How FEHB and Medicare Work Together in Retirement

The topic of health benefits is an important one, especially for those stepping into retirement.

First, some background on Medicare: let’s start with the age that Medicare becomes a decision for most people.

For federal workers who have already retired, the decision point for Medicare is at age 65. Like most Americans out there, federal retirees can make that decision to join Medicare at 65 or not. A big point that I do want to make here is that Medicare is a choice. It is not a requirement and you are not mandated to join. I will give an exception a little bit later for a special group of people, but for most Americans, they simply get to choose whether joining the Medicare program is right for them.

There are quite a number of things that retirees should take under consideration at this stage of their life. The first natural consideration is their health. The need for proper health insurance becomes very apparent when someone’s health begins to decline and that’s the reason why so many retirees are fearful of the rising costs in retirement.

The Medicare program itself is quite complex. The main parts of the Medicare program are Parts A, B, C and D.

Medicare Part A is hospital insurance. It covers things like inpatient hospital care, skilled nursing facilities, hospice care, lab tests, surgery, home health care on a limited basis, so kind of the hospital coverage that you’ve known to expect.

Part B is medical insurance. It covers things like health care provided services, going to a physician, inpatient care, durable medical equipment, home health care, and preventative services.

Part C is an HMO-style program. It’s also called Medicare Advantage.

These plans often have networks, which means you must see certain providers and go to certain hospitals in the plan’s network to get care. People who are enrolled in Medicare Part C must also be enrolled in Medicare Parts A and B. I will say the HMO-style program is not wildly popular because of its limited providers, but occasionally, there will be someone that this is a good fit for.

Then, the last part is Part D, which is a prescription drug plan, and this offers drug coverage for anyone who is enrolled in Medicare Part A and/or Part B. Federal workers who have FEHB will not need Medicare Part D because prescription drugs are already included in their FEHB coverage.

For this article, I’m going to concentrate on Medicare Parts A and B. Those are the two parts of Medicare that we find federal retirees really have a vested interest in because of the kind of coverage they already have under the FEHB program. Like I mentioned, the Part C HMO-style program is not wildly popular, given its limited service providers. Part D, the prescription drugs, is simply not necessary for federal retirees because they have prescription drugs already built into their FEHB program.

Medicare Part A

As mentioned, Part A covers inpatient hospital care, skilled nursing facility care, hospice, lab tests, surgery home health care on a limited basis, etc. Part A is premium free, meaning you don’t pay anything for it, at the age of 65 for most people. As long as you’ve been contributing to Medicare for at least 10 years of your life, Medicare Part A is free. The Part A decision may be made in what’s called the “initial enrollment period”. It’s essentially the seven months surrounding your 65th birthday, so it’s the three months prior to the month you turn 65, the month you turn 65, and the three months after the month you turn 65. That’s the window that this decision is typically made.

Since Part A is free at 65, it’s my belief that everyone should enroll in it. This includes anyone who has been covered the Civil Service Retirement System, the Federal Employees Retirement System and most other Americans who have contributed to Part A for most of their lives (perhaps without even knowing it because it is automatically calculated in your paycheck).

Most Americans, again including CSRS and FERS employees, have contributed to Medicare Part A throughout their working years. During those working years, we all contribute 1.45% of our pay for Medicare Part A, so the coverage becomes free at 65. What I like about Part A is that this simply adds another layer of protection for hospitalization care that we mentioned before.

However, the enrollment in Medicare Part A is not automatic; it gets a little tricky here. For anyone who is already receiving Social Security benefits, they will automatically be enrolled in Medicare Part A. If for some reason they don’t want Medicare Part A, they have to opt out at that time.

For everyone else who has not started receiving Social Security benefits yet, they must be proactive in their election to enroll in Medicare Part A. For instance, if you decide you want to wait until 67 to draw your Social Security benefits, you’re going to have to tell Medicare at age 65 that you want to enroll in Part A.

Medicare Part B

Medicare Part B covers health care provider services, outpatient care, durable medical equipment, home health care, and some preventative services, so this is the part of Medicare that operates most like an FEHB program would. In 2021, the Part B premium is up to $149 per month per person. If you have a higher household  income, chances are you may pay more than that $149 per month, per person.

