Three Steps Federal Retirees Can Use to Decide Whether to Enroll in Medicare Part B

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Many retiring federal employee with a Federal Employee Health Benefit plan (FEHB) plan are unsure whether they should enroll in Medicare Part B once they leave federal service.

Medicare Part B provides insurance for physician and outpatient services. Your FEHB plan has covered these services in the past and will continue to be so even after becoming Medicare eligible.

Medicare Part B has a monthly premium of $144.60/month premium (2020 rate). But if your adjusted gross income is greater than $87,000 (single) or $174,000 (joint), you may be required to pay a surcharge that increases the monthly premium.

So, how do you decide whether to sign up for Part B given the additional cost?

One approach is to compare the annual Part B premium with the potential out-of-pocket costs you could incur under your FEHB plan. Use the following three steps:

  • Figure out your annual Medicare Part B premium.
  • Determine your FEHB out of pocket cap. This is the most you’ll pay in any one year for co-pays and other cost sharing but not the monthly premium.
  • Compare the two numbers. It doesn’t make sense to enroll in Part B if the annual Medicare Part B premium exceeds the out-of-pocket cap. But if its the other way around, you’ll look at your health status.

Medicare Background

Medicare is the federal government’s health insurance program for people who are 65 or older. It also covers certain younger people with disabilities, and people with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant, sometimes called ESRD).

Medicare has two basic options: Original Medicare or a Medicare Advantage Plan (a Medicare Health Maintenance Organization (HMO)).

Federal employees should stick with Original Medicare. I don’t recommend getting out of your FEHB plan and using a Medicare Advantage Plan.

Original Medicare includes Medicare Parts A and B, which are fee-for-service plans. Medicare fee-for-service means you can receive services from any physician, hospital, or clinic that accepts Medicare (which most do). You can also purchase a private Part D plan that covers prescription drugs.

Most federal employees with an FEHB plan will sign up for Part A (hospitalization). Part A does not have a monthly premium. Part A includes coverage for inpatient hospitalization, some skilled nursing care (but not long-term care), hospice, and home health care. It doesn’t cover the physicians you see in the hospital however. You need Part B for that.

Most federal employee won’t purchase a prescription drug plan because they will keep their FEHB coverage. FEHB drug coverage is better than standalone Part D prescription drug plans.

The question is whether to sign up for Part B which covers physician services, other health care professionals such as physical therapy and podiatrists, and outpatient services.

You’ll want to compare the costs of Medicare Part B with the out-of-pocket cap in your FEHB plan to help you decide the answer.

Step 1: Determine your annual Part B premium cost

The Part B monthly premium is $144.60 (2020 rate).

If your adjusted gross income exceeds $174,000 (joint) then you will have to pay a Part B premium surcharge. Medicare assesses the surcharge based on your income from two years earlier (e.g., the surcharge you pay in 2020 will be based on your 2018 adjusted gross income). The bullets below show the premium for various adjusted gross income levels.

  • Below $174,000 = $144.60
  • $174,001 – $218,000 = $202.40
  • $218,001 – $227,000 = $289.20
  • $272,001 – $326,000 = $376.00
  • $326,001 – $750,000 = $462.70
  • Above $750,000 = $491.60

For example, if you adjusted gross income is $200,000 then your monthly premium will be $202.40/month or 2,428.80/year.

Step 2: Determine the out-of-pocket cap for your FEHB plan

Every FEHB plan has an out of pocket cap. Sometimes the out-of-pocket cap is called the catastrophic cap. This amount is the most you’ll pay under the plan for services covered by the plan. These are your co-pays, co-insurance and other charges. It doesn’t include your premium. For example, the Blue Cross Blue Shield basic option (Plan 111 see page 33) has a $5,500 out-of-pocket cap for a self-only policy if you use preferred providers. This means the most you’ll pay in co-pays, coinsurance is $5,500/year for preferred providers.

You should have a plan summary document that lists the annual out-of-pocket cap.

Step 3: Compare the annual Part B premium to the out-of-pocket cap.

In our example, compare the Medicare Part B premium of $2,428.80 to the out-of-pocket cap of $5,500. You know you’ll pay the Medicare Part B premium but you may not have enough expenses to come up to the out-of-pocket cap each year. It’s a best guess based on your health status and the potential for using services that could cost up to $5,500/year.

If you are in good health and don’t enroll in Part B, you can save the forgone Medicare Part B premiums and then use them for any co-pays should you have to pay them.

If you decide to sign up for Part B, then you may also want to lower your FEHB plan costs and go to a cheaper FEHB plan. You can change plans, even as a retiree, in the open enrollment period each year. There are a range of plans with various premiums and out-of-pocket caps.

One final point, if you don’t sign up for Part B within 8 months of retiring and you decide later to do so, then there is a 10%/year additional charge for signing up late.

I don’t know if there is a wrong answer here but more of a comfort level. Some folks like to make sure their health care is fully insured while others are okay with a little less coverage (e.g., no Part B) because they have sufficient assets to make up any shortfall should they need services.

Its your decision but consider your FEHB plan’s out-of-pocket cap in your decision making.

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