A User's Guide to Medicare

Editor's note: This article is adapted from Kiplinger's Retirement Planning 2010. Order your copy today.

Health-care reform dominated the headlines for months, and many people wondered how the new law would affect Medicare. Relax. Medicare, the government-subsidized health-care program, will continue to cover the bulk of medical expenses for Americans 65 and older. And as a result of health-care reform, Medicare will provide even more preventive care as well as enhanced prescription-drug coverage.

If you enroll in 2010, you'll pay $110.50 per month for Medicare Part B, which covers doctor bills and outpatient services. Some higher-income beneficiaries will pay more. Part A, which covers hospital costs, is free. Basic Medicare does not cover prescription-drug costs, but you can buy a Medicare Part D policy that does.

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Despite new enhancements, Medicare continues to have some major gaps in coverage, so it's important to plan how you'll pay for these potential costs. Fidelity Investments estimates that a 65-year-old couple retiring in 2010 will need $250,000 to pay for medical expenses throughout a 20-year retirement -- not including long-term-care costs.

There are three ways to fill the gaps in Medicare: Participate in a retiree health plan from your former employer, if available; buy a private supplemental insurance policy, known as a medigap policy, plus a separate Part D policy to pay for prescription drugs; or drop traditional Medicare altogether for a Medicare Advantage plan, which provides all-in-one coverage for medical services and prescription drugs and sometimes offers extra benefits, such as vision and dental care. (Those extra benefits will likely disappear after the government freezes payments to Medicare Advantage providers next year.)

The process of filling the gaps in Medicare remains essentially the same under the new law, but the precise details -- and costs -- of your coverage could change significantly. Even if you are happy with your current plan, reassess your options during open-enrollment season this fall.

Retiree health benefits

If you're lucky, your employer may still provide retiree health benefits. Many employers have cut back on such benefits over the past several years. In 1988, for example, 66% of large firms that offered health benefits provided coverage to retirees, according to the Kaiser Family Foundation. That number fell to 29% in 2009. And among small firms that provide health benefits to their employees, only 5% extend coverage to retirees.

But even if your former employer continues to offer health-care coverage, your premiums have probably increased over the past few years while your benefits have dwindled. Consequently, an employer-provided retiree health plan may no longer be your most cost-effective option.

A new Medigap lineup

A Medigap policy fills most of the holes in Medicare coverage. As long as you buy a policy within six months of signing up for Medicare Part B, insurers can't reject you or charge higher rates because of your health. These policies are offered by private insurers, but the government has standardized coverage by assigning a specific letter to each type of plan to make it easier to shop around. Every plan A, for example, has the same coverage no matter which insurer offers it (but the premiums could vary significantly).

Plan F continues to be the most popular. It covers Medicare's $275 daily co-payment for days 61 to 90 in a hospital. (Basic Medicare covers the first 60 days of a hospital stay.) Plan F also covers the $550 daily co-payment for days 91 to 150 of hospital stays and pays the full cost of up to 365 additional days in a hospital during your lifetime.

Plan F also covers the 20% co-payment for doctors' services; the cost of 3 pints of blood; the $1,100 hospital deductible; the $137.50-a-day co-insurance for a skilled-nursing facility; the $155 Part B deductible; Part B excess charges; and emergency care outside the U.S.

For years, there were ten plans, labeled A through J. But as of June 1, 2010, medigap policies underwent some big changes. Plans E, H, I and J are no longer sold (but existing policyholders can keep them). Plans K and L were added a few years ago, and now two new plans -- M and N -- have been introduced. The newest plans may be a bit cheaper than others because they don't provide coverage for the $155 Part B deductible or excess charges.

Meanwhile, home recovery and preventive-care benefits will be removed from all medigap plans (because basic Medicare now provides more preventive-care benefits), and hospice coverage has been added to the basic provisions for plans A through G.

For more information about medigap policies, including details about the new plans, see Medicare's publication "2010 Choosing a Medigap Policy," at www.medicare.gov/publications.

Shop around

Each medigap plan with the same letter has exactly the same coverage, so pick the letter plan that works best for you and then comparison shop to find the best price. Most state insurance departments list prices for medigap policies in your area. Visit the Web site of the National Association of Insurance Commissioners (www.naic.org) for links to local resources. The Medicare Rights Center (www.medicarerights.org) also offers consumer information on medigap policies.

After you've compared prices, check the pricing method. Attained-age policies increase in price as you get older. Issue-age policies' prices increase only because of health-care inflation, not because of your age. An issue-age policy may be a little more expensive than an attained-age policy at first, but it will have fewer rate increases over time. Community-rated policies are similar to issue-age policies, but everyone in the area pays the same price regardless of age. You'll usually do best by picking the lowest-cost issue-age or community-rated policy available in your area.

Better Drug Coverage

Medigap policies don't provide coverage for prescription drugs. So if you decide to stick with traditional Medicare, you'll want to buy a stand-alone, Part D prescription-drug policy, too. But the structure of these policies will change in the next few years.

