Medicare enrollment: Prepare or pay the price

Who knew that turning 65 would be so​ fraught with confusion and angst? It has less to do with acquiring more gray hair — or losing your hair altogether— and more to do with the nagging feeling that you face a momentous decision with strict deadlines and severe consequences if you screw up. I am, of course, referring to signing up for Medicare. As a financial adviser, you are in a position to help your clients tackle some of the most confusing issues they will face in retirement, including how to pay for ever-increasing health-care costs that could upend their financial plans. Think of their sense of relief if you provide them with a step-by-step process (see checklist) for how and when to enroll in Medicare and claim Social Security benefits in the most beneficial manner. The traditional retirement age of 65 is still a key milestone for Medicare eligibility, but full retirement age for Social Security benefits is 66 or older, depending on the individual's birth year. The decoupling of the eligibility ages for these two essential retirement programs, and the fact that many people continue to work beyond traditional retirement age, complicates critical enrollment decisions.

Best time to prepare

The year before turning 65 is a good time to review Medicare options. Financial advisers may want to send "Happy 64½ birthday" cards or similar notices to clients to focus their attention on the timeline for the important decisions that lay ahead. "Increasingly, health care is material to the financial well-being of Americans," said Ryan McCostlin, head of health-care financial planning at Bernard Health, a benefits brokerage firm that partners with financial advisers to provide health-care counseling to their clients. "More and more, financial advisers are embracing health-care financial planning because they feel they can't get away with not addressing it," Mr. McCostlin said. "The ones that do can use it as a prospecting and retention tool to differentiate themselves from other advisers." In the two years since launching its financial advisory division, Bernard Health has partnered with Morgan Stanley, Ameriprise, Baird and several regional and independent advisers.

Auto enroll vs. sign-up

People who claim Social Security benefits early are automatically enrolled in Medicare when they turn 65. Clients can decline Medicare enrollment if they have other "creditable" health insurance coverage from a current employer or union or through a spouse's job. Retiree health benefits and extended coverage through COBRA do not count as creditable insurance to replace Medicare Part B. Clients who have creditable coverage through a group health insurance plan at work have up to eight months after that coverage ends to sign up for Medicare penalty-free during a special enrollment period. Clients age 65 or older who are not receiving Social Security benefits and do not have group insurance at work — defined as a company plan for 20 or more employees — must enroll in Medicare during their seven-month initial enrollment period or face tough consequences. Clients can sign up for Medicare by visiting a local Social Security Administration office, calling the SSA toll-free number (800-772-1213) or applying online at ssa.gov. Your clients should click on the "online services" tab and then "apply for Social Security benefits," even if they just want to apply for Medicare, as it's the same form.​ If clients miss their initial enrollment period, they could face lifelong penalties and costly coverage gaps.

The initial seven-month enrollment period for Medicare begins three months before an individual's 65th birthday, includes the birthday month and extends for three months afterward. If your client misses that initial enrollment period and isn't covered by an existing employer's group health insurance plan, he or she must wait until the next general enrollment period to sign up — a potentially costly delay. General enrollment runs from Jan. 1 through March 31 every year for coverage beginning on July 1. So if your client missed their initial enrollment period that ended in April 2018, they would have to wait 14 months until Medicare coverage could begin on July 1, 2019. In the meantime, they could be on the hook for 80% of health-care expenses, even if they have retiree health coverage or extended employer health insurance through COBRA — neither of which are considered creditable insurance that replaces Medicare. Medicare is the primary payer of medical expenses for Americans age 65 and older, and other insurance is secondary. Remind clients with health savings accounts that once they enroll in Medicare, they can no longer make tax-deductible contributions to the HSA, although they can continue to take tax-free distributions to pay for qualified medical expenses.

The ABC and Ds of Medicare

Medicare has four parts. Part A covers hospitalization and is free for most people. Part B covers outpatient services and doctors' fees and has a monthly premium of $134 per month for most enrollees in 2018, which will rise to $135.50 in 2019. Higher-income retirees, defined as individuals with modified adjusted gross incomes above $85,000 and married couples with joint incomes of more than $170,000, pay more. Medicare Part D covers prescription drugs and is also subject to high-income surcharges.

