The Motley Fool explains what you ought to know about Medicare.
Apr 18, 2015 at 7:07AM
Source: Flickr user Garry Knight
Maybe you're interested in learning more about Medicare because you've noticed that Medicare makes your take home pay smaller. Or perhaps you're nearing retirement and you're curious what Medicare may mean to you in your golden years. Either way, we're here to help. Read on to learn what Medicare is, and isn't, and what you need to know about Medicare as you get older.
What is Medicare?
Medicare is a government-run health insurance program that was designed to provide basic medical coverage to seniors.
The program was born in 1965 under title XVIII of the Social Security Act, but while it was created under Social Security, the program is run by the Centers for Medicare and Medicaid Services, which is part of the Department of Health and Human Services.
Medicare consists of various "parts," each of which provides a different form of health insurance coverage.
Part "A" covers some of the costs associated with inpatient hospital stays and can cover some of the expenses of skilled nursing, home healthcare, and rehabilitation.
Part "B" Medicare is available to people who qualify for part "A", and it helps pay for certain healthcare expenses that are not covered by part "A", such as outpatient care, laboratory fees, chemotherapy, and certain other non-inpatient healthcare costs.
Medicare part "C" is also known as Medicare Advantage. Medicare Advantage plans are available through private insurers as an alternative to original Medicare.
Finally, beginning in 2006, Medicare recipients can also buy part "D" plans through private insurers that can help pay for prescription medicines.
How do you get Medicare and what does it cover?
Americans who have paid into the system via a payroll tax for a required period of time receive part "A" coverage for free once they reach 65.
For most Americans, the payroll tax is 2.9% annually, which is split between the employer and the employee. High income-earning Americans pay an additional 0.9% Medicare Tax on amounts earned above certain thresholds. For example, the threshold for a married couple filing jointly is $250,000, and the threshold for a single filing taxpayer is $200,000 in 2015.
Typically, a person who pays into the system for 10 years would amass enough credits to qualify for part "A" Medicare coverage. As a result, people who are 65 and qualify for Social Security, including as a spouse, usually also qualify for Medicare part "A." Although people can sign up for Social Security as early as 62, or as late as 70, everyone must sign up for Medicare three months prior to turning 65, or face penalties.
Certain people with disabilities, or with specific diseases, such as ALS or end stage kidney failure, may also qualify for Medicare when they're younger than 65. People who are 65 that haven't paid into the system can still enroll in part "A"; however, there will be a premium for enrollment, and that premium can be as high as $407 per month.
Once enrolled in part "A" coverage, Medicare begins paying for inpatient services once the enrollee has met his or her deductible for each benefit period. Currently, that deductible is $1,260. Part "A" pays for 100% of covered inpatient services for days 1 to 60, but after 60 days, patients have to pay coinsurance.
Typically, if a patient is admitted for a period that includes two midnights, then inpatient coverage is considered to be eligible for Medicare part "A." Each benefit period ends when a patient hasn't received inpatient care for 60 consecutive days. Once that happens, a new benefit period begins, and that means a new deductible needs to be paid before part "A" kicks in again.
While part "A" is provided for free for most seniors, people enrolling in part "B" must pay a monthly premium.
Part "B" coverage begins paying for eligible outpatient expenses once a deductible has been paid
by the patient. Currently, the part "B" deductible is just $147 per year and generally, part "B" picks up 80% of patient healthcare costs and the patient is responsible for the remaining 20%. Some people buy Medigap insurance plans that are offered through private insurers to cover some of their share of uncovered part "B" costs.
Enrollment in part "C" Medicare Advantage plans is optional, but many people buy them because they offer an annual out of pocket limit that isn't offered under original Medicare. For a price, Medicare Advantage plans can also cover prescription drugs, dental care, or other services that aren't covered by original Medicare, too.
However, unlike original Medicare, people who enroll in Medicare Advantage plans must receive their care through a limited network that is determined by the Medicare Advantage plan. As a result, these plans work similarly to plans offered through many employers that are known as HMOs or PPOs. Overall, roughly 30% of Medicare enrollees have chosen a Medicare Advantage plan instead of original Medicare.
People who buy a part "D" plan pay whatever monthly premium is set by the insurer, plus an additional amount that is added to the monthly premium if income is above certain levels. The coverage offered by these plans varies greatly, including which drugs are covered and at what amounts drugs are covered. As a result, people interested in buying part "D" plans should do a healthy dose of homework to make sure that their medications are covered at the most favorable tiers.
There is considerable debate over what the future will hold for Medicare. Some argue that Medicare part "A" in its current form isn't sustainable because longer-living, aging baby boomers are going to cause Medicare spending to jump.
According to the Congressional Budget Office, or CBO, Medicare's net outlays were $506 billion in 2014. The CBO estimates that Medicare net outlays will climb to $688 billion by 2020 and reach $981 billion by 2025, a 94% increase over the next 10 years. Over that period, outlays for Medicare part "A" will grow by 78% to $483 billion.
Source: Congressional Budget Office
The increase in spending could mean that changes will need to be made to either the benefit provided under part "A" or to payroll taxes. Only time will tell to what extent such adjustments may become necessary, but the CBO estimates that the part "A" trust fund will shrink from $204 billion this year to $124 billion in 2025.
Spending is also going to climb for part "B" and part "D" over the period, but the situation is different for these programs given that they're funded by monthly premiums, rather than the trust fund. As a result, monthly premiums will likely increase to match the rate of increase in healthcare spending.
Tying it together
Prior to Medicare's inception, roughly 35% of seniors didn't have basic insurance coverage, a situation that's unthinkable today. Since an estimated 55 million Americans will be covered by Medicare this year and 74 million Americans will be covered by 2025, lawmakers are unlikely to eliminate the program. For that reason, Medicare is likely to remain a critical component of our healthcare system for years to come.
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