Federal retirement expert, Chris Kowalik, provides insight and tips on how the Federal Employees Health Benefits (FEHB) program and Medicare work together in retirement.
Key takeaways:
- The two parts of Medicare that retiring federal employees should be most concerned about
- Important tips on Medicare eligibility and enrollment
- Pros and cons of having both FEHB and Medicare in retirement
- A look at three different FEHB and Medicare combinations — and their advantages and disadvantages
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Scott Thompson: Hello and welcome to this episode of FedImpact, candid insights on your federal retirement. I’m Scott Thompson with Myfederalretirement.com and I’m here today again with Chris Kowalik of ProFeds, which is home of the Federal Retirement Impact Workshop. Today, we’re going to be talking about the Federal Employee Health Benefits program and the Medicare program and how they work together in retirement. Welcome, Chris.
Chris Kowalik: Happy to be here. Thanks, Scott.
Scott Thompson: In the last podcast episode, we talked about the federal employee health benefits program and how it works in retirement. In today’s episode, we’re going to focus specifically on Medicare and how it integrates with the FEHB program.
Scott Thompson: Okay. That sounds great, Chris. Let’s get started, first, with a little bit of background on Medicare.
Chris Kowalik: Yeah. To give our listeners some background on Medicare, let’s start with the time of your life that Medicare becomes a decision. 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 in the podcast to a special group of people, but for the vast majority of Americans, they simply get to choose whether joining the Medicare program is right for them.
Scott Thompson: Okay. What are some of the things that someone should be thinking about with respect to joining Medicare?
Chris Kowalik: 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. Oftentimes, we find that retirees are relatively healthy at the age of 65. Let’s hope that they are. And, they decide to decline some of the coverage provided by Medicare at the time, but since we as a society are living longer, many folks find that their health deteriorates later in life and then they look back and wish they had made a different choice on Medicare.
Scott Thompson: What are the main parts of Medicare that you are going to discuss today and can you give a brief explanation of what each of them is, so everyone can be somewhat familiar with them?
Chris Kowalik: Yes. The Medicare program itself is actually quite complex. The main parts of the Medicare program are Parts A, B, C and D. Let’s briefly talk about each one and then we’re going to dive into two of them a little bit deeper. 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 we’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, that type of care.
Scott Thompson: Okay.
Chris Kowalik: And, preventative services, that type of thing. Part C is an HMO style program. It’s also called Medicare Advantage. These plans often have networks, which means you have to see certain providers, go to certain hospitals in the plan’s network to get care, so people who are enrolled in Medicare Part C must also be enrolled in Medicare Parts A and B. Okay? I will say the HMO style program is not wildly popular because of its limited providers, but every once in a while, we’ll have somebody 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. For today’s episode, we’re really going to hone in on Medicare Parts A and B. That’s the part of Medicare, the two parts of Medicare that we find federal retirees really have an invested 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 the prescription drugs, they already have built into their FEHB program.
Scott Thompson: Okay. That’s a good overview to get started. I guess it probably makes logical sense to start with Part A. What do our listeners need to know about Medicare Part A?
Chris Kowalik: Yeah. Like I mentioned in the introduction, Part A covers inpatient hospital care, skilled nursing facility care, hospice, lab tests, surgery, home health care on a limited basis, that type of thing. 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 made.
Since Part A is free at 65, it’s our belief that everyone should enroll in it. Right? This includes anyone that’s been covered, even by the Civil Service retirement system, so our CSRS employees, anybody that’s under [furs 00:06:32] and most other Americans who have contributed to Part A for the vast majority of their life. Most Americans, again, including CSRS and [furs 00:06:40] employees have contributed to Medicare Part A throughout their entire career, so we all contribute 1.45% of our pay and it’s for this Medicare program, Part A, that we’ve been contributing to for all these years, so the coverage becomes free at 65. What I like about Part A is, this simply adds another layer of protection for hospitalization care that we mentioned before.
