The A,B,C and D’s of Medicare
Understanding The Basics
The first iteration of Medicare was rolled out in 1965 and included Part A for hospital coverage up to 100 days and Part B for outpatient coverage — doctor visits, lab work, physical therapy, dialysis, chemotherapy, etc.
These are the only two parts of healthcare in retirement that an advisor’s clients get from the government, Roberts said, and therefore must be signed up for through the Social Security Administration website or through the Railroad Retirement Board.
However, there are two other parts to Medicare — Part C, which offers Medigap supplemental coverage or a Medicare Advantage Plan, and Part D, the prescription drug plan. The reason you don’t sign up for the other two parts of Medicare through Social Security is that they are optional and offered by private insurance companies as those are signed up for via insurance brokers or agents typically.
“Part D is optional, sort of. Even though it’s a voluntary program to help retirees with their prescriptions, if people do not enroll in it when they’re first eligible, and they don’t have any other form of credible drug coverage, such as employer coverage or Veteran’s Administration benefits, then they start accumulating a penalty that grows larger with time.
And then when they do finally sign up, they can find themselves paying a lot more for Part D for the rest of their lives.
So even though it’s optional, it’s a very important consideration for folks when they’re first coming into Medicare during their initial enrollment period.
Signing Up and Knowing the Cost
If a client signs up for Social Security between 62 and 65, they will automatically be enrolled in Medicare, with a card showing up in the mailbox one to two months before the client turns 65.
Some of our clients chose to delay Social Security until age 70 to get the maximum benefit. In that case, they would enroll in Medicare first, in which case they’ll be responsible for initiating their own enrollment during a seven-month window that is specific to them.
That window opens three months before the month in which the client turns 65, and extends through the following three months, for a total of seven months. If the client enrolls during the first three months of that window, Medicare will begin on the first day of the month in which they turn 65. And there’s a bonus for clients with a birthday on the first of a month — they can start their benefits one month early.
If the client chooses to enroll during their birthday month or within the three months after, benefits will start the first of the month after the application is submitted.
And then there’s the cost…
Some people assume Medicare will be free. This may come from the fact that Part A for some people has a zero premium, it may also come from people thinking of Medicare as a form of national health insurance.
Either way, it’s estimated that each year about a million people who enroll in Medicare are surprised to find they pay for it. We have seen more than a handful of people put off their retirement by several years because they were unaware of these costs and had not planned for them. This is just one of many reasons to work with a firm that specializes in retirement planning, so you avoid surprises or a lack of planning for known costs.
The bottom line is that Medicare isn’t free, and people need to prepare for these costs.
Clients can be shown that Medicare balances premiums and co-pays, just like private insurance does. Clients who have worked and paid FICA taxes for 10 years have basically pre-paid their Part A insurance already. A client can qualify according to their own work history or under a spouse’s history if the spouse is eligible for Social Security and the couple has been married for a year.
Part B is where a client will see the standard premium structure. It’s income-based, and Medicare uses tax returns from two calendar years prior to calculate it annually.
The base rate, which applies to 93% of enrollees, is currently $164.90 a month for singles earning as much as $97,000 a year, or per person for couples earning $194,000, and rises to as much as $560.50 a month for singles making more than $500,000 a year, or per person for couples earning $750,000 or more.
That’s going to be based on your modified adjusted household gross income on your tax return, which is arrived at by adding lines 11 and 2a on form 1040.
Part D on average costs $31.50 per month, though it can range from $7 to more than $205 as it’s also on an income-based sliding scale.
The tax return that’s looked at for Medicare purposes falls under a two-year lookback, so a client enrolling in 2026 is going to be assessed on their 2024 return.
Things that your clients are doing when they turn 63 or 64 can absolutely affect their Medicare premiums when they turn 65 or 66,” she said. For example, if you have a piece of property you want to sell and it’s going to create a big capital gain, you might want to sell that when you are 62. Likewise, if you are going to retire and take a big severance, Medicare will want a piece of that two years from now.
If your income changes dramatically after a Medicare cost determination is made, due to a divorce or job loss, among other reasons, the client can appeal with an explanation, she said, adding that these cases are often successful.
