MEDICARE MAGIC: HOW IT WORKS

February 20, 2012

Poof! Turn 65, and Medicare magically becomes interesting. But what exactly is Medicare insurance and how does one take advantage of this benefit?

Medicare is a national social insurance program, administered by the U.S. Federal Government, which guarantees access to health insurance for Americans ages 65 and older, and younger people with disabilities. Before Medicare, only half of older adults had health insurance, with coverage either unavailable or unaffordable to the other half. Older adults had half as much income as younger people and paid nearly three times as much for health insurance.

In 1965, Congress sought to alleviate this problem by creating Medicare. Under Title XVIII of the Social Security Act, Medicare provides health insurance to people age 65 and older, regardless of income or medical history. In 1972, Congress expanded Medicare eligibility to include younger people with permanent disabilities. Medicare legislation was also used to spur the racial integration of thousands of waiting rooms, hospital floors, and physician practices by making payments to health care providers conditional on desegregation. (1)

Today, Medicare provides health insurance to 48 million Americans—40 million people age 65 and older and eight million younger people with disabilities. Medicare serves a large population of old, sick, and low-income people. Without Medicare, many would not have access to health insurance or needed medical care. (2)

Medicare has four parts—A, B, C, and D. Initially, traditional Medicare, sometimes called “original Medicare,” was the only option available to enrollees. Medicare included only Part A which covers inpatient hospital, skilled nursing facility, home health, and hospice care, and Part B which covers physician, outpatient, home health, and preventive services. Medicare Parts A and B cover all “reasonable and necessary” medical services and hospital services, including lab tests, skilled nursing and some home health care, but exclude vision, hearing, dental and long-term care. Congress later established Part C, which allows Medicare enrollees to participate in private health plans that must cover all the Part A and B benefits as an alternative to traditional Medicare. In 2003, Congress created Part D, which covers outpatient prescription drugs, also available through private plans.

Medicare today offers enrollees the choice of an open-network plan (Traditional Medicare) or a network plan (Medicare Advantage) with a standard benefit package. 76% of people with Medicare have traditional Medicare. The remaining 24% have a Medicare Advantage plan. With traditional Medicare, the federal government pays directly for health care. (3) With Medicare Advantage, the federal government pays for private health plans, which can offer additional benefits. Medicare enrollees generally have Parts A and B. If they elect to participate in Medicare Advantage, they also will have Part C. In addition, if they need prescription drug coverage, they might have Part D.

On average, Medicare covers about 48% of health care costs for enrollees. Medicare enrollees must cover the rest of the cost. These out-of-pocket costs vary depending on the amount of health care a Medicare enrollee needs. They might include uncovered services—such as long-term care, dental, hearing, and vision care—and supplemental insurance. (4)  As you study the benefits of Medicare, the gap in the coverage provided by the Federal Government becomes apparent. When you approach the age of 65, there will be no shortage of mail and brochures on various Medicare supplement plans, and invitations to insurance seminars by insurers sent to your doorstep. That’s why Medicare enrollees have to pay attention; otherwise, they could find themselves without supplemental insurance or paying much higher premiums than they expected.

Choosing a supplemental plan, whether it’s a Medigap policy that includes a drug plan to go with the original Parts A and B, or a Medicare Advantage plan (often called Part C), that wraps everything into one HMO-type plan, is a highly individual matter. It really comes down to what your medical needs are—which drugs you take, which doctors you want to see, and so on. Because plans and costs vary by region, you can focus on the plans available in your area.

Here’s what you need to remember:

  • The deadline for choosing Medicare supplemental insurance is usually the first week of December of each year. You need to watch your mail, read the information carefully, and act accordingly.

Most Medicare information is clearly written and easy to understand, so you shouldn’t have any trouble making sense of the materials presented. The challenge is analyzing the countless variables that may or may not come into play depending on your own expected health care experience. Will you be hospitalized? Will you stay healthy? Will you be diagnosed with a serious condition? You need to weigh all these things for yourselves, and decide how much coverage you want to carry at what cost.

Government benefits are very important, but they are only a part of what you will need as you retire. The personal decisions you make today will determine your financial security and peace of mind in your retirement years.

We provide advice to our clients for retirement and government benefits in order to help them make good decisions. We would welcome the opportunity to talk to you about your planning for the future in a responsible and professional way.

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References:

1.  National Academy of Social Insurance Research, Strengthening Medicare’s Role in Reducing Racial and Ethnic Health Disparities, October 2006

2.   American Academy of Actuaries, January 2002

3.  The Henry J. Kaiser Family Foundation Research, Plan Enrollment Patterns & Trends, June 2010

4.  The Henry J. Kaiser Family Foundation Research, Medicare Chart book, 4th Edition, 2010

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C. Herb McCarthy
Long Investment Advisory, Inc.

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