Medicare is a federal health insurance program. Anyone eligible for Social Security benefits (i.e., a fully insured worker, spouse of a fully insured worker, or spouse of a worker receiving Social Security disability payments) is automati- cally eligible for Medicare starting at the age of 65. Based on the US Census Bureau data, on average, Medicare covers about half (48 percent) of the health care charges for those enrolled. The enrollees must then cover the remaining approved charges either with supplemental insurance or with another form of out-of-pocket coverage. Out-of-pocket costs can vary depending on the amount
of health care a Medicare enrollee needs. They might include uncovered services—such as long-term, dental, hearing, and vision care—and the supple- mental insurance. This coverage will increase with the aging of America.
Types of Medicare Coverage
Currently, Medicare has four parts, of which Parts A and B were initiated by the 1965 legislation. The 1997 Balanced Budget Act created Part C (now called Medicare Advantage). Part D was created in 2003 by the Medicare Prescription Drug, Improvement, and Modernization Act.
Part A is funded solely through Social Security payroll taxes under the authority of the Federal Insurance Contributions Act (FICA). The Medicare portion of Social Security taxes flows into a separate trust fund, which is used to pay for the hos- pital costs. Medicare’s other optional medical benefits—Parts B, C, and D—are financed by general tax revenues and by the premium payments collected from the beneficiaries. For example, a taxpayer (married filing jointly) with $170,000 or less of taxable income, turning 65 in 2012 and electing coverage, would have paid $99.90 in monthly premiums. This premium, which is indexed for inflation, reflects the individual’s modified AGI, filing status, and the age at which he or she opted to begin coverage.
At the heart of the Medicare reimbursement is the allowable charge. Under the program, Medicare scrutinizes every bill, determining the allowable por- tion of the total service cost. The reimbursement reflects: covered services, fee schedule for medicare-participating health care providers (approved amount), the insured’s deductible, the coinsurance component, and policy caps (e.g., covered days).
Part A. This part A generally covers: inpatient hospitalization, medically neces- sary skilled nursing facility care, hospice care, psychiatric inpatient care and some home health care. No premium payment is required for fully eligible per- sons; however inpatient deductible and coinsurance rules do apply.
• Hospital Services. Part A hospital coverage is based on a benefit period.
This period begins on the first day the patient receives inpatient ser- vices in a hospital. Medicare pays for 90 days of hospital care per “spell of illness,” plus an additional lifetime reserve of 60 days. A single “spell of illness” begins when the patient is admitted to a hospital or other cov- ered facility, and ends when the patient has gone 60 days without being readmitted to a hospital or other facility. There is no limit on the number
of spells of illness. However, the patient must satisfy a deductible before Medicare begins paying for treatment. This deductible, which changes annually, is $1,260 in 2015. After the deductible is satisfied, Medicare will pay for virtually all hospital charges during the first 60 days of a recipient’s hospital stay.
In 2015, for a hospital stay of days 61–90, the patient pays $322 coinsur- ance per day of each benefit period. For Days 91 and beyond, the patient pays $644 coinsurance per each “lifetime reserve day” after day 90 for each benefit period (up to 60 days over the patient’s lifetime). Beyond lifetime reserve days, all costs are borne by the patient.
• Skilled Nursing Facility Services. Under Part A’s skilled nursing facility services coverage, in 2015, if a patient has spent 3 days in the hospital, Medicare will pay for care in a skilled nursing facility as specified here: Days 1–20: $0 copay for each benefit period. Days 21–100: patient pays $157.50 coinsurance per day. Days 101 and beyond: patient pays all costs.
As with Part A hospital coverage, skilled nursing facility services are based on a benefit period. For Medicare to pay for nursing home care, the following requirements must be met: the stay must be in a facility approved by Medicare, the patient’s doctor must indicate that skilled care is needed on a daily basis, the patient must have been in a hospital for at least three days prior to the nursing home stay, not counting the day of discharge, and the patient must have been admitted to the facility within 30 days after the discharge from the hospital for the same condition the patient was hospitalized.
