by Charissa Anderson, CFP®
Senior Vice President
Portfolio and Wealth Management
Whether enrolling in Medicare for the first time or preparing for the Medicare open-enrollment period, it pays to review plan options and choose the most appropriate coverage for your circumstances.
When to Enroll
Most individuals become eligible for Medicare coverage at age 65 and can enroll during a seven-month window beginning three months prior to their birth month. Participants are encouraged to enroll prior to their birth month to avoid gaps in coverage. Delays in enrollment typically lead to a permanent 10-percent increase in costs for each year, or partial year of delay. For example, a delay of 25 months would lead to a 30-percent permanent increase in the cost of your monthly coverage.
Open Enrollment
Choosing health insurance is usually not a one-time decision for most Medicare enrollees. Plans change and over time, needs may change too. Each fall, there is an opportunity to make coverage changes during the Medicare open-enrollment period. Open enrollment begins on October 15 and lasts through December 7, with changes becoming effective the following January. With open enrollment approaching, the below summary covers the various Medicare parts and how premiums are determined.
Source: medicare.gov
Breaking Down Medicare
Medicare Part A: Covers inpatient hospital stays, limited stays in a skilled nursing facility, hospice care and some home health care.
Medicare Part B: Covers certain doctors' services, outpatient care, medical supplies and preventive services.
Medicare Part C: Known as Medicare Advantage, Medicare Part C plans are a type of Medicare health plan offered by a private company that provides all your Part A and Part B benefits. Most Medicare Advantage Plans also offer prescription drug coverage.
Medicare Part D: Helps cover the cost of prescription drugs.
Understanding Premiums
Medicare Part A: Most people qualify for premium-free Medicare Part A. Generally, if you or your spouse paid Medicare taxes for at least 10 years, you will have met the condition to get premium-free Medicare Part A. If you do not qualify, you can buy Part A. Depending on the amount of taxes you have paid, monthly premiums range from $252 to $458 per month in 2020.
Medicare Part B: Most of Medicare Part B, roughly 75 percent, is funded by the government. The remaining expenses are paid through a premium, which is determined by your income level. If your income level exceeds a certain threshold, you will pay an additional premium amount, referred to as the income-related monthly adjustment amount (IRMAA).
To determine if IRMAA will apply, Social Security uses the most recent federal tax return the IRS provided them. Generally, this return is from two years prior. For example, to determine your Medicare cost for 2020, Social Security likely relied on the tax return you filed in 2019 that details your 2018 earnings. If you must pay higher premiums, a sliding scale is used to calculate the adjustment based on your modified adjusted gross income (MAGI). Your MAGI is your total adjusted gross income plus tax-exempt interest. Depending on your income, your monthly Part B premiums will be equal to 35, 50, 65, 80 or 85 percent of the total cost.
Medicare Part C: Medicare Advantage plans are sold by private insurance companies and plan costs vary based on several factors, including carrier, benefits offered and location. In 2019, the national average monthly premium for Medicare Advantage plans was $35.55 per month.
Medicare Part D: These prescription drug plans are also sold by private insurance companies, so premiums will vary from one plan to the next. Like Medicare Part B premiums, you may pay a Part D income-related monthly adjustment amount based on your income from two years prior.
The chart below reflects Part B and Part D costs in 2020. Medicare rate increases are typically announced late in the calendar year. Based on reporting from the Centers for Medicare & Medicaid Services, the projected 2021 Medicare Part B premium is $148.50 per month. If your MAGI exceeds an income bracket, even by just $1, you are moved to the next tier and will have to pay the higher premium
Source: medicare.gov
In addition to Medicare premiums, it is also important to understand your plan’s deductible, copayment and coinsurance costs.
Many things can occur in the two years that pass between the year in which your income is assessed and the year in which IRMAA is applied. If you have had a major life event that caused significant income reduction, you can ask Social Security to adjust your premium by completing the Medicare Income-Related Monthly Adjustment Amount – Life Changing Event form. These events include divorce, death of a spouse and work stoppage or reduction, among others.
Other Resources
Understanding your healthcare costs today and in the future is a critical component of planning. Details and resources are available at www.medicare.gov. The good news is that you don’t need to navigate Medicare related decisions alone. Your portfolio manager can provide resources, who can help you assess the right coverage for you.
Ferguson Wellman and West Bearing do not provide tax, legal, insurance or medical advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.