January 01, 2018

Frequently Asked Questions About Medicare

Bruce A. Tannahill

Medicare is the foundation for most retirees’ health care. Sixty-one percent of Americans over 50 plan to use it to pay for health-care costs in retirement. Even with Medicare, most fear health-care costs in retirement. Seventy-four percent said that one of their top fears in retirement is their health-care costs going out of control. Sixty-four percent said they are “terrified of what health-care costs may do” to their retirement plans. Nationwide’s Health Care Costs in Retirement Survey, October 2016.

Health-care costs in retirement can wreak havoc with retirement planning and legacy planning. One study recently projected that total lifetime health-care premiums (including Medicare Parts B and D, supplemental insurance, and dental insurance) for a healthy 65-year-old couple who retire in 2017 with life expectancies of 87 for the male and 89 for the female would be $321,994 in today’s dollars. When other health-care expenses such as deductibles, copays, hearing, vision, and dental costs are included, the total out-of-pocket costs in today’s dollars are projected to be $404,253. HealthView Services, 2017 Retirement Health Care Costs Data Report, www.hvsfinancial.com/2017/06/12/2017-retirement-health-care-costs-data-report.

Although this number may seem high, it seems more realistic when considered on an annual basis. If our couple combines for 46 years of coverage (22 for him and 24 for her), the average annual cost is $8,795 per person. In comparison, the Centers for Medicare and Medicaid Services reported that the average per person health-care expenditure in 2015 was $9,990.

This article will cover (1) how you become eligible for Medicare, (2) how and when to enroll in Medicare, (3) the different types of Medicare coverage and what they cover, (4) supplemental (Medigap) plans for expenses not covered by Medicare, (5) Medicare premiums and other costs, and (6) how Medicare is funded and its financial situation.

Medicare Eligibility and Enrollment

What Are the Different Parts of Medicare?

Medicare offers four parts, each providing different types of services:

 

  • Part A (hospital insurance) covers inpatient hospital stays, skilled nursing home care, hospice care, and some home health care;
  • Part B (medical insurance) covers doctors’ services, outpatient care, medical supplies, and preventive services;
  • Part C (Medicare Advantage) is offered by private companies that contract with Medicare to provide enrollees benefits under Parts A and B and often Part D; and
  • Part D (prescription drug coverage) is offered by private companies.

Parts A and B are referred to as “Original Medicare” on the Medicare web site and are administered by private companies with the benefits paid by Medicare.

What Are the Eligibility Requirements for Medicare?

Generally, a U.S. citizen or permanent legal resident (green card holder) who has lived in the United States for at least five years can start receiving Medicare benefits at age 65. Clients who are disabled or with certain medical conditions may qualify for benefits at an earlier age. Benefits under Parts B and D do not require work credits. Part A benefits may be available without a premium for clients who meet certain requirements. Clients who do not qualify for Part A coverage without a premium may acquire Part A coverage by paying a monthly premium.

To be eligible at age 65 for Part A without a premium:

 

  • a client or his spouse (including a divorced or deceased spouse) must have enough credits (usually 40) to be eligible for Social Security or Railroad Retirement Board (RRB) benefits, even if he has not started receiving benefits;
  • a client or his spouse was a government employee who did not pay into Social Security but did pay into Medicare; or
  • a person is the dependent child of a deceased adult who had enough Social Security credits to be eligible for Medicare, even if he was not claiming it at his death.

 

To be eligible before age 65 requires a client to:

 

  • have been entitled to Social Security disability benefits for at least 24 months;
  • receive a RRB disability pension and meet certain conditions;
  • receive Social Security disability benefits because he has amyotrophic lateral sclerosis (ALS, or Lou Gehrig’s disease) (eligible immediately without a 24-month waiting period);
  • have permanent kidney failure (end-stage renal disease) and receive maintenance dialysis or a kidney transplant and

—be eligible for or receive monthly benefits under Social Security or the RRB system or

—worked long enough in a government job covered by Medicare; or

  • meet the requirements of the Social Security disability program and be 50 or older and a child or surviving spouse of someone who qualified for Medicare while working in a government job.

Is a Client Automatically Enrolled in Medicare?