Part B. A patient enrolled in Part A will be automatically enrolled in Part B (unless the person opts out of the coverage) and the patient pays a monthly premium for this coverage. Part B covers: physicians’ services, outpatient hospital care, clinical lab services, medical equipment and supplies, mental health services, and certain preventive care. It does not cover the costs of prescription drugs and vaccines that can be self-administered (with a few exceptions). Part B requires a monthly premium payment, an annual deductible and copayments (80/20 coinsurance ratio).
• Physician Services. For physician services, the patient pays an annual deductible, 20 percent coinsurance on approved charges, and 100 per- cent of nonapproved charges. One potentially costly item can be those doctor’s charges that are not approved by Medicare. Many physicians rou- tinely accept Medicare assignment; that is, they agree to accept the approved fee determined by Medicare. However, for those nonparticipat- ing doctors, who do not require their patients to cover the excess charges,
the general limit is 115 percent of the Medicare assignment rate. Since this charge can quickly add up to a sizable amount, patients should use a doctor who accepts Medicare assignment.
• Outpatient Hospital Care. For outpatient care, the insured pays the annual deductible (if not already paid) and 20 percent coinsurance on approved charges (up to a maximum as defined by the inpatient hospital deductible).
Medicare Parts A and B are not designed to cover the following items:
(a) private-duty nursing, (b) skilled nursing care beyond 100 days, (c) treatment outside the USA, (d) most dental work, (e) most immunizations, (f) cosmetic surgery except after an accident, (g) routine foot care, (h) eye and hearing exams, (i) prescription glasses, and (j) hearing aids. An important and potentially costly item not covered by Medicare is the possibly catastrophic costs associated with long-term care. According to Genworth Financials 2015 Cost of Care Survey the national average for a private room in a nursing home is $222 per day, which works out to $81,030 per year.
Remember Medicare is coordinated with other sources of health insurance cov- erage. That can become a significant factor for many baby boomers choosing to continue working beyond the age of 65. So employees may return to the full coverage of their employer-provided health insurance while signing up for Medicare (a minimum of 20 employees required). In these cases, the employer-sponsored insurance becomes the Medicare enrollee’s primary payer, and as a result Medicare becomes the secondary payer. Therefore, initially the claims are required to be submitted to the employer-provided plan. Since Part A of Medicare coverage is free, employees working past 65 years of age should surely sign up for it. They may even have to pay a penalty if they do not sign up for Medicare when they become eligible at 65. However, these employees may not want Part B, since there is a monthly premium associated with it.
Part C. In 1997, Medicare Part C (now called Medicare Advantage) became available to persons eligible for Part A and enrolled in Part B. Under Part C, private health insurance companies can contract with the federal government to provide Medicare benefits through their own policies. Such insurance companies are able to offer Medicare beneficiaries health coverage not only through a private fee-for-service plan, but also through managed care plans such as HMOs and PPOs. Medicare beneficiaries may also be able to enroll in Medicare Medical Savings Account Plans (Medicare MSAs) if these plans are available. The Medicare Advantage has allowed many Medicare beneficiaries (some plans are not avail- able in all areas) to have a wider choice of health plan options, enabling them to obtain the best coverage at a cost they can afford.
Part D. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 offered a prescription drug plan to everyone enrolled in Medicare, Parts A and B. The prescription-drug coverage is provided through private insurance companies that have been approved by Medicare. Each year (generally October through mid-December) there is an enrollment period, and persons applying for the coverage cannot be denied coverage for existing conditions.
