Your Medicare Owner's Manual

Editor's note: This article is adapted from Kiplinger's Retirement Planning 2008 guide. Order your copy today.

While you may not look forward to turning 65, Uncle Sam has a nice present for you when you do: government-subsidized health insurance. But Medicare won't cover all your health-care expenses, so you'll still need to make some key decisions about how to fill in the gaps. Making the right choice could save you hundreds or even thousands of dollars a year in premiums and out-of-pocket expenses.

Sue and Art Gammarino of Springfield, Pa., shaved about $10,000 off their annual health-insurance premiums when they turned 65 this year. Art is a semi-retired electrical contractor, and Sue works two days a week in a dental office. They had been paying about $12,000 a year for health insurance through a small-business association. Once they turned 65, they switched to a Medicare Advantage plan, which covers both medical and prescription-drug costs. Their premiums plummeted to about $62 a month for each of them, for a total of $1,500 a year.

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The Gammarinos encountered a slew of complicated choices when they started searching for coverage, and they're glad they gave themselves plenty of time before Art's birthday to study their options. "We found it to be a tangled mess to sort out," says Sue.

Even if you are already eligible for Medicare, it pays to check out your choices each year during the annual open-enrollment period that runs from November 15 to December 31, when you can switch plans. Several new options appear every year, and the prices and coverage can vary greatly. The plan you picked in the past may no longer be your best option.

Here's what you need to know to get the most out of your Medicare coverage.

Sign up on time

You are eligible for Medicare at 65, even if your normal retirement age for full Social Security benefits is later. The initial enrollment period for Medicare Part B, which covers doctors' visits and outpatient services, runs for seven months, starting three months before your birthday month and continuing for three months afterward. To make sure your Medicare enrollment runs smoothly, you should contact the Social Security Administration (800-772-1213; www.ssa.gov) three months before you turn 65.

If you miss the initial seven-month sign-up window, you'll have to wait until the next general-enrollment period, which runs from January 1 to March 31 each year, for benefits beginning the following July 1. For each year you wait beyond your initial enrollment period, you'll also incur a 10% penalty, which will be added to your monthly Part B premium (Part B premiums are deducted from your Social Security checks). You can sign up for premium-free Part A, which covers hospital services, at any time.

Special enrollment rules apply if you're eligible for Medicare and still on the job. If you have health insurance through your employer or your spouse's employer, you aren't subject to the 10% late-enrollment penalty if you sign up for Part B within eight months of losing that coverage. Similarly, if you have employer-provided prescription-drug coverage, you can avoid the late-enrollment penalty for the Medicare Part D drug plan. If you miss the initial seven-month enrollment period, you can sign up for prescription-drug coverage during the last six weeks of any year, for benefits beginning the following January 1.

Review your choices

When it comes to filling the gaps in your health-care coverage, you may have several choices. Employer-provided retiree health insurance has traditionally been the best option. But don't assume that's still the case. Many employers have been cutting back on retiree coverage. Even if your employer provides retiree health insurance, you may be able to save money by switching to another plan -- especially if your premiums have risen and your coverage has been scaled back over the past few years. Look at the big picture, and compare coverage for medical care and prescription drugs, as well as out-of-pocket costs and any restrictions on health-care providers.

Medicare supplement plans, also known as medigap policies, pay for many of the co-payments, deductibles and other expenses that Medicare doesn't cover. If 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 (see The ABCs of Picking a Medigap Policy).

Medigap policies generally don't cover prescription-drug costs (and the old medigap plans that do offer drug coverage are no longer a good deal). Instead, you'll need a Medicare prescription-drug plan, known as Part D.

New pricing and options for Part D for the following year are unveiled each fall, and you have from November 15 to December 31 to switch policies. Premiums rose an average of 13.6% for the largest plans from 2007 to 2008 -- to $25 per month, according to the Centers for Medicare and Medicaid Services. Beneficiaries in the most-popular plans faced the biggest monthly hikes. For example, the average monthly cost of Humana's standard plan jumped nearly 69%, from $15.34 in 2007 to $25.88 in 2008. Because of major changes like these, it's a good idea to investigate your options during the open-enrollment season every year, even if you've been happy with your plan.

Premiums are only one cost to consider. You'll also need to calculate total out-of-pocket costs for the drugs you take. When you add up premiums, deductibles and co-payments, a higher-premium plan could end up costing less than a lower-premium plan that has hefty co-payments.

There's a great tool that makes it easy to compare total costs. The Medicare Prescription Drug Plan Finder (www.medicare.gov/mpdpf) can help you compare total costs for your medications under each plan available in your area. Just type in your zip code and your drugs and dosages, and you'll see how much each plan would cost you for the year, including premiums and out-of-pocket costs.

You can lower costs significantly by switching to generic drugs, says Jim Yocum, executive vice-president of DestinationRx, whose company developed the Plan Finder tool for Medicare. Before you pick a plan, ask your doctor about substituting a generic for your brand-name medication. The plan with the best deal for brand-name drugs may not offer the best deal for the generic equivalent.

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

All-in-one plans

Instead of paying separately for Medicare Part B, a Medicare supplement policy and a Part D drug plan, you could sign up for a Medicare Advantage plan, which combines all of that coverage in one policy.

Medicare Advantage plans, which are sold by private insurance companies, come in three varieties. Medicare HMOs typically offer the lowest premiums but have the tightest restrictions on the doctors and hospitals you can visit. Regional PPOs tend to cost a bit more, but they include a network of providers that usually spans several states. Private fee-for-service plans usually cost the most, but you can use any provider who agrees to the plan's terms (ask your doctors if they participate). In addition to prescription-drug coverage, Medicare Advantage plans often offer extra benefits, such as eye exams, hearing aids and dental benefits.

You can sign up for a Medicare Advantage plan when you first become eligible for Medicare or during open-enrollment season in the late fall. If you already have a Medicare Advantage plan, you can switch to another Medicare Advantage plan or back to Medicare plus a Part D plan between January 1 and March 31.

To find good deals, review plans in your area by using the Medicare Options Compare tool (www.medicare.gov/mppf). Look at the premiums as well as the "Estimated Annual Cost for People Like You" column, which provides out-of-pocket estimates based on your general medical condition.

Some Medicare Advantage plans have very low premiums, and some charge nothing beyond your Part B premium because of rich government subsidies to insurers. But you need to look carefully at the co-payments and limitations. "If someone has a history of frequent hospitalizations, medigap coverage may be safer than a Medicare Advantage plan that has limits on the coverage for hospitalizations," says Alan Mittermaier, president of Health Metrix Research. Some Medicare Advantage plans don't cover the first 20 days in a skilled-nursing facility (which traditional Medicare covers); some charge higher co-payments for important services, such as chemotherapy; and some provide limited coverage when you travel out of state.

Mittermaier's firm produces an 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.

The Gammarinos started searching for ways to fill in the Medicare gaps about three months before Art turned 65 in February. They went to a lunchtime seminar and started to learn about the difference between Medicare Advantage and medigap policies.

Since they don't have any medical conditions, they discovered that a Medicare HMO would cost a lot less than their other options, and they were particularly interested in a Humana plan that would cost each of them about $62 per month. "We've been blessed with good health at this point, and it worked for us. It was so affordable compared to what we were paying," says Sue.

But before signing up for the plan, they made sure their primary-care physician was in the network, and they talked with friends who already had the same Humana plan but had a lot of health issues -- and had plenty of opportunities to see the coverage in action. "We figured if it's good enough for them, then it's good enough for us."