Your Guide to Medicare

During retirement, there are two government programs that are going to be important to you: Social Security and Medicare. I have written elsewhere about how to optimize your Social Security benefits. This article is my attempt to provide similar coverage on the topic of Medicare.

What is Medicare?

Medicare is the U.S. health insurance program provided by the government. Although it is administered by the states, the federal government provides enormous financial support for the program. Partly because these federal subsidies are so generous, the cost of Medicare insurance is well below what a similar level of coverage would cost in the open market. Consequently, it is to the benefit of nearly everyone who qualifies to participate in Medicare coverage.

Originally, Medicare consisted of two parts, Part A and Part B. Part A covers mostly hospital care. Part B covers mostly outpatient care and doctor visits. Together, these two parts are known as “Original Medicare.” Original Medicare is also called “basic” Medicare or “traditional” Medicare. Because Original Medicare does not cover 100% of the costs of catastrophic care (including medical conditions that could cost in the $ millions), and to cover a variety of other less important gaps in coverage, the government allows private insurers to sell “Medigap” policies to plug these holes.

In addition, private insurers are allowed to sell “managed care” types of medical insurance, known as “Medicare Advantage” as an alternative to Original Medicare. Unlike the “payment for services” model of Original Medicare, these private insurers contract with local health care providers (mostly doctors and hospitals) who agree to bill at a lower cost. Medicare Advantage insurers vary in their strictness concerning “out-of-network” coverage. However, the premiums can be lower for Medicare Advantage and/or coverage may be more generous compared to Original Medicare. This is known as Medicare Part C. The Medicare rules say that private Medicare Advantage insurance plans must at a minimum cover the same things that Original Medicare covers.

As a participant, you must decide between using Original Medicare (Part A and Part B) or Medicare Advantage—you cannot have both.

Finally, private insurers are also able to offer government-subsidized prescription drug coverage, called Medicare Part D. This coverage can be added on to either Original Medicare or Medicare Advantage.

When it comes to Medicare, there are three big tasks that you need to get right:

Signing up at the right time.
Picking the right path for you (Original Medicare or Medicare Advantage), including Medicare Part D coverage.
Understanding and using the coverage.

This article will help you accomplish all three.

When Do I Sign Up?

As long as you are a U.S. citizen, or have been a permanent resident for at least five consecutive years, you become eligible for Medicare when you turn 65. (I am ignoring disability coverage provided by Medicare, which is based upon condition not age.) You can sign up as early as 3 months before the month of your 65th birthday to as late as 3 months after the month of your 65th birthday. This “initial enrollment period” of seven months applies to Original Medicare or Medicare Advantage. If you use Original Medicare, you must first have Part A and Part B before you sign up for Medigap and Part D. Medicare Advantage provides catastrophic care similar to Medigap and often comes bundled with Part D insurance.

If you miss your initial enrollment period, it will likely trigger lifetime premium surcharges for late enrollment in Part B and Part D. The Part B penalty is 10% for each year you are late, and for Part D it is 1% for each month you are late. Again, these are lifetime penalties! You definitely want to avoid these.

But turning 65 does not necessarily mean that you must enroll in Medicare.

Many people are still working when they turn 65. If you are covered by your employer (or your spouse’s employer), chances are you will want to keep this coverage. You may still want to enroll in Medicare Part A, which is free, but you will probably want to defer enrolling in Medicare Part B, which costs money. This is where it gets a little tricky. Very tricky, truth be told. Your particular circumstances will govern your choices.

Are you receiving Social Security? If you are 65 or older and receiving Social Security, you will automatically be enrolled in Medicare Part A and Part B by the Social Security Administration. If you are receiving Social Security benefits, you must take Medicare Part A, which is free, but you do not have to take Part B, which has monthly premiums. If you do not want to take Part B (and have its monthly premiums deducted from your monthly Social Security benefits) you must send back the Medicare card that they will automatically send to you.

Are you (or your spouse) actively employed and covered by an employer-sponsored plan? Does the plan cover 20 or more employees? If you are 65 or older, not receiving Social Security, and you are currently employed and covered by a large employer’s health insurance (or your spouse is employed and you are covered by their employer’s policy), then your plan will remain the “primary payer” of your medical costs and Medicare will be the “secondary payer.” In these circumstances, most people go ahead and sign up for Medicare Part A because it is free and will provide secondary payment benefits that could supplement the primary coverage provided by the employer’s plan.

One possible exception to signing up for free Medicare Part A coverage at age 65 would be if you are contributing to a Health Savings Account (HSA) and would like to continue doing so. The rules require you to stop contributing to an HSA plan six months before you begin Medicare Part A. So, if you want to keep contributing, you cannot have any Medicare coverage at all.

Regarding Medicare Part B, whether or not you enroll will generally depend upon the costs and coverage offered by the large employer-sponsored plan compared to Medicare Part B. Some employer plans are cheaper than Medicare Part B, so it may make sense to defer enrolling in Medicare Part B until after you (or your spouse) have stopped working and are no longer covered as an active employee by the employer’s plan. Also, keeping an employer-sponsored plan may allow your dependent children to maintain their coverage.

