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The A-B-Ds of Medicare


Explaining the Primary Plans



 Alexandra Armstrong CFP, CCPS and Karen Preysnar  CFP Many of our clients ask us questions about applying for Social Security and Medicare benefits. Most understand how Social Securitay works, but there’s more confusion about Medicare. Thus, we thought we would devote this month’s column to the basics of Medicare.

Medicare is a federal health insurance plan for people aged 65 or older and for some disabled individuals under 65. The original Medicare plan consists of Parts A and B. In addition, the relatively new Part D provides prescription drug benefits. Below we describe how Medicare works and review some information about Medigap plans.

Medicare Part A

Medicare Part A is hospital insurance. It helps pay for inpatient care in a hospital or skilled nursing facility as well as hospice care and some home health care. Medicare generally doesn’t pay for custodial care — assistance with daily activities such as dressing, bathing, cooking and the other services primarily needed by people who require long-term care.
   
If you’re already receiving Social Security benefits, you’ll be automatically enrolled in Part A three months before turning age 65. If you aren’t receiving Social Security benefits, you must contact the Social Security Administration to apply.
    
Most people don’t have to pay for Part A coverage. If you do qualify for free Part A coverage, you should enroll three months before becoming eligible. You qualify for free coverage if you meet any of the following conditions:

•  You’re 65, are a U.S. citizen or permanent U.S. resident and you or your spouse has at least 10 years of Medicare-covered employment.
•  You’re 65 and are already receiving Social Security retirement benefits.
•  You’re 65 and are eligible to receive Social Security retirement benefits but haven’t yet filed for them.
•  You’re under age 65 and have received Social Security disability benefits for 24 months.
•  You’re under age 65, have end-stage renal disease and meet certain requirements.
    For each benefit period in 2009 (these amounts change annually) — you’ll pay:
•  A total of $1,068 for a hospital stay of 1-60 days.
•  $267 per day for days 61-90 of a hospital stay.
•  $534 per day for days 91-150 of a hospital stay (these are called “lifetime reserve days”).
•  All costs for each day beyond 150 days.
   
Once you’ve used the 60 lifetime reserve days for days 91 through 150 of a hospital stay, they aren’t renewed. If you’re out of the hospital for at least 60 days and then admitted again, however, a new benefit period begins. That is, during the first 60 days of this subsequent hospital stay, you’d have to pay another deductible, but then Medicare would once again pay the remaining costs.

Medicare Part B

Medicare Part B is medical insurance. It helps pay for doctors’ fees, outpatient hospital services and other medical services not covered under Part A, such as some physical and occupational therapy services and some home health care. You’re automatically enrolled in Part B coverage when you’re entitled to Part A coverage, but you can elect out of it. The basic premium for Part B coverage is $96.40 per month in 2009, which is usually deducted from your Social Security check. 




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The Part B premium is determined on a sliding scale based on a person’s modified adjusted gross income.* In 2009, those who are single with incomes below $85,000 and married couples with incomes under $170,000 will be charged the basic Part B premium of $96.40. Those with incomes above these amounts will pay between $134.90 and $308.30 per month (see table, above). The income threshold levels are periodically adjusted for inflation.
   
Under Part B, you have an annual deductible of $135 in 2009 (this increases annually for inflation). Once you meet the deductible, Part B pays 80 percent of the Medicare-approved amount; you pay the other 20 percent. You may have additional out-of-pocket costs if your doctor charges more than the approved Medicare amount.

Medicare Part D

The Medicare prescription drug benefit has been available since 2006. This insurance is sold by private companies that contract with the federal government, but premiums can be deducted from your Social Security check. The average cost in 2009 is about $37 per month, but your actual premium depends on the plan you choose. Each Medicare prescription drug plan must offer benefits that meet or exceed a standard.
   
The Medicare standard in 2009 is for a $295 annual deductible. For drug costs between $295 and $2,700, you pay 25 percent and Medicare pays the rest. For costs above $2,700, you pay 100 percent until you reach $4,350 in out-of-pocket spending. After that point, Medicare covers about 95 percent of any additional drug costs.
   
On the Medicare website you can input your drug information into the Formulary Finder to determine which plans cover your medications and whether there are any limitations. Also use Medicare’s online Drug Plan Finder for the estimated annual out-of-pocket costs for all the plans available to you. Phone numbers for each insurance company are shown so that you can call the company directly to confirm that you understand the benefits as well as the costs of any plan you’re considering.

Medicare Enrollment

If you’re automatically enrolled in Parts A and B at age 65, you’ll receive a Medicare card three months before your 65th birthday. If you’re not automatically enrolled at age 65, the initial enrollment period begins three months before your 65th birthday and continues for seven months. If you enroll during the three months before the month in which you turn 65, your Medicare coverage will be effective starting the month of your birthday. If you enroll in the month you turn 65 or in one of the following three months, your Part B coverage may be delayed by one month to three months.
   
