by Steve Goodman
CPA, MBA – President & Chief Executive Officer
Contact Steve today for more info.
Medicare was launched in 1965 to provide health insurance coverage for America’s seniors. It has become a very popular program with seniors and insurance companies. Like most government programs, it has grown and become far more expensive than ever envisioned. Roughly 60 million people are insured under Medicare.
In this article I will walk you though the “ABCD” of Medicare plans. That is, an explanation of parts A, B, C and D that make up Medicare.
The basic Medicare program consists of 4 parts, labeled A through D.
Covers hospital bills when a person is in a hospital or skilled nursing facility. It may also cover hospice care.
- People with qualifying work histories pay nothing for Part A coverage
- Part A benefits are subject to a deductible ($1,340 in 2018)
- Co-pays are required for extended stays
- People may sign up beginning 3 months before their 65th birthday. If you sign up within the 3-month period following your 65th birthday, you may have a six-month delay in starting.
Covers physician visits, outpatient services, preventive services, durable medical equipment, and some home health services.
- Part B benefits are subject to a deductible ($183 in 2018)
- Requires a monthly insurance premium ranging from $134 (2018) for individuals earning $85,000 or less increasing to $428.60 (2018) for individuals earning $170,000 or more.
- Requires co-pays on most Part B services
- Annual wellness visit and some preventive services require no payment by the insured.
- If a person is working and covered under a company medical plan, it is critical to speak with HR about possible conflicts with Part B benefits.
Medicare Advantage programs. These are private insurance programs, typically run on an HMO or PPO basis, that offers Medicare-like services. These programs often include Part D benefits and may also offer ancillary medical services, such as dental or vision care, not covered under Medicare. These plans are optional. (These plans are discussed in greater detail in this article.)
Covers prescription drugs. This part was added in 2003. It is an optional service offered by private sector organizations.
- Requires a deductible
- Offers catastrophic coverage for very high costs drugs
- Requires a co-pay
- Part D coverage has a coverage gap known as a ‘doughnut hole’.This coverage gap is scheduled to close by 2020. The doughnut hole left Medicare Part D patients paying a higher rate for drugs for a few thousand dollars’ worths of annual purchases for several years.
There are a few key takeaways that one needs to know to put explanations of Medicare Supplement programs (Medigap) and Medicare Advantage plans into context.
- Medical expenses under Medicare do not have a payment cap. Co-pays are required, and they are unlimited.
- Physicians and other medical providers do not need to accept Medicare patients. Medicare specifies limits on medical payments by service. These are often less than payments offered by health insurance companies.
- Medicare does not cover dental, optical, or some other medical needs.
Medicare Supplement (Medigap) Plans
Medigap plans are private insurance programs that restructure the payments required and potential liabilities incurred under Medicare Parts A and B. With just a few exceptions, these programs are strictly financial – they include no direct medical care. Those insured continue to use the same doctors who accept Medicare. Enrollees continue to pay Part B premiums.
Medigap plans offer standard Medicare features by law. They may add features but must cover 100% of the services paid for by Medicare Part A and Part B. There are roughly 10 standard plan variations. A Medigap Plan ‘K’ program in New Mexico will have the same benefits as a ‘K’ plan in Virginia, though the monthly premium may be different. Except for Massachusetts, Minnesota, and Wisconsin, all Medigap plans must conform to one of the Medicare-approved categories. The three named states have plans that are unique to their states.
The plans differ in terms of co-pays by service, foreign travel coverage, out of pocket limits, and a few other features. With the exception of foreign travel coverage, these plans are simple risk transfer programs. They reduce the risk of high co-pays and deductibles in exchange for a known monthly fee. Few Medigap policies include Part D coverage. The same insurance company may offer Part D policies separately.
The plans are sold on a state level. Prices will vary by location and issuer. Policies may be sold on an issue-age basis or an age level basis.
Medicare Advantage Programs
Medicare Advantage programs resemble the health insurance programs that many Americans have used for decades. These plans may be structured as HMOs or PPOs, with doctor networks and penalties for using out of network doctors – just like a traditional HMO or PPO plan. Private insurance companies sell their plans.
There are a few characteristics of the Medicare Advantage plans.
- They must cover 100% of the medical services covered by Medicare Part A and Part B. The one exception is hospice care which remains covered by Medicare.
- Many, but not all, plans cover Part D prescriptions
- Some plans offer dental and vision care
- These plans set their own copays and out of pocket amounts. Co-pays may be higher than those charged by Medicare.