Whether a client is automatically enrolled or must enroll in Medicare depends on whether he is receiving Social Security or RRB benefits. A client is automatically enrolled in Medicare Parts A and B if he is

 

  • already receiving Social Security or RRB benefits (including survivor benefits);
  • under age 65 and has received Social Security disability benefits or certain RRB benefits for 24 months;
  • receiving Social Security disability benefits because he has ALS; or
  • lives in Puerto Rico and is receiving Social Security or RRB benefits (automatic enrollment is limited to Part A).

A client must sign up for Part A and Part B if he

 

  • is not receiving Social Security or RRB benefits;
  • qualifies for Medicare because he has end-stage renal disease; or
  • lives in Puerto Rico and wants to sign up for Part B.

When Can a Client Enroll in Medicare?

A client who is not automatically enrolled in Medicare has a seven-month initial enrollment period (IEP) to sign up, which begins three months before the month he turns 65, includes the month of his 65th birthday, and ends three months after the month he turns 65. As an example, Mary’s birthday is in June. Her IEP begins on March 1 and ends on September 30. A client who is automatically enrolled can decline enrollment in Part B. A client who fails to enroll during his IEP will have three other opportunities to enroll, but two have specific eligibility requirements.

Special Enrollment Periods (SEP). The benefit of enrolling during an SEP is that there generally is not a late enrollment penalty for signing up during an SEP. A client who did not enroll during his IEP may enroll in Part A or Part B at any time while covered under a group health plan based on current employment. The group health plan could be based on the client’s current employment or his spouse’s (or a family member’s, if the client is disabled). In addition, in the month after the employment ends or the group health insurance based on current employment ends, whichever occurs first, an eight-month SEP begins. There is no SEP if the employment or employer-provided group health coverage ends during the IEP. People covered by health insurance who are volunteering outside the United States also may qualify for a six-month SEP that begins the month after their international volunteering ends.

Caution for SEPs Based on Employment-Based Coverage. Coverage under current employment does not include coverage under either COBRA or a retiree health plan. If the coverage is provided by an employer that has less than 20 workers, a client may be required to enroll in Part B at 65.

There is also a special enrollment period for clients switching from Medicare Advantage to Original Medicare. This SEP runs from January 1 through February 14. It also allows the client to join a Medicare Part D plan during that period.

General Enrollment Period (GEP). A client who does not enroll during the IEP and does not qualify for an SEP may enroll during the annual GEP. It runs from January 1 through March 31, with coverage beginning on July 1. Enrolling during a GEP will result in a late enrollment penalty that applies as long as the client has Part B coverage. The penalty increases the monthly premium by 10% for each 12-month period the client was eligible for Part B but did not enroll.

When Does Medicare Coverage Start?

Clients Who Enroll During Their IEP. For clients who enroll during their IEP, when Medicare benefits begin is shown in Table I on page 25.

Coverage for a client who was born on the first day of the month and enrolls one to three months before reaching 65 starts on the first day of the month before he turns 65.

If a client qualifies for free part A coverage and signs up within six months after his 65th birthday, his Part A coverage is retroactive to the first day of the month he turns 65. A client who signs up for Part A coverage more than six months after his 65th birthday will have Part A coverage retroactive to six months after he signs up.

Clients Who Enroll During an SEP Because of Having Coverage Under an Employer-Provided Group Health Plan. A client who enrolls while still covered by a group health plan or in the first full month after his coverage under the plan ends can choose whether to have coverage begin on the first day of the month he enrolls or the first day of any of the following three months.

Clients Who Enroll During a GEP. Clients who enroll during a GEP must wait until July 1 of the year they enroll for their coverage to begin.

When Can a Client Change His Coverage?

During the annual open enrollment period that runs from October 15 through December 7, a client can

 

  • switch to a Medicare Advantage plan from Original Medicare,
  • change back to Original Medicare from a Medicare Advantage plan,
  • switch Medicare Advantage plans,
  • enroll in a Part D drug plan,
  • switch Part D drug plans, or
  • drop his Part D drug plan.

Medicare Coverage

What Services Are Not Covered by Original Medicare?

Among the services and items not covered by Original Medicare are

 

  • long-term (custodial) care,
  • most dental care,
  • eye examinations for prescribing glasses,
  • dentures,
  • cosmetic surgery,
  • acupuncture,
  • hearing aids and fitting exams, and
  • routine foot care.

