What to know about Medicare -- now

By Kiplinger's Personal Finance Magazine

Though you may not look forward to turning 65, Uncle Sam has a nice present for you when you do: government-subsidized health insurance.

But Medicare won't cover all your health care expenses, so you'll still need to make some key decisions about how to fill in the gaps. Making the right choices could save you hundreds or even thousands of dollars a year in premiums and out-of-pocket expenses.

Sue and Art Gammarino of Springfield, Pa., shaved about $10,000 off their annual health insurance premiums when they turned 65 this year. Art is a semiretired electrical contractor, and Sue works two days a week in a dental office. They had been paying about $12,000 a year for health insurance through a small-business association. Once they turned 65, they switched to a Medicare Advantage plan, which covers medical and prescription-drug costs. Their premiums plummeted to about $62 a month for each of them, for a total of $1,500 a year.

The Gammarinos encountered a slew of complicated choices when they started searching for coverage, and they're glad they gave themselves plenty of time before Art's birthday to study their options. "We found it to be a tangled mess to sort out," says Sue.

Even if you are already eligible for Medicare, it pays to check out your choices each year during the annual open-enrollment period that runs from Nov. 15 to Dec. 31, when you can switch plans. Several new options appear every year, and the prices and coverage can vary greatly. The plan you picked in the past may no longer be your best option.

Here's what you need to know to get the most out of your Medicare coverage:

Sign up on time

You are eligible for Medicare at 65, even if your normal retirement age for full Social Security benefits is later. The initial enrollment period for Medicare Part B, which covers doctors' visits and outpatient services, runs for seven months, starting three months before your birthday month. To make sure your Medicare enrollment runs smoothly, you should contact the Social Security Administration (1-800-772-1213) three months before you turn 65.

If you miss the initial seven-month sign-up window, you'll have to wait until the next general-enrollment period, which runs from Jan. 1 to March 31 each year, for benefits beginning the following July 1.

For each year you wait beyond your initial enrollment period, you'll also incur a 10% penalty, which will be added to your monthly Part B premium (Part B premiums are deducted from your Social Security checks). You can sign up for premium-free Part A, which covers hospital services, at any time.

Special enrollment rules apply if you're eligible for Medicare and still on the job. If you have health insurance through your employer or your spouse's employer, you aren't subject to the 10% late-enrollment penalty if you sign up for Part B within eight months of losing that coverage. Similarly, if you have employer-provided prescription-drug coverage, you can avoid the late-enrollment penalty for the Medicare Part D drug plan. If you miss the initial seven-month enrollment period, you can sign up for prescription-drug coverage during the last six weeks of any year, for benefits beginning the following Jan. 1.

Review your choices

When it comes to filling the gaps in your health care coverage, you may have several choices.

• Employer-provided retiree health insurance has traditionally been the best option. But don't assume that's still the case. Many employers have been cutting back on retiree coverage. Even if your employer provides retiree health insurance, you may be able to save money by switching to another plan, especially if your premiums have risen and your coverage has been scaled back over the past few years. Look at the big picture, and compare coverage for medical care and prescription drugs, as well as out-of-pocket costs and any restrictions on health care providers.

• Medicare supplement plans, also known as Medigap policies, pay for many of the co-payments, deductibles and other expenses that Medicare doesn't cover. If you buy a policy within six months of signing up for Medicare Part B, insurers can't reject you or charge higher rates because of your health (see "The ABCs of picking a Medigap policy"). Medigap policies generally don't cover prescription-drug costs (and the old Medigap plans that do offer drug coverage are no longer a good deal). Instead, you'll need a Medicare prescription-drug plan, known as Part D.

• New pricing and options for Part D for the following year are unveiled each fall, and you have from Nov. 15 to Dec. 31 to switch policies. Premiums rose an average of 13.6% for the largest plans from 2007 to 2008 -- to $25 a month, according to the Centers for Medicare and Medicaid Services. Beneficiaries in the most-popular plans faced the biggest monthly increases. For example, the average monthly cost of Humana's standard plan jumped nearly 69%, from $15.34 in 2007 to $25.88 in 2008. Because of major changes like these, it's a good idea to investigate your options during the open-enrollment season every year, even if you've been happy with your plan.

• Premiums are only one cost to consider. You'll also need to calculate total out-of-pocket costs for the medicines you take. When you add up premiums, deductibles and co-payments, a higher-premium plan could end up costing less than a lower-premium plan that has hefty co-payments.

Continued: All-in-one plans

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