The cost of the Part D drug coverage depends on the insurer and the terms of the selected plan. Typically, a policyholder pays a monthly premium, an annual deductible, and a coinsurance. For example, Humana-Walmart offers three differ- ent plan types: Humana-Walmart Preferred Rx Plan, Humana Enhanced, and Humana Complete. Each type has a different monthly premium, a specified deductible and coinsurance schedule. When analyzing the cost-effectiveness of each insurer’ plan, assess the drug formulary list against the current prescription drugs taken by the client. Online calculators can be used to project annual costs for each plan type, following which plan costs for enrollees with traditional Part A and B coverage can be compared with those selecting the Part C Advantage plan.
Types of coverage under Medicare and the gaps in coverage are summarized in Table 5.2.
Medigap or Medicare Supplemental Policies
We have learned that Medicare does not cover all medical costs. Many people purchase supplemental insurance—known as Medigap—policies offered by private health insurance companies that are designed to cover most of the costs not covered by Medicare. A Medicare enrollee does not need a Medigap policy if the Medicare coverage is through a managed care plan or if the person is qual- ified for Medicaid because of low income.
Medigap Policy Plan Types. Through the Omnibus Budget Reconciliation Act of 1990 (OBRA ’90), Congress ordered the NAIC to standardize Medigap policies so it would be easier for consumers to make the selection. Because of abuses relat- ing to sales practices and distortions of policy benefits, the NAIC created a model (adopted by many states) that established uniform provisions. States that do not adhere to the NAIC model, however, are required to follow the fed- eral standards established by OBRA. The purpose of federal regulations was to provide “for the reasonable standardization of terms and benefits of Medicare supplement policies.”
All the Medigap plans cover the following services: (a) Part A coinsurance and the cost of 365 extra days of hospital care after Medicare coverage ends.
Table 5.2 Medicare and the Gaps
Service Medicare Pays Consumer Pays (2016)
Hospital
Insurance Everything except deductible $0 deductible for 1–60 days
$322/day for days 61–90
$644/day for days 91 and beyond* of each benefit period.
Skilled Nursing
Facility Care Post-hospital care in skilled nursing
facility $0 per day 1–20 days
Up to $161 per day for days 21–100 100% of costs thereafter
Home Health
Care Full cost of medically necessary home health visits by a Medicare approved home health agency
Nothing
Psychiatric
Inpatient Care Same as under the hospital insurance, but only facilities accepting Medicare assignments.
Deductibles and 35% of Medicare- approved amount.
100% of costs after the lifetime cap of 90 days
Custodial
Nursing Care Nothing All costs
Hospice Care Covers all costs for individuals with a life expectancy of six months or less.
Benefits are provided for up to two 90-day periods, plus an unlimited number of 60-day periods.
Copayment of $5 for outpatient prescription drugs and 5% of Medicare-approved amount for inpatient respite care
Blood
Deductible All but first three pints under Part A; 80% of approved amount after deductible under Part B.
Under part A – first three pints (unless replaced)
Under part B – approved amount (after deductible)
Medical
Services 80% of approved charges after
deductible including doctor services, inpatient and outpatient medical and surgical services and supplies, physical and speech therapy, diagnostic tests, durable medical equipment and other services.
$140 deductible and 20% of approved charges
Prescription Drug Coverage (Part D)
Initial Coverage: Patient and the plan together share total cost of drug up to an amount set by Medicare.
Coverage Gap: Patient pays most of drug cost: 58% of cost of generic drugs and 45% of cost for brand- name drugs.
Catastrophic coverage: Plan pays most of the cost for drugs through the rest of the year.
Initial Coverage: Patient shares cost of drug with Medicare.
Coverage Gap: Patient pays most of the drug costs up to the specified limit.
Catastrophic coverage: Plan pays for most of the drug cost for the rest of the year.
Source: Author’s own work.
*Note: Each individual has a once-in-a-lifetime reserve for 60 days for inpatient hospital care.
(b) Part B coinsurance (usually 20 percent of Medicare-approved payment). (c) First three pints of blood. Each plan offers a number of novel features, although none covers long-term care, private-duty nurses, vision care, or dental care. A brief description of each plan now follows:
• Medigap Plan A. Pays all of Part A hospitalization coinsurance, all hospital costs for a full year after Medicare benefits end, all Part B coinsurance, first three pints of blood, and Part A hospice care coinsurance.