Part B premiums are paid either out of the Social Security benefit that you’re receiving (assuming that you’re drawing it at that time), or if you haven’t started drawing Social Security benefits yet, then you’ll pay those premiums directly to Medicare. I do want to make a really important point here. If you choose to keep the FEHB coverage along with Medicare Part B, your FEHB premium will not decrease. This is a very common question we receive in our retirement workshops, so we don’t have any confusion here.

The age 65 mark is a really important period of time, including that seven-month window around your 65th birthday. A Medicare Part B decision must be made once someone has retired from federal service and they are approaching that age of 65. That initial enrollment period, that seven-month window, that’s when the decision is made. It is possible for someone to enroll in these programs after the age of 65. A federal employee can delay their Part B decision beyond the age of 65 with no penalty IF they are enrolled in FEHB AND they’re still working under CSRS or FERS beyond the age of 65.

If there’s no decision made at 65 (assuming one is required at that time with the criteria that we just mentioned), a penalty will apply if you later decide that you wish to enroll in Medicare Part B. The penalty is a 10% premium hike for each 12-month period you have been absent from the plan.  Let’s break that down so we can see an example of what that really means.

If we have someone who delays his Part B decision for 3 years (at age 68) and he decides that he really does want Medicare Part B now, he’s penalized by 10% for every year he missed. In this case, since he was absent from the plan for 3 years from when he was supposed to enroll, he will suffer a 30% premium hike from that point forward. Remember that $149/mo premium that I mentioned before?   He’ll no longer pay this level of premium.  Now, he will pay 130% of that $149/mo premium so that becomes $193/mo.  Again, the longer the delay, the steeper the penalty.

Combo #1: Keep FEHB Only but do NOT Enroll in Medicare Part B

There are different combinations for your FEHB and Medicare Part B coverage, and some advantages to having both programs in place. With the rising cost of health care and health insurance topping the list of concerns for retirees, I hope you can appreciate how important this decision is. Let’s take a look at the three different combinations that you could have between Medicare Part B and FEHB. Combination number one is a retiree decides not to enroll in Medicare Part B and just keep FEHB exactly the way that it is—so FEHB remains their primary (and only) coverage.

This is the “status quo” option that allows retirees to just keep the program that they have right now and simply decline Medicare Part B. Remember, there’s no penalty for not enrolling in Part B, unless later you decide you want to join Part B.

Combo #2: Drop FEHB completely but Enroll in Medicare Part B

Combination #2 is to do the exact opposite of Combination #1. A retiree goes ahead and enrolls in Medicare Part B and he drops FEHB completely and permanently. There are several reasons that I am not thrilled with Combination #2. The first is, in this scenario, the only coverage that is in force is Medicare. Many physicians do not want to see patients when Medicare is the only coverage that they have. The reason being is that the payouts under the Medicare program are relatively low, and physicians would much rather see patients who have full coverage, and therefore, they’re paid more for the services they render. This is a very important distinction from the physician’s standpoint, and whether we like it or not, that’s just the way the world turns out there with physicians, insurance and health care.

The second reason I don’t love enrolling in Part B and dropping FEHB, is that Medicare Part B only pays roughly 80% of covered medical expenses. In this case, the participant would be responsible for the other 20%. With the rising cost of health care, that 20% can be a pretty substantial amount that someone has to pay.

The third reason I don’t love this combination is that when a retiree cancels his FEHB coverage, he may never, ever return. If a retiree were to choose this combination and end up not liking Medicare, perhaps he can’t find a physician to treat him who accepts Medicare (or whatever the case may be), this retiree now has no option to return back to the FEHB plan. Having zero options in retirement for health coverage does not sounds like a great position to be in for anyone.

Combo #3: Keep FEHB AND Enroll in Medicare Part B

The final combination that we have is a hybrid between these two programs (Part B and FEHB). A retiree enrolls in Medicare Part B AND keeps his FEHB coverage in place. On the surface, most people are not excited about this particular combination, because it means that they’re going to be paying both the Part B premium of $149/mo per person and their FEHB premium as well.

This feels pretty steep – but listen up.  There’s planning GOLD that I’m about to share with you.

