01:00 AM EDT on Tuesday, October 11, 2005

If you're retired, and planning ahead for the new year, here's something to keep in mind:

Premiums you may have to pay for a plan offered through the new Medicare prescription drug program could reduce the amount of your monthly Social Security benefit.

But the plan you choose could also sharply lower the amount you spend, out-of-pocket, on prescription drugs.

As a result, the money you save on prescription drugs could more than make up for any reduction in the amount of your Social Security benefits.

First, some background:

In December 2003, President Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

Among other things, that law required the federal Medicare health insurance plan, which is mainly for people 65 and older, to offer a prescription-drug benefit for the first time in the program's 40-year history.

And that's an important point to keep in mind. Yes, the operational details of the new prescription drug benefit are complex; there's a lot to learn, and many options from which to choose.

But amid all the complaints and confusion, it's essential to remember that many Medicare beneficiaries who enroll in one of the new plans should end up saving money when it comes to paying for their prescription drugs -- even after taking into account the plan's cost, said Robert E. Veasey Jr., former president of the Rhode Island chapter of the Financial Planning Association, a trade group for financial planners and others.

"There should be a net gain in just about every situation," Veasey said in an interview at Sowa Financial Group of East Providence, where he works as an investment adviser.

Starting Jan. 1, the new Medicare prescription drug coverage program will be available to 41 million Medicare beneficiaries nationwide. That includes more than 173,000 Medicare beneficiaries in Rhode Island, according to a guide from the Rhode Island Department of Elderly Affairs.

Dr. Mark B. McClellan, administrator of the federal Centers for Medicare & Medicaid Services, said in a statement, "Everyone in Medicare who lives in Rhode Island, no matter what their income or how they get their health care, can choose coverage that reflects what they want, including lower cost, more complete coverage, and convenient access."

Some Medicare beneficiaries have been paying $1,500 to $1,600 a month on prescription drugs, Veasey said. That works out to between $18,000 and $19,200 a year. Under the new Medicare feature, your total out-of-pocket cost for prescription drugs might not exceed $3,600 or so a year (and, in many cases, will be much less), he said.

"So those people will be better off in a given year," allowing them to save "an immense amount of money," said Veasey, a Certified Financial Planner practitioner.

Precisely how much you'll wind up spending out-of-pocket, and how much you might save, will depend in part on how many prescription drugs you use, how much they cost, the plan you choose, and other factors.

Still, Veasey said, "If I were a Medicare recipient, I would seriously consider joining" one of the new Medicare prescription drug plans.

Strictly speaking, the Medicare prescription drug program is an insurance plan, not a benefit. So it's not provided directly by Medicare. Instead, it's offered by insurance companies and other private-sector firms that are working with Medicare (which helps underwrite the cost).

Before considering the impact on your Social Security benefits, here's a look at how things stand now:

Getting Information: Earlier this month, Medicare and the insurers and other private-sector firms began providing Medicare beneficiaries with information about the program, including details about the various types of plans available.

So now is a good time to do some planning of your own, said Kathy McKeon, assistant director of the state Department of Elderly Affairs.

Make a list of which prescription drugs you take and how much they cost, she said. With that and other information, you can begin to sort through all the available plans and choose one that best suits your needs -- and your pocketbook.

In Rhode Island, 18 companies are offering Medicare prescription drug plans. (Most are offering more than one option, too. Thus, Rhode Island Medicare beneficiaries have 44 plans from which to choose.) In addition, two companies are offering managed-care plans that include a drug benefit.

Plans vary as to which drugs they cover, what you'll have to pay, and which pharmacies you may use. (However, all the plans must offer at least a standard level of coverage determined by Medicare.)

So yes, it's complicated. But there's no need to rush; the plans won't start enrolling people until the middle of next month. "One thing we're saying to people is, do not panic," McKeon said in a telephone interview. You have some time to come up to speed on what options are available and which might best help you:

Various organizations are sponsoring information sessions for Medicare beneficiaries. You may also contact your local senior center, or obtain free, one-on-one counseling through the state's Senior Health Insurance Program. For information, call the state Department of Elderly Affairs at (401) 462-4000.

The Medicare program recently published its annual "Medicare & You" handbook. Among other things, it explains how the prescription drug feature works and includes lots of details about available plans. It also offers advice on picking a plan. In addition, it describes how the new prescription drug feature will affect beneficiaries in special circumstances, such as these: you have a supplemental ("Medigap") plan that does not have drug coverage; a Medigap plan that does have drug coverage; an employer-sponsored plan; or a union-sponsored plan.

You may also get more information from Medicare by phone at 1-800-633-4227, or online at:

www.medicare.gov

Enrolling: The program's six-month initial enrollment period will run from Nov. 15, 2005, to May 15, 2006.

You'll be eligible to enroll if you currently have coverage under "Part A" of Medicare (which generally helps pay for inpatient hospital and related expenses) or "Part B" of Medicare (which generally covers physician services, outpatient hospital services and some other items).

