered by Medicare. You also won’t be eligible for delayed Medicare enrollment.

The same applies when you’re self-employed. Join Medicare during the initial enrollment period. Self-employed people can deduct Medicare premiums as a business expense. The IRS has flip-flopped over the last couple of years so it is uncertain whether your spouse’s Medicare premiums are deductible as a business expense.

When your initial enrollment period is extended because you’re covered by an employer plan, you need to enroll shortly after employment ends. The special enrollment period for you is the eight months following your final day of employment.

Many people get this wrong. The enrollment deadline isn’t extended by employer-provided retirement medical benefits, severance medical benefits or your purchase of COBRA coverage. The deadline begins the day your employment or the group coverage based on it ends.

This rule requires a tough decision from the minority of people who have attractive employer-provided retire-ment medical coverage. You might not want to sign up for Medicare and begin paying the premiums, because the coverage is good. But if you don’t sign up for Medicare during the initial enrollment period and later the retiree coverage is reduced or ended, you won’t qualify for a special enrollment period. You still can enroll in Medicare at that time, but you’ll pay the penalty for missing the initial enrollment period.

For Part D prescription drug coverage, the special enrollment period rules are a bit more expansive. You can join Part D without penalty when you leave coverage from an employer or union, including COBRA coverage. The special enrollment period also applies when you had drug coverage that was as good as Medicare and you involuntarily lost it or it changes so that it no longer is as good as Medicare. There are other special enrollment periods, such as when you move out of the area covered by the current policy, but these are the main ones.

But the Part D special enrollment period isn’t as long as for Parts A and B. It lasts only for two months after you lose the previous coverage.

The penalty for missing your initial enrollment period or special enrollment period is high. For Part B you pay an extra 10% of the Part B premium for each full 12-month penalty you delayed enrollment. That penalty applies for every month for as long as you’re enrolled. Since the penalty is a percentage, the dollar amount increases as Medicare premiums increase over the years.

For Part D, the penalty potentially is higher and also depends on how long you didn’t have coverage. The penalty begins with the “national base beneficiary premium” which was $31.08 in 2012. Medicare determines this amount each year based on estimated costs. The penalty is 1% of the NBBP multiplied by the number of full months you were eligible for Part D but didn’t join and weren’t covered by a comparable plan. The result is rounded to the nearest $0.10 and added to your monthly premium.

Example.  Max Profits was first eligible for Part D on May 1, 2009. He joined a Part D plan effective Jan. 1, 2013, going 43 months without coverage. His penalty is $13.40 times 43 times 1%, or $13.36. It’s rounded to the nearest $0.10 for a total of $13.40. That is the additional monthly premium.

This penalty is likely to increase each year, because the NBBP is likely to increase annually.

Next month we’ll discuss Medicare supplement, or Medigap, plans. To achieve the best combination of broad coverage and low premiums you should be busy during the enrollment periods comparing your Medicare plan options.

RW September 2013.