Most people choose original Medicare Parts A and B, and add Part D prescription drug coverage and a private Medigap supplemental policy to cover deductibles and co-payments. Clients can use Medicare anywhere, at any doctor or hospital in the country that accepts it, and most do. About one-third of Medicare enrollees instead opt for an all-inclusive Medicare Part C plan, also known as Medicare Advantage, which often offers additional benefits not provided by original Medicare, such as dental and vision care, and often includes prescription drug coverage. Medicare Advantage plans, which are provided by private insurers, tend to be less expensive — some charge only the standard Medicare Part B premium and others charge an additional monthly fee. In exchange for lower costs and expanded benefits, Medicare Advantage members are usually restricted to using health-care providers and services within the plan's network, often limited to a specific geographic region except for medical emergencies. In a worrying development, a recent report by the inspector general of the Department of Health and Human Services found "widespread and persistent problems related to denials of care and payment in Medicare Advantage." Separately, a bipartisan group of more than 100 lawmakers sent a letter to the Trump administration complaining that Medicare Advantage patients "may be encountering barriers to timely access to care that are caused by onerous and often unnecessary prior authorizations."

Late-enrollment penalties

If your client misses their initial enrollment period, they also will incur a delayed enrollment penalty of 10% for every 12 full months they were eligible to enroll in Medicare Part B but did not. And the penalty continues for as long as they have Medicare Part B. So if your client mistakenly assumed their retiree health plan or COBRA coverage would replace Medicare and signed up for Medicare Part B two years after their initial enrollment period, they would pay a delayed enrollment penalty of 20% of the standard Part B premium every month for the rest of their life. The delayed enrollment penalty for Medicare Part D prescription drug plans is 1% per month or 12% per year for every year an individual was eligible to enroll but did not. Clients may be able to delay enrolling in Part D penalty-free or skip it altogether if they have creditable drug coverage, defined as a policy that is as good or better than the basic Medicare D benefit. Many retiree health plans qualify as creditable drug coverage, as do Tricare for Life, Veterans Benefits and Federal Employee Health Benefits. Clients with those benefits do not need to buy a Part D drug plan. Having creditable coverage also means that if your client loses such prescription drug coverage — perhaps because of retirement — they will have a two-month special enrollment period to sign up for a Part D plan penalty-free after their previous coverage ends. Although retired military personnel can skip enrolling in Medicare Part D, they must sign up for Medicare Parts A and B when they're eligible to qualify for Tricare for Life health benefits. Learn how to optimize Medicare for those who have served in the military in this article. Retired federal employees can skip signing up for Medicare and rely on their FEHB benefits alone, but if they later decide to enroll in Medicare Part B and use their FEHB benefits for supplemental coverage, they will be subject to Part B delayed enrollment penalties.

Initial choices

Probably the most important thing that financial advisers can communicate to their clients about Medicare is the importance of making the right choice in the first place. Although clients who select original Medicare initially can switch to a less expensive Medicare Advantage plan later (see open enrollment guide), it is only during their initial enrollment period or special enrollment period that they can choose any supplemental Medigap plan without medical underwriting. If they select a Medicare Advantage plan initially, they can switch to original Medicare in later years, but they may not be able to get the Medigap plan of their choice, or they may have to pay more for it as a result of their health status. Medigap plans are health insurance policies that offer standardized benefits to work with original Medicare. They pay part or all of certain remaining costs, such as deductibles, coinsurance and copayments. Medigap only works with original Medicare, not with a Medicare Advantage Plan. Depending where you live, you may have up to 10 different Medigap policies to choose from: A, B, C, D, F, G, K, L, M and N. Policies in Massachusetts, Minnesota and Wisconsin have different names. Each policy offers a different set of standardized benefits, meaning policies with the same letter name offer the same benefits. However, premiums can vary from company to company. Clients should select the plan letter they want and then compare prices. "With more choice comes more complexity," Mr. McCostlin said. "For many people, shopping for a Medigap policy feels more like filing their taxes than buying insurance."​ Currently, Medigap F plans are the most popular and comprehensive, but they are going away. Starting in 2020, Medigap Plan F cannot be sold to new Medicare beneficiaries.​ New Medicare enrollees who like the comprehensive coverage of Plan F should consider buying Plan G, which provides most of the same benefits but does not include the Part B deductible, which is $183 in 2018 and $185 in 2019. Existing Plan F policyholders could see premiums rise in the future, as the insurance pool shrinks.

Mary Beth Franklin, a certified financial planner, is a contributing editor for InvestmentNews.