Earlier this year, I had my happiest birthday ever. The reason it was my happiest and most anticipated birthday is that I turned 65 and was thus eligible for Medicare. For the past 20 years due to a pre-existing condition, my health insurance situation ranged from having no insurance to being on TennCare (with premiums based on income) to an expensive HIPPA policy to finally a very expensive, very high deductible state high risk pool administered through BCBS. So, I was (and am) very excited to be eligible for good, affordable health insurance through Medicare.
However, when I began the process of studying my options under Medicare, I learned that the program was somewhat different than I had previously thought. This year, as Medicare became the subject of debate, I began to look further into the funding and the fiscal sustainability of the program. What I learned was also surprising to me.
Since I believe that others may also not be aware of exactly how the program works, its funding, and the sustainability problems, I decided to write this diary detailing what I have learned. This will be a relatively basic view of Medicare, focusing on the program as it relates to seniors, and will not cover Medicare as it relates to those under 65 whose eligibility is based on disability.
Overview
Basic Medicare has 3 parts (A, B and D):
Part A is hospital insurance which helps pay for inpatient care in a hospital or skilled nursing facility (following a hospital stay), some home health care and hospice care. This part is paid for through the Medicare portion of FICA taxes and requires no further premium from beneficiaries who have sufficient quarters paid in. The trust fund for Part A (HI trust fund) has been redeeming the bonds in the fund since 2008 to pay the expenditures and the funds will be exhausted in 2024 after which Part A will only have the current FICA taxes without changes.
Part B is medical insurance which helps pay for doctors’ services and many other medical services and supplies that are not covered by hospital insurance. This part is paid partially by premiums from beneficiaries and partially from the general fund. Premiums from beneficiaries cover approximately ¼ of the cost while the general fund covers about ¾ of the cost.
Part D is prescription drug coverage. This is an extremely complicated program and is administered by private insurance companies. This part is also paid for partially by premiums and the rest from the general fund. Premiums from beneficiaries plus a few other sources of funding cover approximately ¼ of the cost while the general fund covers about ¾ of the cost.
In addition, many seniors also buy a Medigap or supplemental insurance plan from a private insurance company to pay the deductibles and co-pays that Medicare does not pay. These are private insurance company policies. There are a number of options available which pay different benefits, but each of the various options (called Plans) has a standard benefit package set by the government. In other words, all Plan A’s have the same benefits, all Plan F’s have the same benefits, etc. no matter which insurance carrier one chooses. This is paid for by beneficiaries’ premiums to the insurance company.
Part C is better known as Medicare Advantage and is George W. Bush’s attempt at privatizing Medicare, in my opinion. These policies are private insurance policies which replace Parts A and B and often Part D. Some (perhaps many) also offer other benefits such as vision, dental, hearing, and gym memberships. Since I was not interested in a plan meant to replace original Medicare with a private insurance policy, I don’t know as much about how Medicare Advantage works. It is paid for by premiums and by an even larger subsidy by the general fund.
Deductibles and co-pays.
The deductible for Part A in 2011 is $1,132. After that, there is no cost to the beneficiary for a hospital stay between 1 day and 60 days. The cost is $283 per day for days 61-90 of a hospital stay, $566 per day for days 91-150 of a hospital stay (Lifetime Reserve Days) and all costs beyond a 150 day stay. For skilled nursing home stays, the cost is $141.50 per day for days 21 through 100 each benefit period. There is no cost to beneficiaries for the first 20 days.
The deductible for Part B is $162 per year. After that it is an 80-20 plan with Medicare paying 80% and the recipient paying 20%.
For Part D, the standard benefit has a $310 deductible, then the beneficiary pays approximately 25% of drug costs up $2,830 (this is based on the total cost of the drugs, not what the beneficiary paid.) Once the $2830 is reached, the beneficiary pays the full cost of the drugs until the total out of pocket expenses (not including premiums) reach $4,550 until this year. This is the famous donut hole. After that, the beneficiary pays 5% of the cost, while the government pays the other 95%. The ACA has begun reducing the donut hole and this year, seniors had to pay only 50% of the cost of brand-name drugs while in the donut hole instead of the 100% in previous years. The donut hole will be closed in 2020. Here is an excellent article on how the ACA is reducing premiums as well as other changes that benefit recipients. Different policies offer different deductibles, different co-pays and different formularies (which can change at any time).
Premiums
There is no premium for Part A if you paid in for 40 or more quarters through the Medicare portion of the FICA tax. If you had fewer than 40 quarters, you will pay a premium based on the number of quarters you did pay in.
Basic premiums for Part B for those entering this year are $115.40. For those who entered in 2010, the premium is $110.50, and for those in the program before 2010, the premium is $96.40. The reason for the difference is the hold harmless provision of the Medicare Act which limits increases in Part B premiums to the amount of the COLA for Social Security and there has been no COLA increase for the last two years so that there could be no increase in premiums for people already enrolled and having their premiums deducted from their Social Security benefit. However, if you make over $85,000 (filing as an individual) or $170,000 (filing jointly), you pay a higher premium. For those between $85,000 ($170,000 joint) and $107,000 ($214,000 joint), you pay $161.50. This premium progressively goes up to a maximum of $369.10 for individuals making over $214,000 or $428,000 for joint filers.
Part D premiums depend on the insurance company chosen. Medicare does have a helpful webpage where you can plug in your drugs and see what the costs are for the various plans. Some pay all or part of the deductible. The available plans are different for different locations. You have to plug in your state and county to find the plans available for your area. Premiums vary widely. I pay $40 per month for the one I chose, then $7 for generics and $44 for each of the other 2 drugs I take, which are both Tier 2 as I recall. (Tier 1 would be a little less and Tier 3 would be more than the $44.) Like Part B, high income beneficiaries pay a higher premium.
Medigap (supplemental insurance) policies are also location specific. The premiums vary widely for the same location and the same plan depending on the insurance company. I pay $90 per month for a Mutual of Omaha Plan F policy which was the least expensive Plan F I found. The premium rises with your age for most policies, though there are some which are rated in other ways than age attained. Plan F pays all deductibles and co-pays plus some other benefits that Medicare does not pay. Other plans have different benefits so some plans cost less and some cost more than the one I chose. For instance, if a plan does not pay the deductible, it would obviously cost less than a plan which does pay the deductible.
So, this is a basic overview of how Medicare works and a glimpse at the funding. My second diary will go into the funding and sustainability problems in more detail and suggest some reforms that will help keep the program solvent for future generations.