Medicare Part D policies have always had a coverage gap. The so-called doughnut hole begins after you spend $2,830 on prescription drugs in a single year. At that point, you generally have to pay for all of your drugs yourself until your total drug costs for the year reach $6,440. The new health-care-reform law will bring some relief to people who fall within this coverage gap.

Starting June 15, people who reach the doughnut hole during 2010 will receive a $250 rebate check from the government. You don't need to apply for the rebate; the government will send it to you automatically. Once you reach the doughnut hole, you can expect to receive a payment the following quarter. Next year, the doughnut hole will start to shrink, and drug companies will provide a 50% discount on brand-name drugs to people while they are in the doughnut hole. Starting in 2011, Part D beneficiaries will pay a progressively smaller portion of their drug costs each year until 2020, when they will be responsible for just 25% of the cost of drugs purchased while in the doughnut-hole coverage gap.

Also starting next year, individuals with income of more than $85,000 ($170,000 if married filing jointly) will have to pay a new high-income surcharge for Part D premiums, similar to the extra fee they must now pay for Part B. (High-incomers will continue to pay the Part B surcharge, too.)

Because of these coming changes, it is important to reshop your Part D coverage during open-enrollment season this fall. Open enrollment is generally the only time of year you can switch Part D plans. Compare premiums as well as out-of-pocket costs for your specific medications. Average premiums for Part D prescription-drug coverage increased by 7% in 2010 to $30 per month, and the premiums for some of the most popular plans have increased even more over the past few years.

Part D co-payments have been rising, too, and many insurers have been changing their pricing tiers. For example, you could end up with higher out-of-pocket costs if your insurer moves one of your regularly prescribed drugs from a "preferred" category with lower co-payments to a "non-preferred" category with higher co-pays. Ask your doctor whether you can switch any of your prescriptions to a generic or lower-cost medication, which could save you a lot of money.

The Medicare.gov Prescription Drug Plan Finder (www.medicare.gov/mpdpf) can help you compare total costs for your medications for each plan available in your area. Just type in your zip code, your drugs and the dosages, and you'll get a personalized estimate of your total expenses for the year, including premiums and out-of-pocket costs.

Once you've narrowed your choices, click on "Get Plan Performance Information." This will show each plan's complaint and customer-service records.

New Medicare Advantage Rules

Instead of paying separately for Medicare Part B, a Medicare supplemental policy and a stand-alone Part D drug plan, you could sign up for a Medicare Advantage plan, which provides all-in-one coverage. These plans generally come in three varieties: Medicare health maintenance organizations (HMOs), regional preferred provider organizations (PPOs) and private fee-for-service (FFS) plans.

Medicare HMOs tend to offer the lowest premiums, but they also have the tightest restrictions on which doctors and hospitals you can visit. Regional PPOs usually cost a bit more but cover a network of providers that often spans several states. Private fee-for-service plans generally cost the most -- and can be hard to find as their numbers have dwindled -- but you can use any provider that agrees to the plan's terms (ask your doctors whether they participate).

Health-care reform has created a whole new landscape for Medicare Advantage plans. In the past, many of these all-in-one plans had low premiums, but they didn't always offer the same coverage as traditional Medicare. For example, some Medicare Advantage plans didn't cover the first 20 days in a skilled-nursing facility (which traditional Medicare covers), and many charged higher co-payments for important services, such as chemotherapy. But starting in 2011, Medicare Advantage plans will be prohibited from imposing higher cost-sharing requirements for some benefits covered by traditional Medicare. As a result, your current Medicare Advantage plan may offer new benefits.

The health-care-reform law will also gradually reduce government subsidies to private Medicare Advantage insurers, starting next year. Consequently, some insurers may leave the business and others may raise premiums or cut back on coverage. So you'll need to review the details of your policy carefully when it comes time to re-up.

You can review plans in your area by using the Medicare Options Compare tool (www.medicare.gov/mppf). Look at the premiums as well as the column labeled "Estimated Annual Cost for People Like You," which provides out-of-pocket estimates based on your general medical condition. Another great resource is the free annual Cost Share Report (available at www.medicarenewswatch.com), which provides out-of-pocket cost estimates for Medicare HMOs and PPOs that include prescription-drug coverage. You can look up the best value in your area in three different health categories -- good, fair and poor. Even if you're in good health now, it's important to see what a plan would offer if your health deteriorates during the year.

You can sign up for a Medicare Advantage plan when you're first eligible for Medicare or during open-enrollment season, which this year runs from November 15 to December 31. Starting in 2011 and beyond, the open-enrollment period will be earlier in the year, moving up to October 15 through December 7.

Open enrollment is a good time to reassess your Medicare choices and decide whether all-in-one coverage or a multipolicy approach is best for you. You need to consider your health, your specific medications and whether your doctor participates in the plan.