 

Medicare Advantage or Medicare supplemental plans may provide coverage for items listed above.

Generally, What Does Part A Cover?

Part A covers hospital expenses, skilled nursing facility costs, home health care, nursing home care in certain situations, and hospice care.

What Type of Hospital Expenses Does Part A Cover?

Part A covers basic hospital care, including semi-private rooms, meals, general nursing, drugs included in inpatient treatment, and other hospital services and supplies. It is limited to inpatient services for patients formally admitted to the hospital. Spending a night in the hospital for emergency room services, observation, outpatient surgery, or any hospital services does not automatically make a patient an inpatient. Part A also covers inpatient care as part of a qualifying clinical research study and inpatient mental health care. It does not cover private duty nursing, a private room unless it is medically necessary, separate charges for televisions and phones, or personal care items such as razors or slipper socks. Table III on page 29 shows the deductible and coinsurance costs for hospital expenses under Original Medicare.

What Types of Skilled Nursing Facility Costs Does Part A Cover?

Part A covers skilled nursing care in a skilled nursing facility (SNF), including a semi-private room, meals, drugs included in inpatient treatment, medical social services, and other SNF services and supplies. Physical and occupational therapy and speech-language pathology services are covered if they are needed to meet the client’s health goal. For the care to be covered, the client must have spent three days as an inpatient and have entered the SNF within a specified time of leaving the hospital (generally 30 days), and the services must have been required for a medical condition treated during the hospital stay or while receiving care in the SNF. If a client leaves the SNF and re-enters it or another SNF within 30 days, another three-day hospital stay is not required to qualify for additional SNF services. Table IV on page 29 shows the recipient’s payment responsibilities. It does not cover care in a SNF if custodial care, such as aid with bathing or dressing, is the only care needed.

What Coverage Does Part A Provide for Hospice Care?

To qualify for hospice care, a patient must meet all of the following conditions:

 

  • be certified by the hospice doctor and his regular doctor or nurse practitioner that the patient is terminally ill (expected to live six months or less);
  • accept palliative care instead of care to cure his illness; and
  • sign a statement choosing hospice care rather than other treatment covered by Medicare for his terminal illness and related conditions.

 

Medicare does not cover the following care and services after a patient’s hospice care benefit begins:

 

  • treatment to cure the terminal illness or related conditions,
  • prescription drugs to cure the illness (drugs for symptom control or pain relief are covered),
  • care from a hospice provider that wasn’t arranged by the hospice medical team,
  • room and board either in the patient’s home, a nursing home, or a hospice inpatient facility, and
  • hospital inpatient or outpatient care or ambulance transportation unless it is arranged by the hospice team or is unrelated to the terminal illness and related conditions.

What Types of Home Health-Care Services Does Original Medicare Cover?

Home health-care services are covered if

 

  • the client is receiving services under a plan of care established and regularly reviewed by a doctor;
  • the doctor must certify that the patient must need at least one of the following:

—intermittent skilled nursing care (other than drawing blood) or

—physical therapy, speech-language pathology, or continued occupational therapy services if certain requirements are met;

  • the home health-care agency must be Medicare-certified; and
  • the patient must be certified as homebound by the doctor.

 

Covered services include intermittent skilled nursing care, physical therapy, speech-language pathology, continued occupational therapy services, medical social services, part-time or intermittent home health aide services, home medical supplies, durable medical equipment, and injectable osteoporosis drugs.

Although clients receiving home health-care services must be homebound, they can leave for medical treatment, adult day care, or short, infrequent absences for nonmedical reasons such as religious services.

What Services Does Part B Cover?

Part B covers medically necessary services and preventive services. Medically necessary services include lab tests, surgeries, doctors’ visits, and supplies such as wheelchairs, walkers, and blood sugar monitors. Preventive services covered by Part B include a yearly “wellness” visit; flu, pneumonia, and hepatitis B shots; screenings for cardiovascular disease, colorectal cancer, cervical and vaginal cancer, depression, and prostate cancer; tobacco use cessation counseling; and alcohol misuse screenings and counseling.

What Are Medicare Advantage (Part C) Plans?

