You can help your clients prepare well in advance
by Marcia Mantell, RMA®Ms. Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business development, marketing & communications, and education company supporting the financial services industry, advisors, and their clients. She is author of “What’s the Deal with Retirement Planning for Women,” “What’s the Deal with Social Security for Women” and blogs at BoomerRetirementBriefs.com.
Editor’s Note: This is the first article in a series on Medicare. Each quarter, a new component to the complex Medicare system will be explored. Practical suggestions will help financial advisors encourage clients to engage in the system and process early.
When you hear “Medicare” what comes to mind? Probably that it’s the federal government’s health insurance program for older Americans. A single plan that works like employer health insurance. And at 65, simply switch over to “Medicare” and keep on rolling through retirement.
Let’s stop right there and reset the baseline. “Medicare” is nothing like what you may be thinking.
Medicare’s Big Numbers
In fact, Medicare is a gargantuan, gnarly, grizzly system unlike anything encountered before. The financial, investments, and insurance industries all pale in comparison. Wrap your mind around these Medicare numbers to get started:
- 64 million Americans enrolled in Medicare
- $400 BILLION in cost outlays for care (calendar year 2019)
- 344,967 Institutional Providers: Hospitals, Labs, Surgical Centers, Hospices, etc.
- 79,314 Durable Medical Equipment Providers, Pharmacies, Orthopedics, etc.
- 1,404,045 Non-Institutional Providers: Physicians, Radiologists, Practioners, Psychiatrists, Emergency Medicine, Ambulance Services, etc.
- 3,834 Medicare Advantage Plans (in 2022)
- 766 stand-alone Medicare Part D prescription drug plans
(Source: CMS Fast Facts November 2021)
Medicare’s 4 Key Components
Well before clients begin sorting through this labyrinth by zip code and county, they would be well-advised to start understanding the four key components of their Medicare “packet.” To be fully insured, and keep out-of-pocket (OOP) spending as low as possible, they need to assemble the following:
- Medicare Part A – covering hospitalization, skilled nursing, certain home health services, and hospice.
- Medicare Part B – covering payments to physicians and health providers, outpatient procedures and tests, certain other home health services, and durable medical equipment.
- Medicare Part D – covering a portion of a client’s prescription drugs throughout the year.
- Gap or supplemental insurance – covering the client’s share of costs incurred when using Part A and B services.
Adding to the complexity, every individual client—not couple—must choose a path for getting Medicare. There are two distinct options:
- Choose “original” Medicare Part A + Part B + Part D standalone + Medigap; or
- Choose Medicare Part A + Part B + a bundled insurance plan with a built-in drug plan: known as Medicare Advantage-Part D (MAPD) or Medicare Part C.
Digging Deeper Into Medicare Part A
Medicare is a complex law that sits within the Social Security Act. Medicare passed into law in 1965 with two parts: Part A and Part B.
Part A was established to help hospitals get paid. Every American or lawful resident would get hospitalization insurance once they reach age 65. Pay into FICA for at least 40 quarters, there is no monthly premium for workers or their spouses. Pay in less than 40 quarters, buy Part A.
The “H-I” portion of FICA stands for “hospitalization insurance.” All clients who work for a covered employer pay 1.45% of their salary into HI. Employers match the 1.45%. Higher earners pay an additional 0.9% surcharge on all income over $200,000 for single filers and over $250,000 for MFJ.
Part A Is Not “Free”
Part A is often referred to as the “free” part of Medicare, but it’s only premium-free. Most clients do not pay a monthly premium.
- Advisor Tip: Inform all clients that no part of Medicare ever was or ever will be free.
There are plenty of usage costs when a client is admitted to a hospital:
- Deductible = $1,556 for each different health event
- Day rate = $389/day for days 61 ‒ 90; then, $778/day for days 91 – 150
- After using 150 days, clients pay 100%
Part A also covers many costs incurred in skilled nursing care after a hospital stay. However, clients are responsible for their share after day 20. They pay $194.50/day up to day 100. After that, they pay all costs.
- Advisor Tip: Make sure clients build these costs into their budgets or plan appropriate monthly premiums for a Medigap plan to cover their OOP share.
Turning On Part A – Not So Straightforward
Mistakes and mishaps abound when deciding to start Part A. There is no one path to follow. Each client will have a different situation and their entry into Part A will be based on factors such as:
- still working after age 65 and participating in a large employer group health insurance plan;
- coverage for a non-married partner;
- working at an employer with 20 or fewer employees;
- covering children up to age 26;
- claimed Social Security retirement benefits early;
- contributing to a Health Savings Account (HSA);
- eligible for Federal government health insurance, Tricare from military service, or a state government or union retiree plan.
It is up to the client to figure out all their options for “Medicare” health insurance. But you can see how easy it is to get tied up in knots. Each situation will result in a different time to enroll in Part A.
General Rules for Enrolling in Part A
The original rule to sign up for Part A: do so in the three months before the 65th birthday month. Part A would then be effective on the first day of the birthday month. If already collecting Social Security, Part A was automatically “turned on” for that client.
Today, those two general rules still apply. Medicare will send the client a “welcome to Medicare” kit with their Medicare card, number, and effective date.
- Advisor Tip: Inform clients who claim Social Security early to expect a Medicare welcome kit to arrive in the mail 2 – 3 months before their 65th birthday. And to stop HSA contributions the month before their 65th birthday month.
A client does not necessarily have to sign up for Part A. It is automatically tacked on when they claim Social Security. But this is not recommended.
Special Rules When Working After 65
When clients continue to work after age 65, employer benefits remain available. Therefore, if a client works for a company with more than 20 employees, and continuously stays on that health insurance plan, they do not need to sign up for any part of Medicare until either
1) they leave that job and stop work as an active employee; or
2) they turn 70 and start Social Security.
If available, older employees can choose a high-deductible health plan and fund an HSA. When they retire, they’ll sign up for Part A. However, once older than 65, they must stop HSA contributions six months before losing group health coverage.
A hidden rule in Medicare is that each person’s Part A either begins at age 65 or retroactively up to six months earlier if they enroll after 65. Anytime a client has any part of Medicare for any reason, they cannot also contribute to a tax-advantaged HSA. Some examples:
- Client is leaving their job at age 65 and 4 months. They must stop HSA contributions the month before turning 65. Their Part A effective date will be retroactive four months to the first day of the month containing their 65th birthday.
- Client is retiring at 67 to coincide with Social Security Full Retirement Age. Client must stop all contributions to their HSA at age 66 and 6 months. Automatic retroactive start date starts six months earlier.
- Advisor Tip: Discuss health insurance planning with each client to lay out their specific road to Medicare. Invite a Medicare education expert to host an event and answer client questions. And, provide clients a list of trusted resources to begin their exploration into Medicare madness.
Planning For Medicare Should Start At Age 60
Providing sound guidance, direction, and resources is the avenue financial advisors can take. Or, become a Medicare expert. Your role is to prepare clients for the complexity coming their way with plenty of time for them to avoid mistakes and missteps.
- Advisor Tip: Social Security and Medicare discussions should ideally begin when each client turns 60. It is a most valuable gift. These government programs are wildly complicated, yet clients think they know what they are doing. They do not.
In the next article in the series, you’ll see even more madness with Medicare Part B. Make sure to come back!