Scott Thompson: Just to be clear, the enrollment in Medicare Part A is not automatic.
Chris Kowalik: That’s right. 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. Again, if you’re already receiving Social Security, you’re automatically going to be enrolled in Part A. 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. If we have somebody that’s decided they want to wait until 67 to draw their Social Security benefits, they’re going to have to tell Social Security at … I’m sorry. Tell Medicare at 65 that they want to enroll in Part A.
Scott Thompson: Okay. I can see how that might get a little confusing for some folks and that it’s important to pay attention so that you get the coverage you need. I suspect that Medicare Part B works in similar ways. Can you give us an idea of how Part B covers?
Chris Kowalik: Yeah. As a reminder, 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 2017, the Part B premium is up to $134 per month, or more, depending on your income. If you make a good deal of money, if your household makes a good deal of money, chances are you might pay more than that $134 per month, per person.
Those 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, you’re FEHB premium will not decrease. Very important point so that we don’t have any confusion here.
Scott Thompson: Okay. It seems as though age 65 is the time that the decision is made for both Medicare Parts A and B. Is it possible for someone to enroll in these programs after the age of 65?
Chris Kowalik: Yes. The 65 mark is a really important period of time and that seven month window around the 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 we talked about before, that’s when the decision is made. But, a federal employee can delay their Part B decision beyond the age of 65 with no penalty if they’re enrolled in FEHB and they’re still working under CSRS or [furs 00:10:19] beyond the age of 65.
Scott Thompson: Okay. But, I’m sure our listeners are curious what the penalty is.
Chris Kowalik: Right. 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 10% of the premiums for each 12 month period you have been absent from the plan, so that’s government speak there, so let’s see what that really means. If we have somebody that delays their Part B decision for three years, once they … At this point, 68, they decide, nevermind. I really do want Medicare Part B. They’re penalized by 10% for every year they were missing, and so in this case, that’s three years, so that’s 30%. Remember that $134 that we mentioned before that was the premium per month?
Scott Thompson: Yes.
Chris Kowalik: They will pay 130% of that 134 per month, so that becomes 170 for them now, and the longer someone delays, the higher the penalty is.
Scott Thompson: Okay. We know that a retiree could simply keep FEHB and now we know we have Medicare Part B as an option. What are the different combinations and are there some advantages to having both programs in place?
Chris Kowalik: Yeah. If we recall what we talked about earlier, the rising cost of health care and health insurance, where it tops the list for concerns of retirees, we can really appreciate how important this decision is. Let’s take a look at the three different combinations that we 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 it’s their primary and in this case, their only coverage.
Scott, 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 an individual decides they want to join Part B.
Scott Thompson: Okay. How about the next combination?
Chris Kowalik: Yeah. Combination number two is to do the exact opposite of what we just discussed. A retiree goes ahead and enrolls in Medicare Part B and they drop FEHB completely and permanently. There are a number of reasons that I am not thrilled with combination number two here. 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 payout under the Medicare program, they’re low, and physicians would much rather see patients who have full coverage and therefore, they’re paid more for the services they render. 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.
The second reason I don’t love enrolling in Part B, but dropping FEHB is that Medicare Part B pays roughly 80% of covered medical expenses, so the participant in this case would be responsible for the other 20%. This is not 100% coverage or anywhere close. We’re at 80% and with the rising cost of health care, in and of itself, that can be a pretty substantial amount that someone has to pay.
Scott Thompson: Yes.
Chris Kowalik: The third reason I don’t love this combination is that when a retiree cancels their FEHB coverage, they may never, ever, ever return. If a retiree were to do this combination and end up not liking Medicare, maybe they can’t find a physician to treat them who accepts Medicare, whatever the case might 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 lik a great position to be in.
Scott Thompson: That’s true. What is the final combination?
