Medicare Is Not Free, As Many Would Believe.

A retired couple can expect to
spend about $6000 per year (or more) for Medicare. And since Medicare does not “cover”
all costs, there will be added expenses as well.


Part A, generally for
hospitalization, is paid fully by the Medicare Trust Fund supported by the
Medicare tax described in my last post, which you paid into all of your working
life.  Part B, generally physician fees,
is paid 50-50 by the individual and the federal government from general tax
revenues, not the Trust Fund. In 2013 the enrollee fee is $105 per month,
progressively higher for those of greater income. 


Since Medicare Part A and B pay for
about 75% of covered services, most individuals purchase a Medigap policy sold
by private insurers. There are multiple “levels” of Medigap coverage as
specified by the government, each level costing more. Medigap policies only pay
toward the part of covered services that Medicare does not pay for. Hence
Medigap polices do not assist with services that are not covered by Medicare. [Those
with a defined benefit federal, state or local government, company or union
pension often have built in health care coverage which means that they have
Medicare Part A plus pension-paid Part B and a pension-sponsored supplement
that may also pay for non-Medicare covered services such as drugs, vision and
hearing plus some or all of the various Medicare deductibles and co-pays.] 


Non-covered services would include
extended stays in the hospital, many complementary medicine practitioners,
certain at home care such as IV antibiotics, etc. In addition, Medicare (as
with almost all commercial insurance) does not cover indirect healthcare
expenses such as travel to a specialty center, overnight accommodations,
parking, mileage, etc. Not to suggest that Medicare should pay for these
expenses but of course these are costs nevertheless that may eat into a retired
person’s savings rapidly.


Part D, the drug coverage program, is
paid jointly by the federal government out of general tax revenues and by the
individual. Basically, the government gives private insurers a set amount per
enrollee (“premium support”) which is equal to about 75% of the expenses of
running the program and the insurer then collects whatever is needed to make up
the difference from the enrollee. By offering different levels of coverage, an
individual can spend more or less that the remaining 25%.  Part D premiums per person have a wide range among
participating insurers with an average in 2013 of about $40 per month. However,
the costs can still be high for the average person who needs multiple
prescription drugs. Generics may be fully covered or have only a low co-pay.
But brand name or newer medications may require very high co-pays or are not
covered at all. And once a threshold of $2970 in total drug costs has been
reached, Part D offers only partial coverage (the coverage gap) until an
individual has reached a total out of pocket cost of $4700 after which
“catastrophic coverage” kicks in and Medicare then pays 95%. This has been
called the “donut hole” and is being largely eliminated over time by the
ACA/Obamacare legislation. 


Thus Medicare is not free. A
retired couple can expect to spend about $6000 per year (or more) for Part B
($1200/year X2), Part D ($500/year X2) and a Medigap policy (about $1200/year
X2). Add to this the cost of non-covered services, deductibles and co-pays and
uncovered drug costs and the total costs of care can be quite high. Indeed over
10% find they are spending over $8000 per year related to Medicare-covered
services, perhaps substantially more for other services. 


There is another Medicare option
known as Medicare Advantage or Part C. Basically private insurers provide the
same coverage as traditional Medicare in a managed care approach with a limited
physician and hospital network. Urgent and emergent care must be covered no
matter where provided. The insurer receives an amount of money per enrollee
from Medicare that approximates what Medicare calculates the average beneficiary
would consume under Part A in a given year for that geographic area plus a
bonus amount. This extra amount is set to decrease over time as a result of the
ACA legislation. Private insurers then charge for Part B and have found that
they can offer the Medicare-mandated coverage and have enough money left over
that they can also offer added coverage such as dental, vision, hearing, etc.
Usually these programs offer drug coverage at much lower rates than Part D or even
no added cost to the individual. So a person can often save on what they would
have paid for Medigap and Part D insurance and still have broader coverage. 


About 25% of Medicare enrollees
have opted for Medicare Advantage, finding that they get more coverage yet
spend the same amount or actually save money. Removing those with
pension-related assistance with Medicare (see above), the percentage who opt
for Medicare Advantage is very high. As fewer and fewer Americans will retire
with defined benefit pensions in the future, it is likely that the numbers
using Part C will increase much further.


So, at $6000 or often substantially
more, a retired couple may end up contributing a substantial amount of their
annual income toward their health care insurance coverage. With rising annual
health care expenditures per capita, and with seniors having many expensive-to-treat
chronic illnesses, it can only be expected that the premium costs for Medicare
Part B and Part D will continue to rise. There is nothing in the ACA or any
other pending legislation that would significantly reduce these annual
expenditures. The critical issue is to find ways to reduce health care costs so
that insurance costs can be reduced or at least be maintained level. Some
recommendations to do this will be offered in later posts. 


The next two posts will describe
the opposing approaches of the two political parties.”