By Justin Fundalinski, MBA | September 20, 2016
We recently came across a case in which a retired PERA employee worked many of her years during the time when employees did not contribute to Medicare taxes, but also worked some of her years during a time that they did contribute to Medicare taxes. The end result was that she did not earn her 40 quarters of credit to qualify for “free” Medicare Part A insurance (the hospital insurance side of Medicare), but instead fell short by just a few credits. While PERA has some options available to employees who do not qualify for free Part A, the options are not clear cut from a financial position and we were forced examine them deeply. It came down to a couple factors and in this month’s newsletter we want to share some of our findings for those who participate in PERACare for retirees currently or for those who may be faced with some of the same options in the future.
Insurance for hospital care is pretty much a necessity as a short layover in the hospital could create catastrophic medical bills. Since many PERA employees may not qualify for free Medicare Part A, PERA has included a Part A “replacement” in all of its healthcare packages for retirees over the age of 65. So, PERA employees have several choices:
- Opt to pay Medicare Part A premiums.
- Go back to work in the private sector and earn the credits needed to get premium free Medicare Part A.
- Use one of the three supplemental PERACare plans that offer replacement Part A.
- Use one of the three HMO PERACare plans that offer hospital coverage within them.
Paying for Medicare Part A Premiums:
Paying for Part A premiums out of pocket is not the most attractive option. Depending on how many “credits” or “quarters” you earned by paying Medicare taxes determines your premium. It’s not hard to earn the 40 credits that you need to get free Medicare Part A, but we will touch on that later. The premiums are structured like this:
- If you have 40 or more credits you get Part A premium-free
- If you have 30 or more credits but less than 40 you pay a reduced Part A premium currently at $226 per month.
- If you have less than 30 credits then you pay the full premium currently at $411 per month.
While the premiums are high there are some piece-of-mind benefits. The top benefit that comes to mind is that you’re enrolled in Part A, so there will not be any penalties if for some reason you opted out of Part A initially and are forced/or want to get Part A later on. For example, while we don’t think this is a likely event, PERA does not guarantee that they will provide their retired employees with health benefits. What if that benefit was taken away in the future and replacement Part A recipients are forced to purchase Medicare Part A now having to pay the premiums and a penalty for late enrollment. Or what if the coverage that they do offer becomes subpar and paying for Part A looks more attractive.
Earn The 40 Credits:
Ideally, we would all like to receive Medicare Part A premium free. Going back to work at a job that pays Medicare taxes is the only way to earn the credits to qualify you for premium-free Part A. The question is – how long do you have to work and do you even want to go back to work? It’s not hard to earn credits or quarters. You can earn a maximum of four per year and in 2016 one credit is earned for each $1,260 of earnings. So, hypothetically you could earn $5040 in January, never work the rest of the year and still get your four credits for the year. If your already close to the 40 credits you need, earning the additional credits may be an attractive way to get premium-free Part A, but if you have little or no credits this could become a ten year endeavor.
PERAcare’s Supplement Plans/Part A Replacements
For those who don’t qualify for free Medicare Part A, PERA’s supplemental plans function as a replacement to Part A . But don’t let the word “replacement” fool you, this is not a one-to-one identical replacement of the hospital coverage under Medicare Part A. These Replacement Plans are structured closer to a PPO where you have the in-network and out-of-network providers which many are familiar with, but have a various pros and cons:
- Replacement Plans can have deductibles similar to Part A and up to over 5 times higher. Just like Part A, these plans deductibles are based on the “benefit period” rather than annually as most are accustomed to with employer sponsored plans.
- The highest deductibles are for care received “out-of-network,” while original Part A does not have networks or changes based on provider affiliation. So, there might be more flexibility in who you choose to receive care from on traditional Part A.
- Replacement plans are more like 70/30 plans (insurance pays 70% you pay 30%) and have a maximum out of pocket limit (MOOP) that ranges from $4,500 to $27,000 depending on the plan selected and whether care is received in or out of network. Conversely, Part A does not have a MOOP, the benefits are generally structured based off the number of days that you are in the hospital plus typically 20% of the cost of medical services provides (i.e. surgery). With Part A and there is no cap on the total costs you could pay should you require extensive care for a long period of time.
The benefits of these Supplement/Replacement Part A policies key off of which of the three offered Supplement Plans you enroll in.
PERAcare’s HMO Plan with Hospital Coverage Offerings
There are three HMO offerings through PERAcare that have hospital coverage built into them and replace Part A, but keep in mind not every plan is available in every county of Colorado. These HMO plans have more stringent provider networks than the Supplemental plans described above. When covered under these plans, your primary physician becomes the quarterback for you in all your healthcare decisions and in order to see a specialist you will need a referral from your primary. Maybe it’s a hassle, but some find it nice to have a central primary care doctor directing care in a coordinated manner.
Instead of having a deductible and then paying 30% of the costs as described with the Replacement Plans, these HMO plans have fixed dollar amount co-pays. That means instead of you paying the first couple thousand dollars of your care before your coverage kicks in, you pay a fixed rate depending on the service (from $20 per visit up to several hundred dollars for some hospital procedures every time the service is provided). These plans do offer MOOP’s as low as $2,500 annually; however even with such a low MOOP it would take a lot of visits to doctors or hospitals to reach the maximum. Finally, the premiums for the HMO plans are very comparable to the Replacement Plans.
In the end we felt that paying Part A was not financially savvy purely because of the premium expense. If going back to work to earn some credits is not in the cards, the only options are to stay within the PERACare umbrella. At face value, the HMO options appeared to be the most cost effective, but we are always worried that premiums, copays, and maximum out of pocket limits could be altered on future policies making it not as attractive. Fortunately, for those covered by PERACare, at every annual enrollment you can swap from the any of the plans offered without underwriting. So, whether you chose one plan and just don’t like it, you are getting hit with surprise expenses that were not expected, or you know you have an upcoming medical situation that warrants different coverage, you can just sign onto another insurance plan at the next annual open enrollment. This is a luxury that Medicare recipients do not have with their HMO and Supplemental counterparts.
The ability to move plans without underwriting (especially when coupled with a MOOP) is a benefit that few in retirement enjoy. The benefits can embolden people in the PERA system to try out different plans and even roll the dice with lower premium plans, while still having the security a MOOP in place for catastrophic events and still maintain the flexibility to move on to a more appropriate plan the following year as their needs change.