Medicare Advantage plans are an alternative to Original Medicare (Parts A and B) and are offered by private companies approved by Medicare. These plans cover all of the services provided by Original Medicare, except hospice care and some care in qualifying research studies, that are covered by Original Medicare even for those enrolled in Medicare Advantage. Types of Medicare Advantage plans include health maintenance organizations (HMOs), preferred provider organizations (PPOs), private fee-for-service plans, special needs plans, HMO point-of-service plans, and medical savings account (MSA) plans.

Medicare pays the company offering the Medicare Advantage plan a fixed monthly amount for each enrolled participant. Plans must follow Medicare rules but can offer different features and different rules on obtaining services.

Medicare Advantage plans offer varying premiums, out-of-pocket costs, benefits, referral requirements, and in-network and out-of-network providers. These rules can include whether a referral is needed to see a specialist and whether the plan limits coverage to certain providers. They may provide services not covered by Original Medicare, such as dental, vision, or hearing care, either included in the base premium or for an additional premium. Medicare Advantage plans often include Medicare Part D prescription coverage.

What Are the Different Types of Medicare Advantage Plans?

HMO Plans. HMOs limit participants to health-care providers in the plan’s network, except for emergency or urgent care situations and out-of-area dialysis. Participants must normally choose a primary care doctor and obtain referrals for tests or to see other doctors. HMOs generally cover prescription drugs, but those participants who want prescription drug coverage must join an HMO that offers it. They cannot join a Part D plan.

HMO Point-of-Service Plans (HMOPOS). These are HMOs that allow participants to obtain out-of-network coverage for certain services for a higher copayment or coinsurance.

PPO Plans. PPOs generally allow participants to use any health-care provider and pay reduced costs when using a provider within the plan’s network. Unlike an HMO, participants do not need to choose a primary care doctor or generally obtain referrals to see specialists. As with HMOs, obtaining prescription drug coverage requires choosing a PPO that offers the coverage. Participants cannot choose both a PPO and a Part D plan.

Private Fee-for-Service (PFFS) Plans. Participants can generally use any provider who accepts the plan’s payment terms. The plan determines the amount participants must pay for services and generally offers reduced costs for seeing a network provider. Participants do not need to choose a primary care doctor or obtain referrals to see specialists. PFFS plans may include prescription drug coverage. Participants in plans that do not offer prescription drug coverage can join a Part D plan.

Special Needs Plan (SNP). SNPs offer coverage designed for specific groups of people, such as those in a nursing home or with certain chronic conditions. Like HMOs, participants generally must choose a primary care doctor, obtain referrals to see specialists, and use providers in the plan’s network except for emergency or urgent care or out-of-area dialysis. SNPs must include prescription drug coverage.

MSA Plans. MSA plans are similar to health savings account plans, combining a high deductible health plan with a savings account. Medicare deposits money into the MSA that can be used to pay for health-care services. MSA plans do not cover prescription drugs.

When Can Clients Choose a Medicare Advantage Plan?

Medicare participants can choose a Medicare Advantage plan when they first become eligible for Medicare and during any open enrollment period. Plan coverage and costs can change annually, so it is important to review the available plans before the end of the annual enrollment period.

Electing a Medicare Advantage plan can cause clients covered by employer, union, or other plans to lose that coverage. This could cause other family members covered by that plan to lose that coverage. Once employer or union coverage ends, it may not be available again.

What Is Medicare Prescription Drug Coverage (Part D)?

Prescription drug coverage is available through either a Medicare prescription drug plan or a Medicare Advantage plan that offers Medicare prescription coverage. Participants who are enrolled in Original Medicare can choose a Medicare Prescription Drug plan during any open enrollment period. Enrolling in a Medicare Prescription Drug plan while enrolled in a Medicare Advantage plan that includes prescription drug coverage will end the Medicare Advantage enrollment and return the participant to Original Medicare.

It is important for clients to compare the benefits provided by Medicare prescription drug plans and the plan’s costs in choosing a Part D plan. Different plans may have their own formulary of covered drugs and different tiers of drugs with a different cost for drugs in each tier. Plans may use various methods, in addition to drug tiers, to try to minimize costs. These can include

 

  • prior authorization from the drug plan before certain prescriptions are filled,
  • limits on the amount of medication available per prescription, and
  • step therapy, beginning with lower cost medicines before the plan will cover a more expensive prescribed drug.

