Inflation 1 (February, 2010)

We all can agree that health care has been a very hot topic over the past year. In the forefront of discussion is Medicare, which has somehow become the “poster child” for public health care in the United States. Because Medicare will affect all of us one day, it is important that everyone understand the benefits available, the rules for enrollment, and the financial concerns with the program.

First, I’d like to start out with a general overview of Medicare. The Social Security Act of 1965 created Medicare to provide insurance for people over 65. There were originally two parts to Medicare, Part A and Part B. Part A provides hospital and skilled nursing care coverage and is paid for by the government as long as the insured has 40 or more quarters of Medicare-covered employment. It is financed mostly by the Medicare tax of 2.9% split between employer and employee. There is a deductible of $1,100 per year.

Part B covers physicians and other out-of-hospital expenses. The insured person contributes to the cost through a monthly premium, currently $96.40 with a deductible of $155 per year. If you receive over a certain level of income or if you miss your initial enrollment period (discussed later), your premium may be higher. Medicare pays for only 80% of approved charges which often differ from actual charges. For this reason, some doctors refuse to accept Medicare, and this will only worsen if Medicare cuts reimbursement rates as proposed. Medicare Advantage plans are private plans that can help supplement Medicare benefits for an additional premium and are referred to as Part C.

In 2006, Part D, a prescription drug discount plan, became effective. This part has received a lot of attention lately as Congress and the White House have expressed plans to plug the large “doughnut hole.” The “doughnut hole” refers to a gap in coverage for drug costs between $2,830 and $4,550. After a $310 deductible, Medicare pays 75% of drug costs up to $2,830, then nothing until over $4,550, at which point it pays 95%.

So now that you know the gist of what benefits Medicare provides, let’s look at the rules for enrolling in the program. When an individual turns 65, he or she is eligible for Medicare. These days, many seniors are choosing to work past 65 and keep employer health benefits, which can limit your access to Medicare if you are not careful. So here are the rules for enrollment: If you are enrolled in Social Security, you are automatically entitled to Part A and B and a Medicare card will be mailed to you about 3 months before your 65^th birthday. If you aren’t receiving Social Security, you can enroll up to 3 months before your 65^th birthday and no later than 3 months after. If you fail to enroll during this initial enrollment period, you will have to wait until the general enrollment period which is January through March and coverage will not begin until July 1^st. Additionally, the cost of Part B may go up 10% for each 12 month-period that you could have had Part B but didn’t take it and this rate increase is permanent.

There are a few common trap seniors fall into when in comes to Medicare enrollment. One is not checking to see whether their company’s plan requires them to sign up for Medicare Part B upon turning 65. Secondly, some people receiving retiree medical benefits are unaware that the eight-month deadline applies to them. One last trap involves Cobra, a federal law that allows workers to temporarily stay enrolled in an employer’s health plan. If you miss your initial enrollment period, you will have to wait until July of the year you enroll for coverage. Some retirees have chosen to go with Cobra during the gap in coverage only to find out that the Cobra coverage is considered secondary to Medicare. Be sure to research the facts when it comes time for you to consider enrolling in Medicare.

I can’t discuss Medicare without acknowledging the severe financial strain it has on the government. Medicare spending accounts for a large portion of federal spending, trailing behind only Social Security and defense. Program spending is projected to grow around 8% annually. The Medicare Hospital Insurance Trust Fund is projected to be depleted by 2017. The Medicare Report shows that the HI Trust Fund could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134 percent increase in the payroll tax (from a rate of 2.9 percent to 6.78 percent), or an immediate 53 percent reduction in program outlays, or some combination of the two. Larger changes would be required to make the program solvent beyond the 75-year horizon.

That being said, the new Senate health care bill proposes a Medicare cut of $500 billion. What will Medicare cut, because clearly, something has to give? The first place to cut would be fraud, which is estimated to be around $60 billion a year. One has to be skeptical on this point. If eliminating fraud was so easy, why hasn’t it been done before now? Even after eliminating fraud, a lot of cuts still need to be made and they have to come from somewhere.

In conclusion, Medicare is a very beneficial program for senior citizens, but it does have many pressing concerns that endanger its sustainability in the future. In fact, Medicare is in even worse shape than Social Security which is also on a bad track. Until the issues with Medicare are resolved, I think it is best that the government focus on Medicare’s shortcomings before instituting yet another public option.