Have You Made Your 3 Big Medicare Decisions?

Dear Carrie,

I turn 65 in a few months and will be retiring. What do I need to know when I sign up for Medicare? Medicare Advantage?  

—A Reader 

Dear Reader,              

Congratulations on your upcoming retirement. The decisions you make about Medicare are critical when it comes to getting the right kind of health coverage in place. While Medicare won’t cover all your health costs (it generally covers about two-thirds), it's an important benefit you should take time to understand. There are a lot of details that I won't be able to cover in this column, but here are three key decisions you may have to make when enrolling.

Step 1. Choose Original Medicare or Medicare Advantage

This is the biggest decision when signing up for Medicare. You can get Medicare benefits either through Original Medicare (sometimes called Traditional Medicare) or a Medicare Advantage plan. Which one is right for you depends on your situation and preferences. Here are some things to consider:

• Original Medicare contains Part A, which provides inpatient/hospital coverage and Part B, which covers outpatient/doctor care. Under Original Medicare, the government pays directly for the health care services you receive. You can see any doctor and hospital that takes Medicare anywhere in the country without prior authorization from Medicare or your primary care doctor.
• Medicare Advantage (sometimes called Medicare Part C or MA plans) is an alternative to Original Medicare. It covers all services that Parts A and B offer through private insurance companies approved by Medicare. It often includes additional benefits such as dental care, eyeglasses, wellness programs and usually drug coverage.

However, Medicare Advantage plans frequently have network restrictions, meaning you’ll likely be more limited in your choice of doctors and providers. You also may have to go through a primary care physician to see a specialist. You can see providers outside of the network but it will cost more. With Medicare Advantage, you have to choose a specific plan when you enroll, so make sure to check and compare available providers and facilities in your area—as well as plan costs such as premiums and co-payments. You can do this at medicare.gov.

If you've decided on a Medicare Advantage plan, you're pretty much done. But if you choose Original Medicare you have a couple more important decisions to make.

Step 2. Choose a Medigap policy

As I mentioned, Medicare doesn't cover everything, so if you're going with Original Medicare, you should generally purchase a Medigap policy to supplement your coverage. Medigap can help you cover out-of-pocket expenses including copayments, deductibles, and co-insurance. 

There are 10 types of Medigap plans with standardized benefits, all offered through private insurance companies. Premiums and out-of-pocket expenses will depend on the type of Medigap plan and insurance provider you choose. (Just a reminder: With Medicare Advantage you don’t need Medigap.)

Step 3. Choose Medicare Part D—Prescription Drug Coverage

If you choose Original Medicare, you should also select Part D unless you have other drug coverage, for instance through an employer, that is comparable or "creditable" (coverage that is, on average, as good as or better than the basic Part D benefit). Part D provides coverage for outpatient prescription drugs. (This coverage is usually included in a Medicare Advantage plan.)

Each Part D plan has different costs and has a list of covered drugs. Again, you can compare Part D plans in your area at medicare.gov.

Enrollment periods and changing your mind

There are very specific initial and annual enrollment periods to join, switch or drop a plan.

In general, the best time to enroll in Medicare and buy Parts D or a Medigap policy is during a 7-month Initial Enrollment Period. This period automatically starts three months before you turn 65, and ends three months after the month you turn 65.

During this time—and once you're enrolled in Part B—you can buy any Medigap policy sold in your state, even if you have health problems. After this enrollment period, you may not be able to buy a Medigap policy and, if you are able to, it may cost more due to past or present health problems. Also be aware that in most cases, if you don't enroll in Medicare when first eligible, you may have to pay a higher monthly premium due to late enrollment penalties. 

Fortunately, once enrolled, you have some flexibility to make changes, but special enrollment periods and rules apply. You can change your Medicare health and drug plans each year during open enrollment from October 15 to December 7, including moving between Medicare Advantage plans. Do keep in mind that if you disenroll from your Medicare Advantage Plan and switch to Original Medicare, federal law doesn’t usually give you the right to buy a Medigap plan. (The laws in your state might give you more rights.)

Some thoughts on costs

Like choosing any type of insurance, it’s important not to make a decision solely on price. You’ll want to compare features, benefits, premiums, out-of-pocket costs, your location, and your own health needs. A plan with a low premium may cost more in the long run, so shop around and ask questions.

Most people have already paid for Part A if they or a spouse paid a certain amount of Medicare taxes when working. But you’re still responsible for a monthly premium for Part B plus Medigap, Part D, or Medicare Advantage monthly premiums.

You should also be aware that if you are a high earner, your Part B and D premiums will include an additional charge (Income Related Monthly Adjustment Amount or IRMAA) based on your modified adjusted gross income.

And remember, health care costs—including Medicare, Medigap, prescription drug plans, and Medicare Advantage—change over time. So what you’re paying today can be a lot different in the future. Make sure you factor health care costs into your financial plan.

I know this a lot to think about, but Medicare is an important benefit that’s worth understanding. Review the 2022 “Medicare & You” handbook for more specific details. It has information about Medicare coverage, as well as Medicare plans in your area. You can also find free help from health insurance counselors in your area by phone, through your State Health Insurance Assistance Program. 

Congratulations on your retirement and best wishes on your next chapter!

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.