If you have prescription drug insurance from a current or former employer (as a retiree or through COBRA), depending on what you pay for this coverage, you may want to defer signing up for Medicare Part D (prescription drug coverage). However, Medicare requires that the employer’s plan be “creditable coverage” for you to later sign up for Medicare Part D with no penalty. Essentially, this means that its coverage must be at least as good as what is required for Medicare Part D plans. Your employer’s HR department should know whether or not their drug coverage is considered “creditable” by Medicare. This is very important because if you fail to sign up for Medicare Part D during your initial enrollment period, when you sign up for coverage later (which you will want to do), you will be assessed a late enrollment penalty which will increase your premiums for the rest of your life! For this reason, it is vital that you obtain a “creditable coverage notice” that you can later present when you sign up for Medicare Part D to prove that you had creditable coverage. And if you lose your creditable coverage (because you lost your job, for example, or COBRA coverage ended), you will have only 63 days to sign up for Medicare Part D before being penalized.

Does your employer-sponsored plan cover fewer than 20 employees? If you are 65 or older, you will need to enroll in Medicare Part A and Part B (or Medicare Advantage) if your employer-sponsored plan is a “small employer plan.” Generally, a plan covering 20 or fewer employees is a small employer plan. The company’s HR department will know how it is categorized. In these circumstances, Medicare must legally become the primary payer. Chances are that keeping a small employer plan as secondary insurance will not be cost-effective.

When you turn 65, even if you are covered by a former employer’s retiree medical insurance, or by COBRA, you must enroll in Medicare Part A and Part B (or Medicare Advantage).

Many employer-sponsored plans will not pay for expenses covered by Medicare Part A if you are qualified to receive it (for example, because you have turned 65). It is critical to understand how other medical insurance coordinates with Medicare. It is definitely worth a conversation with your company’s (or your spouse’s company’s) HR department about all this! You do not want to mess this stuff up!

Even if you have the option to defer enrolling in Medicare, you may find that it provides better, or cheaper, coverage than the employer coverage you have when you turn 65. In which case, you may want to cancel the employer coverage and switch to Medicare. But be forewarned—if you change your mind you may not be able to get back on the employer’s plan. And in some cases, you may be better off staying on the employer’s plan. Employer-sponsored plans are sometimes less expensive than Medicare plans, although with increased cost-sharing by employers that is less often the case. Also, you need to consider other family members, such as children, who get coverage from the employer’s plan.

Once you have signed up for either Original Medicare (Part A and Part B) or a Medicare Advantage plan, usually because you have turned 65 or because you (or your spouse) have stopped working and are no longer covered by a large employer plan, you will have other medical insurance choices to make.

If you go with Original Medicare (Part A and Part B), perhaps because you like the flexibility of being able to get medical care wherever you like, you would do well to consider adding both Medigap coverage and a Part D prescription drug plan. (I would strongly recommend both.) And it is vitally important to make your choices in a timely manner.

When you first sign up for Original Medicare, you are able to sign up for Medigap coverage right afterward and the private companies who provide this insurance are not allowed to refuse to cover you because of preexisting medical conditions. This “guaranteed access” period does not last forever, however. If you initially decline Medigap coverage and later change your mind and sign up, the insurers may refuse coverage or impose a waiting period before coverage begins, or they may charge you a lot more in premiums.

Similarly, if you do not sign up for Part D coverage when you first qualify and later decide to add Part D coverage, there will be an enormous penalty applied to your cost of coverage—1% of the cost of your monthly premium for every month that you were late in applying. This penalty will be assessed for the rest of your life! For example, if you are four years late in applying, you will pay 48% more in monthly premiums for Part D insurance than others forever.

More and more people are choosing a Medicare Advantage (MA) plan over Original Medicare. Often these plans provide catastrophic coverage similar to Medigap, and most plans include Part D prescription drug coverage. These are typically “bundled” together, making the purchase of an MA plan easier than selecting the individual components separately, as with Original Medicare, Medigap, and Part D. But similar rules for late enrollment apply. These rules are meant to discourage people from deferring catastrophic coverage until they have had a catastrophic medical event.

It is very important to get this stuff right from the start.

Where Do I Sign Up?

If you are already receiving Social Security benefits when you turn 65 (although I hope that you have strongly considered the benefits of waiting until age 70!), the Social Security Administration is supposed to automatically sign you up for Medicare. However, unless you have evidence that this has happened (such as the receipt of a Medicare card in the mail), it is better to confirm it with someone at the Social Security Administration.

In “the old days,” full retirement age was 65, and most people retired and began collecting Social Security benefits at that age. Probably because of this, the Social Security Administration was put in charge of Medicare enrollment. However, now most people’s full retirement age for purposes of Social Security is not until age 67. And quite a few people continue to work even beyond that age.

