ChamberChoice: How Medicare benefits work and what you need to know

The U.S. government enacted Medicare 48 years ago to help senior citizens who were finding it difficult to obtain private health insurance coverage.

It originally consisted of Medicare Part A for hospital insurance and Part B for supplemental medical insurance. A payroll tax paid by employees, employers and the self-employed funded Part A, available to those 65 or older; it had a $40 annual deductible. Part B was open to aged citizens and legal aliens who lived in the U.S. for at least five years for a $3 monthly premium.

Medicare costs have climbed at rates substantially above growth in general inflation or GDP. Today the Part A deductible is $1,184 and the Part B premium is $104.90 with a $147 annual deductible.

“Nearly 50 million Americans — 15 percent of the nation’s population — depend on Medicare for their health insurance coverage. With increasing life expectancies and more baby boomers turning 65 every day, that number is expected to double between 2000 and 2030,” says Crystal Manning, a Medicare specialist at JRG Advisors, the management arm of ChamberChoice.

Smart Business spoke with Manning about how Medicare coverage operates.

Why is Medicare important?

Medical costs have become expensive, especially for those older than 65 and already retired. They are more prone to diseases and injuries, and need a plan that covers drugs, hospital stays and doctor’s visits to ensure necessary medical care. The Medicare benefit structure has remained stable, but medical technology has rapidly increased the tools available to diagnose and treat patients.

Medicare applies to individuals who can’t afford private health insurance, which prevents severe financial hardships from chronic or long-term diseases like kidney failure. Medicare also is available to people of all ages with qualifying disabilities that keep them from earning a living.

How is Medicare funded?

Medicare funding comes partially from payroll taxes. Federal Insurance Contributions Act (FICA) taxes are comprised of a Social Security tax that contributes to Social Security retirement benefits and a 2.9 percent Medicare tax. With Medicare taxes, employers withhold 1.45 percent from employees and then match it. High-income Social Security beneficiaries also pay income tax on Social Security income. Some of that goes into a trust fund used to pay doctors, hospitals and private insurance companies when Medicare patients use their services.

How were Medicare Parts C and D created?

Prescription drug costs are increasing as more seniors rely on new drug therapies to treat chronic conditions. Many cannot afford to maintain their health. This trend will continue as out-of-pocket spending for prescription drugs rises.

In 1997, Medicare benefits became available through private health plans. Now known as Medicare Advantage plans (Part C), they replace and cover all Part A and Part B benefits, with the option to add prescription drug coverage. The Medicare Prescription Drug, Improvement, and Modernization Act created a specific drug only benefit (Part D) through private insurance companies.

In the 2000s, 25 percent of Medicare beneficiaries had no drug coverage. Today, beneficiaries can join a Prescription Drug Plan for drug coverage, or join a Medicare Advantage plan, which covers medical services and prescription drugs. However, seniors need to join a drug plan when first eligible to avoid paying a monthly late enrollment penalty of 1 percent.

What’s critical to know about Medicare?

The drug benefit has a major coverage gap called the ‘doughnut hole,’ which begins when total retail drug costs — not what you personally spend at the pharmacy — reach $2,970. In 2013, anyone reaching the doughnut hole receives a 52.5 percent discount on brand-name formulary drugs and a 21 percent discount on generic formulary medications. Part D beneficiaries remain in the doughnut hole until their true out-of-pocket costs exceed $4,750.

Seniors need to choose the right Medicare coverage. However, know that Medicare isn’t part of the Affordable Care Act’s health insurance exchanges. Your benefits won’t change and you don’t need to do anything.

Crystal Manning is a Medicare specialist at JRG Advisors, the management arm of ChamberChoice. Reach her at (412) 456-7254 or [email protected].

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