A couple of months ago I posted that Caroline had started Social Security, and I described our thought process around that decision. Depending on your financial circumstances, there could be a range of ages for which starting Social Security makes sense. But for most Americans nearing age 65, it’s definitely time to start Medicare. If you don’t, certain aspects of the program may cost you more over the long run. Worse, you might forego some medical coverage altogether as pre-existing condition waiting periods kick in and prevent you from getting health insurance.

In this post I’ll try to document what I’ve learned about Medicare from looking over my wife’s shoulder as she evaluated and made her decision. Fair warning: I’ve only invested the minimal effort required to understand Medicare and ensure we aren’t making any blatant mistakes. I claim no deep expertise or analysis of the mammoth program. I’m not going to try explaining Medicare in depth here. I’ll ignore the many moving parts unless they directly impacted our decision-making.

If you too are interested mostly in an “executive summary,” perhaps what I’ve learned will be helpful to you. If you need more than that, there is no shortage of information on Medicare, starting with the U.S. government’s official Medicare site. Beyond that, the web is filled with articles and videos on the topic.

So let’s treat Medicare as a black box that pays for your health care after age 65. Fortunately it’s a black box that most all of my over-65 friends and contacts say works pretty well. They are happy with their health care and report few financial surprises. So here we’re going to focus simply on your inputs to the system. What are the few decisions you must make when going on Medicare, and how should you make them?

Applying for Medicare

You can apply for Medicare at any time during the three months before the month you turn 65, the month you turn 65, or the three months after that month. If you sign up during the first three months of that enrollment period, your coverage usually begins on the first day of your birthday month.

Medicare Part A (hospital insurance) usually starts automatically when you turn 65. If you want Part B (insurance for doctors’ services), you need to request it. If you sign up for Social Security before turning 65, the application asks whether you want to enroll in Medicare Part B as well. We answered “yes” and Caroline subsequently received a Medicare card in the mail. If you don’t take that route, then you will need to sign up for Medicare separately.

Applications for Medicare Parts A and B are handled directly by the government, the Social Security Administration.  

Applications for Medicare Parts C and D (Advantage plans, prescription drug coverage) and Medicare Supplement plans are handled by private insurance companies. Most people, including us, are likely to work through an insurance broker who simplifies that process and can offer personal advice and quotes.

In our case, we chose to work with BoomerBenefits.com, recommended by our doctor as an impartial resource. I went online, read much of their educational material, and found it helpful. Caroline made an appointment, and soon we were speaking with a friendly and transparent agent.

Our agent explained that she would be compensated by commission for plans we bought, but that she would get the same amount, regardless of our choice. Thus her only incentive would be to get us the best possible plan. However, she noted that the Boomer Benefits insurance agency offered a limited pool of vetted insurance companies—not all the options that might be available to us. These companies were supposedly chosen for their customer service and financial stability. Though I think it likely that commission structure also plays a role. If we wanted to evaluate every insurance plan available in our state, perhaps in search of the absolute cheapest, we could find that information at medicare.gov.

A big draw of Boomer Benefits is their post-sale customer service team. The agency maintains a support staff trained in claim resolution, drug exceptions, Medicare appeals, annual rate shopping, and related topics. Supposedly we will never need to talk with an insurance company or government agency if we don’t want to. I have my doubts how responsive this team can be to a vast customer base, and to what extent they can operate as your proxy in billing disputes, but we’ll see.

Advantage vs. Supplement Plans

You can choose not to buy insurance on top of your government-provided Medicare benefits, but almost nobody with the means chooses to take on the risk and expense that entails. For example, Medicare part A, while ample, does have limits on coverage for hospital stays and skilled nursing care. And Medicare Part B pays only 80% of covered doctor’s services.

The most fundamental decision everybody getting insurance on top of Medicare must make is whether to go with an Advantage plan or a Supplement (Medigap) plan. I’m not going to try to document every aspect of this weighty decision, but I will list some basic information about and the pros and cons of these plans, so you can get a sense of the issues:

Advantage Plans

• bundle hospital, doctor, and drug coverage
• usually low or no premiums
• premium savings likely eaten up by co-pays and co-insurance if you get sick: up to annual out-of-pocket maximum of about $8K in-network
• best if you have few health issues or preferred doctors
• generally must use in-network doctors
• best if you don’t travel far from home often
• insurers can set own rules for referrals and care
• poor record on coverage denial

Supplement/Medigap Plans

• pay most deductibles, co-pays, and co-insurance
• you’re still responsible for the $226 Medicare Part B deductible
• requires monthly premium payment
• more certainty around out-of-pocket costs: rare to incur unexpected out-of-pocket expenses
• might be more expensive if you’re generally healthy
• wider choice of doctors: see any doctor that takes Medicare in any state
• no referrals required to see a specialist
• better protection if you often travel out of state
• coverage is standardized so fewer loopholes and easier to comparison shop
• coverage denial less likely

Specific Supplement Plans

The coverage provided by Medicare Supplement plans is standardized by the government, so you can count on comprehensive coverage with few surprises. When shopping, you’re comparing cost, customer service, and financial stability of the insurance company, not coverage.