You will want to start this process as early as possible in order to leave yourself plenty of time to make decisions—ideally three month before your 65th birthday. You can’t really begin to shop for Medigap, Part D, or Medicare Advantage plans until you have a Medicare number, and it is likely to take at least two weeks for your card to arrive in the mail. The quickest and easiest way is to sign up online at the “Sign Up for Medicare” Social Security Administration webpage.

Although the Social Security Administration is still the gatekeeper for Medicare, the best place to gather information on Medicare is medicare.gov. Click on “Get Started with Medicare,” and you will be taken to a page that lays out four steps related to signing up and using for Medicare:

Once you have your Medicare number it is time to start searching for plans. Before you start, it is a good idea to have a list of all of your health care providers (doctors) and medications (including dosages), as well as your preferred drugstore(s).

Just browse to medicare.gov and click on “Get Started.” Then “Get the basics,” then “Learn based on my situation.” The web pages will ask a series of questions and guide you to pages that will present you with various insurance options to choose from based on your situation.

You will want to register on the site so that you can save all of the information that you enter.

Medicare Part A

Original Medicare includes Part A for hospital insurance and Part B for doctors, outpatient expenses, and medical equipment.

Part A is free for people who have enough Social Security earnings (40 quarters) to qualify to receive Social Security retirement benefits. Even if they don’t, they qualify for free Part A if their spouse or even ex-spouse qualifies. Part A covers certain inpatient care at hospitals, skilled nursing facilities, home health agencies, and hospice.

You must pay a deductible before Part A kicks in. ($1,484 in 2021.) This is not an annual deductible, as is the case for most insurance. It is a deductible for each “benefit period.”

During each benefit period, you pay $0 coinsurance for the first 60 days you are hospitalized, $322 a day for days 61 through 90, and $644 a day for days 91–150, assuming you have not used any of what Medicare calls your “lifetime reserve days.” You get 60 of these your entire life. After 150 days, or after 90 days if you’ve already used up your lifetime reserve days, you’re responsible for all hospital costs. These gaping holes in coverage, which could be financially catastrophic in the event of a really serious illness, is one reason for buying a Medigap Plan or Medicare Advantage Plan, both discussed below.

Notice that Medicare Part A covers only “certain inpatient” care. The word “inpatient” is critical. Hospitals have compelling reasons to “observe” people as outpatients instead of admitting them as inpatients. Among the things that hospitals get negatively rated on are “re-admissions.” One way to avoid readmissions is never to admit the patient in the first place, but classify the visit as observational.

The distinction is important because Medicare may pay different (usually lesser) amounts for observational hospital stays (covered by Part B) versus admissions (covered by Part A).

Further, and potentially more serious, in order for Medicare to pay for a subsequent stay in a skilled nursing facility, patients are required to have had at least three days (two midnights) of hospital care as admitted patients.

Medicare Part B

Part B is not free, but requires a monthly premium that is set each year by the agency that runs the program, the Centers for Medicare and Medicaid (CMS). For people receiving Social Security, Part B premiums are deducted from their monthly Social Security benefit payments. Part B covers services involving doctors, durable medical equipment, and other outpatient expenses. It is used more frequently by Medicare beneficiaries than Part A.

Most of us are used to employer-sponsored plans under which the whole family may be covered. However, with Medicare there is no family plan. Each spouse has a separate plan with separate premiums. This can throw some households for a loop, particularly if they have kids who are still covered on an employer health plan when their parents begin taking Medicare. Again, it is important to coordinate between your current medical insurance plan (including all family members who are covered) and your anticipated Medicare coverage. Your current insurance carrier is the best place to inquire about this.

In most inpatient care situations, keep in mind that you will face 20 percent copay requirements for fees from doctors and other Part B expenses with no ceiling on annual or lifetime copays. Here again, having coverage for catastrophic medical events that can run in the $millions is critical. This can be obtained a Medigap Plan or Medicare Advantage Plan.

You must have Part A of Original Medicare before you can buy a Part D prescription drug plan, but nearly everyone will get Parts A and B at age 65 and buys a Part D plan at the same time. The exception would be someone who is actively employed at age 65 with an attractive (generous) employer medical plan that doesn't have creditable drug coverage (a rare situation). They can stay on their employer's medical plan but could also buy a Medicare Part D drug plan.

Alternatively, you can start out with or switch to a Medicare Advantage plan, which will typically provide both catastrophic coverage and a Part D prescription drug plan bundled in. Remember, you cannot have both Original Medicare and a Medicare Advantage Plan—you must go one way or the other.