• Medigap Plan B. Covers all features of Medigap Plan A. It also pays the Part A deductible.
• Medigap Plan C. Covers all features of Medigap Plan B. In addition, it pays the coinsurance for skilled nursing care (days 21–100), the Part B deduct- ible, plus 80 percent of health care expenses incurred when traveling out- side of the USA (subject to first two months of travel and a benefit cap of
$50,000).
• Medigap Plan D. Covers all features of Medigap Plan C, except that it does not pay the Part B deductible.
• Medigap Plan F. Covers all features of Medigap Plan C. In addition, it pays the physician’s excess billing charges (subject to 115 percent of allowable charge limit).
• Medigap Plan G. Covers all features of Medigap Plan F, except that it does not pay for Part B deductible.
• Medigap K-N. Covers all features of Medigap Plan C, except that they are designed to pay only a portion (such as 50 or 70 percent) of some coinsur- ance payments.
Medicare SELECT. Medicare SELECT, offered in some states as a managed care Medigap plan, provides full Medigap coverage only if the participant uses the plan’s network of health care providers. These policies have lower premiums than the standard Medigap plans which do not restrict the choice of providers.
Retirement Health Plan as the Medigap Insurance? If a Medicare enrollee contin- ues to be covered after retirement by an employer-sponsored health plan, the employer’s plan is considered to be the primary payer, relegating Medicare as the secondary payer. However, an employer-provided plan for retirees may be converted into a Medigap policy. Indeed, some insurance policies automatically change coverage when the employee reaches the age of 65 because they assume that the employee will sign up for Medicare. Table 5.3 provides informa- tion on Medicare and medical supplement insurance at a glance.
Table 5.3 Medicare and Medical Supplement Insurance (at a Glance) Medicare Patient Pays
(2016) Medigap Coverage Generally Pays
Part A – Hospital Insurance
Everything except
deductible Medigaps A, B, C, D, F, G, K, L, M and N pay all part a coinsurance and hospital insurance for up to 365 days after medicare benefits are exhausted.
Medigaps B, C, D, F, G, and N pay 100% of the deductible
Medigaps K and M pay 50% of the deductible
Medigap L pays 75% of the deductible Part A –
Skilled Nursing Care
Post-hospital care in
skilled nursing facility Medigaps C, D, F, G, M and N pay 100% of costs
Medigap K pays 50% of cost Medigap L pays 75% of cost Part B – Physician
and Out-patient $0 deductible for 1–60 days
$322/day for days 61–90
$644/day for days 91 and beyond* of each benefit period.
Medigaps A, B, C, D, F, G, and M pays 100%
of coinsurance or copayment
Medigap N pays 100% of coinsurance or copayment, subject to out-of-pocket limit Medigap K pays 50% of coinsurance or
copayment
Medigap L pays 75% of coinsurance or copayment
Medigaps C and F pay 100% of the Part B deductible
Medigaps F and G pay 100% of excess Part B charges
Hospice Care Covers all costs for individuals with a life expectancy of six months or less. Benefits are provided for up to two 90-day periods, plus an unlimited number of 60-day periods.
Medigaps A, B, C, D, F, G, M and N pay 100%
of costs
Medigap K pays 50% of cost Medigap L pays 75% of cost
Foreign Travel
Emergency Most or all costs will be the
responsibility of the patient Medigaps C, D, F, G, M and N pay 100% of costs up to plan limits
Source: Author’s own work.
Note: Items not covered by Medicare Parts A and B, include: long-term care, custodial care, over-the- counter drugs, self- administered prescription drugs, most eye exams and eye glasses, most dental care and dentures, hearing aids and fittings, cosmetic surgery, experimental procedures, most chiro- practic services, most care outside of the US, etc.
