Choosing Your Retirement Health Coverage

If you are looking for an indication of just how confusing Medicare's rules can be, type the two-word phrase "Medicare maze" into Google's search engine. Google will respond with more than 1,460,000 references to this often-used term.

Fortunately there are resources to guide you through the maze. Social Security (800-772-1213) will answer your questions about Medicare eligibility. And Medicare (800-MEDICARE) or your state's Medicare insurance counseling agency will answer enrollment questions and help you find the lowest-cost prescription drug plans for the drugs that you take.

But there's another set of questions that you are best equipped to answer. These could be called non-maze questions, since they are not primarily about Medicare's rules, eligibility and enrollment. Instead, they are questions to help you find the best supplemental coverage among the four possible options: employer plans, Medigap policies, Advantage plans, and for low-income individuals, Medicaid. Except for those who are eligible for Medicaid, answering the following questions should enable you to determine which coverage best meets your needs given your income level, health and risk tolerance.

What are two or three criteria that are most important to you in choosing the coverage that you will use to supplement Medicare? In listing your criteria, avoid ones such as "I prefer a low-cost plan" — it's simpler to first identify the plans that meet your other criteria, and then to choose among the lowest-cost of those plans. If you want to continue seeing your current physicians, that's one criterion. If you would rather not enroll in a Health Maintenance Organization (HMO), that's another. Also, one criterion should be that your plan has good catastrophic protection.

After you're retired, do you have access to an employer-sponsored plan to supplement Medicare? If you don't, you can skip to the next question. But if you are among the fortunate one-third of Medicare enrollees who do have an employer (or union) supplement, it is likely subsidized by your employer and will be your most cost-effective choice.

Employer plans typically have three or four plan options for you to choose from — one or two HMOs, a Preferred Provider Organization (PPO), and the occasional fee-for-service plan. Assuming that you're in good health, your lowest-cost option will be the HMO. Yes, HMOs are restrictive and they limit your choices. But if you see a physician only two or three times a year, you may be willing to exchange some flexibility in return for several hundred dollars in savings. In later years if you need more medical services and want greater flexibility, you can switch during annual enrollment to one of the employer's less restrictive options.
 
Even though an employer plan is probably your best choice, you should ask a few questions before enrolling. Does the plan meet the criteria you listed in Question No. 1? If not, are you willing to compromise on any criteria that it does not meet? Does the plan have good catastrophic protection? One sign that it may not is that it does not have an out-of-pocket limit for medical services. Other signs are that the out-of-pocket limit is more than $4,000 or that the costs of certain medical services are excluded in determining when the limit is reached.

Are you interested in purchasing a Medigap policy? If you don't have an employer plan, this option can give you the best (and possibly the most expensive) coverage. A Medigap policy is a standardized supplemental insurance policy designed to plug Medicare's larger coverage gaps. There are currently 10 Medigap plans and two high-deductible options. Massachusetts, Minnesota and Wisconsin do not have the nationally standardized plans, but rely on their own statewide versions to supplement Medicare.

The most popular of the Medigap policies is Plan F, which accounts for almost 40 percent of Medigap sales. It is excellent comprehensive coverage and fills almost all of Medicare's gaps. If you are still in your 60s, Plan F may not seem particularly expensive, but remember that most insurers adjust their premiums for age. Thus, in later retirement your premiums are likely to be much higher. A few states prohibit the use of age-adjusted premiums, which means that premiums for a 65-year-old are substantially higher than if they were age adjusted but they will have smaller annual increases. If you are interested in less expensive Medigap policies with somewhat reduced but still good coverage, consider Plans K and L.

Medigap policies will likely meet all of the criteria you identified in Question 1. Their best feature is that they have no network restrictions and allow you to see any provider who accepts Medicare. Premiums vary widely, and most state insurance department websites show premium comparisons and list the names of insurers authorized to sell Medigap policies. But don't rely solely on your state's premium comparisons. Before buying a Medigap policy, contact at least three insurers for quotes. Since the coverage is identical for any given plan (Plan A, B, C, etc.), go with the lowest price.

During the first six months that you have Part A and Part B of Medicare, you have an open enrollment period when you can purchase a Medigap policy without paying higher premiums, regardless of your health. After that, you may be subject to medical underwriting and if you have a pre-existing condition you could pay higher premiums or be denied a policy. 

What's more, if you initially purchase a less expensive Medigap policy and later want to switch to a more comprehensive one, you could be subject in most states to medical underwriting and a possible denial of coverage in the more comprehensive plan. You will also need to enroll in a stand-alone drug plan if you buy a Medigap policy. Choose the lowest-cost plan for the drugs that you take.

Finally, if you want a less expensive alternative than a Medigap policy, your other choice is an Advantage plan, as described in Question 4. (If you can't find an Advantage plan that you like, you can circle back to re-consider Medigap policies).

Do you want to consider a Medicare Advantage plan? These plans are generally your lowest-cost options, and the majority of them do not have monthly premiums. Advantage plans come in different forms — HMO's, PPO's, private-fee-for-service plans, etc. When you join an Advantage plan, Medicare assigns all of your benefits and coverage to the plan.

Medicare Advantage plans are required to have coverage that on the whole is as good as the original (or traditional) Medicare. But individual benefits may be different — some better, some worse. In practice, Advantage plans typically have solid benefits for doctor's visits and preventive tests. And unlike original Medicare, some Advantage plans cover routine vision and dental care. On the other hand, their coverage for treatments of chronic diseases is often not as good as original Medicare's.

As with the other options, you should first determine which Advantage plans (if any) meet your criteria. This isn't always easy to do: depending on where you live, you will probably have 30 or more Advantage plans available to you. If one of your criteria is that you want to continue seeing your current doctors, call their offices and ask their health insurance assistants which Advantage plans, if any, the doctors accept. Then you can focus on those plans.

You can use the "Compare Health Plans" feature on Medicare's website to see a summary of a plan's coverage as well as its toll-free phone number if you have questions. You should avoid Advantage plans that do not have out-of-pocket limits for medical services, that have limits higher than $4,000, or that exclude the costs of some medical services in determining when the limits are reached.

If more than one Advantage plan meets your criteria, you may want to choose the one that has the lowest prescription drug costs for the drugs that you take. To determine this, you will need to use the "Compare Drug Plans" feature on the Medicare website or call 800-MEDICARE. While most Advantage plans include drug coverage, if you enroll in a plan that does not, you will also need to enroll in a stand-alone drug plan. And, before joining an Advantage plan, you may want to consider its quality ratings, which are shown on the Medicare website. The highest rating is five stars and the lowest is one star. Only 20 percent of Advantage plan members belong to a plan with two or fewer stars.
     
Answering these four questions carefully will help you find coverage that matches your needs. And after you're enrolled in a plan, you should periodically monitor it for changes in coverage. Plans that were good choices when you selected them can become poor ones over time. The best time for monitoring is during each year's open enrollment period. You should be alert for increases in a plan's out-of-pocket limit, for example, or for double-digit jumps in premiums. And, if you are enrolled in a stand-alone drug plan, during each year's enrollment period, you should determine which plan is best for the coming year for the drugs that you take.

FPA member David Armes, CFP®, MBA, is principal of Dover Financial Planning LLC, which specializes in evaluating Medicare options for retirees. He worked as a Medicare volunteer counselor for four years. A version of this article first appeared in the Journal of Financial Planning magazine, December 2009.