The ABC's...and D's of Medicare & Medi-Gap Insurance by: Paul M. League, QFP, CFP®

The Medicare Modernization Act, which was passed in December 2003, adds new prescription drug benefits for Medicare beneficiaries via a new Medicare Part D prescription drug plan which becomes effective January 1, 2006.

Choices for people who are eligible for Medicare depend on whether their existing employer provided plan or their Medicare supplemental plan (better known as "Medi-Gap" plans for picking up the "gaps" in Medicare Parts A, B and C) offers "creditable" or "non-creditable" prescription drug coverage. A plan’s prescription coverage is creditable if it is equal to or better than the new standard Medicare prescription coverage via Part D (Check with your present insurer to determine this).

We’ll get into the specifics of the Medicare Part D, but first let’s look at Medi-Gap, which is designed to pick up gaps in Medicare benefits, and is available in 10 standardized plans; namely, Plans A- J (except in Maine, Minnesota, and Wisconsin). Required disclosure charts give consumers a very clear picture of the differences among each of these plans. Private insurers are not required to sell each model plan, and can pick the ones they wish to market. Prices vary greatly from one company to the next, depending on their own pricing and marketing considerations.

Medi-Gap plans are available on a guarantee-issue basis to people between 64 _ to 65 _ who are covered under both Medicare Part A (hospital insurance) and Part B (medical insurance). With guarantee issue, there are no health questions and no pre-existing condition limitations.

Most working people are covered automatically under Medicare Part A. They become eligible for Part A hospital insurance through engaging in Medicare-covered employment. The minimum amount that must be earned for one to be covered to receive Social Security benefits is $920 in 2005 ($970 in 2006), along with at least 40 quarters of Medicare-covered employment to receive premium-free Part A coverage (see chart below).

The premiums and deductibles are indexed annually (the 2005 & 2006 Social Security tax rate is 7.65%; the self-employed tax rate is 15.30%; and the taxable wage base is: $90,000 ($94,200 in 2006).

What about those who obtain Part A, but delay going onto to Medicare Part B after turning 65? The right to guarantee-issue starts with their Part B effective date and ends six months later, which is referred to as "Open Enrollment." For all others, the plans are medically underwritten. Once you have a Medi-Gap plan in California, Law SB 2043 also permits a change in plans on a guarantee-issue basis, but only to a plan of equal or lesser benefits and then only within 30 days of any age change.

HMO Forms of Medi-Gap Insurance
The HMO forms of supplemental coverage are different since they typically require no premiums. This is because they accept Medicare assignment from the government in exchange for a hefty monthly government-paid dollar allocation. HMOs require consumers to sacrifice freedom in choosing doctors since they must receive all benefits through their discounted contracted providers, but in return, they generally offer more benefits.

Some of the various state Blue Cross and Blue Shield plans offer their own versions of the standardized Medicare supplement plans. These are referred to in law as "Medicare C plans" and go by the name "Medicare Advantage plans" (heretofore also known as Medicare Plus plans). These plans require consumers to use specific doctors and hospitals. A carrier must meet the standards of any Medicare standardized plan, but may exceed it to customize their own offerings; hence, the name "Advantage" plans. Beginning in 2006 there will be PPO offerings in these plan types which will provide greater doctor choice and flexibility for those selecting this plan type.

Which Plan is Best?
Which of these standardized plans is best suited to your needs? The answer often centers on the need for prescription benefits. Before January 1, 2006, the only plans offering prescription benefits were plans H, I, and J. The benefits of these plans are limited, with the J plan offering the most in prescription benefits. After January 1, 2006, these plans may no longer be issued and are considered "non-creditable" for Medicare Part D.

Most people who don’t need prescription drugs or don’t foresee the need for them will only consider plans A through G, with many finding that Plan C is the most cost effective overall. Under the limiting fee charge law, doctors who accept Medicare assignments (and most do today) cannot charge more than the Medicare allowable fees. Therefore, standardized plans F, G /I, and J plans may be less appealing, since they charge higher premiums because they offer coverage covering such excess charges.

