With the cost of healthcare rising at incredible rates, finding the best options for healthcare in retirement can be a deal-breaker. For the average federal employee, Medicare is an integral part of their health care planning in retirement.
Let’s start with the basics of how Medicare works.
Most people in the United States are eligible for Medicare at age 65. For 99% of people, Medicare is a choice and not required.
The only individuals that will be required to enroll in Medicare Parts A and B at age 65 are those that are under the military health program called TRICARE. If these individuals fail to enroll they can lose access to their TRICARE health insurance. For the rest of us, Medicare is completely optional.
There are four different parts to Medicare: Parts A, B, C, and D. Part C is often unpopular because it restricts which Healthcare Providers you can go to and part D is for prescription drugs which are already covered under FEHB. For most federal employees, it makes sense to focus on Parts A and B to make this decision.
Medicare Part A
Medicare part A covers inpatient hospital care, skilled nursing nare, hospice care, lab tests, and surgeries. Part A is premium free for those who have contributed to the Medicare system for at least 10 years. This covers most people in the United States because it comes right out of our paychecks. And because part A is free, it often makes sense for everyone to enroll.
For those that are already drawing Social Security at age 65, they will be automatically enrolled in Medicare part A. They would have to contact Medicare if they would like to opt out. Those who have not started Social Security benefits yet will have to actively enroll. You will have three months before and three months after your 65th birthday to enroll in Medicare.
Medicare Part B
Medicare Part B covers things like health care providers, outpatient care, medical equipment, home health care, and some preventative services. This part is not free however.
The premium will be $144 in 2020 for most people, or potentially higher for those with higher incomes. If you are already drawing Social Security, this premium can come right out of your Social Security check. If you are not yet drawing Social Security, you would make payments directly to Medicare. If you choose to enroll in Medicare Part B, it will not lower your FEHB premiums.
For those who are still working at age 65 and enrolled in FEHB, there will be no penalty if they don’t enroll in Medicare Part B during the seven-month window around their 65th birthday; they will be able to enroll once they stop working. But for those who are already retired at 65, there will be a 10% increase to their part B premiums for every year that they wait to enroll. For example, if someone was to wait till age 67 to enroll in Medicare Part B, their premiums will be 20% higher than if they would have started at age 65.
Coordinating Medicare Part B and FEHB
Because there is little downside to enrolling in Medicare part A, for most federal employees the real decision is to decide how they will coordinate their FEHB and Medicare Part B.
There are three main combinations that we should be thinking about.
1. Keeping FEHB and Not Enrolling in Medicare Part B
This option will keep your health insurance situation at status quo without much change. You would continue to pay your FEHB premiums.
2. Enroll in Medicare Part B But Drop FEHB
This option may make sense for some, but there are some inherent downsides to this strategy.
First of all, with no other insurance besides Medicare, some providers will be less likely to provide services to you. Medicare generally pays providers at lower rates. Some providers refuse to work with Medicare-only patients because they want to receive their full rates. This could potentially limit your provider choices in retirement.
It is also important to note that you would not be able to gain access to FEHB after you have dropped it. If someone wants to leave FEHB but ended up not liking Medicare, they will not be able to undo their decision. Even if someone is in pretty good health, it pays to have options in retirement.
Another downside to Medicare Part B is that it only covers roughly 80% of covered medical expenses. This may seem like a good amount, but when bills get large, 20% can be an overwhelming sum.
3. Enroll in Medicare Part B and Keep FEHB
This is obviously the most expensive option because you’ll be paying a premium for your FEHB and Medicare Part B. You will have to weigh the costs and benefits for you, but this option can cover the majority of your out-of-pocket costs.
Because Medicare Part B only covers 80% of qualified medical expenses, FEHB would act as secondary insurance and cover the rest.
Another huge advantage of having both of these insurances is that when you have an expense that is not covered by Medicare, FEHB will then come in as your primary insurance.
Whenever we are talking about insurance, it is always a question about risk. How much risk do you want to take on as an individual?
If you are willing to take on more risk, it may make sense to have less coverage. You may end up saving money or you may end up having to pay out more.
But for others it can make a lot of sense to transfer that risk to an insurance company where they cap how much you’ll be required to pay. It may cost more money upfront but you will know how much you’ll be on the hook for if something was to happen.
This is a topic that everyone should give a lot of thought and attention to. Health care costs are only going to get higher, and the ramifications of a poor decision in this area can be dramatic. An investment of time and education to make a wise decision will pay off big down the road.