How to Understand Medicare Alphabet Soup

Christine Benz: Hi, I'm Christine Benz for Morningstar. Many people are relieved when they're 65 and Medicare-eligible, but finding the right coverage type takes some thought. Joining me to make sense of what she calls "Medicare alphabet soup" is Maria Bruno. She's head of U.S. Wealth Planning Research at Vanguard.

Maria, thank you so much for being here.

Maria Bruno: Thank you, Christine.

Benz: Let's start with what you call kind of a framework for thinking about Medicare selections. You say that it's really important to take a step back and focus on what you need. And you think it's really a balance of--you're looking at affordability, of course, but you're also looking at flexibility and also the likelihood that you'll have coverage when you need it in a pinch.

Bruno: Right.

Benz: So, let's talk about how people can approach that.

Bruno: Yeah, I mean, it can be overwhelming because you hear "Medicare," and it's just not like one Medicare plan. But we created this framework--and my colleague, Steve Weber, came up with this idea and we turned it into a framework for advisors or individuals to get a little bit more comfortable with the decision-making and all the ins and outs of Medicare. We did a very high-level framework. I will preface this by saying that if anybody wants to learn more that they should go to the Medicare.gov website. It's very user-friendly and a lot of good information as well as personalization of that.

But many of us, when we think about insurance coverage, we start looking at plans and what the plan features are, and what the prices are. And that's not necessarily the right way to do it. It's really to take a step back and think about what is important to you when you think about insurance, and then go and find the plan that matches that. So, our framework really thinks about it in three steps. First is: What are your priorities? Second is: Evaluate the plans that match those priorities. And then, thirdly: Go through the enrollment process and understand what that looks like from a timing standpoint.

So, we think about priorities a little bit. One, maybe overall--affordability. I want to minimize over my lifetime the amount of money that I'm going to pay to insurance for my needs. That may mean that on a year-to-year basis, it might be a little bit different. If I incur medical costs, I might have to pay more in any one given year. But my overall affordability, I feel comfortable with.

The other might be flexibility. Is it important that you can access any type of doctor or a specialist without a preapproval or not having to deal with planned provider networks and things like that? If that's important to you, then that's a factor that you really need to think through before exploring options because you want to make sure you have a match there.

The other might be cost certainty, in terms of, "Hey, I'm on a fixed budget, and I want to make sure what I'm paying for on a monthly basis," or I might want to have this convenience of, "I know I may pay more, but I want to make sure that, you know, I pay for everything, I don't have to worry about coinsurance or any type of deductibles and things like that." So, going through that process can help validate what it is that's important and then you go and find the plan that matches that.

So, Steve and I--we use this analogy about cars. I've been thinking about getting a new car, right? So, it's like when you go to buy a new car, you kind of know what's important. So, I joke I'm like, "OK, well, I know I want an all-wheel drive car, and I know I want a sedan. So, I'm not going to go look at SUVs." That narrows my field. But then I'm like, "OK, well, I don't necessarily want a car where have to pay for premium gas." Well, that narrows my universe even more. And the reality of it is, I may not be able to find exactly what I'm looking for. No plan is perfect. No car is perfect in terms of a match, but I'm going to get as close to it as I can.

Benz: Right. That's a helpful analogy. So, let's talk about that alphabet soup piece, because it's not just one and done. I don't just pick one Medicare plan. I'm looking at a couple of different things. So, Medicare Part A, that's the hospitalization, and then Part B is what might be paid for physician care, correct?

Bruno: Right.

Benz: But that's not going to cover everything, right, those two together?

Bruno: Correct. So, those two together are what we typically call "Original Medicare." Part A is free. Many of us pay for that through deferrals and through taxes during our working years. Part B we pay for in premiums. The two together is what we call traditional Medicare or Original Medicare. And there's no necessarily out-of-pocket. So, if you incur hospital stays, you may have to pay some monies there. There's not necessarily caps on those out-of-pockets there, and then Part B covers about 80%. So, you want to think about, "OK, do I need to insure for the remainder of that?" And many of us should be thinking about, yes, insuring that.