The Key Cost Variables

It is important to understand the various terms used in describing these insurance plans. Here are a few of the key terms:

Premium – the monthly payment you make for your coverage.
Deductible – the amount you must first pay, usually each calendar year (or each benefit period for Medicare Part A) before your insurance begins to help pay your medical bills.
Coinsurance – the percentage that you must pay, even after satisfying your deductible, for medical costs. Original Medicare generally pays 80% of covered expenses, so you are left paying the other 20%. Original Part B has no ceiling on this amount, but Medigap and Medicare Advantage plans often do.
Copayments – usually a fixed dollar amount (though sometimes it is a percentage) that you must pay for a medical service after you have satisfied your deductible. This often applies to doctor visits.
Out-of-pocket maximums – Although neither Part A nor Part B of Original Medicare has a ceiling on the total amount of coinsurance you might pay in a year, Medigap and Medicare Advantage plans often feature an out-of-pocket maximum amount. Part D drug plans, purchased with Original Medicare or bundled with Medicare Advantage plans, pay 95% of the cost of drugs. There is no cap on the 5% you may have to pay for super-expensive drugs that you may need.

The Basic Idea of Insurance

Regarding the financial considerations of selecting medical insurance, first and foremost remember that insurance is meant to protect you from financial disaster, not inconvenience. In my opinion, the single most important financial consideration in selecting a medical insurance plan is the out-of-pocket maximum(s) for which you may be responsible. Sometimes the maximums are different for Part A and Part B. For example, consider: what coverage is provided for a catastrophic medical event that could run into the $ millions for long hospital stays, extremely expensive drugs, or multiple appointments with a variety of specialists? Extraordinary medical expenses are often the cause of personal bankruptcy. This is what you need to insure against.

It turns out that most people are not very smart about insuring against medical catastrophe. Instead, they often “insure” against small medical costs (essentially by pre-paying them) instead of focusing on the really big risks. For example, only about 25% of those who have Original Medicare take advantage of Medigap insurance. They may not realize until it is too late that Original Medicare does a very poor job of protecting beneficiaries against very large medical bills. Some employer health plans or high-quality union health plans may have coverage that replicates what a Medigap Plan or a Medicare Advantage Plan will provide, but not often. In most cases, doing without such coverage is taking a big gamble.

Medigap Insurance

Medigap policies, also known as Medicare supplement plans, are private insurance plans that fill a lot of the gaps that expose Original Medicare beneficiaries to enormous medical expenses. Medicare Part B generally pays only 80 percent of the cost of covered services and medical equipment. You pay the other 20 percent—with no limit. Medicare Part A has fewer gaps, but you are still responsible for any deductibles. The costs of long hospital stays not covered by Part A can bankrupt all but the wealthiest households. In my opinion, because of this unlimited exposure to a catastrophic medical event, no one should purchase Original Medicare without also buying a Medigap policy.

There are quite a few Medigap policies to choose from. It is a well-documented fact that when consumers are faced with too many choices, they often make poor decisions. This is especially true when the products are complex and the associated terminology and features are unfamiliar. People freeze and do nothing. Or they make choices that are not in their own best interest.

To simplify the choices and help consumers compare among Medigap policies, the government has organized the plans by letter: A, B, D, G, K, L, M, and N. All of the plans with the same letter have identical coverage. The only difference is the cost of the plan, so the logical choice within each letter is the plan with the lowest monthly premium.

Source: https://boomerbenefits.com/wp-content/uploads/2021/04/medigap-comparison-chart-2021.png (Note: Plans C and F are no longer available to people new to Medicare as of 2020.)

In the table above, the most popular plans (F, G, and N) are highlighted. F is no longer available. G is popular probably because many people feel more secure if absolutely everything is covered. N offers almost the same coverage but omits coverage of “excess charges,” which arises only under very rare circumstances. About 95% of U.S. doctors accept Medicare, and they are not allowed any excess charges. If a doctor who doesn’t normally accept Medicare agrees to see you and tells you in writing that he or she will balance bill you 15% above the Medicare allowed charge, many states will allow it. However Pennsylvania is not one of them.

Plan G may be the most popular, but I’m not one to necessarily go along with the crowd. A lot of people buy extended warranties, flight insurance, and credit life insurance too. Sometimes, insurance companies profit off of people’s irrational fears and lack of information. What I want is protection from unlimited financial exposure to Part A and Part B coinsurance.

The good news is that all of the Medigap plans provide what I would consider good catastrophic coverage. All of them cover Part A coinsurance. All but K and L cover Part B coinsurance, which is potentially the most ruinous exposure. K and L provide a more traditional approach to catastrophic coverage by limiting out-of-pocket expenses rather than providing “first dollar coverage” on a lot of relatively small items. In my opinion, K and L work the way insurance is meant to work—share the costs on little items but limit total out-of-pocket exposure for the really big ones.

From an actuarial standpoint, the most generous plans, G and N, are likely to be most attractive to those who expect to use a lot of medical services. Frequent international travelers may want a plan that will cover 80% if they should need foreign medical services. Aetna reports that only .66% of claims have “excess charges” and the average amount is under $20, so buying that coverage (Plan G) is not likely to be a good deal for anyone but the insurance company.

The main idea I want to emphasize is that if you are using Original Medicare it would be reckless to not buy a Medigap policy of some sort (unless you are one of the lucky few who has a retiree medical plan that provides similar coverage).

