Health care is one of the largest expenses your clients will face in retirement, and helping them make good Medicare coverage decisions is a great way to add value to the relationship.
Medicare doesn’t cover all expenses in retirement, but it’s the most important factor in smoothing out health care costs, which play such an important role in retiree budgets. Medicare data shows that average per-person health care spending by retirees is three times higher than for working people ($18,424 in 2010, compared with $6,125). Health care inflation has been flat in recent years, but there are signs that it is escalating and many experts expect it to return to historical norms of 5 percent or more per year.
Financial planners should be up to speed on the ins and outs of Medicare insurance options to help clients make optimal coverage choices. Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Fla., and a physician with a background in family medicine, takes it a step further, reviewing all her clients’ insurance coverage annually.
“Everything—not just health insurance,” she says. “But on health care, we want to check to see if there have been any changes in the person’s health condition that would call for adjustments in coverage.” The firm schedules the insurance check-ups throughout the year in order to avoid a glut during the annual Medicare enrollment period.
Here are five ways to help clients tune up their Medicare coverage.
1. Watch enrollment timing.
Medicare filing errors can be costly. Eligibility begins at 65, and sign-up is automatic for anyone already receiving Social Security benefits. If not auto-enrolled, your client must sign up sometime in the three months before their 65th birthday or in the three months following; failing to do so can lead to expensive premium penalties down the road.
Monthly Part B premiums jump 10 percent for each full 12-month period that an enrollee should have been covered but didn’t sign up. That can really add up—a senior who fails to enroll for five years ultimately would face a 50 percent Part B penalty (10 percent for each year). Penalties are also applied to Medicare Part D (prescription drugs) and Medicare Advantage plans (Part C) that include drug coverage.
McClanahan pays careful attention to enrollment timing as part of her client insurance review process. Many older clients are not yet receiving Social Security, because they are working longer to earn delayed filing credits. In most cases, they can also remain on their employer’s health insurance plan. “It’s a great way to mitigate health insurance costs,” she says.
2. Go with traditional or Medicare Advantage?
The first Medicare enrollment choice is to decide between traditional, fee-for-service Medicare or a Medicare Advantage plan. The traditional fee-for-service program remains the gold standard—it allows your client to see any health care provider who accepts Medicare. But coverage is assembled from an a la carte menu of insurance choices (Part B, Part D prescription drug coverage and a Medigap supplemental plan, which caps out-of-pocket costs and supplements Medicare’s basic coverage).
Advantage is a managed care option that rolls all the different parts of Medicare into an all-in-one option. Enrollees often save some money with Advantage—many plans carry no additional prescription drug premium, and Medigap plans are not used by Advantage enrollees. But there’s a trade-off: you must use the providers in the network assembled by the plan provider.
“Most of my clients already have a doctor they like, and I always tell them to ask their doctors what kind of insurance they prefer to use,” says McClanahan.
Advantage works best for younger, healthier seniors. If your client develops health problems and needs more flexibility on provider choices, they can switch back to traditional Medicare during the annual enrollment period.
One downside here: It’s best for them to add Medigap coverage when they initially enroll; at that point, there is a six-month open enrollment period when Medigap insurers must sell them a policy at the best available rate regardless of health status, and cannot deny coverage.
3. Shop drug coverage regularly.
Your client receives an Annual Notice of Change (ANOC) from their Part D prescription drug insurance company (or Medicare Advantage) each fall by September 30. The ANOC should be reviewed carefully for any changes in coverage for the year ahead. Often, this is the signal that coverage should be re-shopped during the annual enrollment period, which runs from October 15 to December 7.
Insurance companies often change their offerings year-to-year in ways that can increase drug costs by hundreds of dollars, or make it more difficult to get certain drugs. At the same time, your client’s drug needs may have changed since the last plan selection period in ways that make a plan less beneficial.
The best online tool for plan shopping is the Medicare Plan Finder at the Medicare website. Plug in your client’s Medicare number and drugs (you’ll need each drug’s name and dosage). The tool then displays a list of possible plans; their estimated cost, premiums and deductibles; which drugs are covered; and customer-satisfaction ratings. The finder will also give you advice about drug utilization and restrictions.
Planners also should download a copy of the federal government’s free guide to Medicare benefits, Medicare & You. This is the definitive source on all things Medicare—it’s updated annually—and can be useful in plan decision-making.
4. Beware high-income premium surcharges.
High-income seniors pay surcharges on premiums for both Parts B and D. The surcharges affect individual tax filers with $85,000 or more in annual income and joint filers with income over $170,000, and scale up from there. The Social Security Administration determines who pays the premium surcharge using recent tax returns. Eligibility is determined on the basis of modified adjusted gross income, which includes adjusted gross income and tax-exempt interest income. (View a complete table of the income brackets and costs for 2016 here.)
Monitoring the surcharge trip-wires should be part of any broader tax management strategy used with clients.
5. Avoid the HSA trap.
The growing popularity of high-deductible health insurance in the workplace, coupled with Health Savings Accounts (HSAs), is starting to create some tricky Medicare navigation issues for retirees—and some workers.
HSAs can only be used alongside qualified high-deductible health insurance plans. Medicare is not considered a high-deductible plan. That means that if a worker—or a spouse covered on the employer’s plan—signs up for Medicare coverage, the worker must stop contributing to the HSA, although withdrawals can continue.
If your client is still working at age 65, any decision to delay a Medicare enrollment in this situation depends on individual circumstances. If they work for an employer with fewer than 20 workers, Medicare usually is the primary insurer at age 65, so failing to enroll would mean losing substantial insurance coverage—hardly worth the tax advantage of continued HSA contributions. If they work for a larger employer, Medicare coverage is secondary, so a delayed Medicare filing is more feasible—so long as your client isn’t enrolled in Social Security.
Note that a filing for Social Security automatically triggers Part A enrollment—and it cannot be declined. That would require the worker to stop contributing to the HSA. A Social Security claim by the worker’s spouse would trigger the same problem if the spouse is covered under the worker’s health plan.
In these situations, the HSA contributions should stop six months before that Social Security claim is made. Medicare Part A is retroactive for up to six months, assuming the enrollee was eligible for coverage during those months. Failing to do that can lead to a tax penalty.