How Medicare Works

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Introduction to How Medicare Works

Image courtesy Medicare
An estimated 42.3 million people benefited from Medicare in 2004. See more senior health pictures.

Medicare is a major effort on the part of the United States government to provide affordable health insurance for seniors over the age of 65, as well as people with certain disabilities. While other countries have more thorough health coverage programs, funding for Medicare has always been a sensitive political issue in the U.S. Recent changes and the addition of a prescription drug plan have caused a lot of controversy. Regardless of these issues, Medicare is a vital means of paying for health care for many Americans. An estimated 42.3 million people benefited from Medicare programs in 2004 [Ref].

In this article, we'll see who is eligible for Medicare, how to get it and how it has changed. We'll also take a look at some of the controversies surrounding this program.

Medicare Basics

Image courtesy Medicare

Originally, Medicare covered people age 65 and over. Later, the program expanded to include people with permanent disabilities as well as ESRD, or end-stage renal disease (severe kidney disease). There are a few extra eligibility requirements, however. To receive Medicare, you have to be eligible for Social Security. For someone age 65 or over, this means you have to have worked for a minimum of ten years (non-consecutive) at a job that withheld Social Security from your pay. People under age 65 can sometimes receive Social Security, but they are still not eligible for Medicare until they turn 65. While changes to Social Security will push the age at which benefits begin to 67, Medicare eligibility will still start at 65.

People with disabilities or ESRD who want Medicare coverage have to meet the Social Security Administration's definition of permanently and totally disabled or end-stage renal disease, respectively.

Medicare provides partial coverage for certain medical services. The main coverage has two parts, Part A and Part B.

Medicare Part A
Part A is also known as Hospital Insurance, or HI. People who are eligible for Medicare can usually get Part A coverage without having to pay a monthly premium, because they have already paid into the system with their Social Security withholdings.

Part A covers hospital stays including meals, supplies, necessary testing and a semi-private room. A private room is not covered unless it is medically necessary. Rehabilitation and other skilled nursing services are covered. Home health care is covered, but only if it is medically necessary, and only on a part-time, intermittent basis. This includes physical, occupational and speech therapy when conducted by a Medicare-approved health agency. Certain medical equipment, such as walkers, wheelchairs and other supplies are also covered. Finally, Part A covers hospice care for terminally ill patients, including drugs and support services for symptom treatment and pain relief.

Medicare Part B
Part B is sometimes referred to as Medical Insurance, or MI. The monthly premium for Part B in 2005 was $78.20. Patients must also meet an annual deductible before coverage kicks in. In 2005, the deductible was $110.

The insurance provided by Part B covers medically necessary doctor's appointments. This includes outpatient medical and surgical services, diagnostic tests and some medical equipment. It also offers coverage for home health care. It does not cover routine checkups, except for a one-time "Welcome to Medicare" exam.

Together, parts A and B are known as Original Medicare. While Original Medicare allows you to visit any doctor that accepts Medicare, the coverage is somewhat limited, and Part B carries deductibles and co-payments. These coverage exceptions and costs are "gaps" in Medicare. You can purchase health insurance from a private company to cover these gaps, or MediGap Insurance. MediGap providers must follow federal guidelines and must clearly identify their policy as Medicare Supplement Insurance.

Medicare does not cover dental work, cosmetic surgery, health care services obtained outside the United States, hearing tests, long-term care, routine eye care, eyeglasses, most shots or long-term care.

In the next section, we'll talk about Medicare Advantage Plans and Part D, the Prescription Drug Plan.

Waiting Can Cost YouYou can only enroll in Part B during certain enrollment periods. For each year that you were eligible for Part B and didn't enroll, your Part B monthly premium will be increased by 10 percent when you do enroll. This is a permanent penalty, added to every monthly premium for the rest of your life.

Advantage Plans and Prescription Drugs

Image courtesy
U.S. Administration on Aging

Medicare also offers Advantage Plans (formerly known as Medicare Part C, or Medicare + Choice). Recently Medicare expanded to include a prescription drug plan, or Medicare Part D.

Advantage Plans
Advantage Plans allow Medicare users to customize their plan to more closely fit their medical needs, but they are not available in all areas. Some of these plans offer prescription drug programs, and private insurance companies provide some of the coverage in these programs. Details depend on the specific program and the eligibility of the patient.

The plans come in several forms:

Medicare Health Maintenance Organization (HMOs) Plans -
These plans emphasize preventive health care. Only doctors that are within the HMO network are be used. An appointment with a specialist requires a referral from a primary care physician.
Medicare Preferred Provider Organization (PPOs) Plans - PPOs are similar to HMOs, except users have the option of seeing a doctor that is not in the plan network if they are willing to pay more. A referral from a primary care physician is also required for specialist appointments.
Medicare Special Needs Plans - Special Needs Plans are for specific groups of people, and include access to doctors who specialize in that area. For example, people with diabetes might be eligible for a Special Needs Plan.

