Hi everyone! Welcome back to Melissa Making Cents!

I'm never surprised to get questions about healthcare from clients that are closing in on their retirement date. For many families healthcare costs are expensive while still in the workforce.  It is overwhelming to try to plan for the same healthcare expenses once you are on a fixed retirement budget. Average medical costs can range from state to state in retirement, and may depend on your health status. As a CERTIFIED FINANCIAL PLANNER™, I like to create comprehensive financial plans for clients nearing retirement using an average healthcare cost of $19,000 per year, which is the approximate national average.

Last week, I talked about the basics of Medicare coverage and costs such as premiums, deductibles, and coinsurance. But what if Medicare coverage doesn’t meet your healthcare needs...or it puts too much of a strain on your wallet? Well, there’s good news! You can enroll in a supplemental policy that helps to cover some of the costs of Medicare, or start planning now to defray healthcare costs in the future. Today’s post will offer an overview of supplemental policies, as well as cost-saving strategies so that can help you avoid being in a financial pickle later on.  While most of us enjoy various varieties of pickles, a financial pickle is not desirable in retirement.

First things first: do you need a supplemental health policy?

There are two reasons why you might look for a supplemental health policy while on Medicare. The first is that Original Medicare (Part A for Hospital Insurance and Part B for Medical Insurance) doesn’t cover all healthcare expenses, and you may wish to have additional coverage. A good example of this is if you travel a lot and want to make sure you’re covered in the case of a medical emergency.

The second reason is that even though Original Medicare is a federal program that is subsidized by taxes, it still comes with a price tag through deductibles and coinsurance. As I shared in last week’s post, you might still have high out-of-pocket costs with Medicare Part B because you will be responsible for a 20% coinsurance, and there is no out-of-pocket limit for medical expenses. That means if you have recurring lab tests that incur a $2,000 bill each month, you would be responsible for $400 (20% coinsurance) per month, or $4,800 per year. Ouch!

Fortunately, there are supplemental policies available to help cover these expenses. The main supplemental health policy is Medigap, which offers a variety of plans tailored to fill in...the Medicare gaps (see what they did there?!).

Medigap: An Overview

What Medigap policies cover

Medicare Supplement Insurance, also known as “Medigap,” helps to cover some of the healthcare costs that are not covered by Original Medicare. These include co-payments, coinsurance, and deductibles. Some Medigap policies will also cover additional healthcare services that wouldn’t otherwise be covered under Original Medicare, such as foreign travel emergencies. Unlike Medicare, which is a standardized federal program, Medigap coverage and plans can vary by state. Keep in mind you can only enroll in Medigap if you have Medicare Part A and Part B; if you are enrolled in a Medicare Advantage Plan through a private insurance company, you are not eligible for Medigap.

What Medigap policies do not cover

Furthermore, Medigap does come with some exclusions. For example, most Medigap policies don't cover long-term care, vision or dental care, or private nursing. You may wish to purchase a separate dental or vision policy to further meet all your healthcare needs.

How Medigap policies work

The way Medigap coverage works is fairly straightforward. After you receive healthcare services that are covered under Medicare, such as a routine doctor’s visit, Medicare will pay the allowed amount for the service. So if the visit costs an allowed amount of $100, Medicare would pay $80 ($100 minus the $20 for the 20% coinsurance). Then, the Medigap policy pays its portion of the costs (such as the $20 for the coinsurance) afterward. Should there still be a balance after Medicare and Medigap pay their shares, then any remaining costs would be your responsibility.

How to enroll in Medigap

The timeline to enroll in Medigap is contingent on your timeline for enrolling in Original Medicare. More specifically, your Medigap Open Enrollment Period lasts for six months, starting on the first day of the month in which you’re 65 or older. There are many private insurance companies out there offering Medigap coverage, so it’s important to find one that's licensed in your state and offers coverage that fits your needs. In addition, private companies can’t deny you Medigap coverage or refuse a renewal if you have health problems or preexisting conditions. As long as you pay the premium, you’re covered! Just like with Medicare, if Medigap is right for you, I recommend enrolling as soon as you’re eligible. Even if there are special enrollment periods later, you will usually get better rates if you sign up as early as possible.

What Medigap costs

To enroll in Medigap, you would need to pay a monthly premium, which is determined by the insurance company offering the coverage. The costs of Medigap policies are generally based on one of these methods:

• Community-rated (“no age-rated”): Under this cost structure, everyone with the Medigap policy pays the same premium, regardless of age. The cost of the premium will rise over time due to factors such as inflation, but older policyholders will not pay any more than younger policyholders.

• Issue-age-rated (“entry age-rated”): Under this cost structure, policyholders who purchase Medigap at a younger age will incur lower premiums than those who purchase the policy at an older age. The benefit to this is that although premiums may rise due to factors such as inflation, younger policyholders will not have their premiums increase due to age.

• Attained-age-rated: Under this cost structure, the premium is based on the policyholder’s age and rises as the policyholder gets older.

You can learn more about Medigap coverage options and costs in this helpful guide.

The difference between Medigap vs Medicare Advantage plans

Last week I mentioned the Medicare Advantage plans, which is also sometimes referred to as Medicare part C.  These supplemental policies offered through private insurers are often confused with Medigap policies. They are 2 different plans, and the government will only allow you to have one or the other. So... what's the difference?

Well.. Medicare Advantage plans bundle all of the Original Medicare benefits into one policy. Some policies even include the Part D drug coverage. Medicare Advantage plans will provide a cap on out of pocket costs, limiting responsibility for deductibles and copays.

As I mentioned above, Medigap policies will pick up the bill for a lot of your deductibles and coinsurance costs under the Original Medicare coverage. The level of coverage you receive will largely depend on the Medigap plan that you choose. 

