Make the right initial Medicare decision

A former colleague contacted me recently to discuss the many decisions involved in signing up for Medicare. I was impressed by Joe’s diligent research when considering which type of Medicare coverage was right for him and his wife Pat, who just retired.

In fact, Joe could serve as the poster child for making the right Medicare decision, and his experience may provide some guidance for financial advisers and their clients about the importance of getting this crucial decision right the first time.

“After taking care of my dad, who spent the last five years of his life in and out of hospitals, I knew how important it was to make the right Medicare decision,” Joe told me. “I contacted all sorts of people I knew who had retired in the past few years and I asked them what they did, why they did it, and how was it working out.”

Emily Gang, owner of the Medicare Coach, a fee-based consulting service, said most people don’t ask enough questions and end up making an incorrect Medicare decision that doesn’t allow them to see their preferred doctor or costs them too much money.

“Both issues can result in larger out-of-pocket medical costs which can make them go through their savings more quickly and destroy their retirement plan," Gang said during a recent webinar for financial advisers on The Five Common Medicare Mistakes. A former risk management expert at Goldman Sachs, she has spent the past four years helping thousands of people navigate Medicare rules and confusion.

Gang said most people start the process by picking a Medicare plan based on the barrage of ads they receive in the mail, see on television or hear on the radio, particularly amid the advertising blitz during fall open enrollment, which runs from Oct. 17 through Dec. 7 each year. That’s the No. 1 mistake, she said. They should start the process by asking their doctors which type of Medicare they accept.

Medicare comes in two flavors: original Medicare and Medicare Advantage. Original Medicare is administered by the federal government. You can go to any doctor or hospital anywhere in the U.S. that accepts Medicare. Medicare Advantage plans are run by private insurance companies and are usually limited to a network of health care providers.

Regardless of which type of Medicare coverage you choose, you must first enroll in both premium-free Medicare Part A, which covers hospitalization, and Part B, which covers doctors’ fees and outpatient services for a monthly premium. The standard Part B premium is $170.10 per month in 2022, but higher-income beneficiaries pay more.

Medicare only pays for 80% of allowable costs. To cover the remaining 20% of costs, you can buy a Medigap policy that pays for the deductibles and co-insurance of original Medicare, as well as as a Part D prescription drug plan.

Or you can choose to bundle your coverage with a Medicare Advantage plan, which often comes with lower monthly costs, but charges per-visit co-pays. If you enroll in a Medicare Advantage plan, also known as Medicare Part C, you can't buy a Medigap policy. Advantage plans usually includes extra benefits, such as dental, vision and prescription drug coverage, but require you to use network providers that sometimes want prior approval for specialty care.

Many people are swayed by the lower monthly costs and extra benefits offered by Medicare Advantage plans and figure that if they don’t like the network restrictions, they can always switch to original Medicare later. But that can be difficult, Gang warned.

When you first enroll in Medicare, there's a six-month widow during which you can buy any Medigap plan you want. After that, you would be subject to medical underwriting and could be denied Medigap coverage, meaning you would have to stick with an Advantage plan.

It’s also critical to pay attention to enrollment deadlines, Gang said.

Most people must sign up for Medicare during a seven-month initial enrollment period surrounding their 65^th birthday or face lifelong delayed enrollment penalties. But Joe and Pat qualified for an exception. Because Pat continued to work past age 65 and her employer-provided group health insurance covered both of them, they didn't have to sign up for Medicare until that group health insurance ended.

After sifting through mounds of data and comparing specific plan details, Joe and Pat chose original Medicare and bought a comprehensive Medigap policy to cover their deductibles and co-payments.

“We have a vacation home out of state, and we may spend more time there now that we are both retired,” Joe said. “We came to the conclusion that we needed original Medicare so we didn’t have to deal with out-of-network issues.”

Joe and Pat chose separate Part D plans based on their individual medication needs. After looking at the cost per year for both premiums and co-pays, Joe said it made the most sense for Pat to buy the cheapest drug plan and for him to buy the most expensive one, which covered his brand-name prescription.

Lots of details. Lots of decisions. Helping your clients make the right Medicare decision the first time — or referring them to someone who can guide them — can bolster the sustainability of their retirement income plan.

(Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s new 2022 ebook at MaximizingSocialSecurityBenefits.com.)