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In This Chapter

^ Steering clear of the late penalty by enrolling in Part D when you should ^ Understanding what you pay if you don’t sign up on time

He Part D late penalty basically sets a deadline. It’s a device for persuading you to join a Medicare drug plan when you first become eligible —

And not just when you happen to feel like it. If the date of your personal Part D enrollment deadline passes and you enroll in Part D months or years later, prepare to

Pay a penalty in the form of a surcharge that’s added to every monthly Part D premium for as long as you stay in the program.

Face a higher penalty the longer you delay signing up for Part D.

Experience a probable increase in your penalty cost each year.

Pay a lot more for the same drug coverage over time than if you’d signed up for Part D as soon as you were able.

Heavy stuff, huh? People considering Part D often think the late penalty is unfair, though actually it exists for several reasons (see the later sidebar "What were they thinking. . . when they created the late penalty?"). Medicare strictly enforces the late penalty — and takes the view that being confused about Part D is no defense for signing up late. If you have no other prescription drug insurance that’s at least of equal value to basic Medicare drug coverage (or Creditable; See Chapter 6), or if you’re not receiving Extra Help (see Chapter 5), every month that you delay enrolling in Part D makes the penalty bigger. That’s why I’m sharing its implications in the context of deciding whether you need to sign up for Part D right now. Very often, the late penalty is an important part of that decision — or a consequence of it.

So in this chapter, I explain how to avoid the penalty by signing up at the right time — depending on your individual circumstances. Then I describe how the penalty is calculated, how it grows ever larger over time, and whether putting off joining Part D is worth risking it.

What were they thinking. . . when they created the late penalty?

If you’re like many people, you probably feel indignant about the late penalty. How can joining the Medicare drug program be voluntary if you’re going to be penalized for not signing up on time? Why can’t you wait to join Part D until you need it, or when you choose to? Here are the arguments:

Part D gives protection against future risks, just like any other form of insurance. You buy home insurance in case the basement catches fire; you buy car insurance in case you total the station wagon.

If no one joined Part D until she needed prescription drugs, the system couldn’t function. Here comes that insurance concept again: Healthy people must be in the system to spread the financial risk and hold down costs. If only sick people enrolled, drug coverage would be so expensive that most people wouldn’t be able to afford it.

Part D isn’t the only Medicare program that has a late penalty. So does Part B,

Which imposes an extra 10 percent on the premiums for every year you delay signing up, for the same reasons given previously. But because almost everyone signs up for Part B as soon as they’re eligible, the fact that a late penalty exists often goes unnoticed. (Part B helps you pay to see a doctor and use other outpatient services; see Chapter 1 for details.)

Of course, Part D isn’t entirely insurance in the ordinary commercial sense. It’s also a benefit, and that’s why the late penalty seems a bit confusing. The federal government subsidizes your drug coverage in various ways — to a certain degree in the initial coverage period, and to a very large extent if your income is low enough to qualify you for Extra Help (which I explain in Chapter 5) or your drug costs are high enough to take you into the catastrophic phase of coverage. Nonetheless, Part D is built on insurance principles, with the late penalty as a cornerstone.

Avoiding a Late Penalty by Signing Up for Part D at the Right Time

The only way to avoid a late penalty is to meet your own particular deadline. Getting the timing right depends on your situation, which is probably one of the following:

You’re joining Medicare right now (or are about to do so) but don’t have good drug coverage.

I You already have good drug coverage from another source (such as an employer health plan) but are about to lose it or drop it.

I You’re just returning to live in the United States after living abroad.

I You’ve just been released from prison.

In the next few sections, I consider each of these circumstances and also provide a tip for sidestepping an obstacle hidden in the fine print that may trip you up if you don’t know about it.

Ij$jAB££ If you miss your personal deadline for joining a Part D plan, your next chance to join is the annual enrollment period between November 15 and December 31 (with coverage beginning January 1). See the later section "The Price of Missing Your Personal Enrollment Deadline" to find out about the costs you have to pay for letting your deadline slide.

When you join Medicare and don’t have creditable drug coverage

Iijj|kB£* You can get Part D as long as you’re enrolled in Medicare Part A (hospital insurance) and/or Part B (doctor and outpatient services), as explained in Chapter 1. Whether you need to enroll in Part D at the same time as you sign up for Medicare depends on whether you have other drug coverage regarded as creditable under Part D rules. (Coverage is Creditable When it provides at least as much value as minimum Medicare drug coverage. I explain this concept and how it affects decisions about joining Part D in detail in Chapter 6.) If you have creditable drug coverage when you sign up for Medicare, you don’t have to sign up for Part D at the same time.

