What Is Creditable Coverage?

Creditable coverage is a health insurance, prescription drug, or other health benefit plan that meets a minimum set of qualifications. Types of creditable coverage plans include group and individual health plans, and student health plans, as well as a variety of government-sponsored or government-provided plans. Creditable coverage is used to determine whether policyholders have to pay late enrollment penalties or, in some cases, coverage and costs associated with pre-existing conditions.

Key Takeaways

  • Creditable coverage is a health benefit, prescription drug, or health insurance plan—including individual and group health plans—that meet a minimum set of qualifications.
  • Creditable coverage is a measure used to figure out if policyholders must pay late enrollment penalties or, in some cases, coverage and costs associated with pre-existing conditions.
  • Most companies offering prescription drug coverage to Medicare-eligible beneficiaries have to disclose their status as creditable or non-creditable coverage programs.

How Creditable Coverage Works

Creditable coverage is most closely associated with prescription drug coverage. Most companies that provide prescription drug coverage to Medicare-eligible beneficiaries must disclose their status as creditable or non-creditable coverage. Creditable coverage means that the policy meets or exceeds the coverage offered by a Medicare Part D prescription drug plan.

This disclosure provides Medicare-eligible beneficiaries with important information relating to their Medicare Part D enrollment and is mandatory whether the insurer is primary or secondary to Medicare. If the policyholder’s coverage is considered creditable, they may be eligible for subsidies. A creditable coverage notice also allows prescription drug policyholders who are not using Medicare to avoid paying a Part D late enrollment penalty.  

Make sure to hold on to a creditable coverage notice because you may want to join a Medicare drug plan in the future and will need to prove you don’t owe penalties. Medicare beneficiaries not covered under creditable prescription drug coverage, and who choose not to enroll before the end of their initial enrollment period for Part D, will usually have to pay a higher premium on a permanent basis if they subsequently enroll.

Creditable Coverage Requirements

In order to be considered creditable, a prescription drug plan must meet these four requirements:

  • Provide coverage for both brand and generic prescription medication
  • Provide the policyholder with a reasonably broad option of medication providers, or a mail-order option
  • Pay at least 60% of the cost of prescription expenses
  • Either not have an annual benefit maximum, or have a low deductible

You may have creditable coverage through a current or former employer, trade union, or one of the following:

  • Federal Employee Health Benefits (FEHB) Program
  • Veterans' Benefits
  • TRICARE (military health benefits)
  • Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA)
  • Indian Health Services

You also might have creditable coverage if you get health insurance coverage through your spouse's employer or if you’re on a COBRA plan.

Creditable Coverage and Pre-Existing Conditions

Some people with pre-existing conditions may find that their conditions are excluded from their health insurance plan coverage, although this is no longer the norm thanks to the Affordable Care Act (ACA). Some policies still allow insurers to apply an exclusion period to these conditions, which increase the costs for which you are responsible.

The passage of the ACA blocked many insurers from being able to use this exclusion period but it can still happen because they have been covered by previous policies. Medicare typically covers pre-existing conditions without lengthy waits.

A legacy individual health insurance policy is one that you bought for yourself or your family on or before March 23, 2010, that has not been changed in certain ways that reduce benefits or increase costs to consumers.

If you have prior creditable coverage, it can reduce the exclusion period since creditable coverage means that you had insurance over a period of time. But there is a limited window in which creditable coverage applies. If you quit a job or lose company coverage and do not obtain new coverage within a certain number of days, for example, you may be responsible for some costs stemming from pre-existing conditions.