 

Clients or the health-care provider who writes the prescription can request an exception to a rule or to receive a drug that is not included in the plan’s formulary.

What Are Medicare Supplement Insurance (Medigap) Policies?

Medicare Supplement Insurance, or Medigap, policies are available from private insurance companies. Participants purchase these policies to cover some of the costs not paid by Original Medicare, such as deductibles, copayments, and coinsurance. Some plans also offer coverage not available through Original Medicare, such as medical care while traveling outside the United States. They generally do not cover long-term care, vision or dental care, hearing aids, eyeglasses, or private nursing care. For Medicare participants with Medigap coverage, Medicare will pay its share of the Medicare approved amount and the Medigap policy pays its share. Medigap coverage cannot be sold to anyone who has a Medicare Medical Savings Account. Medigap policies are guaranteed renewable, regardless of health, although the premium may increase.

Medigap coverage requires enrollment in both Part A and Part B. Medigap policies sold after January 1, 2006, cannot include drug coverage but participants who still have a plan purchased before that date can keep the drug coverage offered by the plan. Clients cannot have prescription drug coverage from both a Medigap plan and a Medicare drug plan.

Federal and state laws standardize the coverage available under each Medigap plan, and the plans must be clearly identified as “Medicare Supplement Insurance.” The standardized policies are generally identified by letter. Policies with the same letter must provide the same exact coverage. Policies in Massachusetts, Minnesota, and Wisconsin use a different standardization method.

When Can a Medigap Policy Be Purchased?

Clients can purchase Medigap policies during their Medigap open enrollment period, which begins on the first day of the month in which they are 65 or older and enrolled in Part B. If a client delays Part B enrollment because he is covered under group coverage based on current employment, his Medigap open enrollment period starts when the client signs up for Part B. Participants can purchase any Medigap plan during the Medigap open enrollment period, regardless of health.

After a client’s Medigap open enrollment period, insurance companies can deny a policy based on medical underwriting, delay coverage for pre-existing conditions, or limit Medigap policy options and increase the costs.

Once a participant has a Medigap plan, he can switch to another plan or another insurer without penalty.

What Are the Different Benefits Offered by Medigap Plans?

See Table II on page 28.

Medicare Premiums and Other Costs

What Are the Premiums for Part A?

Generally, there is no premium for Part A coverage because Medicare taxes paid while working are intended to pay for those expenses. Clients do not pay premiums for Medicare Part A at age 65 if

 

  • they are receiving or are eligible to receive Social Security benefits or RRB benefits or
  • they or their spouses had Medicare-covered government employment.

 

Clients under age 65 qualify for premium-free Part A if

 

  • they received Social Security or RRB disability benefits for 24 months or
  • they have end-stage renal disease.

 

A client who does not qualify for premium-free Part A will pay premiums based on the number of credits he earned for Social Security purposes. A client who has less than 30 credits pays a monthly premium of $413 in 2017. A client who has 30 to 39 credits pays a monthly premium of $227 in 2017 (40 credits are required to receive Social Security benefits). The premium increases 10% if a client does not enroll in Part A when first eligible, unless he qualifies for a special enrollment period. The increased premium lasts for twice the number of years a client is eligible but did not sign up.

What Are the Out-of-Pocket Costs for Part A Coverages?

Medicare recipients must pay deductibles and coinsurance for each benefit period. A benefit period starts when a recipient is admitted as an inpatient in a hospital or SNF. It ends when a recipient has not received inpatient hospital care or skilled care in an SNF for 60 consecutive days. Original Medicare provides 60 “lifetime reserve days” for use when a client’s hospital stay exceeds 90 days during a benefit period. Once the 60-day lifetime reserve has been used, the recipient pays for any days that exceed 90 days in a benefit period. Table III (below) shows the recipient’s payment responsibilities for hospital care, and Table IV (below) shows the recipient’s payment responsibilities for SNF care.

What Are the Premiums for Part B?

Part B costs consist of a monthly premium, an annual deductible, and copayments. The deductible and copayments are discussed in a subsequent question. For 2017, the standard monthly premium is $134.