A key issue is whether annual rate increases are likely from the insurer for inflation or age adjustments. This is where an insurance broker with real-world experience can be valuable.

The government originally specified more than a dozen Medicare Supplement plans: A through N. A couple of plans (C and F) have been discontinued. Again, the plans all differ in financial parameters, not in the medical coverage provided. For example, there is variation in how much Medicare deductibles or co-insurance is covered.

For Caroline’s health situation we were told that Plans N or G would be our best options. A quick inspection of the government’s comparison chart shows that Plan G offers the most comprehensive coverage of the still-available plans.

Caroline chose a Plan G offered by United Healthcare through AARP, which was recommended by several friends. Reading the fine print as best we could, we also thought it might be less susceptible to rate increases. The plan cost a few dollars more per month than the competition and required joining AARP ($16), but those were trivial expenses compared to peace of mind in our health care.

Note that some insurers offer higher-deductible options for certain Supplement plans. If you want the best possible catastrophic coverage but anticipate lower health care costs or don’t mind self-insuring more, you might want to investigate these plans.

Prescription Drug Coverage

In 2006 Medicare Part D insurance plans started providing some coverage of outpatient prescription drugs. Like most everything involving the government and insurance companies, the plans are more complicated and less generous than you’d probably like. But if you’re facing five-digit annual prescription drug costs, they may save you from financial ruin.

These plans organize drugs into a half-dozen tiers and coverage into four phases. The system is too complicated to explain in a blog post. If you take more than one or two prescription drugs, and maybe if you don’t, you’re going to need an agent with computer software to estimate what your annual costs might be.

The good news is that premiums are very cheap. The bad news is that there is no annual out-of-pocket limit on your prescription drug costs. Though, above a $7,400 “catastrophic threshold” currently, your responsibility drops to just 5% of the cost.

More good news is that starting in 2025, out-of-pocket prescription drug costs will be capped at $2,000, a major change that will directly benefit us and many other retirees.

We’ve been told that the drugs covered by most drug plans—their formulary lists, are very similar, but I have no way to verify that. Suffice to say, if you’re dependent on any expensive, cutting-edge drugs, you’d be well advised to verify they are on the list for your plan and affordable.

We’ve also been warned that the formulary lists can change annually with drugs added, removed, or substituted, so you may need to monitor them depending on your medical situation.

Changing Plans

What makes the Medicare decision stressful, and one reason that we’re opting for the most comprehensive Supplement plan at the start, is that your freedom to change plans may be limited going forward. As with much health insurance, you can’t game the system by opting for better and more expensive coverage only later in the game when you might have bigger health problems.

This means you cannot count on shifting from an Advantage plan to a Supplement plan or between Supplement plans without incurring medical underwriting of your pre-existing health conditions and possibly higher rates or denial of coverage. You may not be able to purchase a Supplement plan at all down the road or you might pay higher premiums than if you’d chosen it originally. So, if your health history dictates the best possible coverage, you may be wise to start with the most comprehensive Supplement plan. However a quick web search indicates there may be state-specific exceptions, so do your homework if you want to start with a less comprehensive plan.

Part D prescription drug plans however are different. You can change them without penalty during the annual open enrollment period that runs from mid-October to early December every year.

Costs: The Bottom Line

So the bottom line for Caroline’s expected health care costs given our choices looks like this:

• Medicare Part B premium: $165/month, deducted from Social Security payment [$1980/year]
• Medicare Part B deductible $226/year
• Supplement Plan G premium $109/month [$1308/year]
• Prescription Drug Plan premium: $11/month [$132/year]
• Prescription Drug Plan deductible: $505/year
• Estimated drug costs: $5,000/year

TOTAL/YEAR: $9,151

Within a given year, we can expect that Caroline’s health care expenses should not exceed that amount.

Unfortunately, that’s several thousand dollars more than we’ve typically been spending on her health annually in retirement. However the number will come down to almost equal our historical norm once the new prescription drug plans come into effect in 2025.

We can easily make it through a few years of elevated health care expenses, so we aren’t concerned.

Lastly, we’ve been told that insurance companies can always raise their rates, which are not regulated. Annual increases of 2-5% are not uncommon—another reminder that health care expenses are never perfectly predictable.

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OUTDOOR ADVENTURE: My new web site explores the books, authors, and trails of the long-distance hiking movement and has more about my forthcoming memoir Rain and Fire In The Sky: Beyond Doubt On The Colorado Trail. Click over to TrailMemoir.com.

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[The founder of CanIRetireYet.com, Darrow Kirkpatrick relied on a modest lifestyle, high savings rate, and simple passive index investing to retire at age 50 from a career as a civil and software engineer. He has been quoted or published in The Wall Street Journal, MarketWatch, Kiplinger, The Huffington Post, Consumer Reports, and Money Magazine among others. His books include Retiring Sooner: How to Accelerate Your Financial Independence and Can I Retire Yet? How to Make the Biggest Financial Decision of the Rest of Your Life.]

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