Also, it is critical to buy your Medigap policy within six months of when you sign up for Medicare Part B. Once you have secured Part A and Part B coverage, the clock starts to tick on your one-time six-month “guaranteed access” period. It is only during this one-time open enrollment window that you are guaranteed the right to purchase a Medicare Supplement plan. Your health status does not matter when you buy a plan during this window—insurers can’t refuse to insure you because of preexisting conditions, and can’t charge you higher premiums because of these conditions. Also, the policy is guaranteed to be renewable on these terms so long as you keep up with your premiums. These guarantees may not be available to you if you miss your enrollment window.

Choose your plan carefully. The loss of guaranteed issue rights for Medigap can occur if you already have a Medigap plan and want to get a different one. You may have to go through some “medical underwriting” and if you have health concerns the insurer may decide to not issue you a policy. There are limited circumstances in which you may have “guaranteed issue rights” after the initial six-month guaranteed access period, for example if you have Parts A and B but continued with an employer plan but later leave it. Or if your former Medicap insurer leaves your state. But for the most part, medical underwriting will apply if you try to buy a Medigap policy later.

Medigap insurance companies must all offer the same benefits for each plan letter, so the only difference is the cost—the monthly premium. Most Medigap issuers base their rates on gender, zip code, tobacco usage, and age. Sometimes they offer household discounts to couples who buy the same policy. Future premium rates for a plan may change in three different ways:

Community no-age-rated—the premium is the same regardless of age
Issue-age-rated—the premium is based upon your age when you enroll
Attained-age-rated—premiums increase as you get older

As with most insurance, Medigap policies are regulated by the states. Not all states allow all three approaches to changing premium rates. Because your ability to later change plans or insurance companies may be limited, it is not enough to find a plan that meets your needs next year—you need to find a plan that will meet them for ten or twenty years. There are generally no guaranteed issue rights for Medigap policies outside your Open Enrollment Period. If you buy a low-cost plan today, you may not be able to upgrade your coverage ten years from now when your health has deteriorated and you want a more comprehensive plan. This may be one reason why the most expensive, and generous, Medigap plans tend to be the most popular.

It's not as though changing Medigap plans is never possible. For example, there are more safeguards for people who wish to get a Medigap policy when they are switching from Medicare Advantage to Original Medicare. But there can be complications even here. Because Medigap policies are regulated at the state level, you should call a State Health Insurance Assistance Program counselor in your state and review your options before selecting a Medigap plan.

Medicare Advantage

Like Medigap policies, Medicare Advantage (MA) policies are sold by private insurers, and like Medigap, they can shield people from catastrophic costs. In fact, one good reason to prefer Medicare Advantage plans over Original Medicare even with a Medigap policy is the fact that they all have out-of-pocket maximums.

Medicare Advantage plans are usually also less expensive than a combination of Original Medicare and Medigap. And MA plans are usually sold with a Part D plan (prescription drug coverage) bundled in, adding to their convenience. Many MA plans also offer dental, hearing, and vision insurance coverage, none of which are offered by Original Medicare. They are simpler to buy and use than Original Medicare. For all of these reasons, enrollment in Medicare Advantage has nearly doubled in the last 10 years.

The reason that Medicare Advantage plans can do all this is that they collect the same government subsidies per subscriber that are allocated to Original Medicare, and they control their costs by contracting for services with local health care providers (especially doctors and hospitals).

Nearly all MA plans are of two types—either a health maintenance organization (HMO) or a preferred provider organization (PPO).

HMOs generally require you to receive all your care in their networks and sock you with high out-of-network costs. Your primary physician needs to coordinate your care and is the gatekeeper for any referrals you might need. This is generally the cheapest MA plan.

PPOs offer you broader access than HMOs to doctors and hospitals outside its network, and you usually don’t need referrals from your primary doc. If you want to go to a special hospital in another state for treatment, a PPO will let you do this. Of course, as with everything, this freedom usually costs you in terms of higher premiums and more out-of-network care charges. PPOs have not one but two sets of annual out-of-pocket limits—one for in-network and the second for out-of-network care.

If you have an MA plan of either type that includes a Part D plan, as most MA plans do, keep in mind that this plan is separate from the rest of your MA plan, with separate deductibles, copayments, and out-of-pocket caps for prescription drug expenses.

The most important criteria in selecting an MA plan are whether your doctors, hospitals, and other preferred health care providers are in its provider network. Another consideration (assuming that you get one with a Part D plan bundled in) is how much it will charge you to continue taking your current medications.

In many cases, those criteria will still leave most, if not all, of the Medicare Advantage providers that offer policies in your geographic area. A logical next step in screening is to check out the CMS “star” ratings that measure the quality of MA plans. Plans receive from 1 to 5 stars, with some half stars in between.

MA quality ratings are based on a large set of medical care indicators, measuring such things as whether patients in the plan are using Medicare wellness tests and staying healthy, how well the plans help manage patients with ongoing or chronic health issues, how patients feel about the care they’ve received, and how Medicare assesses plan performance. Most of the time there are plenty of 4-5 star providers available.

