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.

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 gaming of the system by making people who sign up for Medicare Part D late pay a financial penalty in the form of higher monthly premiums. 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 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 because you already had similar prescription drug coverage through your job, union, spouse, 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 the similar benefits, you’ll be given credit for that coverage and you’ll pay the normal premium, not the penalty premium.

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.

Pre-Existing Condition Exclusions & Creditable Coverage

Thanks to the Affordable Care Act, the second situation in which prior creditable coverage matters is much less common now that it used to be. Before the ACA, health insurers could refuse to cover pre-existing conditions or could impose long waiting periods before coverage kicked in for those conditions. Now, the ACA forbids pre-existing condition exclusions in all comprehensive major-medical insurance plans except grandfathered individual health plans. As the years pass, grandfathered plans are becoming less and less common; they’ll soon be a thing of the past.

However, when health plans were allowed to impose a long waiting period before they’d cover a pre-existing condition, the Health Insurance Portability and Accountability Act allowed people to decrease that long waiting period by crediting prior creditable coverage against the waiting period. 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 the ACA reformed health insurance coverage for people with pre-existing medical conditions, there are still a few situations in which a pre-existing condition can cause problems with your health insurance coverage. Learn more in “3 Ways Your Pre-Existing Condition Still Causes Insurance Problems.”

Code of Federal Regulations, 42 CFR 423.46 - Late enrollment penalty.
Code of Federal Regulations, 42 CFR 423.56 - Procedures to determine and document creditable status of prescription drug coverage.

Continue Reading