Episode 219: Medicare is Confusing: Here’s How to Make Sense of It

Medicare Basics Overview

Alex Murguia 00:09

Hey everyone, welcome to Retire with Style. I'm Alex and I'm here with my good buddy Wade Pfau who's a bit under the weather which is, ⁓ I don't know, it's in the cards today since we're covering what are we covering today Wade?

Wade Pfau 00:23

Yeah, it's kind of ironic we're talking about health care in retirement, particularly Medicare, which is going to become the primary payer for most Americans once they reach age 65, with some exceptions that we can talk about.

Alex Murguia 00:36

And off the record Wade is blaming me for his recent cold. Wouldn't you say Wade?

Wade Pfau 00:43

Yeah, that's right. I came out to see you earlier this week and when I hopped in your car, the first thing you said is, hey, I'm getting over a cold. I was like, here we go. It came to pass.

Alex Murguia 00:55

And of all things, many of you may not know this, but Wade's a bit of a germaphobe. He carries with him a bottle of hand sanitizer in his back pocket.

Wade Pfau 01:06

Well, that's something that's really been a post-pandemic thing with my wife, but even she doesn't even trust Purell. She goes for the heavy duty stuff that also kills norovirus. So that's what I tend to carry around on business trips.

Alex Murguia 01:26

Do you get by customs, any problems? Do you always have to, you know, how do get through security?

Wade Pfau 01:32

No, it's in less than 100 milliliters, so that's all good.

Alex Murguia 01:37

There you go. Okay. I thought you put that right into an IV drip or something.

Wade Pfau 01:43

That might not be a good idea.

Parts vs Plans: The Alphabet Soup

Alex Murguia 01:50

All right. Medicare. Before the podcast, Wade and I had a little level set just to get everything straight because it could get confusing. We're thinking about the best ways to present this and so, Wade, I feel it would be a great use before we're going to the intricacies of it if we level set by talking about the alphabet soup of the parts of Medicare, but then how there's also plans, which happen to have the same letters as the parts. And with regards to the plans, how the plans are also referred to as plans, supplements, and Medigap. Alright, so effectively what are the parts and then what are the underlying plans in addition to the underlying plans?

Wade Pfau 02:28

Right, this is worth really emphasizing—this has been a source of confusion. There are two four letter words that begin with P, but part and plan are two very distinct words that have very distinct meanings in the Medicare world. So when we're talking about parts and plans, make sure you don't think those are just two ways of saying the same thing. They're different. And we're talking about chapter seven in our series going through the third edition of the retirement planning guide book. And what you need to know to be ready for your retirement. And so most Americans, with some exceptions, become eligible for Medicare at age 65, reaching age 65. And the first choice they have to make is on the part side. They can go with original Medicare, which is Part A for hospital insurance, Part B for medical insurance. And then if they don't have any retiree health insurance or anything, they'll also wanna choose Part D for prescription drug coverage.

Wade Pfau 03:31

Alternatively, they can go the route of Medicare Advantage, which is Part C. Part C has become more popular. It's now actually, in just a short period of time, over 50% of new enrollees are now choosing Part C, just slightly over 50%.

Alex Murguia 04:01

Now, wait real quick when you say alternative, that means instead of Part A, B, and D, if they choose to go Part C, they can just do Part C.

Wade Pfau 04:11

Part C, uh-huh. And then most Part C plans include prescription drug coverage, so you have it all in one package. And if you've seen commercials for Medicare on television, which are quite common, especially around the open enrollment season in October, all those commercials are for Medicare Advantage, Part C plans run by private insurers.

Alex Murguia 04:32

And if you pick a Part C plan that does not have prescription coverage, could you then tag on Part D?

Wade Pfau 04:40

I think so, but I think it's usually just more straightforward to pick a Medicare Advantage plan with the prescription drug coverage. There might be some issues, and it might also depend state by state, but generally, you would choose a Medicare Advantage plan with prescription drug coverage.

Original Medicare & Medigap Supplements

Alex Murguia 04:45

Solid. Perfect. I'm just trying to think of every iteration that our listener may be hearing and thinking. Okay, and so now we've got the parts down, what about the plans?

Wade Pfau 05:10

Right, the plans are the Medicare supplements, also known as Medigap, and those are only available with original Medicare. if you choose Medicare Advantage, you're not able to have a supplement. But the supplements, they range Plans A through N, with different levels of coverage.

Alex Murguia 05:20

Original being Part A and B.

Wade Pfau 05:37

If you became eligible for Medicare after January 1st, 2020, Plan G is the most comprehensive supplement available, which covers all the copays, deductibles, coinsurance in original Medicare, Parts A and B, except for the deductible for Part B, which this year is $283. So you'd still have to pay the Part B deductible, but otherwise you have no more out-of-pocket costs related to anything covered by Part A and B if you have the Plan G supplement.