Financial criteria are also important. What is the plan’s maximum out-of-pocket expense for the coming calendar year? Is this only for in-network services or does it also include out-of-network expenses? If a Part D plan is bundled in, how about the cap on prescription drug costs?

You can do a lot of your initial screen at https://www.medicare.gov/. Click on “Find Plans” and answer a few questions and you are on your way. Before you make a final selection, you will want to get more information on the particular plans that interest you the most. Just click “View Details.” At the bottom of the screen click “View plan website.”

Medicare Part D

Part D prescription drug insurance can be complicated and, in some cases, expensive. But in my opinion you absolutely must have a Part D plan. Even though it is not legally required, it should be. People without drug coverage are at risk for all or nearly all of their medication costs. These expenses can bankrupt even affluent households.

Part D plans usually charge a monthly premium. There is an annual deductible as well, meaning you must pay 100% of the cost of drugs covered by your plan until you have met the deductible. (In 2021, this amount is $445.) Even after you have met the deductible, there is generally a copayment ($ amount) or coinsurance (percentage) that you will have to pay. Once your plan has paid out a certain amount, you enter a coverage gap known as “the donut hole.” In 2021, this begins once you have spent $4,130 on medications for the year. At that point, you will pay 25% of the cost of medications until your total out-of-pocket outlay is $6,550. Beyond that, you will qualify for “catastrophic” coverage. At this point, you will have to pay $3.70 for generic drugs, $9.20 for brand-name drugs, or 5% of the cost, whichever is greater. (All of these figures are for 2021.) This means that there is still quite a lot of unlimited out-of-pocket exposure if you should need super-expensive drugs.

Don’t ask me to explain the logic of any of this. Welcome to the world of government healthcare!

Part D plans often market themselves based on their annual “out-of-pocket limits” on your drug expenses. Ceilings differ by plan and can be a major factor in choosing a plan in the first place. But these ceilings do not protect you from those 5% charges in the catastrophic phase.

As with all things Medicare-related, you will be hit with potentially enormous penalties if you fail to enroll in a Part D plan when you first take Medicare (during your one-time “open enrollment” period). The penalty is an additional 1% per month for every month you are late for the rest of your life.

To find a plan, either separately if you want Original Medicare or bundled with a Medicare Advantage plan, you will want to have a list of your medications, including dosages, and then go to https://www.medicare.gov/. The website will ask you to enter your list (if you register it will save the list for you) and then the software will sort through available plans and tell you roughly what a year’s worth of these drugs will cost you. Make sure you include your preferred pharmacy choices here, so that you can see whether a plan works with your pharmacy and how this may affect costs. (I would include all of the pharmacies that are convenient to you to give yourself as much flexibility as possible.)

Plans have the authority to attach three major conditions that could affect using the drugs you want:

Prior authorization – your doctor may be required to prove that your medication is medically necessary.
Step therapy – the plan may require you to first try a less expensive medication before approving a more expensive one.
Quantity limits – the plan may limit the amount of a drug that you can receive.

Part D drug plans also have star ratings from Medicare, which should probably factor in along with cost and convenience.

You are free to change drug plans every year during open enrollment (October 15 to December 7). It makes sense to check every year to makes sure that your plan is still competitive. I would advise you to not even think about ending Part D coverage. If you do, you will face potentially stiff premium surcharges should you ever need Part D again. And, as you get older, the value of this coverage grows.

How Do I Decide What is Right for Me?

Too much choice, it seems, is a bad thing. This is especially true when the things people are deciding about are multi-dimensional and complicated, as for example, choice of a prescription drug plan or a health insurance plan. People’s minds can get overloaded, and they often respond by shutting down and doing nothing. Or if forced to make a choice, they are likely to select whatever seems to be the “default” choice presented to them by whomever they are talking to or whatever webpage they are looking at. Bad idea.

I suggest that, for this sort of thing, it is hard to beat a spreadsheet like Microsoft Excel or Google Sheets. The columns and rows give you a grid in which to put they key information you will want to compare, and it also means that it is written down and stored for later use. Once you set up the structure, you will be able to re-use the spreadsheet each year during “open enrollment” when you will be faced with making the same decisions again. (Open enrollment starts October 15 and ends December 7 each year.)

You can break the coverage selection criteria down into two categories: financial and non-financial. Usually, the non-financial considerations will be your initial screening criteria. For example, how likely are you to need medical care outside of your local area? Do you spend a lot of time living somewhere other than your full-time residence (at a summer home, for example)? How much do you travel? Does the idea of being able to go anywhere in the U.S. to get the absolute best medical treatment appeal strongly to you? Your answers to these questions may tilt you toward Original Medicare because of its geographic flexibility.