Chris Kowalik: Yeah. The final combination is that we have a hybrid between these two programs. We have an employee that goes ahead, or in this case, a retiree who enrolls in Medicare Part B and they keep their FEHB coverage in place. Now, on the surface, most people are not excited about the combination, about this particular combination, because it means that they’re going to be paying both the Part B premium of $134 per month, per person and their FEHB premium as well.
When we’re weighing different decisions that we have, there are two parts that we need to consider. The first is, what that decision costs you and in this case, the decision costs us the premium of $134 per month and the FEHB premium. But, that’s only half the equation when we’re thinking about the real ramifications of this decision. The other half of the equation is what this decision gets you in return.
That’s where combination three really stands out. Just to remind everyone, this is the scenario where you have Medicare Part B and you have FEHB coverage in force. If we remember from the previous combination, Part B picks up 80% of covered medical expenses. Now, since we have another insurance program in force, FEHB, they’re going to pick up the remaining 20%. By having Medicare Part B and FEHB coverage in force, you essentially have limited the vast majority of out-of-pocket expenses like copays, deductibles, and coinsurance.
Scott Thompson: Okay. That certainly seems like pretty full coverage. Out in the private sector, we hear a lot about Medicare supplements. In this scenario that you just described, does FEHB act as a supplement?
Chris Kowalik: You know, in some ways, FEHB does look 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? But, here’s the deal. If you were to receive services or need some, say, medical equipment that’s not covered by Medicare, so it’s not an approved charge, Medicare won’t pick up any of it. And, 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%. 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 Medicare supplement, simply because it helps with those expenses that Medicare simply won’t approve.
Scott Thompson: Yeah. There is quite a bit for our listeners to be thinking about with respect to Medicare and their FEHB plan. What recommendations do you have for our listeners today?
Chris Kowalik: I have a couple of things to share with our listeners that I think are really important when you’re making your decision. Remember, I said there was a special exception to one of the rules that we talked about at the very beginning. I’m going to cover that, as well.
The first consideration is that I want everyone to really consider your health, both today and in the future. Sometimes, at 65, our health looks pretty good and so it might dissuade someone from taking on another type of insurance, because things are all right at that point. You want to really look at what your health not only looks like at the time of 65, but well into retirement and make sure that you’re giving due consideration to how our health changes.
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. A lot of 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, because you’re taking on so much of the responsibility yourself.
The third consideration is, I want everyone to consider how much of the rest of the coverage that’s not covered by one of the insurance companies, how much you would just prefer to transfer to someone else, instead of taking it all on yourself. Instead of having to pay all those copays and deductibles and coinsurance, how much of the rest of that would you just prefer to give to an insurance company and make them pay it. Right?
Those are all some big considerations with respect to Medicare and how it combines with FEHB. With any kind of insurance, we’re transferring a risk to the insurance company that we do not want to shoulder ourselves. For instance, we do this with automobile insurance and homeowner’s insurance. We pay the insurance company every month, so that if we’re in a car accident, or our house burns down, or anything like that, that the insurance company’s on the hook for the vast majority of the cost. We 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. Okay?
Scott Thompson: That’s right.
Chris Kowalik: Now, the final note that I do want to make is for any of our TRICARE recipients. For those of you that are under the military health program, TRICARE, and you’re trying to make your decision on Medicare Part B, you actually don’t have much of a decision. Part of the requirement to have TRICARE beyond the age of 65 is that you enroll in Medicare Part B. I know I said it was a choice for everybody else. Unfortunately, for TRICARE recipients, you will be required to enroll in Part B at that time. Hopefully, that helps that special audience that we have listening today.
Scott Thompson: Okay. Thanks so much, Chris, for this much needed clarification on this topic today. You always seem to have a great way of taking the complex subjects and breaking them down into the simple terms. It’s always a great pleasure to have Chris Kowalik of ProFeds with us on the podcast. Stay tuned to another episode to get straight answers and candid insights on your federal retirement.
