by Ryan W. Smith
In recent years, the financial planning industry has expanded its services to include all forms of financial planning, not just the investment and retirement account assistance for which it is more traditionally known. One of the more recent additions to full-service financial advisory services has been Medicare.
Medicare is the single-payer health insurance program for Americans aged 65 and older. It was established in 1966 as an addendum to the Social Security Act, after being initially proposed by President Eisenhower in 1961, at the very end of his term in office. Most people don’t know that there are between 30 and 50 private companies contracted for administrative purposes in a given year or that there are more than 55 million Americans who are part of the program.
Medicare on average pays for just over 50% of all health care charges for enrollees, with the remaining payments covered out-of-pocket or with supplemental insurance. Enrollment in Medicare is divided into four sections: Part A is fee-for service and covers Hospital and Hospice care, Part B is also fee-for-service and covers outpatient services and tests, Part C is sometimes referred to as Medicare Advantage and provides similar services to Part A and B as well other services not typically covered by those Parts while Part D is the prescription drug plan created in 2006 and is designed to help people pay for self-administered prescriptions so that those covered have little to no prescription drug costs.
Medicare Parts A and B provide standardized coverage and are often referred to as “Original Medicare.” Medicare Part C does not reduce benefits from Parts A or B, but will often have an additional cost and has been typically associated with HMO organizations, with more and more PPO networks being added in recent years. Medicare Part C enrollment has leapt from 5.4 million in 2005 to over 17 million in 2015 as a result of the additional services covered above what Original Medicare would cover. Medicare Part D will have an additional cost, one that can vary widely due to benefits and coverage, and is not standardized. However, all Part D plans must cover at least 2 medications in a minimum of 148 different pharmaceutical categories.
One important note on Medicare coverage is that Medicare is not designed to pay for all medical costs. By design, the program contains premiums, deductibles and co-pays like traditional health care plans. Open enrollment for all Medicare plans is between October 15 and December 7 each year.
A program this large, which covers 1/6 of all Americans, with so many parts and options, it is no wonder that many people will miss a filing deadline or make an error while filling out paperwork, which can quickly become a very costly mistake. It is this propensity for mistakes, the large number of people under its coverage and the mere fact that the Baby Boomer generation is becoming eligible for benefits that have led many financial advisory firms to begin to include Medicare as part of their comprehensive financial management practices. Here are some common mistakes that many Medicare enrollees make which can be avoided:
1) Review Part D annually
Prescription drugs can be one of the most costly parts of healthcare. There are many drugs each year which will fall off, allow for a new generic manufacturer, or, less often, be added to coverage plans. Any premium changes, increases in out-of-pocket costs for prescriptions or even pharmacy listings should be topics of conversation between advisor and client.
2) Spousal Part D Coverage
Because of the differences in coverage and yearly changes, sometimes dramatic, to Part D plans, it is often not the best idea for two spouses to have identical Part D plans. It is important for financial advisors to help their clients take into consideration that the prescription needs for men and woman can vary significantly and how Part D coverage can reflect those differences.
3) Medicare Advantage Networks
Medicare Part C, or Medicare Advantage, plans often have better coverage than Original Medicare, but sometimes there are specifics, like the plan’s Network that must be taken into account. Much like employer-based or private insurance, Medicare Advantage plans have a network of doctors and facilities where coverage is deemed “in-network” and the policy will help more fully cover those expenses. Unlike private insurance, however, there are many Medicare Part C plans that provide zero out-of-network coverage. It is important for financial advisors to discuss these coverage networks with their clients.
4) Switching Medicare Advantage Plans
Much like their private insurance brethren, there are several life-changing events that can allow for changes outside the open enrollment periods. However, if you are in a 5-star Medicare Part C plan these changes can be made at any time of the year. Most enrollees, though, do not have 5-star plans, yet they can still take advantage of the January 1 to February 15 period, each year, where enrollees are allowed to switch from Medicare Advantage plans to Original Medicare plus Part D. These possible changes can be very important to those enrollees with limited resources, so it is important for financial advisors to bring this topic up with clients so that the best, most cost-efficient coverage changes can be made when applicable.
5) Medigap coverage
Medigap coverage within the Medicare universe refers to the private supplemental insurance coverage that nearly all Medicare enrollees will sign up for if their employer does not provide it or they are not enrolled in Medicare Part C. These plans are so popular that most who do have supplemental insurance, will have more than one type of Medigap supplemental insurance.
One important note with Medigap coverage is that enrollees have 6 months after enrolling in Medicare Part B to buy supplement plans. During this period, even those with pre-existing conditions will not be denied coverage. After the six month window, however, insurance companies are free to reject or change coverage depending on the enrollee’s particular situation.
6) Not Signing Up When Eligible
For those Americans who are already receiving or signed up for Social Security benefits on their 65th birthday, their enrollment in the Original Medicare, Parts A and B, is automatic. However, for those not receiving Social Security benefits or those who have chosen to delay Social Security benefits, enrollment must be completed by the individual. There is a 7 month window for those not receiving Social Security benefits to sign up, three months before turning 65, the month one turns 65 and the three months after turning 65. Outside of that window, it is important to note, signing up for Medicare can be costly, be delayed or be denied.
There is an important role for financial advisors to play regarding Medicare. Working Medicare into a discussion about overall-financial health is a great way for advisors to educate their clients, make sure their clients are truly being fully covered as well as making sure that the health and well-being of their clients is maintained for as long as possible.
One way that financial advisors can best assist their Medicare-eligible or near-eligible clients is through a Monte Carlo simulator, such as the one found in AdvisoryWorld’s SCANalytics program. This forward-looking projection, based on historical data and input information, can provide a what-if for clients. One simulation might look at the various costs over time for a particular Medicare Part D plan, while another might look at typical cashflows for those who do not sign up for Part D or choose a thinly-covered plan. Once all cashflows and expenses are entered into the system, a 30-year projection can look at these costs impact retirement savings over time, as related to the overall gain in the client portfolio.
Medicare is one of the largest social programs in the U.S. It has myriad regulations, many of which change each year. It is important for enrollees to be confident they are getting the most from their Medicare plans, as healthcare costs are among the most expensive items in retirement. For financial advisors, a strong working knowledge of Medicare facts, signup information and pitfalls, can be a boon to business, a natural entry to conversation with potential and existing clients, even if it’s not a great source of revenue.