Medicare is a fantastic resource for retirees, offering healthcare coverage that would be prohibitively expensive if purchased through a regular health insurance policy. However, Medicare isn't actually free... and it may not even be cheap if you pick the wrong plan. If you select your Medicare plans using the following criteria, you'll be able to minimize your monthly premiums -- and can end up saving significant moola as a result.
1. Choose Medicare Advantage over Medigap
Medigap plans are a sort of aftermarket add-on for original Medicare. They pay for many of the original Medicare deductibles (the amount you're required to pay out-of-pocket before your insurance kicks in), and also provide coverage for services that aren't included in Medicare Part A or Part B. Medicare Advantage plans, on the other hand, work more like the health insurance policy you likely had before you retired. These plans replace original Medicare as well as providing additional coverage, and they typically feature both deductibles and co-pays (the portion of a medical expense you're required to cover yourself, even after you've met your deductible for the year).
Medicare Advantage plans tend to have significantly lower premiums than comparable Medigap plans, in part because the Advantage plans typically require you to shell out more for deductibles and co-pays. Thus, choosing Medicare Advantage over Medigap should reduce your Medicare premiums. However, it's important to look at all your cost factors when making this decision -- if you expect to have a lot of medical expenses in the near future, a Medigap plan may work out to be the cheaper option overall because the lower deductibles mean the plan will pay more of your expenses than a Medicare Advantage plan would.
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2. Compare plans across providers
Both Medicare Advantage and Medigap plans are provided by various private insurance companies. Because these companies may use different approaches to arrive at a monthly premium for their plans, you will often find that two plans offering roughly equivalent coverage have totally different premiums -- which means that shopping around for your Medicare plans can save you a bundle.
This effect is particularly startling with Medigap plans; each Medigap plan is required to offer coverage based on a specific template, so a particular Medigap Plan A (for example) will be identical to every other Medigap Plan A... yet the premiums charged by two different Plan A providers can be radically different. For example, I pulled up the Medigap Plan Finder on the Medicare website and searched for plans in zip code 90230. The site found me 31 insurance companies offering Plan F (the most popular Medigap plan) in that zip code, with monthly premiums ranging from $119 to $372. In other words, the most expensive version of Plan F is more than three times the price of the cheapest one even though the coverage from those 31 plans is identical.
In the case of Medicare Advantage plans, verify that the policies you're considering really are more or less identical by comparing the deductibles, co-pays, and what types of medical expenses the plans cover (i.e. whether they both offer prescription drug coverage).
3. Consider a Medical Savings Account (MSA) plan
A Medicare MSA is Medicare's version of the health savings account (HSA). It's a package deal: first, you sign up for a special high-deductible Medicare Advantage plan, and then you open an MSA, which works much like a bank savings account. What makes MSAs even better than HSAs is that Medicare will actually put money in your MSA for you (in fact, you're not allowed to put your own money in these accounts). You can then use the money in the MSA to pay for medical expenses that arise before you've met the annual deductible for the plan. Any money left in the account at the end of the year can be used in future years to pay for qualified medical expenses.
Because the Medicare Advantage plan associated with these accounts is always a high-deductible plan, you'll typically pay quite a low premium compared to other Medicare Advantage plans. However, be aware that MSA plans never come with prescription drug coverage: you'll have to buy a separate Part D plan to cover these expenses. So you'll need to add the premium for the Part D plan of your choice when determining whether or not an MSA plan will be a better deal for you premium-wise. Note that MSA plans are not available in all areas; check the Medicare plan finder to see if there's one available for you.
When shopping around for Medicare plans, it's crucial to remember that premiums are only one of the costs associated with these plans. As a rule of thumb, someone with lots of medical expenses is better off choosing a high-premium plan with excellent coverage, since this will work out to be the best deal overall. However, if you're fairly young and in good health, a low-premium plan can save you a ton of money. And if your health declines in the future, you can always switch to a high-premium plan in later years. The money you save on premiums during the early years of your retirement can help ensure that you've got some extra money saved in case your health deteriorates in the future.