But most people receiving Social Security benefits and whose Medicare premium is deducted from their Social Security benefits will pay less than $134 for 2017. This is because the 2017 Social Security cost-of-living adjustment (COLA) is less than the increase in the Medicare premium. To prevent increased Medicare premiums from reducing a recipient’s net Social Security benefits, the law has a hold harmless provision. For most Medicare recipients receiving Social Security benefits, that provision limits the monthly increase in the client’s Medicare premium increase to the amount of the COLA in their Social Security benefits.

The hold harmless provision does not apply to clients if

 

  • they enroll in Part B for the first time in 2017;
  • they do not receive Social Security benefits;
  • their Medicare premiums are not deducted from their Social Security benefits;
  • they have both Medicare and Medicaid, and their Medicare premiums are paid by Medicaid; or
  • they are subject to the income related monthly adjustment amount (IRMAA).

Are Medicare Part B Premiums Adjusted for Income?

IRMAAs can result in substantially higher Part B premiums. Clients are subject to an IRMAA if the modified adjusted gross income shown on their tax return from two years earlier exceeds a certain amount. Modified adjusted gross income (MAGI) is the total of adjusted gross income and tax-exempt interest income. The IRMAA is adjusted annually for inflation, but the income ranges are not. Table V on page 30 shows the premium amounts for clients who do not qualify for the hold harmless provision. If their income drops in a later year, the IRMAA is reduced or eliminated.

Is There a Penalty for Not Enrolling in Medicare Part B During the Initial Enrollment Period?

A late enrollment penalty is imposed on clients who do not sign up when first eligible or drop Part B and re-enroll later, unless they qualify for a special enrollment period. The penalty is 10% for each full 12-month period that they were eligible for Part B but did not enroll. The Part B late enrollment penalty applies as long as the recipient has Part B.

What Are the Part B Deductible and Copayments?

For 2017, the Part B deductible is $183. After it is met, there is typically a 20% coinsurance payment.

What Are the Costs for Medicare Advantage (Part C)?

There are no set charges for Medicare Advantage plans. Medicare Advantage enrollees generally pay the Part B premium plus an additional Medicare Advantage premium. Some Medicare plans may pay part of participants’ Medicare Part B premium or not charge any additional premium. Each plan sets its own premium, deductible, copayment or coinsurance, and annual out-of-pocket limit.

What Are the Costs for Medicare Part D Coverage?

Part D costs may include the premium, deductible, copayment, coinsurance, and costs in the coverage gap, also known as the “donut hole.”

What Are the Medicare Part D Premiums?

Plans generally charge a monthly premium that can either be deducted from a participant’s Social Security benefits or RRB benefits or billed to the participant directly. Some Medicare Advantage plans include prescription drug coverage without an additional premium. Plans may also have copayments, coinsurance, and deductibles.

The Medicare web site, www.medicare.gov, allows participants to compare plans available in their area. Entering their specific prescriptions produces a personalized cost estimate and coverage information.

For clients with limited income and resources, Medicare’s Extra Help program offers assistance paying the drug plan’s premium, deductible, coinsurance, and copayments. It also eliminates the coverage gap and late enrollment penalty.

Are Medicare Part D Premiums Also Adjusted Based on Income?

As with Part B premiums, participants pay an additional amount if their MAGI two years earlier exceeds certain levels. This additional amount is known as Part D-IRMAA and is paid directly to Medicare, usually as a deduction from the participant’s Social Security check. It is not paid to the drug plan. Table VI on page 31 shows the 2017 premium schedule. The income ranges for the Part D-IRMAA are the same as Part B-IRMAA. The Part D-IRMAA amount is adjusted annually for inflation, but the income ranges are not.

Is There a Penalty for Not Enrolling in Medicare Part D Coverage During the Initial Enrollment Period?

Part D premiums are increased by a late enrollment penalty if, after his initial enrollment period ends, a client has a period of 63 or more days without Part D or other creditable prescription drug coverage. Creditable prescription drug coverage is coverage, such as employer or union coverage, expected to pay, on average, at least as much as Medicare’s standard prescription drug coverage. The penalty is determined by multiplying 1% of the “national base beneficiary premium” by the number of full months that a client was not covered by a Medicare drug plan or other creditable prescription drug coverage. The result is rounded to the nearest $0.10 and added to the monthly premium. For 2017, the “national base beneficiary premium” is $35.63.