When you’re weighing different decisions that you have, there are two parts that you need to consider. The first is what that decision COSTS you, and in this case, the decision costs us the premium of $149/mo plus the cost of the FEHB premium. But, that’s only half of the equation when you’re thinking about the real ramifications of this decision. The other half of the equation is what this decision GETS you in return.

This is where Combination #3 really stands out—the scenario where you have Medicare Part B and FEHB coverage in force. If you remember from the previous combination, Part B picks up 80% of covered medical expenses. In Combination #3, since you have another insurance program in force (FEHB), it’s going to pick up the remaining 20% (instead of you paying out-of-pocket). By having Medicare Part B and FEHB coverage in force, you essentially have very limited out-of-pocket expenses like copays, deductibles, and coinsurance.

Out in the private sector, you may hear a lot about Medicare supplements. In some ways, FEHB almost looks like a supplement (in that it picks up the 20% of the remaining covered expenses). Remember, Medicare’s going to pick up 80% and a supplement would pick up the other 20%. That’s the way a Medicare supplement is designed. But, that’s it. That’s all that the supplement is going to cover, and you might be wondering… 80% plus 20%, that equals 100%… isn’t that good? Yes, BUT keep reading…

If you were to receive services or need medical equipment that’s not covered by Medicare, (meaning it’s not an approved charge), Medicare won’t pick up any of it.  By default, the way that Medicare supplements work, since these services or equipment are not covered by Medicare, the supplement can’t pay any of the bill either. It’s only approved Medicare expenses that the supplement will cover.

Here’s where having Medicare Part B and FEHB together really makes a lot of sense.

We’re still under the 80%, 20% rule, so Medicare picks up 80% and FEHB picks up 20%. But, if you receive services or equipment that’s not covered by Medicare, then FEHB steps in to be your primary coverage for those expenses. This is a far better scenario than a traditional Medicare supplement, simply because it helps with those expenses that Medicare simply won’t approve.

Three Considerations for Your FEHB/Medicare Decision

There’s a lot to think about with respect to Medicare and your FEHB plan. The first consideration is your health, both today and in the future. Sometimes at 65, your health looks pretty good and so it might dissuade you from taking on another type of insurance (and another bill). You really want to consider how your health may look over the remainder of your lifetime.  Since we’re living longer, we have a greater chance of needing more health care services as our health naturally deteriorates.

The second consideration is the cost of services that you might need (as well as those out-of-pocket expenses that you’ll be responsible for). Many folks say, “If Medicare picks up 80%, I don’t mind picking up 20%”.  EXCEPT when the bill is really big, right?!  It could be really expensive to not have Medicare Part B, because you’re taking on so much of the responsibility yourself.

The third consideration has to do with how much of the bill you would just prefer to transfer to someone else (like Medicare or the insurance company), instead of taking it all on yourself? Instead of having to pay all those co-pays, deductibles and coinsurance, would you rather those be picked up by making prudent Medicare decisions.

Those are all some big considerations with respect to Medicare and how it combines with FEHB. With any kind of insurance, you’re transferring a risk to the insurance company that you do not want to shoulder yourself. For instance, you do this with automobile insurance and homeowners insurance. You pay the insurance company every month, so that if you’re in a car accident, or your house burns down that the insurance company is on the hook for the vast majority of the cost. Most people would probably like to do that for health insurance as well. Even though nobody likes paying for insurance, everyone likes having insurance when they need it.

Special Exception for TRICARE Recipients

The final note that I do want to make is for any of our readers who are under the military health program called TRICARE. For those of you under TRICARE, you will be required to enroll in Medicare Parts A and B when you turn age 65.   It’s simply part of the requirement to retain TRICARE at 65 (known as TRICARE for Life which is premium-free).  I know I said it was a choice for everybody else earlier in this article, but if a TRICARE recipient fails to enroll in Medicare Part B at age 65, they will permanently lose TRICARE COVERAGE. Hopefully, that helps clarify things for this special audience.

Again, there are some big considerations with respect to Medicare and how it combines with your FEHB program. Be sure you have the right information about your FEHB and Medicare benefits, so you can make informed decisions regarding your health coverage in retirement.