October 2009 - Personal Planning

The current debate about universal health insurance coverage is capturing headlines daily and much of the discussion involves issues around Medicare. The fact is, however, that this program is still not very well understood by many people - particularly by those who are not yet old enough to participate. Medicare is the largest single health care payer in the nation, and currently covers approximately 45 million Americans. In about 20 years, it is projected to cover about 75 million people. In general, U.S. citizens or permanent residents who are age 65 or older are eligible for Medicare benefits if they (or a spouse) have worked for at least 10 years in a job that has paid money into the system through FICA (Federal Insurance Contribution Act) taxes or self-employment taxes. Exceptions to the age limit are made for some disabilities.

The sheer size and overall obligations of Medicare are at least partial explanations for the confusion over the program. Medicare Part A is the terminology used for hospital insurance, which helps pay for hospital care, skilled nursing facilities, home health care and hospice care. Most people who are eligible to receive these benefits will be able to do so without having to pay any monthly premiums. For coverage to start promptly at eligibility, individuals should elect coverage three months before their 65th birthday. If, however, they fail to elect coverage at age 65, they will still have annual opportunities to enact it. Medicare Part B provides medical insurance such as coverage for doctor services and outpatient care. This too is obviously desirable, but requires the payment of ongoing monthly premiums. Thus an individual who still has coverage through an employer may delay the election of this option; however, this delay will generally result in higher premiums.

In 2006, Medicare Part D came into effect, which provides coverage for prescription drugs (hence the “D” for drugs). The reasoning was that older and retired individuals should be protected from the high (and seemingly ever-increasing) cost of prescription drugs. Part D also requires beneficiaries to choose and enroll in a given plan and pay premiums. This prescription drug benefit also made previously existing Part C plans more attractive. These plans are more commonly referred to as Medicare Advantage Plans, and they give beneficiaries the option to receive their Medicare benefits through private health insurance plans. In addition to these major parts of Medicare, there are also supplemental medical insurance plans available known as Medigap Plans A to J. These plans are sold by private insurance companies to help fill gaps in coverage provided by regular Medicare, and they add features alphabetically and cumulatively, making Plan J the most wide-ranging supplemental coverage.

Of course, none of this deals with Medicaid, which is separate from Medicare, and provides health insurance to people with limited incomes who meet additional eligibility requirements. Combined, the spending on both Medicare and Medicaid is projected to grow dramatically in the coming decades, influenced by the same demographic trends that are expected to adversely affect Social Security. However, in addition to the fundamental problem that comes from the shrinking ratio of current workers available to be taxed to cover current recipient benefits, Medicare also suffers from the constantly rising cost of delivering health care services. As a result, in the coming decade Medicare alone is expected to account for about 15% annually of the federal budget. The Congressional Budget Office states that “future growth in spending per beneficiary will be the most important determinant on long-term trends in federal spending… and is ultimately the nation’s central long-term challenge in setting federal fiscal policy.” This evolving challenge, which influences the current debate, is primarily the result of Medicare being established as a “pay-as-you-go” program. As such, it remains an unfunded and ever-increasing liability of the federal government—and all taxpayers.