How does Medicare work if you also have other types of insurance?

Let’s say you applied for Medicare, but you or your spouse still have private health insurance through an employer. Or, perhaps you’re eligible for health insurance through Medicaid, veterans benefits, or TRICARE. If you find yourself in the position where you have multiple insurances, Medicare coordinates with your other insurance providers to determine which is the “primary” insurance. The primary insurance pays for the medical expenses, such as that $100 doctor’s visit, first. If there’s still a balance remaining after reaching the limits of the primary insurance (like if the primary insurance only covers 80% of the bill), then that insurance sends the rest of the bill to the secondary insurance. Which type of insurance pays first depends on the type of coverage you have, and Medicare could be either the primary or secondary insurance. The Medicare website offers a helpful guide to determine how types of insurance work together, based on different circumstances.

What are some other ways to reduce your healthcare costs while on Medicare?

Aside from Medigap and other insurance policies, there are a few strategies to keep your medical expenses low while on Medicare. These include being judicious in choosing your healthcare providers, seeking additional financial assistance programs, planning ahead through an HSA, and utilizing tax deductions.

Stick with providers who accept “Medicare assignment”

One of the main benefits of Original Medicare is that you can visit any doctor or hospital that accepts Medicare. However, to reduce the costs of healthcare services, I recommend seeking out providers that specifically say they accept “Medicare assignment.” This can save you a lot of money in the long run. 

What “Medicare assignment” means is that the doctor or specialist will accept the pre-approved cost of services as determined by Medicare, rather than charge a higher amount. For example, if the pre-approved cost of a doctor’s visit is $100 and you’ve already met your deductible, Medicare would pay $80 of that cost and you would be responsible for the remaining $20 due to the 20% coinsurance.

By contrast, providers who don’t accept Medicare assignment are permitted to charge up to 15% more than the Medicare-approved amount. So if that same doctor doesn’t accept Medicare assignment and charges $115 for the visit, Medicare would still only pay $80 and you would foot the bill for the remaining $35 (the $20 from the coinsurance, plus $15 for the extra 15% charge). 

See if you are eligible for Medicare Savings Programs

Through Medicare Savings Programs, the government offers financial assistance for low-income individuals to help pay premiums for Medicare Part B and Part D. In some cases, these savings programs can also assist with costs related to deductibles, coinsurance, and co-payments for Part A and Part B. 

There are four main types of Medicare Savings Programs, each with different income limits and eligibility criteria:

• Qualified Medicare Beneficiary (QMB) Program: assists with Part A premiums, Part B premiums, deductibles, coinsurance, and co-payments

• Specified Low-Income Medicare Beneficiary (SLMB) Program: assists with Part B premiums only

• Qualifying Individual (QI) Program: assists with Part B premiums only

• Qualified Disabled and Working Individuals (QDWI) Program: assists with Part A premiums only

In order to apply for a Medicare Savings Program, you would need to contact your state’s Medicaid office. 

Use your Health Savings Account to cover healthcare costs 

If you have a Health Savings Account (HSA) that you’ve contributed to over the years, you can use that money for qualified medical expenses such as premiums or coinsurance that are not covered by Medicare. You would need to be enrolled in a High Deductible Health Plan (HDHP) in order to open an HSA. Many employers offer HDHPs and HSAs, but you could also enroll in one on your own through the Marketplace.

Similar to 401k retirement accounts, HSAs accept pre-tax contributions: up to $3,550 for self-only coverage and up to $7,100 for family coverage as of 2020. Unlike Flexible Spending Accounts (FSAs), which are “use it or lose it,” the money you put into an HSA rolls over year to year and also has the ability to earn tax-free interest. This makes it a valuable savings vehicle, especially if you’re able to start early!

Deduct your Medicare premiums from your taxes

Sometimes my clients ask me if Medicare premiums are tax deductible. And the answer is...well, sometimes! 

If your annual medical expenses are above a certain threshold (10% of your gross income, as of 2019), you can file an itemized deduction on your Schedule A (Form 1040) and include Medicare premiums in those deductions. In addition, if you are self-employed, you may be able to deduct your Medicare premiums as well, no matter the threshold. 

While this method won’t necessarily reduce your cost of healthcare services, it can result in putting more money back into your pocket through tax refunds. As always, I recommend speaking with your accountant or CPA to make sure you are maximizing your deductions, especially when it comes to healthcare.

What financial planning should I take into consideration if additional coverage is required?

Whether you’re four months or forty years away from signing up for Medicare, it’s a good idea to start the planning process to make sure you’re not saddled with healthcare expenses you can’t pay for. This could mean increasing your retirement contributions now to make sure you have enough to afford your healthcare needs. If your employer offers a high-deductible health plan with an HSA, you may also wish to enroll and sock away some cash for future medical expenses. And when sourcing your primary care physicians and specialists, find a few that you know accept Medicare (specifically with Medicare assignment) so that you can keep your preferred providers as you transition into this new health insurance.

It’s also important to remember that Medicare has changed a lot since its inception, and the coverages that are available today may evolve over time. It’s always a good idea to stay informed about changes to Medicare--such as costs, coverage options, and additional policies--so you can make the best decisions for yourself, your health, and your family when it’s time for you to enroll. If you have any questions about navigating finances related to Medicare or finding the combination of coverage that’s best for you, please call or email to schedule an appointment with me.

Come back next week, when my foray into medical expenses continues with the topic of hospice care. 

Until next time...this is Melissa Making Cents!

Melissa Anne Cox CERTIFIED FINANCIAL PLANNER™ is also a College Planning and Student Loan Advisor in Dallas, Texas.