How to Understand Medicare in 3 Simple Steps
Medicare, like many other government programs, is far from being easy to understand. From family and friends, you get little snippets of guidance, but nothing that gives you a cohesive picture. From the government, you receive the overly exhaustive Medicare & You handbook that is so thick and dry, it might as well come with a “drowsiness may occur” label. And, as for the rest of the Medicare mail, there is little more than ads, ads, and more ads, very few of which offer any more substance other than a quick sales pitch for a Supplement or Advantage Plan (you’ll learn what these are later on). For those approaching 65, understanding Medicare is often daunting.
That’s why I am writing this post. I want to help you see your Medicare “big picture.” I’ll try not to go into mind-numbing detail (although I can’t promise this will be evening pleasure reading), and I won’t give you unhelpful bite-sized chunks. You will likely still have questions afterward, but I hope this step-by-step guide helps clears up some confusion about what you will encounter as you make the transition from your private (or employer) insurance to Medicare.
If you don’t have time to read this right now, you can call us at 937-492-8800, and we can set you up with a Medicare expert who will walk you through all this information one-on-one.
But if you are ready to learn, it’s time to get started.
Step #1: Learning the Parts of Medicare
The best way to understand a complex topic is to split it up into parts. Medicare has made this easy for us because Medicare is already made up of four parts: Parts A, B, C, and D. It is essential that you understand them before we go any further.
Part A (A.K.A. Inpatient care, A.K.A. Hospital Insurance)
Part A is coverage for care received while officially admitted in at a hospital. Beyond that, it also covers skilled nursing/rehab, hospice, and some home health services. However, for simplicity’s sake, think Part A equals hospital insurance!
Part B (A.K.A. Outpatient care, A.K.A. Medical Insurance)
Part B, on the other hand, is the exact opposite, covering care received while checked out of the hospital. So, in a sense, it covers (at least in part) about everything else. This includes diagnostic tests, x-rays, and outpatient surgeries as well as an extensive list of preventative care options. Note that Part A and B together make up what is known as “original” or “traditional” Medicare.
Part C (A.K.A. Medicare Advantage)
The C in Part C is for complicated, so I’ve decided to address this later on in the post. For now, just keep it in the back of your mind. This is one of your “2 main options” we will meet again in step 3.
Part D (A.K.A Prescription Drug Plan)
The D in Part D is for drugs. In other words, it helps cover the bills for your medications. Part D drug plans are offered by private insurance companies that are regulated by Medicare. Whether or not you need one will be determined by which option you choose in step 3. If you do need one, you purchase it as a stand-alone plan based on your medications and preferences. I recommend using Medicare’s Drug Plan Finder.
Step #2: Understanding Signing Up for Parts A and B (Who and When and How)
Now that you have a basic understanding of Medicare’s parts, you should know who should sign up for Parts A and B, when you should do it, and how it is to be done. Let’s start with “who.”
Who Should Sign Up?
These two Parts are absolute musts! Everyone should sign up for Medicare Parts A and B eventually. Where situations differ is in the answer to the next question: when?
When Should You Sign Up?
Since Part A is free for most everyone, almost everyone should sign up Part A during their Initial Enrollment Period (IEP). The IEP is the seven-month period starting 3 months prior to your 65th birthday month. The only reason you might want to opt of Part A is because of HSA contribution difficulty.
Part B, on the other hand, has an associated premium of $135.50 (in 2019). This means if you will continue working and have better value coverage with your employer, it may be a good idea to put off signing up for Part B until you are finished working. Why pay the extra premium if you don’t need to, right?
However, you have to be careful with this. If you are going to delay signing up for Part B, you must make sure that you are qualified, otherwise you will incur a penalty. And even if you are qualified, you need to make sure it makes financial sense for you to do so. To give you a quick run down, in order for it to be a good idea to delay Part B, the following three things must be true about your situation:
- You must have insurance through active employment, not retiree benefits or COBRA. In other words, you must be working (or you spouse must be working if you are covered under their plan).
- Your employer insurance must cover 20 or more employees.