Then there's also Part C, which is Medicare Advantage plans. So, these are private companies that contract with Medicare to basically offer Part A and B, but then they also offer things like dental, vision, maybe gym memberships. Then there's Part D, which is basically the prescription drug plans. So, those come together when we think about the Medicare alphabet soup. Those are the four big ones.

Benz: Right. So, regarding the Part D, what about people who have very few drugs that they take and, so, they are sort of looking at the cost of that Part D insurance versus just maybe going without? How should they size up that decision-making?

Bruno: First and foremost, I mentioned the Medicare.gov website. You can actually go in there and put in your prescriptions. So, one: Know what your needs are, again. What are your regular drugs? Put those in. They can do a plan match for you if you're looking for Part D. And then, you can make the decision of, "Do I take a lot of pills? Are they expensive? Are they brand versus generic? Do I want to insure this risk or not?" And then figure out which plan is most convenient. The thing I will say with Part D is, you do want to validate that every year because networks change, the drugs move off of different types of lists. So, if you do--with any of this, really, once you make your decision, you still want to take a look at it on an annual basis. But certainly, with Part D, you want to take a look at that and just make sure that it's economical for you as well. And that will vary by individual.

Benz: And how about thinking about that supplemental insurance policy? The good ones can be a big-ticket item in many retiree households. How should they approach the right policy for them?

Bruno: I think one way to think about it is whether or not to take advantage of a Medicare Advantage plan. They offer the Medicare Part A, B, and probably D as well. These are HMO, PPO type plans. They may be very beneficial from an overall affordability standpoint, but they may not offer as much flexibility because you may be limited to provider networks and things like that. So, that's one decision point.

The other supplemental policy is maybe Medigap policies. So, there's another alphabet soup there. These are plans A through N. These are not Medicare plans. They are Medigap plans. So, it's important distinction there. But basically, they are meant to cover what Medicare doesn't cover. And there it's important to understand, you know, in terms of there's high-deductible supplemental plans--where you may have lower premiums, but when you do incur medical costs, you might have to pay more out of pocket. And then they're more-comprehensive first-dollar coverage type plans, like a Medicare Part F or G--that basically you have to pay higher premiums, but they're more broad in terms of coverage when you do incur those medical expenses. Again, you could go to the Medicare website and help navigate a little bit more. But understanding which of those features are important can help then narrow down that field.

Benz: So, how about enrollment? You mentioned that it's important, at least with the prescription Part D coverage, to kind of re-shop that every year. But how about the first enrollment? I think people get very confused about when they should be signing up for Medicare.

Bruno: Yes. It's not when you turn 65 on your birthday.

Benz: So, don't wait till your birthday?

Bruno: No, don't wait for your birthday. So, the way it works in terms of the initial enrollment is--if you want coverage to start at age 65--you basically have a seven-month window for the initial enrollment. Three months before turning 65, your birth month, and then three months after. So, that's really your window to sign up. If you want coverage to start at age 65, you want to do that three months in advance. But that's your window. If you miss that window, then there's an annual enrollment period January through March. The challenge there, though, is that coverage doesn't begin until July. So, the downside is, one, you may not get coverage when you need it. There may be a gap. And then, secondly, if you delay, you may incur some surcharges that will carry on through your life on these premiums. So, do your homework there. But if you're still working and you have employer coverage, then you can certainly wait until you retire. But you want to coordinate the Medicare start with when you actually retire so you don't have a lapse of coverage. So, that's one thing.

And then, once you're enrolled, there's the annual enrollment season, which is Oct. 15 through Dec. 7. This is really your window to make sure that the plan you have meets your needs. So, if you want to make a change in your Medigap policy, for instance, or you want to move to a Medicare Advantage plan or vice versa, that's your window to do that. A word of caution there in that if you do make some changes, you might have to go through an underwriting process. So, your cost may be different or you may actually be denied coverage. So, make sure you understand what the decisions of that impact would be during that window. And then Part D as well: Networks change, coverage changes, formulary drugs change as well. So, it's important to relook at those every year as well.

Benz: Maria, always great to get your perspective. Lots of moving parts here. Thank you so much for being here to unpack them for us.

Bruno: Thank you. Good to be here.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.