Medicare Basics

Medicare Basics

The federal government established Medicare in 1965 to provide a system for delivery and payment of medical and hospital care for Americans ages 65 and over. In 1972, the program added coverage for certain individuals with disabilities. The Centers for Medicare & Medicaid Services (CMS, formerly HCFA) is the federal agency that administers Medicare. Through its regulations, policies, and directives, CMS plays an active role in containing the costs of medical services for seniors. It does so at a macro level through elaborate provider payment systems (the Prospective Payment System for hospitals is one example), and at the micro level through medical necessity decisions in individual cases under Medicare’s reasonable and necessary care rule. CMS contracts with private companies called fiscal intermediaries (Medicare Part A) and carriers (Medicare Part B) to make coverage determinations and process Medicare claims. The Social Security Administration’s role in Medicare is primarily limited to eligibility and enrollment matters.

When seniors reach the age of Medicare eligibility, some may be unpleasantly surprised to learn that the program does not pay for routine physicals, eyes and hearing exams, dental care, most long-term care services, and many other excluded medical products and services. Others may be surprised to learn that they face substantial out-of-pocket costs I the form of deductibles, coinsurance charges, of co-payments.

Many seniors have a choice between Medicare’s two health care delivery systems. The program offers Original Medicare with its Part A and B, and private insurance, called Medicare Advantage, through Medicare Part C. Original Medicare typifies a traditional fee-for-service delivery model. Medicare Advantage differs from Original Medicare in that private insurance companies offer Medicare coverage through HMOs, PPOs, and Private Fee-for-Service (PFFS) plans under contract with CMS.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Modernization Act of 2003, or MMA) added $1.3 billion in funding in 2004 and 2005 for the Medicare Advantage program. As a result, new plans are emerging in markets that until recently had original Medicare as senior’s only option. Thus many more seniors can decide whether to stay in Original Medicare or enroll in a Medicare Advantage plan. In communities with server plan options, this decision can be difficult. 

The MMA also created a new prescription drug benefit under Medicare Part D. The Part D program, which adds a voluntary drug benefit to the Medicare program for those who are entitled to Medicare Part A or enrolled in Medicare Part B, started on January 1, 2006.

How Are Medicare Benefits Funded? 

The Original Medicare Program had two parts: Part A (Hospital Insurance) and Part B (Supplementary Medical Insurance).

Part A, Hospital Insurance (HI), is financed by a 1.45 percent payroll tax that employees and employers pay (2.90 percent for the self-employed in 2009). Unlike the Social Security tax, the HI tax is imposed on all annual earnings. Beneficiaries who are entitled to Social Security retirement benefits do not pay a premium for Medicare Part A. 

Part B, Supplementary Medical Insurance (SMI), is not to be confused with Medicare Supplement (Medigap) insurance policies. Part B covers physician services and other costs not covered under Part A. Part B is financed with general federal revenues (75 percent of program costs) and monthly premiums deducted from retirees’ Social Security retirement benefits (25 percent of program costs). The monthly premium amount for 2009 is $96.40. The Part B premium is income-related. Single seniors with incomes above $85,000, and married couples over $170,000 will pay progressively higher premiums. Still, there are a few, if any, circumstances under which insurance acquired through other means is more cost-effective than Medicare. 

Part C, Medicare Advantage (MA), is also not to be confused with Medicaid, which in some states in called Medical Assistance and also is abbreviated MA. Part C is financed through a combination of Medicare Part A and Part B funds. Prescription drug coverage in Medicare Advantage plans is funded through Part D. 

Part D, the new prescription drug benefit, is financed by general federal revenues (74.5 percent of program costs), premiums, and state payments for some low-income seniors. 

Medicare Eligibility 

Medicare has three main categories of eligible persons: people age 65 and older generally, certain individuals who have been entitled to Social Security Disability benefits for 24 months, and persons diagnosed with permanent kidney failure requiring dialysis or kidney transplants. Since July 2001, an exception to the disability program’s 24-month rule exists for persons with ALS (Lou Gehrig’s disease). They are eligible for Medicare in the their first month of eligibility for Social Security Disability benefits. In addition, disabled widows and widowers as young as age 50 may be eligible for Medicare coverage. 

Enrollment in Medicare

Automatic Enrollment

Seniors who receive Social Security benefits before age 65 are automatically enrolled in Medicare Part A and B on the first day of the month when they turn 65. Social Security normally mails a Medicare card about three months before a senior’s 65th birthday. This mailing also contains a postcard for those who do not want to enroll in Medicare Part B. Those who don’t want to enroll in Medicare Part B must return the postcard to Social Security to decline coverage.

Initial Enrollment Period

Seniors who did not elect to take early retirement benefits may enroll in Medicare during the initial enrollment period. They have seven months to enroll, starting three months before the month of their 65th birthday.

The date of enrollment determines the effective date of a senior’s Medicare coverage. If a beneficiary enrolls during the three months prior to his of her 64thbirthday, coverage begins the first day of the birthday month.

