I heard from a financial adviser in Florida recently who asked if there was anything her clients, a married couple ages 69 and 70, could do to avoid paying a delayed enrollment penalty for their new Medicare Part D prescription drug plan.
"They never carried any drug coverage before now since they didn't feel that they needed it," the adviser wrote. "But now that they signed up for Medicare Part D, they got hit with a late-enrollment penalty."
Medicare Part D drug coverage is optional, and other sources of coverage, such as a current or former employer or union, Tricare, the Department of Veterans Affairs or other health insurance, are appropriate substitutes. But forgoing Medicare D coverage initially and signing up at a later date without having creditable coverage in the interim can be a costly mistake.
The couple wasn't aware that there is a permanent delayed enrollment penalty of 1% per month — for a total of 12% per year — for failing to enroll in a Medicare prescription drug plan during the initial enrollment period when they turned 65. Their combined penalty is about $25 per month, in addition to their monthly premiums, costing them an extra $300 per year.
"Are they really stuck paying it for the rest of their lives?" the adviser asked. The short answer is yes.
Individuals may owe a late-enrollment penalty if they go without creditable drug coverage for any continuous 63-day period after their seven-month initial enrollment period, which begins three months before their 65th birthday. The cost of the late-enrollment penalty depends on how long they went without prescription drug coverage.
Medicare calculates the penalty by multiplying 1% of the "national base beneficiary premium" each year ($33.19 in 2019) times the number of full months the individual was not covered by Part D or creditable coverage. The monthly premium is rounded to the nearest ten cents and added to the monthly Part D premium.
Medicare offers this example of how the penalty is calculated. Mrs. Martinez is currently eligible for Medicare and her initial enrollment period ended May 31, 2015. She doesn't have prescription drug coverage from any other source. She didn't sign up for Part D by May 31, 2015, but instead joined during the open enrollment period that ended Dec. 7, 2017. Her drug coverage was effective Jan. 1, 2018.
Since Mrs. Martinez was without creditable prescription drug coverage for 31 months, from June 2015 through December 2017, her penalty was 31% of the national base premium of $35.02 for 2018. Her monthly penalty totaled $10.90 in 2018 in addition to her plan's monthly premium.
The amount of the base premium and penalty can change from year to year. In 2019, Medicare recalculated Mrs. Martinez's penalty using the new base beneficiary premium of $33.19 for 2019. So her new monthly penalty is 31% of $33.19, or $10.30 each month in 2019, plus her plan's monthly premium.
How do you know if you have to pay a late-enrollment penalty? Once you join a Medicare drug plan, the plan will tell you if you owe a penalty and what your premium will be. In general, you'll have to pay this penalty for as long as you have a Medicare drug plan.
If you don't agree with the late-enrollment penalty, you may be able to request a "reconsideration." Your drug plan will send information about how to do it. Complete the form and return it within 60 days, along with any proof that supports your case, like a copy of your notice of creditable prescription drug coverage from an employer or union plan.
In the meantime, you must continue to pay the penalty. Medicare drug plans can disenroll members who don't pay their premiums, including the late-enrollment penalty portion of the premium. Most reconsideration decision are made within 90 days.
The best way to avoid a late-enrollment penalty is to join a Medicare plan when you're first eligible, even if you don't have any prescription drug needs initially. Look for a stand-alone drug plan with low monthly premiums or a Medicare Advantage plan that includes drug coverage.
Medicare beneficiaries can re-shop their drug coverage and Medicare Advantage plans each year during open enrollment season, which runs from Oct. 15 through Dec. 7.
And if you switch coverage, make sure you don't go 63 days or more in a row without a Medicare drug plan or other creditable drug coverage. Your plan must tell you each year if your drug coverage is creditable coverage. Keep this information because you may need it if you join a Medicare drug plan later.