When it comes to cost-sharing on Part A, Medicare levies a $1,600 deductible, then requires a $400 daily copay beginning day 61 of a hospitalization, rising to $800 a day on day 91. After that, 100% of the cost is borne by the client.
On Part B, there’s an annual deductible of $226, after which Medicare picks up 80% of costs and the clients pays 20%.
Mind The Gap
To handle these costs, clients can avail themselves of Medigap coverage, also called a Medicare Supplemental plan, which charges a higher premium up front but lower cost-sharing on the backend. Or the client can choose a Medicare Advantage plan, which has lower premiums up front but higher copays, co-insurance and deductibles down the line.
In years where you have more health conditions, you’re going to have higher cost-sharing on the back end and a lot less predictability because no one knows when they’re going to get sick and need a lot of healthcare.
The benefit of going with Medigap coverage is that Medicare is the doctor network regardless of which insurer sells the plan, no referrals are necessary, and there is national portability for those with a snowbird or RV lifestyle.
There are 10 separate Medigap plans, each covering a defined set of benefits and they’re labeled Plan A, B, C, D, F, G, K, L, M, N. The plans with the most coverage are the top sellers, she said, especially among clients who want to feel their Medicare experience is as good as or better than their working-life healthcare experience.
Less than 2% of the population enrolls in Plan A, B, C or D, because most people on a fixed income don’t want to have a plan that doesn’t cover the $1,600 deductible, or doesn’t cover skilled nursing co-insurance, Roberts said.
Plan F was very popular for a long time, it covers 100% of all the gaps and even 80% of foreign travel, though it was discontinued for new enrollees as of January 1, 2020. Today G is the best seller, and it’s almost the same as Plan F. The only thing different is you pay that $226 Part B deductible out of pocket.
The rates for Medigap plans vary greatly depending on the state of residence, age, gender, and tobacco use.
Put it all together, a single client with less than $97,000 in income would pay nothing in a given month for Medicare Part A, $164.90 for Part B, $31.50 for Part D, and, say, $120 for Plan G, or a total of $316 per month.
That’s a plan with a $226 deductible and 100% coverage on coinsurance. They don’t even have doctor co-pays. The only co-pays they have are for their drug plan.
It’s extremely important that when a client first signs up for Medicare and enrolls in Part B, the client must also sign up within six months for Medigap in order to have seamless, no-questions-asked coverage. If they miss that window, in most states their insurer can review health, insurance and prescription histories and can accept or decline the application based on risk.
For clients who miss the window, the rate they’re given may be too expensive, and for them Medicare Advantage is the next option. Today, 51% of retirees enroll in Medicare Advantage, and usually this choice is based on price.
The Medicare Advantage plans typically have HMO or PPO networks for Medicare Part A and B coverage, and their contracts usually are for regional or even local doctors and hospitals. Many retirees don’t mind this, because they want to stay local anyway.
One thing people get wrong about Advantage plans is that they think if they enroll in an Advantage plan, they don’t have to pay for Part B, and that is incorrect. You must enroll in A and B and stay enrolled in them to choose either a Medigap plan or a Medicare Advantage Plan. So even if you find a Medicare Advantage plan that has a zero premium, you still have to be enrolled in Part B and pay your $164.90 per month.”
Not Ready for Retirement
And finally, for clients who work past 65 and have large group health insurance through their employer, that employer’s insurance is going to be considered primary, and already has outpatient benefits and drug benefits.
Why would you want to enroll in Part B and D and pay premiums for those when you don’t need to? Your group coverage would be primary, and Medicare would be secondary.
Instead, these clients should consider enrolling in Part A at 65, because there’s a zero premium for Part A at that point. It can coordinate with the employer coverage and reduce the client’s spending in the event of a hospital stay.
But the client should delay Parts B and D and apply for them two months before they want to retire and follow up to make sure that Medicare has all the proper documents so there are no penalties.
The one exception is if the client is contributing into a Healthcare Spending Account. In that case, the IRS will cut off contributions if there’s a secondary form of insurance.
Individuals who have Federal employee health benefits can enroll in just Part A when they turn 65, but they’ll end up paying higher copays through the Federal employee benefits, so they might as well sign up for the rest as well.