- Medicare Advantage plans must have a ceiling on out of pocket costs ($6,700 in 2018). Medicare regulates this ceiling. Plans may offer a lower ceiling.
- Enrollees in Medicare Advantage plans enjoy all the rights and protections available to any Medicare enrollee.
- These plans can restrict an insured’s access to when and who provides medical treatment.
- Plans are typically open for new sign-ups at certain times of the year, usually in the fall. This may vary by state.
- Part B premiums must still be paid under a Medicare Advantage plan.
Medicare Advantage companies file new rates annually. These plans are rated by Medicare for quality on a five-point scale. The ratings are available on the Medicare plan finder website.
Selecting a Plan – Parts A and B
At age 65, people need to make a choice concerning their basic care. The choices are as follows:
- Accept Medicare Part A and Part B as is.
- Purchase a supplemental policy (Medigap) to mitigate costs and risks
- Purchase a Medicare Advantage plan to cap out of pocket costs.
You cannot enroll in a Medigap and a Medicare Advantage plan at the same time.
We will leave the Part D discussion for later.
If you are concerned about an uncapped out of pocket liability, consider Medigap and Medicare Advantage plans. Some Medigap plans cap out of pocket costs. All Medicare Advantage plans do.
If you want an inexpensive program to limit your costs, select a Medicare Advantage program. Medicare Advantage plans will limit your choice of doctors.HMO plans will require that you receive authorization to see a specialist. If cost is an issue, most Medicare Advantage plans can save you money while capping your risk.
If you want a program to limit your doctor co-pays, look into a Medicare Advantage plan. They have a different co-pay structure depending upon who you see for treatment. These plans can save you money.
If you want vision and dental coverage, only a Medical Advantage plan can cover this.
If you want the broadest possible choice in healthcare providers, you need to select either base Medicare plan or a Medigap plan.
If you want maximum flexibility when seeking medical specialists, you are best served with base Medicare or a Medigap plan. A Medicare Advantage PPO may not require prior authorization to see a specialist, but you will still need to consider in-network vs. out of network alternatives.
If you are still employed and have a health policy from work, you need to check with your benefits people at work. Either a Medigap or a Medicare Advantage plan could cause problems with coverage and possibly negate any use in having two policies.
If you qualify for Medicaid and Medicare, you should contact your state Medicaid office for advice.
Part D choices are simpler.
- Do not buy a Part D plan
- Buy a stand-alone Prescription Drug Plan (PDP)
- Buy a Medicare Advantage plan that includes Part D coverage
Only private insurance companies offer part D plans. Medicare does not offer a Part D plan directly.PDP’s are insurance policies. They charge a minimum monthly amount in return for reduced prices whenever prescriptions are needed. If you wait until you have an expensive drug need, the insurance company will demand a higher monthly rate and may delay benefits.
Part D plans are priced on an income basis. If an individual earns $85,000 or less, he/she will pay the minimum. The cost increases through individual income of $170,000.
Part D plans require a deductible. Once the deductible is met, there is a co-pay period. This period ends at a dollar level, followed by a period in which the insured must pay the standard Medicare retail price. At a further dollar amount, the co-pays are reinstated. This ‘doughnut hole’ situation in which drug prices increase should be eliminated by 2020.
Some Medicare Advantage plans include a Part D program as either a standard feature or an option.
If you have a prescription drug program through a union, government, or other plans for retirees, you may be required to pay for a PDP through the sponsoring organization. Many sponsoring organizations function as insurance companies for these benefits with Medicare.
The Future of Medicare
Medicare has had a cash shortfall in every year since it began except for 1966 and 1974. The program has shown cumulative losses of $4.7 trillion since it began. Medicare alone represented 49% of the US Government’s deficit in 2017.
Every year, the Medicare Trustees report on the plan’s financial status. The 2018 report showed a bankruptcy date of 2026 for the program. This is three years earlier than the 2017 estimate. Clearly, the program has financial concerns, though this is not the first time. In the early 1970s, the program came within two years of insolvency before Congress stepped in to save the program. In 2009, the program again came close to insolvency until the Affordable Care Act passed to relieve the pressure.
In the event Medicare does reach a state of bankruptcy in 2026, estimates show that Part A will only pay 91% of benefits due. Left unresolved, this will decline to 78% by 2039.
Medicare experts note that fixing Part A will require raising the annual payroll tax from 1.45% to 1.64%. Fixing Part B will require raising premiums from $1,608 to $6,191, a substantial increase.
Want customized advice on Medicare parts ABCD? Please contact me today.
CPA, MBA – President & Chief Executive Officer
About Steve Goodman
For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.
He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.