But what if you Don’t Have such coverage?

If you’re turning 65 soon and Don’t Have creditable drug coverage from another source, you need to enroll in a Part D drug plan at the same time as you enroll in Part A or Part B to avoid a late penalty. That means signing up within the span of your seven-month initial Medicare enrollment period, which starts three months before the month you turn 65 and ends three months after it. For example, if your birthday is in April, your enrollment period runs from the beginning of January to the end of July, and you need to enroll in a Part D plan in July at the latest (and start receiving Medicare drug coverage on August 1) to guarantee avoiding a late penalty.

If you’re joining Medicare at a younger age because of disability and Don’t Have creditable drug coverage from elsewhere, the same rules apply. But in this case, your seven-month initial enrollment period begins three months before your 25th month of receiving disability payments and ends three months later. So, as in the preceding example, if your 25th month on disability falls in April, you need to sign up for a Part D plan in July at the latest to dodge a late penalty.

If you join Medicare at a younger age due to a disability and incur a late penalty because you didn’t sign up for Part D at the same time, you get another chance when you turn 65. You can use the regular seven-month Medicare enrollment period around your 65th birthday to re-enroll in Part D and get rid of the late penalty.

I If your income is limited and you qualify for Extra Help (as explained in Chapter 5), by law you Won’t Be hit with a penalty if you sign up late.

When you lose or drop your current creditable drug coverage

If you have creditable drug coverage from another source, you Don’t Need to enroll in Part D when you sign up for Medicare, as explained in Chapter 6. But what if you lose that coverage? Or your coverage suddenly ceases to be creditable? Or you decide to drop it?

If you lose creditable coverage Involuntarily, Meaning that you lose it through no fault of your own — for example, if your employer’s plan terminates or begins offering benefits that overall are of less value than Medicare drug coverage — you’ll qualify for a special enrollment period in which you can sign up for Part D without incurring a late penalty. That period lasts for 63 days after you’re notified that your creditable coverage will end Or 63 days after the date it actually ends (whichever’s later). See the later section "What the 63-day rule really means" for some crucial details if you’re in this boat.

I If you deliberately drop your creditable coverage, perhaps if it becomes too expensive to maintain, you Won’t Receive a special period to enroll in Part D. Instead, you must sign up during the annual enrollment, which runs from November 15 to December 31 each year. To avoid a late penalty, you can’t go for more than 63 days without creditable coverage. So you’d have to keep your current coverage at least until the end of October, because your Part D coverage wouldn’t begin until January 1. (Ideally, however, you’d keep your own coverage until the end of the year so you continue to be protected by insurance.)

You may find out that your previous sponsored coverage (which you’ve already lost or dropped) Wasn’t Creditable only when you enroll in a Part D plan. Then, almost certainly, you’ll be slapped with a late penalty. At that point, you’ll need to ask the plan for a Reconsideration — a review during which your claim of not realizing that your previous coverage wasn’t creditable will be investigated. I cover this situation, as well as other circumstances in which people feel they’ve received a late penalty unfairly, in Chapter 13. That’s where I also explain in detail how to go about asking for a reconsideration.

When you return to the United States after living abroad

You can’t receive Part D coverage while living abroad, and you Aren’t Expected to sign up for it until you return to live in the United States

Permanently. (This rule is different from the one for Part B enrollment when you’ve been living abroad, which I clarify in Chapter 1.) When you return to the U. S., you can join Part D without risking a penalty in one of two ways, depending on your circumstances:

If you turned 65 while living abroad: You get a special initial enrollment period (IEP) to sign up with a Part D plan on your return. This period lasts seven months — three months before the month of your return to the U. S., the month of your return, and three months after your return. Enrolling in a plan no later than the end of the month before you return ensures you can use your Part D coverage as soon as you arrive back.

I If you were eligible for Part D before moving abroad: You get a special enrollment period (SEP) on your return. You can enroll in a plan without having to apply for an SEP (as I explain in Chapter 17). The SEP begins on the date of your return to the U. S. and ends 63 days later. (See the later section "What the 63-day rule really means" for details.)