On the other hand, perhaps you are more interested in saving money on premiums or having more generous coverage of such things such as dental, vision, and hearing (which are not offered by Original Medicare). If so, a Medicare Advantage policy may be right for you. However, you will want to be sure that your doctors and their preferred hospitals are “in network.” You will also want to check out their coverage of the particular medications that you are currently taking (their Part D plan).

Another important non-financial consideration is the rating that the Centers for Medicare and Medicaid Services (the people who administer the programs, often abbreviated “CMS”) provide on the particular policy you are considering. Not everyone agrees with the criteria used, but at least the CMS is transparent and consistent in their methodology. Many experts urge users to focus on policies that have at least a four-star rating. That can be helpful way to whittle down the list of potential policies to something manageable.

Let me reiterate some of my recommendations that will make your decisions somewhat easier:

If you prefer the flexibility of Original Medicare, you will need to purchase both a Medigap plan and a Part D drug plan as well.
If you prefer the potentially lower cost, ease of use, and ancillary coverage (like dental, hearing, and vision) of a Medicare Advantage plan, you will need to select one includes Part D coverage.

The reason you must do this is to insure yourself against unlimited out-of-pocket expenses in the case of a catastrophic health event. This is the most important and basic function of insurance.

What Medicare Plans Do Not Cover

Medicare does not cover each and every health care expense you may need to pay for:

Long-term care. Medicare will cover a short-term stay in a skilled nursing facility if a doctor says it is medically necessary. It must follow a hospital stay of at least three days, and coverage will end after 100 days.

Custodial care. Medicare does not cover “custodial care” of any duration, in any setting, whether in a nursing home, an assisted living facility, or at home. Custodial care is defined as help with the "activities of daily living" (ADLs), such as eating, bathing, dressing, toileting, and the like.

Dental, vision, and hearing services. Some Medicare Advantage plans cover these, but Original Medicare does not.

Medical services provided outside the U.S. Medicare will pay for medical care provided outside the United States only in a few limited circumstances. These include when a beneficiary is traveling between the contiguous states to Alaska by the most direct route, and when a beneficiary requires emergency care while near the U.S.–Canada border and the nearest emergency care is located on the Canadian side. You may be covered if you’re on a cruise ship but only if your medical care was provided within six hours of either arrival at or departure from a U.S. port, that is unless the ship is of foreign registry and within 40 miles of a U.S. port. If you are going to travel abroad or go on a cruise, it is a good idea to check into a separate insurance policy for your trip. (Some cruise lines provide coverage with your ticket.)

The Bad News for High Income Retirees

Like Social Security benefits, which phase-in the taxability of benefits at certain income levels, Medicare raises the premiums for high income participants. And the increases in premiums are step function. If your “modified adjusted gross income” is $1 more than the maximum allowed for the lower level of premiums then BAM! You are hit with the higher premium regardless of how far into the high bracket you went. The effective marginal tax rates in those first few dollars of income are astronomical! For a married couple filing jointly, an extra dollar above $176,000 will result in $1,720.80 higher annual premiums for Part B and Part D combined. That’s a marginal tax rate of several thousand percent!

Unfortunately, its almost impossible for tax planning to help make sure that the MAGI is below these thresholds. There is a 22-page document available to help you figure out exactly what it is, but simplistically, with respect to Medicare, modified adjusted gross income (MAGI) is “total adjusted gross income and tax-exempt interest income.” The Social Security Administration makes the determination whether you will pay a surcharge, called Income-Related Monthly Adjustment Amount (IRMAA), based upon your “latest” tax return, by which they mean your return from two years ago. For example, your IRMAA for 2021 will be based on your 2019 return.

If possible, it would be good planning to try to keep Medicare MAGI below $176,000 (as of 2021) for a married couple filing jointly who are both on Medicare. (The thresholds change each year based mostly on inflation. For 2023, the new threshold is $194,000.) Beyond that, the hits occur regularly up to $330,000. This is clearly not “soak the rich” program—more like “soak the upper-middle class!” For a single filer, which would hit a retired couple if one of them dies, the break points are cut in half (as are the Part B + Part D Medicare premiums). For example, an income $1 above $88,000 would cause the annual premiums to jump from $2,179 to $3,040.

The table below shows the IRMAA “tax burden” of the premiums as a percentage of income at the break points for a married couple filing a joint return. As above, the break points and premiums for a single filer would be half of the amounts shown. However, the “tax burden” of the Medicare premiums as a % of income are identical. The table below shows the current Part B and Part D premiums paid by a married couple filing a joint tax return, the resulting “tax burden” of the premiums as a percentage of income at the bottom of the bracket (except the first line, which uses the top of the lowest bracket):

Some online scuttlebutt indicates that the Social Security Administration is fairly lenient in some cases regarding circumstances that may have reduced your income in the last two years and may qualify you for a lower premium. “IRMAA Appeals” are limited to “life-changing events” such as:

Death of spouse
Marriage
Divorce or annulment
Work reduction
Work stoppage
Loss of income from income producing property
Loss or reduction of certain kinds of pension income

It would seem, for example, that this may include a lowered income because you retired or lost your job. You file an appeal by filling out form SSA-44 to show that although your income was higher two years ago, you have had a reduction in income due to one of the life-changing events above. For more information on the appeal process, see Medicare Part B Premium Appeals.

