Should Federal Annuitants Enroll in Medicare Part B after Age 65?

There are advantages to enrolling in Part B as a complement to FEHB coverage (technically, Medicare is "primary" and pays first). Almost all of the national plans waive their hospital and medical deductibles, copays, and coinsurance for members enrolled in both Medicare Part A (hospital) and Part B (medical). In effect, they "wrap around" Medicare. HMOs generally have only nominal deductibles or copayments and most of them do not provide such waivers. However, an increasing number do. For example, in the Washington, DC area CareFirst and M.D. IPA provide wrap around benefits to retirees with both parts of Medicare. In other parts of the nation, the Humana plans offer similar savings. With Medicare Parts A and B and most national Federal plans, you will have close to 100 percent coverage of almost all medical expenses (a few services are not covered by either program and would not get this coverage). Coverage for dental and prescription drug expenses will still differ depending on which plan you choose.

However, Medicare Part B will rarely save you nearly as much money as you spend on the Part B premium. This is because the cost sharing for physician visits and tests in almost all FEHB plans is already so low. And as we discuss below, for those who pay more for Part B than the normal premium, it is almost always a bad buy in purely financial terms.

By comparing results for those with Part A only, versus those with Parts A and B, you will see that in most plans you are likely to spend several hundred dollars a year more for this combination than by retaining the FEHB plan alone. Simply put, Medicare Part B is of limited dollar value to someone already covered by a good health plan. If you join an HMO, the Medicare premium gains you very little in dollar benefits. If you are willing to use preferred providers in national plans, or to join an HMO and use its network, you can usually save several hundred dollars per year or more—often a thousand dollars a year or more—by not joining, or dropping, Medicare Part B. Even if you do not use preferred providers, you will do almost as well without Medicare Part B, because of the special rate ceiling that limits what Medicare-participating doctors can charge for Medicare allowed charges.

Part B does have some important advantages. Perhaps most importantly, in almost all the plans that wrap around Part B, enrollment in Part B gives you the freedom to go outside the plan's network at no cost.

Even if you enroll in one of the plans that don’t wrap around, you can use your Part B benefit to go outside the plan’s doctor network and pay only 20% of the Medicare allowed charge. For example, for access to a specialist at the Mayo Clinic, you could simply go the specialist and charge the visit to Part B without your HMO or PPO plan’s permission.

Part B provides more generous benefits than most FEHB plans in a few categories, such as physical therapy and home health care, and it covers more of the costs of prostheses and durable medical equipment than many. Still, Medicare Part B rarely reduces overall costs enough to pay for the extra premium. For those plans that waive cost sharing for services covered by Part B, in almost all situations it will likely save you several hundred dollars a year and often as much as half the Part B premium—but rarely anywhere near the "for sure" premium expense.

Also importantly, Part B gives you the option of joining a Medicare Advantage plan—either PPO or HMO—through Medicare and suspending your FEHB enrollment and premium payment. It also gives you the option under some plans of enrolling in both FEHB and MA plans simultaneously and getting a large premium reimbursement.

Enrollment in Part B gives you some “insurance” against the possibility that Congress would enact some major adverse change to the FEHB program.

Finally, for many the value of "peace of mind" that you get from coverage under both programs exceeds the increase in premium costs.

There is an important innovation under way that reduces the cost of enrolling under both programs that will be attractive to many. The national Aetna Direct plan not only has a Medicare wraparound, but also lets you use your $900 a year per spouse personal care account to reimburse most of your Medicare Part B premium, or to offset dental and other expenses not covered by FEHB plans or Medicare. This gives you the advantage of wraparound coverage at a significantly lower cost than you would otherwise pay. Since the plan also waives its deductible and other cost sharing if you have parts A and B, this plan winds up costing less with Medicare than without Medicare for those who pay normal Part B premiums. Likewise, the Blue Cross Basic plan provides both a wraparound benefit and a $800 yearly reimbursement account for each spouse with Part B, and GEHA High has a $600 reimbursement for each. Some HDHP and CDHP plans, including the national MHBP HDHP plan, and the CareFirst HDHP plan in the DC metro area, offer similar premium and/or personal account advantages, including the wraparound benefit.

If you do decide to drop (or not start) Part B you can join it later. But there is a 10 percent a year penalty if you later decide to join or rejoin. As a financial matter, however many years you elect to do without Part B, you will be money ahead for approximately the first five or six years after joining or rejoining (those who start out paying the higher income-tested premium well be much more money ahead). After that, the penalty will outweigh your earlier savings (except for those who were once above, but now fall below, the income-tested premium). If you never join or rejoin, you will (on average) save annually roughly the amounts indicated in our Guide showing costs with and without Parts B—generally about half the cost of the Part B premium, though this varies somewhat from plan to plan. Thus, either not joining or dropping Part B is not an irrevocable decision, and later rejoining Part B need not be highly costly.

There are some circumstances to which the conclusions above do not apply:

  • Working employees over age 65 with Medicare Parts A and B coverage face a different situation. The special waivers of deductibles and coinsurance do not apply, because Medicare is by law the secondary rather than primary payer (except for firms with fewer than 20 employees). Your best choice is to stay in your preferred FEHB plan, and postpone joining Medicare Part B until you actually retire. There is no penalty for joining after age 65 if you were working and covered by employer insurance (subject to the same exception for small firms).
  • A few people over age 65 did not earn Medicare Part A and can join by paying a very substantial premium—about $5,000 a year. We recommend strongly against this purchase. Almost all FEHB plans charge you at most a few hundred dollars for hospital admissions, far less than the Part A premium.