Living Dangerously

James McGlynn

FOR MOST SENIORS, purchasing Medicare Part D prescription drug insurance is the right move—even if they don’t require any expensive medicines right now. The coverage insures against the risk of someday needing prescription medication that costs thousands of dollars and might be otherwise unaffordable.

The federal government subsidizes Part D, so it’s cheaper than purchasing stand-alone private drug insurance. Another good reason to enroll in Part D at the first opportunity: You avoid the penalty associated with a late sign-up.

Part D has an initial open enrollment window that runs from three months before to three months after your 65th birthday month. After that, there’s a late enrollment penalty unless you have “creditable coverage”—meaning that, up until that point, you had equivalent drug insurance from, say, your current or former employer. You’d also avoid the penalty if you’re enrolled in Medicare Advantage, a comprehensive health plan that typically includes prescription drug coverage.

If neither applies, Medicare imposes a penalty on those who sign up late. It’s trying to squelch moral hazard—free riders who only buy coverage after being prescribed costly medicine. The math on the Part D penalty is complex. But here’s Medicare’s official explanation: “Medicare calculates the penalty by multiplying 1% of the ‘national base beneficiary premium’ ($32.74 in 2023) times the number of full, uncovered months you didn’t have Part D or creditable coverage. The monthly premium is rounded to the nearest $.10 and added to your monthly Part D premium.”

Scratching your head? Here’s the boiled-down version: In 2023, delaying signing up by one month adds 33 cents to the Part D premium. That may not sound like much until you consider some delay signing up for months or even years—and the penalty persists for as long as they’re enrolled in Part D. In a hypothetical example, Medicare calculates that someone who was 29 months late enrolling would pay an extra $9.50 a month for coverage or $114 a year—for life.

Still, Part D might not be right for everyone. Who might choose not to enroll? Two groups come to mind. As I mentioned, those who enroll in a Medicare Advantage plan usually have prescription drug insurance bundled into their overall coverage. In fact, if your Medicare Advantage plan covers prescription drugs, you can’t have Part D, too.

A second, smaller group could be those fortunate few who are both healthy and wealthy. They might choose to self-insure—pay drug costs from their pocket—to avoid a substantial surcharge owed by high-income individuals who enroll in Part D.

The Part D surcharge is $70 a month per person in 2023 for joint filers earning between $366,000 and $750,000 annually. For those making more than $750,000, the monthly surcharge ramps up to $76.40 a month. These are known as income-related monthly adjustment amounts, or IRMAA for short. IRMAA surcharges are levied not only on Part D, but also on Part B—and the Part B charges are even higher.

Healthy and wealthy people can avoid the Part D cost by self-insuring. Under the worst-case scenario, they’d pay for up to 12 months of prescriptions before enrolling in Part D at the next opportunity, at which point the charge would include the penalty for late enrollment.

Part D can be purchased each year during an open enrollment period that runs from Oct. 15 to Dec. 7. It’s not underwritten—meaning no one is turned away from coverage based on health.

Individuals paying the highest income-based Part D IRMAA fee of $76.40 a month—on top of the average Part D premium of $32.74—would save $1,309.68 by not signing up for one year. They would pay a penalty for delaying if and when they signed up, however.

If they delayed signing up for Part D by one year, I estimate it would take 28 years before the late enrollment penalty exceeded the savings of delaying Part D coverage for one year. I’m assuming that a wealthy person could afford to pay out-of-pocket for prescriptions for one year.

To be sure, if you’re not wealthy, this is living dangerously. The most expensive prescription drug, Zolgensma, a one-time infusion to treat spinal muscular atrophy, costs $2.1 million in 2022, according to GoodRx. The site lists 10 drugs that cost more than $600,000 over the length of therapy, none of them commonly used. Still, if you couldn’t afford them, be sure to enroll in Part D when it’s available.

James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. Check out his earlier articles.

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