- Your employer plan should be a better value than Part B.
For more details about whether you should sign up for Part B, click here.
If you found that you cannot delay, you must sign up for Part B during the Initial Enrollment Period, just like for Part A.
However, if you can delay, you just sign up when you retire. You will likely have a Special Election Period to sign up after your employer coverage ends.
How Should You Sign Up?
Unlike the last one, this one is easy and straightforward! There are four ways to sign up for Parts A and B:
- If you are already receiving Social Security benefits, it is automatic!
- You can sign up online at https://www.ssa.gov/medicare/.
- You can call your local Social Security Office.
- You can go and visit your Social Security Office for an in-person appointment.
Once you’ve signed up, expect your Medicare card to come in the mail soon after. Not too difficult, right?
Step #3: Understanding Your 2 Main Options
After figuring out the who and when and how of signing up for Parts A and B, this is where you have to make a big decision. It is here where the Medicare trail diverges into three possible paths:
- You could go with Original Medicare (Parts A and B) alone.
- You could pair a Medicare Supplement with Original Medicare.
- You could go with a Medicare Advantage Plan (Part C—I told you we’d meet him again).
I promise I can count (I’d be in bad shape as a financial planner if I couldn’t). The reason why it says there are only 2 options in the heading is because, although a very choice few disagree, most do not believe option #1 to be viable at all. Allow me to explain why:
Original Medicare Alone Leaves Some Potentially Devastating Gaps!
Parts A and B alone do not cover everything. For Part A, you have a $1,364 deductible that you may have to meet more than once per year and limited to no coverage for extended hospital stays. And for Part B, you have a 20% coinsurance on all outpatient services. And these are just a couple of the many costly gaps!
To give you an idea of what this might cost you, this means a 120-day hospital stay would be over $31,000! And if you have outpatient chemotherapy and radiation like my father-in-law, you could wind up being on the hook for over $30,000 that Part B won’t cover! Since there is no out-of-pocket spending cap with Medicare alone, there is no limit to what you might spend.
With that being said, I strongly recommend choosing one of the other two options (you can’t choose both). As the last part of our last step, we will look at what sets these two apart and outline some of the strengths and weaknesses of each.
What’s The Difference?
Medicare Advantage plans should be seen as an alternative to Original Medicare offered by private insurance companies that provide coverage that is at least as good as Medicare. Although you still have to sign up for Parts A and B, if you sign up for Medicare Advantage, the private insurance company will REPLACE Medicare as the payer of your claims. But you will still pay the Part B ($135.50 for 2019) premium each month.
A Medicare Supplement, on the other hand, pays SECONDARY to Medicare. Medicare pays what it normally pays for, and then the Supplement swoops in to pay your share of the costs (i.e. those gaps we talked about earlier such as 20% on outpatient services).
What Are The Strengths And Weaknesses of Each?
To put it simply, the Medicare Advantage Plan wins at cost effectiveness. As an in-the-ballpark figure, an Advantage Plan will cost you about $60 per month on average. Some are even $0 premium plan! A Supplement, on the other hand, will cost an average of about $110 per month. In addition, an Advantage Plan almost always has a built in drug plan, while you will have to buy a stand-alone drug plan if you have a Supplement, which (depending on your medications) is about an extra $35 per month.
However, a Medicare Supplement wins at just about everything else. They cost you less in out-of-pocket expenses throughout the year. Their benefits package is much more stable every year. You have more freedom to choose healthcare providers, and you are more likely to have out-of-state coverage.
For a more in-depth look at the pros and cons of these two options, click here.
When it comes to deciding, it is all about what is important to you. For instance, if you travel a lot, out-of-state coverage may be very important to you. Therefore, you may want a Supplement. However, if you are more cost-conscious, an Advantage Plan might be the best. It’s all about finding the best plan to meet your unique needs and preferences.
Retiring soon and don’t know what to do? Call us at 97-492-8800 to discuss your options. No high-pressure sales pitches here, just in-depth discussion about the ins and outs of Medicare!