Should you buy Medicare Parts B and D?

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(MoneyWatch) Welcome back to my series of posts this week on enrolling in Medicare and buying medical insurance once you reach age 65. This post continues with the series of steps you should take to make sure you're covered for medical expenses.

First, figure out whether you should buy Parts B and D. If you want Medicare coverage under Parts B and D, you'll need to pay monthly premiums for these benefits. Are they good deals? Is it worth paying the premiums?

Yes is the short answer, but there are a few exceptions and details. Part B coverage (physician and outpatient coverage) is a good deal overall. The basic premium you pay only covers about one-fourth of the cost; the federal government pays the rest through general revenue.

For new retirees, the monthly premium in 2013 for Part B benefits is $104.90 if your total taxable income in 2011, plus tax-exempt interest, is below certain thresholds ($85,000 if you're single; $170,000 for a married couple). If your income exceeds these, your Medicare Part B premiums can range from $146.90 to $335.70, depending on your taxable income. FYI, there's a two-year look-back on your income for administrative purposes.

Part D benefits (coverage for prescription drugs) provide essential coverage, since most retirees take prescription drugs. The monthly premiums can range from $20 to $50, but it's possible you might pay higher amounts, depending on the features of the plan you select and your geographic location.

As I mentioned in my previous post, if you're working beyond age 65 and receive medical coverage from your employer as an active employee, you may not want to enroll and pay premiums for Parts B and D until you retire. At that point, signing up for both of these benefits is probably a good idea, since the price you pay will most likely be less expensive than any other medical insurance coverage you can find.

Shopping for Part D coverage

If you decide to purchase Medicare Part D coverage, you'll typically buy it from an insurance company or as part of a Medicare Advantage plan (Medicare Part C). There are many companies that offer Part D benefits, but the premiums, benefits and features can vary significantly by plan, so you'll need to do some research to find the right plan for you. One of the most important features to consider is the plan's formulary -- the list of drugs that the plan covers. If you take a significant number of prescription drugs, you'll want to carefully compare the drugs you take to a plan's formulary to make sure the medicine you take is covered.

The standard Part D prescription drug plan has significant gaps in coverage, including the hated donut hole, which means you have the potential to pay thousands of dollars out of pocket, even if you have Part D coverage, in order to get the medicine you need. For example, if your total drug costs exceed $2,970 in 2013, you might be paying 100 percent of the costs until your total out-of-pocket costs for drugs reach $4,700; at that point, you'll be eligible for catastrophic coverage, and you'll pay only a small part of your remaining costs. Make sure you completely understand the features of the plans, including how the donut hole affects your coverage, before choosing any of them.

There are online shopping tools that can match you with the plans that offer the best coverage based on the medications you're currently taking. Again, it's well worth your time to shop around and consider the strengths of various plans, particularly if you take a significant number of prescription drugs and they're critical to your health. Also, be aware of the sponsor of the various tools you may use -- there could be some bias. You may want to start with tools sponsored by Medicare or other nonprofit organizations that advocate for seniors.

One more thing: There's a possibility you could substantially reduce your out-of-pocket expenses for prescription drugs through healthy lifestyle choices regarding your diet, exercise and stress management. I suggest you do everything in your power to reduce your reliance on prescription drugs; you'll save lots of money, and you'll be healthier as well.

Do you need a Medigap or Medicare Advantage plan to supplement Medicare? See my next post for answers.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.