Seniors (or their spouses) who did not pay Medicare taxes may be able to buy Part A coverage. This feature is especially helpful for seniors who immigrated to the United States later in life to be near family members. Medicare can cover them after five years of legal residence. The monthly premiums for Part A coverage, however, are high when compared to Part B. In 2009, the Part A monthly premium is $244.00 for people having 30-39 credits of Medicare-covered employment. The Part A monthly premium is $443.00 for people who are not otherwise eligible for premium-free hospital insurance and have less than 30 credits of Medicare-covered employment. 

Note that the vast majority of seniors, because they paid taxes during their working years through FICA into the Hospital Insurance (Part A) Trust Fund, are entitled to Medicare Part A without payment premiums for the coverage when they reach age 65. They are eligible for Medicare Part A at age 65 even if they wait until later to draw Social Security Retirement benefits. If they do not take Social Security at age 65 or earlier they may still apply for Medicare separately. You should typically recommend that clients seriously consider Medicare coverage when first eligible. It is unlikely that any commercially acquired medical-expense policies for older individuals will be as cost-effective as Medicare Part A coverage. Unlike Social Security, under which the full retirement age (FRA) is gradually increasing, the age of 65 for Medicare eligibility remains in effect and is not scheduled to rise.

General Enrollment Period 

Part A: Seniors who do not elect to enroll in Medicare Part A during the initial enrollment period may enroll any month thereafter. Coverage is calculated to begin six months retroactively or during an individual’s 65th birthday month, whichever is sooner. There is no penalty for late enrollment for Part A. 

Those who are ineligible for automatic Part A coverage may apply and acquire it for a premium as noted above. Otherwise, seniors who apply for Social Security retirement benefits automatically apply for Medicare Part A. 

Part B: If a beneficiary does not sign up for Medicare Part B during the initials enrollment period, he or she may only sign up during the general enrollment period, which is January 1 through March 31 of each year. The effective date of coverage is following July 1. 

It is not usually a good idea to delay Part B enrollment. A 10 percent penalty is added to the Part B premium for each year that a beneficiary delays enrolling. The exception is for many seniors who continue to work beyond age 65, with healthy insurance coverage through an employer’s health plan. These beneficiaries are exempt from the penalty and may enroll during a special enrollment period

Special Enrollment Period

Seniors who decline Part B at age 65 because they have health insurance coverage through an employer’s health plan may later enroll in Part B during an eight-month special enrollment period. The special enrollment period starts when the employer’s health plan coverage ceases to be their primary insurance, which is usually at retirement. As noted above, no late enrollment penalty applies. 

Retiree medical benefits (COBRA), if offered, are not considered primary insurance by Medicare. Therefore, in most cases, seniors should take Part B coverage during the special enrollment period when they (or their spouse if covered through a spouse’s group plan) cease working even if these other options are available. Continuing retiree coverage, when available, essentially acts as a supplement. 

The Medicare Card 

The senior’s Medicare number appears on the Medicare card issued upon a senior’s enrollment in the program. It is a nine-digit Social Security number, followed by a letter designation, most commonly A, B, or D. Individuals collecting on their spouses’ work records use their spouses’ Social Security numbers, not their own. Thus, a senior’s Medicare number may or may not be simply the same as his or her Social Security number. The Medicare number for retirees who worked for a United States railroad company is usually the nine-digit Social Security number preceded by a letter, most commonly A, WA, or WD. However, seniors who retired prior to967 use a special six-digit number instead of Social Security number. The card also shows the beneficiary’s enrollment status with the effective dates of his or her Hospital (Part A) and Medical (Part B) coverage. 

Generally speaking, seniors should be prepared to show their Medicare cards whenever they get health care to ensure that their providers bill Medicare. The one exception, however, is for seniors who belong to a Medicare Advantage plan. That plan issues a membership card that the senior must use to ensure proper claims processing. When doctor office staff sees a Medicare card, they often assume that the claims should go to the Medicare Part B carrier. For Medicare Advantage enrollees, providers must send the bills to the Medicare Advantage plan if they want to be paid.

“Did I Show the Wrong Card?” 

Mrs. Church received a notice from a Medicare carrier denying payment for a visit to her physician to treat lesions on her legs. The explanation for the denial noted that Medicare denied payment because the beneficiary is not covered under Medicare Part B. Because Mrs. Church belongs to a Medicare HMO, the doctor’s office should resubmit the claim to her Medicare Advantage plan. Note that federal rules permit the Medicare Advantage plans to establish claims filing deadlines stricter than those in Original Medicare, where providers have at least 15 months to submit claims. In Mrs. Church’s case, she would not be liable for the bill if the doctor’s office failed to meet the Medicare Advantage plan’s unique claims filing deadline. 

Enrollment by Plan Type 

Unless they request otherwise, seniors are automatically enrolled in the original, fee-for-service Medicare program when they sign up for Medicare. Beneficiaries can switch to private plans such as Medicare HMOs or return to Original Medicare on a monthly basis throughout the year.

The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved.