The ABC’s (and “D”) of Medicare
For most Americans in their early 60’s the thought of Medicare begins to creep into their consciousness. Generally at age 65 a person may qualify for Medicare coverage. According to the Kaiser Family Foundation there were 61.2 million Medicare beneficiaries by year end 2020 with Californians representing over 10% of that figure. In 2019 the Medicare program had expenditures of over $776 billion. The Medicare program is administered by The Centers for Medicare and Medicaid Services (CMS) and is a federal agency under the oversight of the United States Department of Health and Human Services. Such a large federal program may make you wonder: What is Medicare? What service or coverage does it provide? How much does it cost and how is it paid for? The following paragraphs will touch upon each of these topics.
I think it is worth noting straight away that although the Medicare is administered by the federal government, the program is not funded by the federal government. Since 2001, the U.S. has been spending at a deficit meaning we’ve had to borrow money through the issuance of treasury bonds to supplement tax revenues and pay for federal spending. This is a peripheral issue. The point I’d like to make is that the money to fund Medicare and other programs comes from taxpayers, and specifically in the case of Medicare, payroll taxes paid by employees, employers and self employed individuals. These tax receipts are funneled into the Medicare Trust Fund and distributed to fund the program. Any money that is borrowed by the government for this and other programs is repaid using taxes collected from taxpayers. In addition to tax receipts, Medicare also receives funding directly from beneficiaries through premium payments. Government administered? Yes. Government funded? No.
What is Medicare?
Medicare is a government administered, national health insurance program that was established in 1966. It primarily provides health insurance coverage to Americans age 65 and older. To put it another way, as you age and become more susceptible to illness and require care, Medicare offers assurance that you will be provided with the care you need. Medicare has four subcomponents: Part A, B, C and D.
Medicare Part A is also referred to as Hospital Insurance. This coverage is required and provides the beneficiary with coverage for hospital stays, skilled nursing for rehabilitation and convalescent services and finally, hospice services. Part A also provides coverage for surgery, lab tests and certain home health services.
Medicare Part B can be thought of as Medical Insurance. Part B is an optional coverage and provides the beneficiary with coverage for outpatient services such as doctor office visits, ambulance services, durable medical equipment (DME) such as crutches, walkers, wheelchair/scooters, oxygen equipment, and CPAP devices. Additionally, Part B provides coverage for preventive screenings for cancer, diabetes, cardiovascular disease and flu shots.
Before we move you may notice that there are certain benefits that were not mentioned. These include routine eye examinations, coverage for eyeglasses and contact lens, hearing screenings, prescription drugs as well as dental coverage. That’s because Part A and B does not provide these benefits. For coverage of these types of exams and screenings we’ll need to look at Part C.
Medicare Part C is also known as Medicare Advantage. Part C is an alternative to the government administered Medicare Program. Part C is offered through private insurance companies that are contracted with Medicare to provide benefits equal to or better than Medicare Part A & B.
Medicare Advantage is a combination of Medicare Part A, B and D (discussed below).
Think of it as “the bundle” your cable or telephone company are always trying to sell you on. The cost of buying the bundle is usually lower than purchasing the component parts individually. Another benefit is that Part C often offers additional coverage not provided by Parts A and B (e.g., eye examinations, dental coverage, prescription drug coverage etc.).
Medicare Part D is also known as Prescription Drug Coverage. Every Part D plan has a list of covered medications. Medicare’s website provides an official list of approved drugs and their pricing.
Most Medicare beneficiaries receive Part A coverage for free. Actually, it’s not really free. If there is no cost to the beneficiary at the time they receive the coverage that is likely because either they or their spouse, during the course of their working years contributed to the Federal Insurance Contributions Act (F.I.C.A.) tax. In other words, they’ve prepaid for their coverage. There are some circumstances where you may have to pay for Part A but for the most part, if you worked for 40 quarters (10 years) and paid the F.I.C.A. tax, you’re covered.
Medicare Part B coverage has a cost. The standard premium is $135.50/month however depending on your and/or you and your spouse’s income the premium for Part B may be as high as $504.90/month as of 2021.
Penalties for Late Enrollment
It’s important for you to be prepared to enroll into the Medicare program as you approach age 65. As mentioned above, there are typical no premiums due for Part A. However penalties for late enrollment into Part B could reach up to 10% of the annual premium and they are permanent. If the enrollee is covered under their employer or their spouses employer plan then they may defer enrollment until they are no longer covered by the employer plan. Lacking this caveat, it is important to enroll at age 65.
So that’s it. A brief, thirty thousand foot overview of an important component of financial planning. If you have questions about this or other topics feel free to reach out to me via email or by scheduling a Zoom or phone call.