Medicare is a health care program funded and operated by the federal government. Medicare is an entitlement program, not a means-based one. The program currently insures approximately 39 million Americans at a cost of $213 billion annually.
Medicare functions in many ways like conventional health insurance programs. It is available to anyone over the age of 65 (provided only that the individual would be entitled to receive Social Security benefits if he or she chose to retire) and anyone under the age of 65 who has been receiving Social Security Disability Insurance (“SSDI”) for at least two years.
Recipients of Medicare often must contribute to their coverage costs by paying co-insurance or deductibles. Moreover, Medicare does not cover all services. Primarily, Medicare pays only for “acute care” – not care which Medicare views as preventive or needed for chronic health issues. (Accordingly, Medicare does not pay for “custodial care,” such as that provided by long-term home health care, adult day care, assisted living and long-term nursing home care.) In order to minimize the resulting out-of-pocket costs, Medicare recipients often purchase “Medigap” policies – supplemental policies the help cover the gaps in Medicare coverage. As with any insurance policy, when picking a Medigap policy, make sure you understand what the policy covers and what its terms are.
Medicare eligibility may obviate one’s need for additional asset planning. However, without substantial or income, one may find it difficult to pay either for prescription drugs (which traditionally has not been covered by Medicare, though the program began partial drug coverage in 2004) or for long-term care (which is largely outside Medicare’s coverage). Accordingly, some Medicare-eligible people may find it important to use asset-planning as an alternative.
The services available under Medicare differ depending on the specific “Medicare Part” one is enrolled in. Part A covers hospital stays; Part B covers doctors’ fees; Part C provides for recipients to receive their care from third parties; and Part D provides prescription drug coverage. Each “Part” is discussed in detail, below:
Medicare Part A: Medicare Part A provides hospital insurance and covers the costs associated with in-patient hospital care, skilled nursing facilities, hospice and home health care. Most Medicare Part A recipients do not pay a Part A Premium because either they or their spouses paid Medicare taxes while working. A person who is not eligible to receive Part A free of charge may be entitled to pay for it.
Part A Coverage Gaps: Medicare does not provide for all hospital-related costs. Medicare will pay for a recipient’s hospital stay for up to 90 days for each “spell of illness,” with no cap on the number of illness spells. Medicare beneficiaries also have an additional lifetime reserve of 60 days of hospital stays that Medicare will cover. However, before Medicare will begin coverage, the recipient must first meet a deductible. The deductible, which changes annually, is $1,156 in 2012. Medicare will not pay for experimental or medically unproven treatments.
Here are the 2012 co-insurance costs for Medicare Part A:
Co-Insurance for Hospital Stays:
- Yearly Deductible – $1,156
- Days 61-90 – $289 per day
- Days 91-150 – $578 per day (taps into 60-day lifetime reserve)
- Days 151 and above – all costs
Co-Insurance for Skilled Nursing Facilities:
- Days 21-100 – $144.50 per day
- Days 101 and above – all costs
Medicare Part B: Medicare Part B basically covers out-patient care, including visits to medical specialists, diagnostic tests, preventive services, out-patient therapies and ambulance transportation. Part B also covers home health services so long as the beneficiary is not enrolled in Part A. In 2011, new enrollees in Medicare Part B who have less than $85,000 in annual income ($170,000 for couples) pay a monthly premium of $115.40. Enrollees in higher income brackets pay increased premiums.
Gaps in Part B Coverage: Part B recipients pay 20 percent of Medicare’s approved rates for physicians’ services, outpatient hospital treatment, medical supplies and durable medical equipment.
Medicare Part C: Otherwise known as a “Medicare Advantage Plan,” Medicare Part C is a popular alternative for people wishing to avoid the coverage gaps in Medicare Parts A and B. Plans under Medicare Part C essentially function like a traditional HMO or PPO policy. The plan provider is responsible for covering the insured’s care, for which Medicare pays the provider a fixed monthly amount. Although Part C plans are governed by Medicare’s rules, they may differ from each other with regards to co-payments, annual deductibles and referrals.
Medicare Advantage plans often offer perks such as free gym memberships as an incentive to attract new members. When choosing a Medicare Advantage plan, be careful not to base your choice on these added and unnecessary fringe benefits at the expense of the more critical item, healthcare coverage. Rather, make sure that your doctors are in the plan’s physician network, and try to learn about other people’s experiences with the plan. Keep in mind that once a Part C plan is picked, there are limitations on how and when it can be switched.
Part C plans can be restrictive. Ultimately, using Medicare Parts A and B along with a supplemental policy will generally provide a greater pool of doctors and services to choose from than those found in a Medicare Advantage Plan.
Medicare Part D: Medicare Part D provides subsidizes prescription drug costs through private health insurers who contract with Medicare to market drug plans. Part D is available, for a cost, to anyone enrolled in Medicare Part A or Medicare Part B. Elderly or disabled Medicare recipients who elect for drug benefit coverage will pay an average monthly premium of $30 in 2012, depending on the specific provider being used.
Part D recipients must first meet a deductible ($310 in 2011) before coverage kicks in. After the deductible is met, Medicare will pay 75 percent, or $1,890, of prescription drug cost up to $2,520 (in 2011), with the recipient paying the other 25 percent, or $630. Coverage then stops completely until the recipient’s out-of-pocket costs reach $4,550 (in 2011), after which Medicare will cover approximately 95 percent of additional costs through its “catastrophic coverage” program. The $4,550 in out-of-pocket costs is comprised of the $310 annual deductible, the $630 (25 percent of costs up to $2,520) and an additional $3,610 the recipient must pay alone. This $2,660 gap is what is known as the “doughnut hole” – Medicare Part D recipients must cover this amount themselves.
The best way to avoid the “doughnut hole” is to pick a Part D plan with low drug prices. This is because it is drug costs – not premiums, co-payments or deductibles – that contribute to the first $1,890, bringing the gap closer. Importantly, only drugs that are actually covered by the plan contribute towards out-of-pocket expenses for purposes of the Part D threshold. You can use this calculator to determine the potential drug benefit savings you will have under Medicare Part D.
Beginning in 2011, those in the “doughnut hole” will receive coverage from their plan for at least 7% of the cost of generic drugs, as well as a 50 percent discount, paid by the manufacturer, for brand-name drugs. An interesting benefit of this is that, although the Part D recipient’s out-of-pocket expense while in the “doughnut hole” for brand-name drugs is only 50 percent of their actual price, Medicare treats it, for purposes of getting out of the coverage gap, as if the full price was paid. Over the coming years, Medicare will phase in additional discounts for both brand-name and generic drugs and it is anticipated that by 2020, there will be only a flat 25 percent co-payment for either.
Low-Income Subsidization: Low-income New Yorkers may be eligible to receive prescription drug coverage from New York State’s Elderly Pharmaceutical Insurance Coverage (“EPIC”) program or additional subsidization of Medicare Part D from the Social Security Administration in a program called “Extra Help.” These programs help bridge the coverage gap left by ordinary Part D plans and can also reduce or eliminate deductibles and co-payments. Those who qualify for full Extra Help do no pay a monthly Part D premium so long as their Part D plan’s premium is at or below Medicare’s “regional benchmark.”
As previously mentioned, Medicare does not pay for long-term care. This is because Medicare views itself as a provider of medical care, not care for assistance with basic activities of daily living (“ADLs”) such as dressing, toileting, bathing and meal preparation. Such assistance, or “custodial care,” includes long-term home health care, adult day care, assisted living and long-term nursing home care. The two primary providers of custodial care are Medicaid and long-term care insurance carriers.
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