Prescription Drug Plan
The Medicare Prescription Drug Plan was created to help people pay for their prescription drugs. A private insurance company administers each plan (there are more than 20), although it has to meet Medicare guidelines. The plans have varying costs and formularies (the list of drugs covered under the plan). Anyone who wants to sign up for Medicare Prescription Drug coverage must compare the plans and find one that covers the drugs they need, or will need in the future. You can change plans during the open enrollment period at the end of each calendar year.

Although the premiums for the different plans vary, Medicare estimates an average of $32 per month. There is a $250 deductible, meaning that the first $250 you spend on prescription drugs each year is not covered. Medicare will pay 75 percent of any prescription drugs you purchase from $250 up to $2,250. Then the next $2,850 you spend on drugs is not covered at all -- you have to pay the entire amount. If you reach that point, you'll have spent $3,600 of your own money on prescription drugs. Then, Medicare kicks in again, paying 95 percent of your drug costs for the rest of the year.

Anyone eligible or currently receiving Medicare can sign up for a prescription drug plan between Nov. 15, 2005 and May 15, 2006. For every month that you delay enrollment in a prescription drug plan when you are eligible, you will incur a permanent penalty of one percent of your monthly premium per month that you delay enrollment. This penalty does not apply to anyone who has prescription drug coverage through a job or a spouse. More information on the different plans is available at Medicare.gov.

We'll find out how to sign up for Medicare in the next section.

Prescription Drug Discount CardsWhen Congress passed the law that created Part D, they wanted to do something to help seniors pay for their medications before the law went into effect in 2006. They created Medicare Prescription Drug Discount Cards. There were 73 different cards to choose from, each with had different plans and formularies. The cards were issued by different private companies or HMOs, and were valid in different parts of the country, creating a confusing decision for many Medicare recipients. The cards cost less than $30 and provided a discount of 10 to 25 percent [Ref]. You can still use your card until May 15, 2006 or until you sign up for a Part D plan.

Signing Up for Medicare

Financial Assistance

Low-income Medicare recipients may be eligible for financial assistance or lower cost programs. Anyone who receives Medicaid (a program that provides health coverage for low-income Americans) can receive help paying their Medicare premiums.

The "Extra Help" provision of the prescription drug plan allows seniors who receive Medicaid to get drug coverage with no monthly premium or annual deductible, and a small co-pay on drugs costs up to $3,600, with Medicare covering all drug costs above $3,600. Medicare users with lower incomes who do not receive Medicaid can still get assistance in the form of lower premiums and deductibles. There are similar programs available to help pay the costs of Part B as well. You can learn more about these financial assistance programs in this Social Security publication.

Signing up for Medicare is a straightforward process itself, but there are different enrollment periods that apply to different plans.

If you receive Social Security before you turn 65, you will automatically be enrolled in Part A and Part B the month you turn 65. Three months before your 65th birthday, you'll receive your Medicare card in the mail. You can opt out of Part B by following the instructions on the card.

If you are not already receiving Social Security benefits when you turn 65, you can apply for both those benefits and Medicaid at the Social Security Web site. To apply only for Medicare, call 1-800-772-1213.

You can enroll in Part B during several different periods:

Initial Enrollment Period - This begins three months before your 65th birthday and lasts for seven months.
General Enrollment Period - Jan. 1 to March 31 of every year. Coverage begins July 1.
Special Enrollment Period - If you receive group health coverage through work, a union, or your spouse, you can delay enrolling in Part B without incurring the ten percent penalty. You can enroll in Part B at any time while you are covered by a group health plan, or during the eight months after your coverage ends.

Initial enrollment in the prescription drug plan lasts from Nov. 15, 2005 to May 15, 2006. A general enrollment period will be available during those same months each year.

If you are under age 65, but are disabled or suffer from end-stage renal disease, you are eligible for Medicare if you have received Social Security benefits for at least 24 months. To apply, call the number listed above.

Next, we'll explain Medicare administration and funding.

Administration and Funding of Medicare

Funding for Medicare comes partially from payroll taxes, known as FICA (Federal Insurance Contributions Act) taxes. FICA comprises Social Security tax and Medicare tax. The rate of the Medicare tax is 2.9 percent. Employers withhold 1.45 percent from their employees and match it with another 1.45 percent [Ref]. High-income Social Security beneficiaries also pay income tax on their Social Security income, some of which goes toward Medicare. This money goes into a trust fund used to pay doctors, hospitals and private insurance companies when Medicare patients use their services. This trust fund has been more difficult to manage than the Social Security trust fund, because health care expenditures are harder to track and can change quickly. Medicare Part B is partially (about 25 percent) paid for by premiums and co-pays. In all, Medicare costs about $277 billion per year, roughly 13 percent of the total federal budget [Ref].

Look at your payroll check stub --
you're contributing towards Medicare with your FICA taxes.

