Table of Contents
We read through the federal government’s 124-page 2021 “Medicare and You Handbook” so you don’t have to (although you probably still should). If you or a parent is turning 65, Medicare will soon become a fact of life. Over 60 million Americans were covered by Medicare to start 2021, but 50+ years since Medicare came into existence, many seniors and their families struggle to navigate the program, stumbling across the many pitfalls. It is a bit ironic that a program, with its handbook available in large print, is so confusing that being able to read the words doesn’t guarantee that you will understand what to do. We read all 124 pages and combined that with our experience to put together an overview and break down some of the 8 most common and impactful pitfalls to avoid while navigating Medicare.
Medicare is designed as subsidized healthcare, primarily for those over age 65, and if you follow the rules, it does exactly that. The main components of Medicare are summarized as:
Part A – Inpatient hospitalization, skilled nursing facility, and hospice care
Part B – Outpatient, doctor services, preventative services, medical equipment
Medicare Advantage (aka Part C) - Essentially private insurance subsidized by Medicare in exchange for following certain rules
Prescription drug coverage (aka Part D) - Generally a recommended add-on to cover drug costs under Original Medicare. Many, but not all, Medicare Advantage plans include drug coverage.
Supplemental Insurance (aka Medigap) - Optional, standardized plans added to fill some of the holes in Original Medicare. Medigap is incompatible with Medicare Advantage.
Signing-up for Medicare
If you are already receiving Social Security or Railroad Retirement Board benefits, you will automatically be enrolled in Original Medicare the month you turn 65. You may be automatically enrolled under 65 if you collect Social Security disability or have ALS. Those delaying Social Security beyond age 65 will need to sign up. The initial sign-up period is 7 months long and includes:
The month you turn 65
The 3 months prior
The following 3 months
For example, if you turn 65 in June, you can sign up March-Sept of that year.
If you were still covered by a group health plan, there is also a special sign-up period:
Anytime you’re still covered by your group health insurance
The 8 months after employment or coverage ends, which occurred first
However, there are circumstances in which you are not eligible for a special sign-up period despite meeting the above requirements.
Finally, there is a general sign-up period, January 1st to March 31st each year, but you may owe penalties that generally get more severe the longer you delay.
State Health Insurance Assistance Programs
Because the entire Medicare program can’t be covered in a single post, and the Medicare and You Handbook can feel overwhelming, one important resource to know about are the State Health Insurance Assistance Programs (SHIPs). SHIPs are run by states, funded federally, independent of any insurance company, and exist for the sole purpose of helping you navigate the Medicare system. SHIPs can answer questions around:
Enrollment and eligibility
Insurance plan comparisons
Medicare overlap and incompatibility with existing insurance
Each state has a phone number for your local SHIP, and while these programs are important resources, it is unlikely that you will get an answer to a question you do not know to ask. For that reason, we put together a list of Medicare “traps” and mistakes to avoid.
8 Potentially Costly Medicare Pitfalls
The list below is not exhaustive but covers many mistakes, with more common, higher impact mistakes placed higher on the list. Without further ado, here is our list of medical pitfalls:
PITFALL #1: Sign-up Mistakes Resulting in Penalties and Higher Costs
Leave it to a federal benefit program to impose penalties on its participants for making mistakes. We’re not talking about fraud or abuse; we’re talking about being charged for honest to goodness mistakes when signing up for Medicare.
Part A Penalty – The monthly premium is 10% higher for twice the number of years you were eligible but didn’t sign up during initial or special enrollment periods. If you were eligible for 1 year, but didn’t sign up, your Part A premium will be 10% higher for 2 years. The standard 2021 premiums for Part A are based on the number of quarters in which you, or your spouse, paid Medicare taxes:
Part A Premium is $0 (and 10% penalty never applies) - Paid Medicare taxes for 40+ quarters
Part A Premium is $259/month - Paid Medicare taxes for 30-39 quarters
Part A Premium is $471/month - Paid Medicare taxes for less than 29 quarters
Part B Penalty – The Part B penalty can be more severe because your Part B premium goes up 10% for each 12-month period you could have had Part B but did not enroll. If you were eligible for Part B for 5 years before signing up, your premiums would be 50% higher for as long as you have Part B. The standard Part B premium is $148.50 in 2021 although you may pay more based on your modified adjusted gross income (MAGI) reported 2 years ago.
It is worth noting that there are ways to delay Part B coverage without owning penalties to avoid paying a premium for insurance you don’t need. The most common scenario is that you or your spouse is still working, and you have health coverage through an employer or affiliated union. However, there are a few sub-pitfalls as things like COBRA or VA coverage don’t count as coverage based on a current employer.
Durg Coverage (Part D) Penalty – The penalty is 1% for each uncovered month multiplied by the national base beneficiary premium of $33.06 in 2021. For example, 13 months uncovered would result in 13% x $33.06 = $4.30 penalty each month, indefinitely, as long as you have drug coverage through Medicare. That penalty would likely increase in future years as the national base beneficiary premium goes up.
PITFALL #2: Not Realizing that Original Medicare has No Out-of-Pocket Maximum
Medicare is designed to cover the majority of medical costs, but because Original Medicare (Part A & Part B) doesn’t have out-of-pocket maximums, your medical expenses have no ceiling. For example, after meeting your Part B deductible of $203 in 2021, Medicare pays 80% of the cost and you pay the remaining 20%, so on a million dollars of medical expenses, you would likely owe $200,000. Many group health plans through employers have yearly maximums, so this can be a shock.
You have a few options if this is a risk you want to avoid:
Many Medicare Advantage plans have yearly limits on out-of-pocket expenses
Some Medigap plans (K and L) limit out-of-pocket expenses
You may have secondary coverage through an employer or union plan, or Medicaid
PITFALL #3: Original Medicare Coverage Lacks Most Common Dental, Vision, and Hearing Care
Dental care tends to be a blind spot for new retirees because with the exception of some surgeries and emergencies, Medicare doesn’t cover the costs. Original Medicare generally does not cover:
Most dental care, including dentures
Hearing exams and hearing aids
Routine physical exams (don’t confuse with “Wellness” visits and other preventative services)
Many retirees face costs in at least one of these categories and will likely pay out-of-pocket unless covered by an appropriate Medicare Advantage plan or through secondary coverage. Medigap typically won’t help, but specific insurance, i.e. dental insurance, through a private provider may be available.
PITFALL #4: Not Electing Some Form of Prescription Drug Coverage
Drug coverage under Original Medicare is limited to certain drugs used for pain management during a hospital stay, some injections, some anti-cancer medication, and a few others, but the large majority of prescription drugs are not covered. Depending on new diagnoses, this can lead to unmanageable costs in retirement. You have two main options for drug coverage:
Join a Medicare Advantage plan with drug coverage, many, but not all, include this benefit
Join a Medicare drug plan
Note that both options require existing Part A and B coverage
Historically Medigap plans could have drug coverage which you can keep if you already have one. However, if covered through a Medicare Advantage plan with drug coverage, or you find a Part D plan better suited, you can ask your Medigap provider to drop drug coverage and reduce your premiums while keeping the remaining benefits.
PITFALL #5: Medicare + HSA Contribution Penalties
Retirees can, and often should, use their HSA savings to pay Medicare premiums, deductibles and other qualified medical costs, but HSA contributions are subject to a penalty for anyone enrolled in Medicare. Typically, this means you should stop contributing to your HSA the month you turn 65. If you defer Medicare enrollment, you can continue to make HSA contributions, but you will want to stop 6 months before the month you apply for Medicare to avoid a penalty.
PITFALL #6: Thinking Medicare Will Cover Costs Outside the U.S.
If you spend a significant amount of time in retirement outside the U.S., you probably won’t be covered by Original Medicare or Medicare Advantage plans. In fact, don’t assume that you will be covered even in the case of an emergency. A few possible options include:
Medigap plans C, D, F, G, M, and N can cover 80% of emergency costs during foreign travel
Some Medicare Advantage plans provide coverage, although most do not
Travel insurance may cover costs of medical treatment or medical evacuation
Some premium credit cards will cover medical evacuation costs
PITFALL #7: Not Knowing the Income Breakpoints 2 Years in Advance
Unlike Part A premiums which are based on quarters of Medicare taxes paid, Part B and D premiums are influenced by income and assets. Costs are based on modified adjusted gross income (MAGI) from 2 years ago and are published by Medicare for Part B and Part D.
Part B premiums in 2021 are determined using the following table:
Drug Coverage (Part D) premiums in 2021 are determined as follows:
Remember that penalties may apply, see Pitfall #1, and that this applies whether covered by Original Medicare or Medicare Advantage plans, but these breakpoints provide a potential tax planning oppourtunity.
On the other end of the income spectrum there are breakpoints to qualify for “Extra Help”. For example, in 2020, yearly income under $25,860 for a married person with no dependents and other resources less than $29,160 would qualify for help paying Medicare drug costs.
PITFALL #8: Medicare Incompatibility with the Health Insurance Marketplace
Still relatively new with the passage of the Patient Protection and Affordable Care Act, you generally do not want to overlap Medicare and Marketplace coverage. If you receive monetary assistance for Marketplace premiums you may have to pay them back when filing taxes
Wrapping it Up
If used correctly, Medicare coverage helps retirees over 65 and certain other individuals pick up a significant portion of their medical costs. Given the many pitfalls, avoiding costly mistakes is easier said than done. Except where otherwise explicitly cited, all information in this post was distilled from the 2021 Medicare and You Handbook which is a great resource along with your local SHIP for additional details.
Author: Andrew Dudar is a registered investment adviser representative at JRW Advisory Services, serving clients in Colorado and across the United States where exclusions apply.
Disclaimer: The article is written for the purpose of general education and information and should not be taken as financial advice or planning. Please consult with a qualified advisor, Medicare professional, or local SHIP before acting on or making decisions about your unique financial and health situation.