Alex Murguia 06:11

Now the trick is, I would imagine when you say the most comprehensive, it's probably the most expensive as well.

Wade Pfau 06:20

You should shop around. In theory, it should be the most expensive. That's not always the case. There just may be different competition in your local market. So don't be scared away from Plan G because you're worried it's more expensive. It may not be. And you can use the Medicare Plan Finder tool at Medicare.gov to look through your options.

Choosing Original Medicare: When It's Right

Alex Murguia 06:39

And in your book, you go down, now that you have all of these, I mean, it's very easy for the listener to think, well, this is overwhelming, thank you for this information, now what? How do you make sense of this alphabet soup in your book?

Wade Pfau 06:54

Well, we could go through in outlining this in the book, a list of characteristics that might make original Medicare, the Part A and B, D, and supplement, more attractive, and then some characteristics where Medicare Advantage might be more attractive. So maybe it's worth going through those lists. And if you've got a copy of the third edition at home, I'm actually looking at page 165 with original Medicare, reasons you might consider original Medicare.

Wade Pfau 07:24

This first one's important. So if you're a snowbird or if you're someone who's traveling quite a bit in retirement, you're not really limited to one area. Original Medicare is going to work a lot better for you because most Medicare Advantage plans, they work either like HMOs or PPOs and they're more limited. The in-network coverage for Medicare Advantage is usually in one geographic area. So if you spend part of the year somewhere else, there may be no in-network providers available to you. That makes Original Medicare is accepted. Anyone who accepts Medicare, which is estimated to be about 98 to 99% of medical providers in the United States, you'll be covered with Original Medicare. You can go visit those. You don't need any referrals. You can make those appointments. Medicare Advantage is a lot harder to use in that respect.

Wade Pfau 08:13

Then also, even if you are just staying in one general area, if you have preferred healthcare providers, but you can't find them in network for any of the Medicare Advantage plans available, that would be a reason to choose Original Medicare. If you're someone who does tend to use more healthcare services or see more specialists, it can be a lot easier to navigate all that because you don't have to worry about this whole in network and getting referrals with Original Medicare. So if you just generally value having the options not to face those kinds of in-network restrictions or just having a limited service area. If you want to have a comprehensive supplement to cover all those out-of-pocket costs, original Medicare would be the way to go. And then also, if you're traveling internationally, Medicare is not really meant to provide health care coverage outside the US, but some of the supplements do have limited emergency coverage overseas as well. So that might be helpful.

Medicare Advantage: Benefits & Tradeoffs

Wade Pfau 09:43

Now, Medicare Advantage. Generally, Medicare Advantage, your premiums will be less, especially if you're someone who's choosing a relatively comprehensive supplement. So if you're really focused on having the lowest possible premiums, Medicare Advantage might provide that to you. Now, Medicare Advantage, there's out-of-pocket limits for Medicare Advantage, but they tend to be higher than if you had Original Medicare plus a comprehensive supplement. Your overall premiums would be higher, but your out-of-pocket costs would be less. Medicare Advantage, you may be looking at lower premiums, but if you use a lot of healthcare, you'll spend more overall until you hit those out-of-pocket caps.

Alex Murguia 10:08

Now, what would you say is the level of coverage across all the Medicare Advantage plans? Does it range from HMO type to PPO type?

Wade Pfau 10:17

Yeah, there's a number of different options, but the two most common are HMO designs and PPO designs. It's just, because they're through private insurers, they tend to work in the same manner people are used to with their pre-Medicare health insurance.

Alex Murguia 10:25

Okay.

Wade Pfau 10:37

Well, we just began the list of why you might choose Medicare Advantage. There's more like other reasons. Yeah, yeah. So if your preferred health care providers are in network with a Medicare Advantage plan you're looking at, can lean you in that direction. If you do tend to use less health care services, so you don't have a lot of out-of-pocket spending, with the lower premiums through Medicare Advantage, you might be spending less overall.

Wade Pfau 11:05

There's the risk element to that. But if you tend to just be, you know, you don't use a lot of healthcare services anyway, that can make Medicare Advantage more attractive. Medicare Advantage can also have some supplemental benefits not available through Original Medicare. And a lot of the marketing for Medicare Advantage focuses on there may be dental coverage, vision coverage, hearing aids, things that aren't really covered through Original Medicare. You really have to assess the value of those additional benefits. But that's certainly part of the marketing angle is you can get some additional benefit. And that's how the commercial will say, you're missing out on benefits that you could be getting through Medicare with our Medicare Advantage plan. Your dental vision and hearing is covered. So that's an element to consider.

Premiums, Out-of-Pocket Costs & Coverage

Alex Murguia 11:50

Comment here, what are the, on orders of magnitude, would be the price differences that you've seen? You're talking like a couple thousand dollars a year or a couple hundred dollars a year?

