For many clients, Medicare is an afterthought. "We spend little time talking about health insurance for clients in their working years," says David Lamp, a planner with BBJS Financial Advisors in Seattle. "Many are covered by employer health plans, so they don't pay attention."
That all changes as clients come closer to making Medicare decisions, Lamp says. "Suddenly our meeting agenda leads off with discussions of medical coverage."
Such discussions are likely to become more common. The oldest baby boomers turn 65 in this year-the age when Americans become eligible for Medicare.
DECISIONS, DECISIONS
As the boomers hit 65, they'll have to make critical decisions. "From the start, enrollees are confused," says Linda Patchett, a planner with Woodward Financial Advisors in Chapel Hill, N.C. "This year, the primary Medicare publication, Medicare & You 2011, is 136 pages. It's overwhelming."
There is an alphabet of Medicare plans to choose from. Part A (hospital insurance) is typically automatic. Part B covers doctors' bills and other outpatient services. Part C, also known as Medicare Advantage, consists of plans from private firms that wrap around Part B. Part D offers prescription drug policies offered by private firms.
With original Medicare, seniors get to choose doctors and hospitals, but there are coverage gaps. Often they'll turn to Medicare Supplement (Medigap) plans and Medicare Part D prescription drug policies. Medicare Advantage may include Part D drug coverage too. Most states offer several Medicare Advantage, Medigap and Part D plans.
Lamp sends a healthcare timeline to clients approaching Medicare age. It says, "Open enrollment for Medicare starts three months prior to your 65th birthday and stays open until three months after your 65th birthday. Medicare Part A [hospital insurance] is typically automatic, but all other Medicare decisions need to be made during this time."
Failure to make those decisions at the right time can be costly. "It is important to apply as soon as you are eligible," says Bedda D'Angelo, president of Fiduciary Solutions, a financial planning firm in Durham, N.C. "If you don't have retiree healthcare coverage through your employer, you need to sign up for Part B, which is your major medical. She adds that many people decline Parts B and D when they first apply for Medicare and later discover they need the coverage after all. "Every day you wait permanently increases the cost of your monthly premiums."
CHANGING TIMES
While making initial decisions on time is vital, the need for decisions-and for ongoing counsel from advisors-does not disappear. "Most people who are already enrolled in Medicare should review their coverage at the start of Medicare's annual open enrollment period (OEP)," says David Armes, principal at Dover Financial Planning in Long Beach, Calif. "In 2011, the OEP is from Oct. 15 to Dec. 7."
Previously, the OEP was from Nov. 15 through year-end, so Medicare enrollees should be aware of the change. During the seven-week OEP, seniors can move to and from Medicare Advantage, Medigap and Part D drug plans.
Client situations and plan details can change from year to year. Clients may keep a plan that is no longer appropriate or is too expensive, so it makes sense to reconsider options each year, says Scott Neal, a planner in Lexington, Ky. "Last year, for example, I reviewed one client's Medicare Supplement policy and cut the premium cost by 55% ," he recalls.
Armes says that seniors who don't have employer plans can often save substantial amounts by switching to the lowest-cost Part D plans for the specific drugs they take. "Many retirees choose a plan because it has low premiums," he says. "But a high-premium Part D plan often will have the lowest annual cost for specific drugs."
Even if retirees choose a Part D plan that is the lowest-cost plan for their drugs, they should review it in subsequent years, Armes suggests. They may have changed the drugs they take, and the drug plans may have changed their formularies (drugs covered by the plan). "One study found that only 6% of the people in Part D plans were in the lowest-cost plan for the drugs that they take, while the other 94% averaged paying $520 more a year than they should have paid," he says.
PREMIUM PLANNING
Besides plan selection, advisors also can help clients with income-based Medicare premiums. This year, most Medicare enrollees pay $96.40 a month for Part B.
However, some seniors pay anywhere from $161.50 to $369.10 a month, depending on income levels. Those are per- person premiums; thus, a married couple with joint income just over $170,000 in 2011 would pay a total of $323 a month (nearly $3,900 a year) for Part B, if both are enrolled. Their neighbors, with income just under $170,000, might pay about $2,300 a year for Part B.
Patchett reminds planners that tax-exempt income will be included in MAGI (modified adjusted gross income) to calculate the Part B premium. Thus, Roth IRA conversions and capital gains will affect future premium expenses.
"The bill for the increased premium comes due two years later, so the connection is often overlooked," he says. That is, income reported on a 2011 tax return will determine Part B premiums in 2013.
Mary Brooks, a planner in Colorado Springs, Colo., says that the higher Part B premium can be a "real shocker" to clients. Planning for Part B premiums also is a discussion item for Clarissa Hobson, a planner who conducts Medicare strategy for clients of Carnick & Co., a financial advisory firm in Colorado Springs. One client was able to time the receipt of a severance package, thus "smoothing out" the receipt of that income across several years to decrease Part B premiums.
Another client could withdraw either taxable or tax-free income from a traditional or a Roth IRA. The client decided to take tax-free cash from the Roth IRA in years where other income would push up Part B premiums. Taxable income from retirement accounts will be taken in years when the client isn't receiving income from other sources. "Managing the timing of income is the key," Hobson says.
The healthcare reform law passed last year makes such planning even more important. "Part D premiums are now income-tested as well," Armes points out. Beginning this year, upper income enrollees will pay an extra $12 to $69.10 a month for Part D. The income definitions and breakpoints are the same as they are for Part B, so the same clients will be affected. Planning around capital gains and Roth IRA conversions may save your clients money if they can remain under specific MAGI levels.
Armes adds that last year's healthcare reform law also froze MAGI levels until 2020. The Kaiser Family Foundation projects that 14% of Part B enrollees will be subject to the income-related Part B premium in 2019, up from 5% in 2011, and a similar hike will occur for Part D premiums. If clients aren't affected now, they might have to deal with higher premiums in 2015 or 2016, when income from 2013 or 2014 will boost their Medicare costs.
COMPLICATING FACTORS
Other provisions from last year's healthcare reform law may further complicate planning for Part B and Part D premiums, according to Peter North, a planner in Bath, Maine, and Fleming Island, Fla. He anticipates an increase in capital gains tax rates from 15% to 20% in 2013, as well as a 3.8% surtax on investment income, from the healthcare law, which takes effect that year.
"The aggregate tax increase is likely to have a chilling effect on the equities markets," he says. "So we'll be taking some gains now to take advantage of today's rates and avoid market stagnation." He adds that such sales need to be balanced with the potential for temporary incremental Medicare costs due to accelerated income. "We will try to mitigate the impact on Medicare premiums."
Still other provisions from last year's healthcare law might impact Medicare planning. "The new law requires Medicare to cover fully all recommended preventive tests and an annual physical, effective this year," Armes says. Prior to 2011, Medicare supplemental policies with higher cost-sharing were less attractive because retirees had co-payments or co-insurance for some preventive tests.
In 2010, for instance, Medicare paid only 80% of the costs of mammograms and colonoscopies. Retirees in plans with higher cost sharing often had sizable co-pays for such tests. Now with Medicare paying the entire cost of all recommended preventive tests, lower-premium but higher cost-sharing plans have become more financially attractive. They include the four newest Medigap plans (K, L, M and N) as well as the high-deductible version of Plan F.
Therefore, it may be time for planners to go over clients' Medigap policies or to consult with someone who specializes in that area. "Last year's health law has demonstrated that things change, sometimes quite dramatically," Lamps says. With baby boomer clients entering the age of Medicare, it will become increasingly important for planners to keep up with the inevitable new wrinkles.
