Turning 65? Beware of Medicare traps for the unwary

Many people celebrate turning 65 because that makes them eligible for Medicare, and they anticipate enjoying a reduction in their health care costs -- both for insurance premiums and out-of-pocket expenses. While these desirable outcomes might happen, it pays to look ahead and consider the possible long-term consequences of the decisions you’ll be making when you reach age 65.

In some circumstances, the choices you make now could close off potential choices you might want to make in the future.

Your first decision

You have a seven-month initial enrollment period to sign up for Medicare. It begins three months before the month you turn 65, includes the month you turn 65 and ends three months after that month.

You have two basic choices when enrolling:

  • Traditional, or original Medicare. With this option, Medical care is provided on a fee-for-service basis, and you can choose your medical providers, as long as they accept Medicare patients.
  • Medicare Advantage (MA) plans. With this option, you typically receive medical services through a medical provider network, similar to an HMO or PPO.

Many people who choose original Medicare also purchase a supplemental plan called Medigap to help pay for Medicare deductibles and co-payments. Because traditional Medicare doesn’t pay for prescription drugs, you’ll also need to purchase a second, separate plan under Medicare’s Part D. Both Medigap and Part D plans require additional monthly premiums.

MA plans typically provide more comprehensive coverage than traditional Medicare, so there’s usually no need to purchase a supplemental Medigap plan. Most MA plans also cover prescription drugs, so you only need to buy coverage from one health care provider to cover all your costs. 

The trap for the unwary

Many people turning age 65 choose a Medicare Advantage plan (MA) because they want a lower monthly premium than might be possible with a Medigap plan. One disadvantage of MA plans, however, is that you’re usually restricted to using the providers in the plan’s network. Many people don’t focus on this restriction if they’re currently healthy and don’t spend much time or money with medical care.

The potential challenge comes when you reach your 70s or 80s, begin incurring serious medical conditions and want the freedom to choose your providers. In this case, you could incur substantial out-of-pocket expenses with your MA plan through its deductibles, co-payments and co-insurance. 

Another problem can arise if you begin taking more prescription drugs. That can make your out-of-pocket costs increase substantially under the MA plan’s drug formulary. 

In these situations, you might want to switch back to original Medicare and purchase a supplemental Medigap policy and Part D prescription drug policy. The trouble is, in most states, this choice may not be available to you.

When can you switch plans?

Let’s take a look at the circumstances under which you can change your plan under Medicare. Each year, during Medicare’s open enrollment period (from Oct. 15 to Dec. 7), you can switch from:

  • original Medicare/Medigap to an MA plan,
  • one MA plan to another MA plan,
  • an MA plan to original Medicare (but not a Medigap plan, see below), and
  • your Part D prescription drug plan to another plan, if you’re in original Medicare.

The problem comes when you want to switch from an MA plan to a Medigap plan that supplements traditional Medicare, or from one Medigap plan to another Medigap plan. Most states allow insurance companies to apply medical underwriting in this situation. Connecticut, Massachusetts, and New York are the exceptions. If the insurance company finds you to be in poor health, it can increase your premiums or even deny coverage outright.

In limited circumstances, you’re allowed to switch out of an MA plan into a Medigap plan without medical underwriting, including these:

  • If your MA plan no longer serves your area
  • If you move to an area not served by your MA plan
  • If you enrolled in an MA plan for the first time and want to switch within the first 12 months

For a more detailed description of the various circumstances under which you can switch plans, see this informative post from the National Council on Aging’s My Medicare Matters. For details on situations in which an insurance company can’t refuse to sell you a Medigap policy, see this page from Medicare’s website.

Take the time to consider your options

Even if you’re healthy now, you may want to keep your options open by enrolling in original Medicare and a Medigap supplement plan when you reach age 65. This can give you more options when selecting health care providers if you incur serious medical conditions in your 70s or 80s. 

On the other hand, if you’re happy with your preferred provider network and enroll in an MA, at least you’re aware of possible restrictions you might encounter in the future. 

Some people end up in an MA plan through so-called “seamless conversions,” in which your health insurance company automatically converts your pre-age-65 policy to a MA plan at age 65 in an attempt to provide you with continual coverage as you transition to Medicare. If this happens to you, you have the freedom to decline the automatic plan and make a conscious election for a different plan.

“Open your mail from your insurance company as you approach age 65,” advised Diane Omdahl, president of Sixty-Five Inc., an advisory firm that for a fee helps consumers choose MA and Medigap plans. “Many people are deluged with solicitations as they approach Medicare eligibility, but it’s a mistake to throw away that notice from your current insurance company.” Insurance companies are required to inform you about seamless conversion and your rights.

One more potential trap

If all these complications weren’t enough, here’s another possible trap: You must stop contributing to a Health Savings Account (HSA) when you enroll in Medicare. In the year you reach age 65, your maximum HSA contribution is prorated based on the period before your 65th birthday. If you contribute more than the maximum allowed, the excess contribution is included in your taxable income, and a 6 percent excise tax may apply. 

It’s possible that your HSA administrator won’t automatically shut off your contributions or notify you when you turn age 65, so you’ll want make sure you stop contributing before your birthday.

Whew -- there’s a lot to consider when you reach age 65. You’ll serve yourself well if you spend the time needed to take care of this business. Then, you can go celebrate that you’ve made it this far!

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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.