For many, saving premium dollars and paying for their own prescriptions is a better buy. The theory is that it’s cheaper to pay the prescription costs yourself and save the premium over trading dollars with an insurer.

If prescription coverage is critical to you, another option is to buy a supplemental prescription discount card from a private vendor or set up an investment side fund to pick up any gaps, such as prescription costs related to unforeseen needs. After awhile, the side fund may grow bigger than what’s needed and could be drawn down for other income or lifestyle needs. However, the side fund approach may not work as well for those over 75 because of their shortened life expectancy.

High Deductible -- Medi-Gap Plans (Standardized F, K & L Plans)
Medicare allows insurers to offer high deductible Medi-Gap plans. Most of these offerings are in the standardized Plan F design. Benefits of the standardized Plan F remain, except there is a higher deductible of $1,730 in 2005 ($1,790 in 2006) -- indexed annually. Premiums are reduced substantially with these high-deductible plans.

Certain insurers report that 70% to 80% of their standardized F Plan claims average under $600. So, for many, it makes sense to buy the newer and less expensive high-deductible Plan F, or similar offerings, over the other plans. The premium savings between the higher cost standardized Plan F and the newer, lower cost high deductible F plan, can almost entirely pay for the higher deductible exposure. This is especially true when you multiply this savings over several years of averaged catastrophic claims.

New Prescription Options – the New Medicare Part D – January 1, 2006
As of January 1, several options will be available for those enrolled in Medi-Gap plans. Under the new legislation, you have the following options:

If you do not have creditable coverage (which the old Plans H, I and J are not after 12/31/05) or you are enrolled in a Medi-Gap plan without prescription benefits, you have to enroll in a Medicare prescription drug plan before May 15, 2006 to avoid a premium penalty (Failure to pay premiums from when you were eligible but chose not to). The late enrollment penalty is a cumulative, lifetime penalty. (You can have a Medi-Gap plan with one company but buy your Part D coverage from any other CMS approved company as you so prefer.)

Who is Eligible for Part D?
Anyone who is newly eligible for Medicare by turning 65, for example, can enroll in a Part D benefit up to three months before their birth month or three months after their birth month. You must be entitled to Part A, or be enrolled in Part B.

The following are some important dates and time frames:

Under Medicare Part D, carriers can offer: standard, actuarially equivalent, or enhanced benefit designs, such as the following:

(Note: All benefits are calculated on an annual basis. All dollar amounts shown above will change annually to reflect inflation increases in prescription drug prices. Assuming full utilization, the beneficiary could be exposed to out-of-pocket expenses of over $3,600, considering the deductible, co-insurance/co-payments, and actual drug prices in the year of claim).

Included Drugs
To be covered under Part D, the drug must be available only by prescription, approved by the FDA, and used and sold in the U.S. for a medically accepted purpose. Formulary drug lists may be used, but they cannot discourage enrollment among certain groups of people.

Excluded Drugs (Non-Medically Accepted Purposes):

We hope that the above overview of Medicare, existing Medi-Gap Insurance Plans, and the New Part D Medicare Prescription Drug Plan is helpful. Please evaluate any Medi-Gap offerings carefully and prior to any purchase by first fully reading such required plan documents as the plan brochure, outline-of-coverage, guide to health insurance for people with Medicare and any replacement form (as applicable).

Paul M. League, QFP, CFP® is the principal of League Financial & Insurance Services / LeagueFinancial.com, and a registered representative and investment advisor representative with Royal Alliance Associates, Inc., Member NASD/SIPC, a Broker/Dealer & Registered Investment Advisor. Paul has specialized in wealth creation, preservation, and expansion through individual and group benefit programs for over 20 years. He can be reached at 332 S. Beverly Drive, Suite #101, Beverly Hills, CA 90212, phone (310) 277-3141; www.LeagueFinancial.com ;E-mail: Paul@LeagueFinancial.com.

Disclaimer Notes: The material discussed is meant for general illustration or informational purposes only and is not to be construed as investment or tax advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary; therefore, the information should be relied upon only when coordinated with individual professional advice. We do not provide tax or legal advice. ©Paul M. League. All Rights Reserved.