Its Medicare Season – Part 2

Health care costs continue to be an important retirement planning consideration.  Last week, we focused on the pending Part B premium increases for 2017 and beyond.  This week, we are highlighting the benefits of choosing Plan G over Plan F for healthy individuals with a Medicare Supplement (Medigap) plan.

Choosing between Medicare Supplement (Medigap) Plans F & G

Most of you who already have traditional Medicare know that Medicare Part A (hospital) and Part B (physicians and outpatient services) don’t cover the full amount of your hospital bill and/or the cost of physician and outpatient services.

The most popular Medicare Supplement plans used nationally to fill the gap are plans C & F.  Both are “guaranteed issue”  plans, meaning that the insurance company cannot refuse you if you purchase  during your “initial enrollment “window”.  The difference between the two is that F covers Part B “Excess Charges” and Plan C does not.  Given this choice, Part F is generally a better option as the difference in premium far outweighs potential Part B Excess charges.  Everyone’s situation is specific, of course, in terms of your health and the plans available in your state.

Plan F’s popularity stems from the fact that it is the most comprehensive plan and fills in all the costs not covered by Parts A & B.  This is also the first plan recommended by many independent agents as it has the most expensive premium and therefore the highest commission for the agent.

Hopefully, most of you who have traditional Medicare also know that, by law, all Medicare Supplement plans of the same “letter” (A, B, C, G, F, K, etc.) sold in any particular state by any insurer must be identical.   There are no networks or referrals or copays and you can see any doctor or hospital that accepts Medicare and each plan pays providers the exact same amount.  The only difference among plans of the same letter in the same state is the monthly premium that a carrier charges.  So it makes sense to simply shop for the letter plan in your state that  has the lowest premium and fits your specific needs.

For clients who are healthy, however, Plan G is a consideration.  In  terms of benefits, he only difference between plans F & G is the annual Part B deductible.  Once you’ve paid the Part B deductible for the year, all of the coverage is identical.

If you comparison shop for lowest premium  F & G plans in your state, then it’s likely that the difference in monthly premium between plans F & G over the course of a year will more than offset the Part B deductible – $204 for 2017.   As long as Plan G’s monthly premium is at least $17 less than Plan F ($204/12 = 17), then you’ll  save money with Plan G.

The above anomaly should make sense when you consider that Plan F is “guaranteed issue”, “first dollar” coverage and Plan G is not.

First, carriers are considering a different “risk pool” when pricing each plan.  The only time you can buy Plan G without medical underwriting (in most states) is when you are new to Medicare Part B and in your initial open enrollment window.  Plan F  is a guaranteed issue plan and so there are a lot more ways people can purchase Plan F outside of open enrollment and without medical underwriting.

Second, because Plan F is “first dollar” coverage, there are no out-of-pocket costs and it is used more frequently by policyholders than Plan G.  Plans with a deductible, as in the case of Plan G, are used less frequently as deductibles effectively serve as a “barrier to care”, meaning that folks don’t want to pay the deductible and therefore forego care.

So in addition to the initial savings you may find when comparing Plan F & G premiums like the above and the fact the lower Plan G premiums generally offset the Part B annual deductible, there are also considerable savings to be realized over time.

The reason is because the rate of annual premium increases for most F plans  has been significantly higher than G plans over time and this is expected to continue  and get worse.  After 2020 (and as a result of the “doc fix” legislation we referenced last week), Medicare Supplement plans will no longer cover the annual Part B deductible as a benefit.  Existing Plan F policyholders can keep their current plan, but Plan F will no longer accept new applicants.  As a result, the pool of Plan F members will  begin to age more so than other plans, which will further drive proportionate claims cost and this will drive up future Plan F premiums.

Plan G has a smaller pool of healthier policyholders who use it less frequently and, as a result, G plans have better claims experience and these savings are built into the initial and ongoing premiums.

Over the many years that comprise a typical retirement today, the lower rate of annual premium increases for Plan G versus Plan F can result in significant savings for Plan G policyholders .

Where this is also particularly relevant is for folks who are over age 65 and still working.  When you are over age 65 and separate from service from your employer, the Medicare guaranteed issue options are typically all that are presented and Plan G is not mentioned.  And many agents will steer you to Plan F.

For those potentially losing their group coverage and/or for those who are otherwise healthy and who have already defaulted to Plan F or are considering a plan for the first time, then the underwriting requirements for Plan G are also not onerous.  There is no physical required, but typically a series of health questions and  sometimes a prescription drug check in order to ensure height/weight requirements and the presence of any declinable (pre-existing) conditions or medications related to declinable conditions (coronary artery disease, stroke, cancer and diabetes complications).   Most carriers will list these conditions on their application, which makes it easy to find what would prevent you from obtaining Plan  G.  Absent any declinable, pre-existing conditions, Plan G is likely a far better value than Plan F.

For those who already have Plan F and are now curious, it is possible to shop for a new Medicare Supplement plan at any time., but there are downsides  to consider. Following the six months after your initial Medicare enrollment period (and assuming that your current carrier hasn’t either gone bankrupt of misled you), then you no longer have a ‘guaranteed issue right’.  So any new carrier can refuse to sell you a new policy, require you to pay more in premiums, deny coverage for up to six months for any benefits in the new policy that are not in your current policy, and exclude coverage for pre-existing conditions or force a waiting period before the new coverage begins.

In short, switching Medicare Supplement policies subjects you to medical underwriting with premiums based on your age and health status.  Underwriting varies from carrier to carrier.  So it’s possible that you could do the same or better than what you have.  They only way to find out is to shop and you can do this  at any time.  If  you find a plan you like and apply, then that’s fine.  Just be sure not to cancel your current policy until you are provided coverage from another carrier.  What you would do is tell the new carrier that you will  cancel the old policy within 30 days of having the new policy (yes, you will pay for two policies for one month).  But it’s worth the 30 days to ensure that you want to keep the new policy and you have 30 days to decide if you don’t want it, at which point you can fall back on the existing policy.

Health care costs can represent a significant portion of overall retirement spending.  As health care costs, including insurance premiums, continue to rise it is increasingly important to proactively manage these costs.

Long term cash flow planning may be particularly impacted by rising health care costs.  To lessen the impact, you could consider setting aside a portion of your investment accounts, that won’t impact your overall spending, to be tapped in the event of higher than expected health care costs occur.

Any funds sitting in a Health Savings Account (HSA) could serve this purpose and, if you are younger than 65, then an HSA may be a good vehicle to invest dollars for future health care expenses, like the Medicare Part B deductible which will no longer be covered by Medicare Supplement policies after 2020.

On an ongoing basis, it’s also important to consider the impact of year to year cash flow on your taxable income.  Delaying income or managing taxable income to lessen the impact of Medicare income surcharges may help.  By proactively considering the effects of health care costs to your retirement spending, the impact of rising health care costs may be reduced.

Please reach out to your ACM wealth advisor with questions on your plan and consider engaging us in a conversation about your long term cash flow if you haven’t already.

Next week, we will provide some quick tips on shopping your Part D coverage (which you should do every year during Open Enrollment).

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