Wade Pfau 12:00

So if you choose Medicare Advantage, you still pay your Part B premium. And then many Medicare Advantages don't have any additional premium. There's now some options that will even refund you part of the Part B premium, or they might have an additional cost. It works out like around, across all the Medicare Advantage plans, including those with no additional premium, the average monthly cost tends to be around $20. And then if you only look at plans with premiums, it's around $60 per month extra. But then you don't have the supplement that way. So you are then going to face more out of pocket expenses for co-insurance, co-payments, and deductibles on your health care.

Alex Murguia 12:44

And so, could the commercials that you're hearing about Medicare Advantage saying you're missing out on premiums, you're missing out on services, could you get those services if you just added like the Medigap, one of the Medigaps?

Wade Pfau 12:57

Well, Medigap is only covering things with original Medicare. You cannot get, although some of our retirement researcher academy members said there's a few plans out there that are changing this, but the general answer is Medicare supplements won't cover the dental vision or hearing.

Dental, Vision & Supplemental Benefits

Alex Murguia 13:03

No.

Wade Pfau 13:15

So no, that's not a way to get those additional benefits.

Alex Murguia 13:19

So if you're on A, B, and then a plan, you know, one of the Medigap plans, how would you get dental?

Wade Pfau 13:26

Well, you could buy separate dental insurance if you want, or you could, sometimes dentists will have you like join their dentist for an annual fee, get the two cleanings and maybe discounts.

Alex Murguia 13:37

The point being that there's no, there's no, I'm just trying to bring home that there's no plan for it within this universe. It'd have to be some sort of out of pocket thing.

Wade Pfau 13:46

Right. It may be worth also, well, just a couple of other points. Medicare Advantage plans, if you have certain chronic conditions, there can be Medicare Advantage plans tailored to really help out with those situations. And then also there's that appreciating just having one Medicare card rather than with Medicare Advantage, you got your card instead of having an A, B, D in supplement to be thinking about.

What Medicare Covers: Deductibles & Copays

Wade Pfau 14:57

But then we get into, what does Medicare not cover in terms of what are the co-insurance co-payments and the like? So if you have a comprehensive supplement, like with hospital stays, if you just are going with original Medicare and you don't have the supplement, there's a $434 copay for days 61 through 90, and then you have to pay the full costs beyond 90 days for a hospital stay. So a supplement can take care of that for you. With any kind of Part B medical expense, there's a 20% co-insurance that the supplement will cover that. You get three pints of blood for free, which maybe is not that huge a benefit.

Alex Murguia 15:17

We throw in the doormats for free. Typo? Which one do you get for free?

Wade Pfau 15:19

Yeah, I've got a table. I've never could find any what these three pints of blood are worth. Now you have the Part A hospice co-insurance and co-payments covered. There's an issue. Well, you don't get long-term care through Medicare. That's a whole separate conversation but under limited circumstances, after a hospital stay of at least three nights, you can get skilled nursing care for up to a hundred days. The first 20 days are covered fully, but there's a $217 copay for days 21 through 100. You can get a supplement that would cover that for you. For Part A, every time you have a benefit period, which is not the same as a year, you can have multiple benefit periods per year if you're in the hospital and then out for 90 days and then go back in again. Each benefit period, there's a $1,736 deductible. So that's a good benefit from the supplement.

Alex Murguia 16:08

And for the listeners, the definition of benefit period means.

Wade Pfau 16:14

Well, a benefit period begins when you enter the hospital and then ends once you've been out of the hospital for at least 90 days. And then that resets all the days one through 60 of a hospital stay versus 61 through 90 and so forth. But you're facing that deductible each time. There's a Part B deductible of $283 that if you became eligible for Medicare after January 1st, 2020, by law, supplements can't cover that for you, but there's some older supplements, Plan F. in particular that might cover it. Well, that do cover that. It's just, that's not really an option anymore. The supplements can cover excess charges from Medicare, which is where if a Medicare provider does not accept assignment from Medicare, they can charge up to 15% extra than the Medicare rates for health services. And you'd have to pay that out of pocket unless you have a supplement that covers this Part B excess charge. And then the foreign travel emergencies. That's a potential benefit of a supplement. So with a comprehensive supplement, other than that Part B deductible, again, you don't have any out-of-pocket expenses anymore related to things that are covered by Parts A and Part B. Now, not everything may be covered, but for anything that is covered, you're no longer facing out-of-pocket expenses.

Switching Plans & Underwriting Risks

Alex Murguia 17:40

Is it fair to say for the most bulletproof plan, it would be like get Part A, B, get the supplement that kind of matches yourself, and on the side do something for vision and dental.

