This is one in a series of Under the Hood articles that provides insight into common issues faced by advisors and their clients.
Medicare was created through Title XVIII of the Social Security Act in 1965 and became effective in 1966. This program, administered by the federal government, was originally created to provide medical coverage for qualifying individuals 65 and older and the disabled. However, I suspect that no one at that time predicted the medical advancements which were to come and the longer life expectancies which ensued.
In this article, we'll discuss the various parts of Medicare, some of its history, and the provisions of Medicare Parts A, B, C and D.
The History (and Side Effects) of Medicare
In the beginning, Medicare was a bit more than a social health insurance program. It also played a role in the racial desegregation of America because payment to medical providers was conditional. In short, if the medical provider refused to accept minorities, the government refused to pay the provider.
Over the past 48 years, Medicare has added several illnesses to its coverage including hospice care in 1982 (made permanent in 1984); speech, physical and chiropractic therapy in 1992; and ALS (i.e.; Lou Gehrig's disease) in 2001, to name but a few. However, as mentioned, with the longer life expectancies experienced by the population since its inception, Medicare and Medicaid (i.e.; state insurance for the poor) have become the largest item (combined) in the federal budget today, with an estimated cost of over $900 billion per year and rising. Medicare alone cost about $492 billion in 2013.
In 1967 when the House Ways and Means Committee published its projected cost of Medicare in 1990, it figured it would be $12 billion. The actual cost that year? A staggering $98 billion.
How to Qualify
Medicare covers those aged 65 and older, along with younger persons with disabilities and end-stage renal failure. To qualify at age 65, a person must have been a U.S. resident for at least five years and they or their spouse must have paid Medicare taxes for at least 10 years.
Medicare Part A
Medicare Part A covers in-patient hospital expenses (with limits); skilled nursing care and nursing home care (under certain circumstances and with limits), and hospice care. As for the limitations to coverage, there is a limit of 90 days per stay in a hospital, plus a coinsurance. During the first 60 days there is no coinsurance. However, from day 61 to 90, the individual is responsible for a co-pay of $304 per day. From the 91st day on, the coinsurance is $608 per each "lifetime reserve day" up to a maximum of 60 days total over the individual’s lifetime.
To clarify, a lifetime reserve day is any day over the first 90 days of an individual's lifetime. For example, if a Medicare patient were in the hospital for 100 days during one hospital stay, the last 10 days would be considered "lifetime reserve days" leaving the person with 50 of these days to use over their lifetime. The point here is that Medicare Part A has some potentially expensive gaps which is why a person should purchase a Medicare supplement plan (or see Medicare Part C below).
Medicare Part B
Medicare Part B is optional and covers outpatient expenses such as lab tests, outpatient surgeries, doctor visits and limited outpatient prescription drugs (typically not drugs you would administer yourself). Coverage begins after meeting an annual deductible of $147 (2014). After meeting the deductible, the individual must also pay a coinsurance of 20% of the Medicare-approved charges for services and drugs.
Medicare Part C is not actually a separate coverage, but is the part of Medicare which allows private health insurers to create Medicare replacement policies. In short, an individual may elect to purchase one of these plans in lieu of Medicare and a supplement.
In the past, an individual with Medicare would often buy a Medicare supplement to cover procedures or illnesses which Medicare did not cover. However, when Congress passed the Balanced Budget Act of 1997 it included a provision to allow what was originally called Medicare +Choice or Part C plans.
When Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the name of these plans was changed to Medicare Advantage plans. Therefore, Medicare Part C created the Medicare Advantage plan which is an option that can be purchased in lieu of traditional Medicare. Normally, these plans are fairly comprehensive in coverage.
Medicare Part D
This is the newest part of the Medicare program and covers prescription drugs. Moreover, it is also available to anyone with Medicare. There are two ways to obtain Medicare Part D coverage. They are:
1) Join a plan run by an insurance company or other private company approved by Medicare; or
2) Purchase a Medicare Advantage plan which covers prescription drugs (see Medicare Part C above).
Medicare Part D covers prescription drugs up to a maximum of $2,970 per year.
To find a Medicare Part D program, you can view the Medicare choices online or call 800-633-4227.
Medicare has become an integral part of the American fabric. Millions of individuals rely on it to pay for what has become a significant expense in their budget. As health care costs continue to rise, and life expectancies lengthen, it's clear that some action will need to be taken to preserve this important program.
I don't think many of the original legislators from 1965 could have imagined how costly Medicare would become and I doubt many of us today can fully appreciate the coming mushroom this program will create as the baby boomers cycle through the retirement turnstile. One thing seems certain, no politician or political party wants to be known as the party that killed Medicare.
In the next article in this Under the Hood series, we'll discuss the premiums for Medicare and the changes in the program as a result of the Affordable Care Act.
To see how Mike Patton uses Medicare premiums in his clients' financial plans, see his blog posting, Factoring Medicare Part B Premiums Into Financial Plans.