What Is the Coverage Gap?

Most Medicare Part D plans have a gap in coverage when a participant’s total expenses for covered drugs reach a certain amount. For 2017, the gap begins when total costs reach $3,700. Costs that count toward the coverage gap are deductibles, copayments, coinsurance, and other payments by the participant; the discount provided on brand name drugs; and anything paid while in the coverage gap. Costs that are not included are the drug plan premium, any pharmacy dispensing fees, and payments for drugs that are not covered. A participant’s share of the cost for both brand-name and generic drugs in the coverage gap will gradually decline until it reaches 25% in 2020.

What Are the Costs for Brand-Name Drugs in the Coverage Gap?

Hitting the coverage gap does not mean that participants have to pay the full retail price of the drug. Instead, participants pay a maximum of 40% of the plan’s cost for covered brand-name prescription drugs. Ninety percent of the price (the amount paid plus the 50% manufacturer’s discount) are included in out-of-pocket costs in determining when the coverage gap is exceeded.

What Are the Costs for Generic Drugs in the Coverage Gap?

During the coverage gap, for generic drugs, Medicare pays 49% of the price (including dispensing fees) and the participant pays the remaining 51%. Unlike brand-name drugs, only the participant’s payment is included in the costs to determine when the coverage gap is exceeded.

What Are the Costs After the Coverage Gap Is Exceeded?

Once the total costs reach $4,950 in 2017, participants are out of the coverage gap and qualify for “catastrophic coverage.” Under catastrophic coverage, participants pay a small copayment or coinsurance per drug for the rest of the year.

What Are the Costs for Medigap Coverage?

Medigap premiums are set by the issuing insurance company and can vary widely for the same Medigap policy coverage.

Do Medigap Issuers Price Their Policies in Different Ways?

Insurance companies may use one of three ways to price their policies:

 

  1. Community-rated or no-age-rated policies charge the same monthly premium to everyone for the same policy, regardless of age.
  2. Issue-age-rated policies base the premium on the age when the policy is issued.
  3. Attained-age-rated policies base the premium on the insured’s current age.

Medicare Funding and Its Financial Situation

Primary funding for Medicare Part A comes from the 1.45% Medicare tax paid by both employees and employers on wages and self-employment income. Beginning in 2013, workers are subject to an additional 0.9% tax on wages and self-employment income above certain thresholds ($200,000 if single; $250,000 if married filing jointly; and $125,000 if married filing separately). The funds are held in the Hospital Insurance (HI) Trust Fund. Some proposals to repeal the Affordable Care Act would have repealed the 0.9% additional tax.

Approximately 75% of Medicare Parts B and D funding comes from general revenue, with the balance coming from monthly premiums paid by beneficiaries and interest on U.S. Treasury securities held in the trust fund for Parts B and D. These funds are held in the Supplementary Medical Insurance (SMI) Trust Fund, which consists of a Part B Fund and a Part D Fund. Funds cannot be transferred between the two parts of the SMI Trust Fund.

Financing for Medicare Part C comes from both the HI and SMI Part B Trust Funds.

What Is Medicare’s Financial Situation?

The 2017 Medicare Trustees’ Report projected that the HI Trust Fund would remain solvent until 2029, one year later than the 2016 report estimated.

The SMI Trust Fund for Parts B and D is considered adequately financed because the premiums and general revenue transfers are updated annually to cover the expected costs and to provide a reserve for Part B contingencies. This determination may not reassure clients or their advisors because of concern over the federal budget.

Conclusion

Planning for health-care costs in retirement (or after age 65) requires an understanding of Medicare’s different parts, what is and is not covered by the different parts, and the costs involved in Medicare coverage. Because out-of-pocket health-care costs for a healthy 65-year-old couple are projected to exceed $400,000, not planning for those costs can prevent clients from having the retirement they hope for or from leaving the legacy included in their plans.

Bruce A. Tannahill

Bruce A. Tannahill, J.D., CPA/PFS, CLU, ChFC, AEP®, is director of Advanced Sales for a large mutual insurance company in Phoenix, Arizona, vice-chair for eCLE of the Continuing Legal Education Committee, and an associate editor of Probate & Property.