If you don’t enroll in Parts A and B during your initial enrollment period, you must wait until the next general enrollment period. General enrollment periods occur each Jan. 1 through March 31, and the coverage won’t begin until the following July 1.
   
If you delay enrollment, in some cases the Part B premiums will increase 10 percent for each 12-month period during which you could have enrolled but didn’t. If you have to pay this premium penalty, you’ll pay it for as long as you’re covered under Medicare. If you have health care insurance from your (or your spouse’s) current employment after age 65, however, you can delay enrollment in Medicare without penalty. Note that COBRA coverage doesn’t qualify. When either your employment or your group health insurance coverage ends (whichever occurs first), you’ll have a special enrollment period of eight months within which to enroll in Medicare Part B without penalty. This includes the month in which coverage or employment ended.
   
If you continue to work past age 65, we recommend that you enroll in Part A insurance at age 65 since there’s no cost. But it may be wise to delay enrollment in Part B coverage if you have other primary health insurance that would treat Medicare as a secondary payer of benefits. One reason is to delay paying the premiums for Part B coverage. In addition, if you plan to purchase Medigap (supplemental) insurance, you should coordinate that with your Medicare enrollment. See the Medigap discussion later in this article for more information.
   
Enrollment in Medicare Part D is optional. For example, if you have prescription drugs coverage from a current or former employer, you can choose to keep it and not to buy Medicare Part D. But if you don’t enroll during your initial enrollment period, you may have to pay a premium penalty of 1 percent a month if you enroll at a later date unless your coverage is at least as good as Medicare’s and you’ve had no gap in your drug coverage for more than 63 days.

Supplemental Health Insurance

To cover the expenses not paid for by Medicare, you can maintain group retiree health insurance as offered by your employer, purchase a Medicare managed care plan (an HMO type of plan) or purchase Medigap insurance. In this article, however, we’ll comment only on Medigap plans.

Medigap

Medigap insurance (also called Medicare supplemental insurance) is provided by insurance companies specifically to cover what Medicare Parts A and B don’t cover. But Medigap policies sold since 2006 don’t offer prescription drug coverage, so unless you have drug coverage through another health plan, you would need to buy a Part D plan to obtain drug coverage.
   
Once you enroll in Medicare Part B, you have a six-month open enrollment period in which to buy a Medigap policy. During this period you cannot be denied coverage because of any current or prior health problems as long as you’ve had continuous health insurance coverage for the six months before enrolling. (If you had a break in coverage of less than 63 days, you’ll still qualify.)
   
Nor can a Medigap provider charge you more based on your health conditions if you apply during the open enrollment period. Therefore, timely application for a Medigap policy is important. Medigap policies are guaranteed renewable as long as you continue to pay your premiums. Note: Some states allow you to purchase Medigap insurance outside the six-month enrollment period. Check with your state insurance commissioner for more information.
   
A variety of Medigap policies are available. There are actually 12 standardized plans** labeled A through L, with A being the most basic and J the most comprehensive.
   
Every insurer must sell the basic A coverage, which picks up most out-of-pocket co-payments for hospital charges and doctor bills. Policies B through J provide increasingly comprehensive coverage. Policies K and L are newer and are designed primarily to cover catastrophic expenses.
   
As you might guess, the price increases as the benefits increase and the rates between insurance companies differ, so comparison-shopping is necessary. We recommend comparing the Medigap
coverage offered by three companies. Once you and your adviser have selected a company and you’ve paid the initial premium, you have 30 days to receive a full refund if you change your mind.

For More Information

The Medicare website offers a wealth of information and some handy tools to help you make the right decisions. For more information, you can also obtain free publications about Medicare and Medigap insurance by calling 800/MEDICARE (800/633-4227) or you can call the Social Security Administration at 800/772-1213. The SSA handles Medicare eligibility and enrollment.

 *    Modified adjusted gross income equals adjusted gross income from your tax return two years prior, plus any tax-free interest, Series EE bond interest used toward education and excluded foreign earned income.

**    Note: The standard Medigap policies differ for residents of Massachusetts, Minnesota and Wisconsin.


Alexandra Armstrong is co-author of the fourth edition of On Your Own: A Widow’s Passage to Emotional and Financial Well-Being. She is a Certified Financial Planner practitioner and chairman of Armstrong, Fleming & Moore, Inc., a registered investment advisory firm in Washington, D.C. Securities are offered through Commonwealth Financial Network, member FINRA/SIPC. Investment advisory services are offered through Armstrong, Fleming & Moore, Inc., an SEC-registered investment adviser not affiliated with Commonwealth Financial Network.
   
Karen Preysnar, Certified Financial Planner practitioner, co-author of this article, is vice president in charge of financial planning at Armstrong, Fleming & Moore, Inc., and a registered representative with Commonwealth Financial Network.
   
Individuals should contact a financial planner, tax adviser or attorney when considering these issues. Commonwealth Financial Network does not give tax or legal advice. Consult your personal adviser before making any decisions. The authors cannot answer individual inquiries, but they welcome suggestions for article topics.


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