Initially, Medicare was as a single-payer system in which the government acted as the administrator and distributor of taxpayer-funded health insurance. However, since the 1990s, government officials have made changes that allow private insurers to take part in Medicare, opening the system to market forces. The Medicare Advantage Plan (or Medicare + Choice) programs are the primary example of this.

Source: 2005 Annual Report
of the Social Security and Medicare Boards of Trustees
Projected distribution of Medicare
funding for the 2006 fiscal year

The Centers for Medicare and Medicaid Services (CMMS) administers Medicare. It falls under the Department of Health and Human Services. During Medicare's early decades, there was little oversight on claims and payments from Medicare to providers. This resulted in inflated claims and a rise in the costs of health care, which put a severe strain on the Medicare trust fund. In 1983, Medicare went to a fixed rate payment plan, instead of just paying whatever doctors and hospitals billed them. Today, participating health care providers accept Medicare payments as "paid in full" for services. Non-participating providers can only charge patients up to 15 percent beyond the amount approved by Medicare.

Next, we'll learn about the history of Medicare.

The Costly Drug PlanThere was never any doubt that adding a prescription drug plan to Medicare would cost the government a lot of money. Initial estimates put the cost at $400 billion over 10 years. However, just a year before the plan was to go into effect, the Office of Management and Budget issued a new cost estimate: $535 billion [Ref]. With politicians concerned about a rising deficit and unwilling to raise taxes to help pay for the program, that extra $135 billion will be a bitter pill.

Medicare's Controversial History

The idea behind Medicare grew out of the movement for government health and retirement insurance that spawned Social Security. However, a national health care plan felt like Communism to some, so the program was initially met with resistance. Medicare was signed into law by President Lyndon Johnson in 1965. When Medicare went into effect in 1966, over 19 million people enrolled [Ref].

Image courtesy Social Security Administration
On July 1, 1966, SSA Commissioner Bob Ball held a press conference to announce plans for implementing Medicare.

Through the 1970s and 80s, changes to Medicare were relatively minor. The program was adjusted slightly to increase efficiency and reduce costs, and coverage was expanded to include permanently disabled people and people with end-stage renal disease in 1972. In 1988, the Medicare Catastrophic Coverage Act made sweeping changes that included prescription drug benefits. However, to pay for the expansion of Medicare, higher-income seniors had to pay higher premiums and deductibles. The high-income seniors refused to subsidize low-income seniors. In one incident, a group of angry seniors physically chased the bill's sponsor, Illinois Congressman Dan Rostenkowski, to his car [Ref]. The next year, Congress repealed the changes.

The next major change came in 1997, when managed-care options were offered (Medicare + Choice, or Advantage Plans). This was part of a move to privatize some aspects of Medicare. Today the 2003 Medicare Prescription Drug, Improvement, and Modernization Act (MMA) gets most of the headlines. In addition to adding the prescription drug plan, MMA links premiums to beneficiary income. An increase in government spending, however, will primarily pay for this expansion of Medicare.

From early disagreements about the type of national health care system the U.S. should adopt (the most popular alternative was a voucher system), to constant struggles with funding, program expansion and fraud, Medicare has always been controversial. Politicians often call Medicare a "third rail" -- touch it and die. Seniors who depend on the system can react harshly to any changes.

Medicare spending is projected to increase to nearly $500 billion dollars by 2012.

Most of the current controversy stems from the new prescription drug plan. Critics say that the plan costly to the government and confusing to seniors. Many opponents also claim that it was designed to boost the profits of pharmaceutical corporations rather than help seniors afford prescription drugs. The plan does not offer any price controls on drugs. The fact that private health insurers administer the various drug plans is another sore spot for some critics. But so many Americans need prescription drugs to survive that any assistance in paying drug costs is welcome.

For lots more information on Medicare and related topics, check out the links on the next page.

Medicare FraudThe United States General Accounting Office reported a $12.6 billion dollar loss to the Medicare program due to fraud in 1998 [Ref]. Not only does that fraud put a strain on the Medicare trust fund, it also causes higher premiums and deductibles for Medicare recipients. Medicare fraud can take many forms. In some cases, it is as simple as billing Medicare for medical services that were never performed, or billing for services or equipment that are more expensive that what was actually performed. In some cases, swindlers use stolen Medicare numbers to create phantom patients and bill Medicare for non-existent appointments and tests. Some aggressively pursue seniors with door-to-door or telephone marketing and use intimidating tactics that pressure them into purchasing expensive equipment or procedures.

You can help prevent Medicare fraud by following a few simple tips:

Safeguard your Medicare number.
Don't give in to hard-sell or scare tactics.
Be suspicious of "free" tests or doctors who waive your co-pay.
Watch for providers who bill for procedures that they never performed.
Report Medicare fraud by calling 1-800-HHS-TIPS (1-800-447-8477)

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