Wade Pfau 17:55

Uh-huh, and Part D too for prescriptions. But yeah, that's the most, the risk averse version, the highest premiums, but for the least out of pocket costs. That would be the way to go.

Alex Murguia 17:58

Yeah, yeah. And Part D, yeah. That would be like bulletproof. Yeah, and then on the flip side, would be get a Medicare Advantage plan and the most cost-effective option if you think your body is like Superman.

Wade Pfau 18:20

Yeah, and some people might be thinking, well, I'll get a Medicare Advantage early on when I'm healthier and then switch to a supplement later. But that may not work out for you because initially you can get any supplement when you're first eligible for Medicare. But once you're out of any initial enrollment period or a special enrollment period that lets you sign up later, those policies can be underwritten and you may not qualify. So you can't wait until you're unhealthy to switch over to a comprehensive supplement.

Alex Murguia 18:44

So what you mean is you can get A, B, and let's say you're on an advantage plan, you could later on say, all right, now my bones are getting creaky, you know what, I'm going to do A, B, get the prescription on D, and then select any Medigap plan that you want, but you're saying you can do A, B, and the prescription D, but you're not going to be able to select any sort of supplement that you want because you may not be able to be underwritten for it. Is that kind of what you're saying?

Wade Pfau 19:04

Yes, yeah, every year during open enrollment, you can switch back and forth from Original Medicare to Medicare Advantage, Medicare Advantage to Original Medicare, or switching Medicare Advantage providers. It's just, if you're trying to switch back over to Original Medicare later, you may not pass the underwriting for the supplement that you want.

Alex Murguia 19:35

Okay, and that's a real risk. Now it would be someone with a chronic illness or something along those lines. It'd be tricky.

Wade Pfau 19:44

Yeah, yeah.

Working with Medicare Brokers & Resources

Wade Pfau 20:25

So, well that, I guess there's the whole issue of when do you need to sign up for Medicare and all that sort of thing. Yeah, and it's one expected to do this all by themselves because this seems, you're talking the two things, they're health and wealth, right? And it affects both of those. What have you seen? What's your suggestion? And how they could use your book to maybe help guide them directionally. And once they have that guidance directionally, how do they really, really drill down in it? Like to what extent can your book take them to? And then at a certain point, there's some sort of handoff.

Wade Pfau 20:25

Yeah, yeah, so this Medicare area is something you can do, do it yourself. You don't necessarily need a professional to help you. And you just use the plan finder tool at Medicare to find your options and choose one, sign up. That being said though, there are many independent brokers out there who you don't pay. They're reimbursed, they receive a commission from the plan that they put you in, but you're paying the same premiums either way. It's not more expensive for you to go through a broker than it would be to sign up directly. So in many cases, people do like to simplify this aspect of their life by working with an independent Medicare broker.

Healthcare Budget Planning in Retirement

Alex Murguia 21:07

Okay. And wait, in terms of, since we've talked about the health side of it now and the wealth side, what is a reasonable budget for healthcare expenses in retirement in light of all of this?

Wade Pfau 21:20

Well, you want to think about with your choices, what are your premiums, deductibles and that sort of thing going to look like? And so that would vary. Your budget will be less. What will your premiums will be higher, but your concerns about out of pocket spending would be less with original Medicare and a comprehensive supplement. And then you're just beyond the premiums that you're paying. You're looking, trying to assess what your out of pocket costs might look like. You can estimate those based somewhat on your past spending for health related things. May not be exact. Whenever you switch health insurance, many insurers have negotiated rates for different services. So it's not as simple as just looking at your previous health spending and adjusting that for Medicare, but getting a sense of what you might be paying out of pocket in addition to premiums and coinsurance and deductibles.

Alex Murguia 22:12

Okay. Wade, I think this was an episode that had a lot of things for folks to digest and doing more may be overwhelming. I think this is a good stopping point for this episode because it's one that I would hear it again because I can't stress enough the confusion that we have with folks with regards to the Medicare parts A, B, C, D, but then Medicare plans.

Wade Pfau 22:24

Okay.

Alex Murguia 22:42

Plan is also known as supplement, also referred to as Medigap, A through N. And sometimes Y, I had to get the Y in there. But right, wait, I think it's a good stopping point, folks can listen to it again, just to level set what the terms are and what the basic pros and cons are of that.

Wade Pfau 22:49

Yeah, fair enough. Because yeah, there's other topics that are pretty complicated too about when you may not have to sign up for Medicare. But right, we can save that for a different episode since it's a whole different set of issues that you need to digest to fully understand your status with Medicare.

Alex Murguia 23:23

Alright everyone, we'll then catch you next week on Retire With Style. This is Alex signing off with my good buddy.

Wade Pfau 23:30

Wade, take care everyone.

Alex Murguia 23:32

Take care everyone.