Unfortunately, a one-time boost in income because you sold some real estate or took an IRA distribution to do a Roth conversion is not likely to get any relief. However, the IRMAA will be automatically adjusted with your next tax return (or at least it should be).

Open Enrollment

Every year during “open enrollment” (October 15 to December 7), Medicare permits people to choose new plans, usually with no adverse coverage or pricing consequences. (Medigap policies are an exception—a new policy may require medical underwriting.) Few people take advantage of this opportunity, and as a result, they often end up with plans that cost too much and cover too little.

Why does this happen? (Why don’t people floss? Why don’t they exercise?) A recent survey by benefits insurer Aflac found that employees do not understand their health benefits, spend little time trying to do so, and would rather clean their toilets than grapple with this topic!

Laziness could cost you, however. Medicare Advantage and Part D drug plans can change a great deal from year to year. This year’s cheapest plan may not be the cheapest next year. The prices of drugs in what are called "plan formularies" can change a lot. A drug covered one year by a plan may not even be in its formulary the next year. Or it may have shifted to a different pricing category, or “tier,” in the plan.

At a minimum, you should make sure that your doctors and hospitals are still in your provider networks, your drugs are still covered, and your prices have not gone up by what you consider unreasonable amounts. If so, you can probably stick with what you’ve got without spending a lot of time investigating the options. However, if you kept your original spreadsheet, at least you are prepared to re-do your comparison shopping if and when it becomes necessary.

In addition to the more general open enrollment period between October 15 and December 7 (which allows you to switch in to or out of both Original Medicare and Medicare Advantage), there is also a special Medicare Advantage Open Enrollment Period for people already in an MA plan who want to make changes.

To switch plans, contact the insurance provider of the plan you like and apply for coverage. If you’re not sure how to contact the provider, Medicare’s plan finder tool may be useful. You will be disenrolled from your previous plan as soon as your new plan takes effect. If you are switching from a Medicare Advantage plan to original Medicare, you can either call your former plan or enroll through Medicare by calling 800-MEDICARE.

In addition to the open enrollment periods there are also Special Enrollment Periods for people whose circumstances may have changed and who therefore need to change their coverage. For example, a move outside of the service area for their MA plan.

Using an Insurance Broker

You do not need to wade through this complex set of decisions on your own. Insurance brokers are paid by insurance companies to sell Medigap and Part D plans under traditional Medicare and to sell Medicare Advantage plans for those who choose that route. They do not cost consumers anything.

I recently turned 65 (July, 2023), and I was very glad to find a very experienced insurance broker: John Barbati (johnb@pennhealthins.com) of Penn Health Insurance Solutions, Inc. I was so delighted with his service that I asked him to help me update this article. I highly recommend him.

For Further Study

The best book I have found on the subject is Get What's Yours for Medicare: Maximize Your Coverage, Minimize Your Costs by Philipp Moeller. I highly recommend this book—much of the information provided above is from it. The author hosts a radio show and website called “Ask Phil.”

Key Medicare-Related Websites

Below are the Medicare-related websites that I find are most helpful:

https://www.medicare.gov/ - The official source. You will want to start here.

https://www.shiptacenter.org/ - State Health Insurance Assistance Programs: "Free one-on-one Medicare counseling and assistance. Get help specific to your state."

https://www.aging.pa.gov/aging-services/medicare-counseling/Pages/default.aspx - APPRISE "Free Medicare counseling by the PA Dept. of Aging."

https://www.medicarerights.org/ - Medicare Rights Center: “The largest and most reliable independent source of Medicare information and assistance in the United States.” Activities include counseling, education, and policy work.

The two websites below may not be as “user friendly” and may involve more spade work, but they are authoritative and often helpful:

https://www.ssa.gov/ - The Social Security Administration are the “gatekeepers” for Medicare applications. Remember, they handle Medicare enrollments. Search “Medicare enrollment” for the relevant pages. (One clue: the formal name of Medicare Part B is “Supplementary Medical Insurance” or “SMI.”)

https://www.cms.gov/ - Centers for Medicare and Medicaid Services website. These folks make the policies and rules that guide the system. Includes a section on Medicare.

Below are some of the best “commercial” websites I have found that provide good coverage of Medicare-related topics:

https://www.medicareresources.org/ - “The Medicare Resource Center”

https://boomerbenefits.com/ - “We Speak Medicare”

https://expertmedicare.com/ - Keith Murray at Integrity Senior Solutions: “Helping people to better understand how Medicare works and make informed decisions.”

https://www.healthline.com/medicare/ - “Medicare: Helping you navigate this complex medical system”

https://www.ehealthinsurance.com/ - “We Make Health Insurance Affordable & Easy”

https://www.medicareinteractive.org/ - “Powered by the Medicare Rights Center”