In other words, everybody with Medicare will be eligible for the new prescription drug coverage program.

If you sign up by Dec. 31, 2005, your coverage will begin Jan. 1, 2006. (If you sign up later during the initial enrollment period, your coverage will kick in on the first day of the following month. So if you sign up Feb. 15, for example, your coverage will begin March 1.)

You should consider enrolling in one of the plans during the initial enrollment period -- even if you don't use a lot of prescription drugs. Why? If you don't enroll by May 15, 2006, you'll generally have to pay a higher premium.

Paying Premiums: There's a twist here. To understand it, it's helpful to remember how things work now.

If you are enrolled in Medicare Part B, you generally must pay a premium. If you are collecting a Social Security benefit, the Social Security Administration automatically deducts that premium from your monthly Social Security benefit, said Kurt Czarnowski, regional communications director for the Social Security Administration.

What if you enroll in the new Medicare prescription drug program, which technically goes under the name Medicare "Part D"? "The individual will have the option of paying the premium directly to the provider or asking the Social Security Administration to have the premium deducted" from the monthly Social Security benefit, Czarnowski said in an interview at the agency's regional headquarters in Boston.

So it's possible that, from your monthly Social Security benefit, there'll be a deduction not only for your Medicare Part B premium, but also for your Medicare Part D premium.

That could reduce -- or even eliminate -- the amount of any cost-of-living increase you receive in Social Security benefits next year.

How can that be? The following will give you a general idea:

The average retired worker receives about $955 a month in Social Security benefits this year.

Suppose next year's cost-of-living increase is around 3.8 percent. That would give the average retiree an extra $36 or so each month. (The Social Security Administration is scheduled to publish the precise figures later this month.)

The government has already said that the Medicare Part B premium will be $88.50 a month next year, compared with $78.20 a month this year -- an increase of 13 percent, or $10.30 a month.

That could cut the cost-of-living increase for the average retired worker to somewhere around $25 a month in this example.

And, depending on the type of Medicare prescription drug plan involved, the premium could reduce -- or even eliminate -- what's left of the cost-of-living increase for the average Social Security retiree next year.

Federal law generally says that, no matter how high Medicare's Part B premium goes for a coming year, the amount of your monthly Social Security benefit can't be less than what it was the previous year.

However, there's no such provision for the Medicare Part D premium -- the one for prescription drug coverage.

As a result, McKeon said, if you choose a Medicare prescription drug plan with a premium, and decide to have that premium deducted from your monthly Social Security benefit, "You will have a reduction in your [Social Security] check equal to what that premium is."

But keep these other points in mind:

The new Medicare Part D premium won't be automatically deducted from your Social Security benefit, Czarnowski said.

If you want to have it deducted, you'll have to request that option from the Social Security Administration -- after you enroll in a Medicare prescription drug plan, he said.

One benefit of having the premium deducted: it's automatic. So you could save on some paperwork, and you won't forget about making the payment. "It's safe, secure, regular and you never have to worry about it," Czarnowski said.

It's sort of like having your monthly Social Security benefit deposited directly into your bank or credit union account, instead of waiting for a paper check to arrive in the mail. (Social Security Administration figures show that the direct-deposit option is used by about 83 percent of beneficiaries nationwide, 81.4 percent in Connecticut; 81.2 percent in Massachusetts; and 80.9 percent in Rhode Island.)

At a minimum, the new Medicare drug plans must provide the following coverage:

You pay a $250 annual deductible.

After that, you pay 25 percent of your annual drug costs from $250 and $2,250 (the plan pays the other 75 percent).

You then pay 100 percent of your next $2,850 in drug costs.

Once you've spent $3,600 in out-of-pocket costs, you pay 5 percent of your drug costs; the plan pays the rest.

But that's only the minimum standard; most plans offered in Rhode Island will provide more generous terms. For example, 28 plans will have no deductibles.

You also have the option to join a Medicare Advantage plan (which generally offers health services through an HMO or similar arrangement). Terms vary, but you might have no deductible depending on which one you choose.

Medicare beneficiaries in Rhode Island who choose a stand-alone prescription drug plan can get coverage for as little as $7.32 a month.

However, lower income beneficiaries can get help in paying some or even all of their premiums. (About one-fourth of beneficiaries nationwide can receive financial help for their Medicare Part B premiums, and about one-third of beneficiaries nationwide can get help paying their Medicare Part D premiums, according to the Centers for Medicare & Medicaid Services.)

In general, you may qualify for extra help if your income is below $14,355 if you're single, or below $19,245 if you're married and living with your spouse. In that case, you may not have to pay for monthly premiums and certain other costs associated with your prescription drugs. For information, call the Social Security Administration toll-free at 1-800-772-1213.

Neil Downing is a Journal staff writer and author of The New IRAs and How to Make Them Work for You. Questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail:

moneyline [at] projo.com

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