When you’re released from prison

You can’t receive Part D coverage while incarcerated in a prison or any other correctional institution, and your stay doesn’t count toward the Part D late penalty. In this situation, the rules are the same as for someone returning from abroad, as I explain in the previous section. If you turned 65 in prison, you get a seven-month initial enrollment period (IEP) to sign up for a Part D plan, lasting from three months before the month of your release to three months after. Otherwise, you get a special enrollment period (SEP) to sign up for a Part D plan, beginning on the day of your release and ending 63 days later. (See the following section for more on the 63-day rule.)

What the 63-day rule really means

The 63-day rule Is usually explained as the time you have during a special enrollment period to enroll in a Part D plan and avoid a late penalty. But this explanation isn’t precisely accurate. Rather, you must be actually Receiving Part D coverage within 63 days to avoid a penalty.

Say you lose your current creditable drug coverage on March 31. Counting 63 days from that date brings you to June 2. If you leave it to the last minute and sign up with a Part D plan on June 1 or 2, you’re still within the 63-day time frame. But you’re not avoiding the late penalty because, under Part D rules, your drug coverage actually begins on the first day of the month After You enroll — in this example, July 1. You’re then penalized for one month without coverage, which may not amount to much money at first but can increase quite a lot with time, as I explain later in this chapter. So think in terms of 60 days instead (or 59 if the time frame includes February), and you’ll be okay.

The Price of Missing Your Personal Enrollment Deadline

The purpose of this section isn’t to scare you half to death, but to give you a practical awareness of what the late penalty means so that — if it figures at all in the decisions you make about joining Part D (and it may not) — you can make an informed choice. Here, I explain how the penalty is calculated and how it can grow over the years. In the end, only you can decide whether ignoring the late penalty is worth the risk.

Looking at how the late penalty is calculated

The basis of the late penalty is something called the National average premium (NAP). Every fall, Medicare works out the average of all the premiums that Part D plans nationwide will charge during the following year. This dollar amount becomes the NAP for that next year. If you incur the late penalty, you’ll pay 1 percent of the NAP for every month you were without creditable coverage and didn’t sign up for Part D. This formula works out at 12 percent a year.

JttNG/ If you miss your personal deadline for joining a Part D plan, your next chance is the annual enrollment period that runs from November 15 to December 31 (with coverage beginning January 1). If you also miss that window, you have to wait another 12 months to sign up, increasing your penalty amount by another 12 percent. Every extra year of delay adds 12 percent to the penalty. Check out the following examples to see the math for yourself:

I Rebecca turned 65 and signed up for Medicare in March 2007. But by the time her personal enrollment period expired at the end of June, she hadn’t signed up for Part D (and had no comparable drug coverage). Her next chance to join Part D was during the open enrollment period between November 15 and December 31, 2007. She decided to do it, and her drug coverage began January 1, 2008. By then she was six months over her deadline (July through December). So her late penalty in 2008 was 6 percent (1 percent x 6 months) of the 2008 NAP, which was $27.93. One percent of that amount is 28 cents. So Rebecca’s monthly late penalty was calculated at 28 cents multiplied by 6 (her months without coverage), which came to $1.68. Medicare rounds the penalty to the nearest 10 cents, so Rebecca actually paid $1.70 a month in 2008, or $20.40 for the whole year, on top of her plan’s premiums.

I Brad was 70 years old and already in Medicare when Part D drug coverage began in 2006. Because the program was just starting, the initial enrollment period for that year was extended into May. But Brad couldn’t figure out what to do about Part D, and he let the deadline pass.

He had another chance to sign up during open enrollment at the end of 2006, but he let that go by, too. Finally, he enrolled in a Part D plan at the end of 2007. By then, he’d been without drug coverage for 19 months (June 2006 to December 2007). So in 2008, he paid a 19 percent penalty — 28 cents multiplied by 19, which came to $5.32. This amount was rounded to the nearest 10 cents, so Brad paid $5.30 a month, or $63.60 over the whole year, on top of his plan’s premiums.

Understanding how the late penalty can add up over time

Maybe the amounts in the preceding section’s examples don’t sound like too big of a deal. But that isn’t the end of it. Rebecca won’t pay the same penalty amount she was first assessed — $1.70 a month in 2008 — for all the years to come. Nor will Brad pay his penalty — $5.30 a month in 2008 — for as long as he’s in the Part D program. They’ll both pay a new penalty amount each successive year, and so will anyone else who has a late penalty. That’s because Medicare recalculates the NAP annually. If the NAP changes, the crucial 1 percent also changes — and so does everyone’s penalty amount.

