Medicare Is Not Free, As Many Would Believe

[Stephen C Schimpff]

A retired couple can expect to spend about $6000 per year (or more) for Medicare. And since Medicare does not “cover” all costs, there will be added expenses as well. 

Part A, generally for hospitalization, is paid fully by the Medicare Trust Fund supported by the Medicare tax described in my last post, which you paid into all of your working life.  Part B, generally physician fees, is paid 50-50 by the individual and the federal government from general tax revenues, not the Trust Fund. In 2013 the enrollee fee is $105 per month, progressively higher for those of greater income. 

Since Medicare Part A and B pay for about 75% of covered services, most individuals purchase a Medigap policy sold by private insurers. There are multiple “levels” of Medigap coverage as specified by the government, each level costing more. Medigap policies only pay toward the part of covered services that Medicare does not pay for. Hence Medigap polices do not assist with services that are not covered by Medicare. [Those with a defined benefit federal, state or local government, company or union pension often have built in health care coverage which means that they have Medicare Part A plus pension-paid Part B and a pension-sponsored supplement that may also pay for non-Medicare covered services such as drugs, vision and hearing plus some or all of the various Medicare deductibles and co-pays.] 

Non-covered services would include extended stays in the hospital, many complementary medicine practitioners, certain at home care such as IV antibiotics, etc. In addition, Medicare (as with almost all commercial insurance) does not cover indirect healthcare expenses such as travel to a specialty center, overnight accommodations, parking, mileage, etc. Not to suggest that Medicare should pay for these expenses but of course these are costs nevertheless that may eat into a retired person’s savings rapidly. 

Part D, the drug coverage program, is paid jointly by the federal government out of general tax revenues and by the individual. Basically, the government gives private insurers a set amount per enrollee (“premium support”) which is equal to about 75% of the expenses of running the program and the insurer then collects whatever is needed to make up the difference from the enrollee. By offering different levels of coverage, an individual can spend more or less that the remaining 25%.  Part D premiums per person have a wide range among participating insurers with an average in 2013 of about $40 per month. However, the costs can still be high for the average person who needs multiple prescription drugs. Generics may be fully covered or have only a low co-pay. But brand name or newer medications may require very high co-pays or are not covered at all. And once a threshold of $2970 in total drug costs has been reached, Part D offers only partial coverage (the coverage gap) until an individual has reached a total out of pocket cost of $4700 after which “catastrophic coverage” kicks in and Medicare then pays 95%. This has been called the “donut hole” and is being largely eliminated over time by the ACA/Obamacare legislation. 

Thus Medicare is not free. A retired couple can expect to spend about $6000 per year (or more) for Part B ($1200/year X2), Part D ($500/year X2) and a Medigap policy (about $1200/year X2). Add to this the cost of non-covered services, deductibles and co-pays and uncovered drug costs and the total costs of care can be quite high. Indeed over 10% find they are spending over $8000 per year related to Medicare-covered services, perhaps substantially more for other services. 

There is another Medicare option known as Medicare Advantage or Part C. Basically private insurers provide the same coverage as traditional Medicare in a managed care approach with a limited physician and hospital network. Urgent and emergent care must be covered no matter where provided. The insurer receives an amount of money per enrollee from Medicare that approximates what Medicare calculates the average beneficiary would consume under Part A in a given year for that geographic area plus a bonus amount. This extra amount is set to decrease over time as a result of the ACA legislation. Private insurers then charge for Part B and have found that they can offer the Medicare-mandated coverage and have enough money left over that they can also offer added coverage such as dental, vision, hearing, etc. Usually these programs offer drug coverage at much lower rates than Part D or even no added cost to the individual. So a person can often save on what they would have paid for Medigap and Part D insurance and still have broader coverage. 

About 25% of Medicare enrollees have opted for Medicare Advantage, finding that they get more coverage yet spend the same amount or actually save money. Removing those with pension-related assistance with Medicare (see above), the percentage who opt for Medicare Advantage is very high. As fewer and fewer Americans will retire with defined benefit pensions in the future, it is likely that the numbers using Part C will increase much further. 

So, at $6000 or often substantially more, a retired couple may end up contributing a substantial amount of their annual income toward their health care insurance coverage. With rising annual health care expenditures per capita, and with seniors having many expensive-to-treat chronic illnesses, it can only be expected that the premium costs for Medicare Part B and Part D will continue to rise. There is nothing in the ACA or any other pending legislation that would significantly reduce these annual expenditures. The critical issue is to find ways to reduce health care costs so that insurance costs can be reduced or at least be maintained level. Some recommendations to do this will be offered in later posts. 

The next two posts will describe the opposing approaches of the two political parties.