What Is Creditable Coverage?

Creditable Coverage Defined & Explained in Plain English

Elderly man talking with his pharmacist.
Image © Ariel Skelley/Getty Images

In the health insurance world, creditable coverage is insurance coverage you had in the past that you get credit for when applying for new health insurance.

Why would you need credit for prior insurance coverage? In some cases, your new insurer can penalize you for not having had similar coverage in the past. However, if you had similar creditable coverage in the recent past, you’ll get credit for that coverage and won’t be penalized.

This is not as much of an issue as it was prior to the Affordable Care Act, as that law eliminated creditable coverage requirements that used to be necessary to avoid pre-existing condition waiting periods under employer-sponsored health plans. But for people enrolling in Medicare, creditable coverage is still important.

Two Situations in Which Creditable Coverage Matters

Medicare Part D & Creditable Coverage

If you don’t sign up for Medicare Part D prescription drug coverage when you’re first eligible for it, usually when you turn 65 years old, you’ll be penalized by paying higher monthly premiums if you later decide to buy Medicare Part D coverage.

This rule is in place to prevent people from gaming the system. Without this rule, people could forgo Part D coverage to save on monthly premiums when they have low drug costs, but sign up for Part D coverage when their monthly drugs are more expensive than the monthly insurance costs would be. Medicare prevents this by making people pay higher premiums if they sign up for Medicare Part D after their initial enrollment window. For every month you go without coverage, your Medicare Part D premium will be 1% higher. If you sign up 25 months late, your premiums will be 25% higher than the standard rate. And that 25 percent penalty will remain in place for as long as you have Medicare Part D.

However, it’s not really fair to penalize you with higher premiums if the reason you didn’t buy Medicare Part D coverage when you first became eligible was that you already had similar prescription drug coverage through your employer, union, spouse's employer, or a retiree plan. In this case, you weren’t trying to game the system; you were trying to avoid paying twice for the same coverage.

Enter the concept of creditable coverage. If you’re able to show you had other coverage providing similar benefits, you’ll be given credit for that coverage and you’ll pay the normal premium for Part D when you eventually enroll, instead of the premium plus a late enrollment penalty.

Prescription drug coverage that counts as creditable coverage for Medicare Part D must meet both of the following criteria:

  • Prescription drug coverage you had continuously without a break in coverage of 63 days or more since you were first eligible to enroll in Medicare Part D.
  • The actuarial value of the insurance is equal to or greater than the actuarial value of a standard Medicare Part D plan.

How do you know if your current prescription drug coverage will count as creditable coverage for Medicare Part D? Your current insurer should tell you. Insurers are supposed to send a notice of creditable coverage to all of their enrollees who are eligible for Medicare Part D coverage. This notice should come before your initial Medicare part D eligibility period and before each subsequent open enrollment period.

Medicare Part B & Creditable Coverage

The same basic rules are true for Medicare Part B. This is the portion of Medicare that covers outpatient and physician services, and all Medicare beneficiaries pay a premium for Part B coverage (unlike Part A, which is free for most enrollees, since they paid Medicare payroll taxes during their working years). In 2019, the standard premium for Medicare Part B is $135.50 per month.

But the late enrollment penalty for Part B is calculated a little differently. For each 12-month period that you didn't enroll in Part B after you were eligible, and during which you did not have creditable coverage that took the place of Part B coverage, your Part B premium will increase by 10 percent. So if you don't enroll in Part B until 37 months after you're eligible, and you don't have creditable coverage during that time, you'll pay Part B premiums that are 30 percent higher than the standard rate, for the rest of the time you have Part B coverage (you had three 12-month periods without creditable coverage; the one additional month doesn't count, since it was less than another 12-month period).

If you're going to delay enrollment in Part B, your creditable coverage needs to be from a current employer-sponsored plan (yours or your spouse's). Unlike Part D, described above, retiree health benefits aren't considered creditable coverage for delaying Part B. If you have retiree health benefits, you'll need to enroll in Part B when you're first eligible in order to avoid a potential penalty later on.

Pre-Existing Condition Exclusions, Waiting Periods, & Creditable Coverage

Prior to the Affordable Care Act, pre-existing conditions were an obstacle for people who were obtaining coverage in the individual market, and even in the employer-sponsored market. In the individual market, insurers in most states could simply reject applications from people with pre-existing conditions, exclude the pre-existing condition indefinitely, or increase the premium. It generally didn't matter whether the person had prior creditable coverage or not.

Now, the ACA forbids pre-existing condition exclusions in all comprehensive major-medical insurance plans except grandfathered and grandmothered individual market health plans. Grandfathered plans have not been available for purchase since 2010, but people who have had them since before the ACA was enacted are able to keep them for as long as the insurer allows them to remain in force, and many of those plans had pre-existing condition exclusions. Grandmothered plans have not been available for purchase since the end of 2013, but federal guidance issued in 2019 allows these plans to remain in force until the end of 2020 (at each state's discretion and each insurer's discretion). As is the case with grandfathered plans, many of these grandmothered plans still have pre-existing condition exclusions or rate increases that were built into the plans when they were sold, and which still apply to the coverage.

But in the employer-sponsored market, the Health Insurance Portability and Accountability Act (HIPAA) has limited the impact of pre-existing conditions since the mid-1990s. Under HIPAA, employer-sponsored plans could not reject enrollees based on medical history, and although pre-existing condition waiting periods were allowed, they could be reduced or eliminated when enrollees were able to show proof of prior creditable coverage. To learn more about how HIPAA helped people with pre-existing conditions use their creditable coverage, see “ Pre-Existing Conditions - Understanding Exclusions and Creditable Coverage.”

Although HIPAA protections remain in place, people who are enrolling in employer-sponsored plans no longer need to show proof of creditable coverage in order to avoid pre-existing condition waiting periods, as the ACA does not allow such waiting periods anymore.

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