One part of the calculation doesn’t change — the number of months anyone goes without drug coverage. For example, Brad will continue to pay a penalty of 19 percent of the NAP due to the 19 months he lacked drug coverage. But the dollar amount of that 19 percent will change each year as the dollar amount of the NAP changes. So in 2009, he’ll pay 19 percent of the 2009 NAP, and the next year he’ll pay 19 percent of the 2010 NAP, and so on every year.

I cover the NAP’s yearly variation and provide some estimates of the effect of NAP changes over time in the following sections.

Wondering how much the NAP will change each year

If the NAP rises, everybody with a penalty pays more as time goes by. But the truth is, nobody knows how much the NAP will change annually. Even Medicare doesn’t know until September of each year when it works out the average of all Part D plans’ premiums for the following year. Whether the NAP rises or falls depends entirely on the plans.

Certainly you can find out what the NAP will be for Next Year. That information is included in the Medicare & You Handbook that Medicare sends to all of its beneficiaries every October. The last section in the handbook explains Medicare costs for the following year, including the Part D national average premium (referred to more bureaucratically in the handbook as the National base beneficiary premium) And the 1 percent penalty amount. (You can also read the Medicare & You Handbook online at Www. medicare. gov.)

As this book goes to press, the 2009 NAP is unknown. So to date, only one NAP change, from 2007 — the first year the penalty was imposed — to 2008, has occurred. Between those two years, the NAP rose only 58 cents (from $27.35 in 2007 to $27.93 in 2008), which was far less than anyone expected. Will it always stay so low? Nobody knows. But it’s worth remembering that in these days of Part D’s infancy, the plans have tried to keep their premiums relatively low in order to attract customers. If the market shakes out in the future, with fewer plans competing, you can expect premiums to rise, taking the NAP upward as well.

Estimating how the late penalty may grow long-term

At this point, presenting a chart that shows exactly how much penalty amounts can grow over 5 years, 10 years, 20 years, or more would be useful. Of course, that’s impossible due to the annual reassessment of the NAP. But, what the heck, I’m going to do some educated guesswork so you can at least get an idea of how those amounts can accumulate long-term.

The NAP may creep up very gradually by a dollar or less every year throughout the next decade or so. Or it may jump around all over the place — going up by $5 or $10 one year, or even going down by a few dollars or cents the next. But here I make very conservative assumptions. In fact, in Table 8-1, I make a totally unrealistic assumption — that the NAP doesn’t rise At all, But remains basically the same ($28) as in 2008. Even so, you can see how the penalties mount up and become substantially higher with every year you delay joining Part D. (Note: These figures are raw calculations that haven’t been rounded to the nearest 10 cents.)

Table 8-1 How Penalties Mount Up If the NAP

Remains the Same as in 2008 ($28)

$3.36

Now I’m going a bit further out on a limb, but still very conservatively. In Table 8-2, I assume the NAP will rise by $2 each year in the ten years from 2009 through 2018 — so it becomes $30 in 2009, $36 by 2012, and $48 by 2018. And since these numbers are just raw calculations, I haven’t rounded to the nearest 10 cents.

Table 8-2 How Penalties Grow If the NAP Increases

By $2 a Year from 2009 to 2018

Deciding whether to risk ignoring the late penalty

I know what you’re thinking. You’re looking at that last figure in Table 8-2 — $1,411.20 as the possible accumulated ten-year penalty for someone who delayed signing up for more than three years — and wondering whether it’s less than what you’d have paid in premiums for those 40 months. It may well be. But before deciding to ignore the late penalty and stay out of Part D for a few more years, consider the following:

W Table 8-2′s numbers aren’t real. They’re purely a guesstimate. The actual penalty amounts may be higher.

U Table 8-2′s numbers only account for the next 10 years. Penalties accumulated after 15 years or more — when you may be in your 80s and on a fixed income that doesn’t go as far as it once did — are going to be a lot higher.

U At present the monthly late penalty is calculated on 1 percent of the NAP. But Medicare law allows for this amount to be increased to 2 percent at some unspecified future date. If that happens, the penalties would be doubled.

So delaying Part D enrollment is your choice — but recognize that it’s a gamble. Remember the famous line from Dirty Harry Where Clint Eastwood is facing down a bad guy who doesn’t know whether Clint still has a bullet left in his.44 Magnum? He says, "I know what you’re thinking . . . [and] you’ve got to ask yourself a question: ‘Do I feel lucky?’ Well, do ya, punk?" Well, do you?

Part III