Important Developments
Medicare Act of 2003. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 was the first major modification of the Medicare program since its inception in 1965. This Act introduced several new benefits for individuals who are eligible for Medicare, all of which are voluntary, includ- ing the much advertised prescription drug benefit. Through the creation of HSAs, the law also expanded the health care options available to individuals who are not yet eligible for Medicare. The provisions of the new law were grad- ually implemented, beginning in 2004. The following time line was provided by the 2003 Act:
Effective Date Provision that Become Effective January 1, 2004: Individuals covered by high-deductible health plans may
establish HSAs.
June 1, 2004: Medicare recipients will be able to purchase and use prescription drug discount cards.
January 1, 2005: The deductible for Medicare Part B will increase.
January 1, 2005: Medicare will begin offering new preventive health benefits.
January 1, 2006: The new Medicare prescription drug benefit will take effect.
January 1, 2006: Tax-free subsidies will be paid to employers who offer retiree health benefits.
January 1, 2006: Medigap supplement policies will change.
January 1, 2006: Medicare Advantage plan choices will expand.
January 1, 2007: The Medicare Part B premium will be linked to income.
January 1, 2010: Private plans will be allowed to compete with traditional Medicare on a limited basis.
Medicare Act of 2003 Created Health Savings Accounts. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Act) created the HSA. The HSA can be used by virtually anyone with a high deductible health insurance plan. The HSA is similar to the Archer Medical Savings Accounts (Archer MSA); but HSAs come without the latter’s restrictions or limits on partic- ipation. HSAs may be funded by tax-deductible contributions from either employees or employers, including by cafeteria plans. Distributions from HSAs to reimburse participants for medical care expenses are tax-free. Undistributed balances may be carried forward from year to year.
The Medicare Act created Section 223 of the Internal Revenue Code provid- ing for HSAs. In 2015, it offered individuals and families additional opportu- nities to save for current and future health care with a HSA as follows: (a) HSA
holders can choose to save up to $3,350 for an individual and $6,650 for a family (HSA holders 55 and older get to save an extra $1,000 which means
$4,350 for an individual and $7,650 for a family). These contributions are 100 percent tax deductible from gross income. (b) Minimum annual deductibles are $1,300 for self-only coverage or $2,600 for family coverage. (c) Annual out of pocket expenses (deductibles, copayments, and other amounts, but not premiums) cannot exceed $6,450 for self-only coverage and $12,900 for family coverage.
Distributions from an HSA are excluded from income to the extent that they are for qualified medical expenses, as defined in IRC Section 213(d). The reference to IRC Section 213(d) implies the same broader definition of qualified medical expenses that the IRS approved for Health flexible spending accounts, including the cost of over-the-counter drugs if prescribed by a doctor. With certain excep- tions, qualified medical expenses do not include payments for health insurance coverage, so the HSA could not be used to pay the premium for the high deduct- ible health plan. The exceptions apply to the payment of premiums for the following coverage:
• COBRA continuation coverage
• A qualified long-term care insurance contract
• Any health plan maintained while the individual is receiving unemploy- ment compensation
• For those eligible for Medicare, any health plans other than a Medicare supplemental policy.
HSAs permit contributions by eligible individuals, their employers, or both, including contributions made through pre-tax salary reductions under cafeteria plans. The Medicare Act amends Section 125 of the Internal Revenue Code to add HSAs as a qualified benefit under cafeteria plans. This amendment permits long-term care insurance premiums to be paid through an HSA funded through a cafeteria plan, even though long-term care insurance is excluded as a qualified benefit under Section 125.
HSAs under Section 223 effectively replace the Archer MSA plan, which was formerly provided by Section 220. Archer MSAs and HSAs served the same function; however, the MSA was limited to self-employed individuals or small employers. It should be noted that Archer MSA program expired on December 31, 2007. An existing Archer MSA balance can also be rolled over to an HSA.1
1 This article was produced by John H. Fenton.