Are you or a relative close to retirement age and beginning to think about Medicare? You have a lot of company. An estimated 10,000 baby boomers turn 65 each day and become eligible for Medicare. However, many people are in the dark about how it all works. Do you know, for example, that if you do not enroll in Medicare within a specific window of time, you will be subject to significant penalties? Do you understand what medical expenses Medicare pays for and when you might receive a large bill? Do you know what can be done to protect against these expenses?
In this series of articles, I hope to help simplify your understanding of the Medicare program, your costs, and the insurance options that are available to protect you. Medicare is a huge program with countless details and many exceptions to rules. I can’t cover everything in a short series of articles, and I certainly don’t claim to know everything. My goal is for people to come away with a clearer picture of how the program works, so they can plan appropriately and know when to ask questions.
Most seniors are enrolled in Traditional Medicare (also known as Original Medicare). Since my background is with the Traditional Medicare program and associated insurance products, this will be the focus of the articles, but they will also touch on Medicare Advantage and Prescription Drug coverage.
First, a short disclaimer: I am a private individual not affiliated with the federal Medicare program. While I worked hard to ensure the accuracy of my information, it has not been reviewed by Medicare. If there are any disagreements with official Medicare materials, those materials should be relied upon.
The Medicare Program
Medicare is the federal government’s health insurance program for Americans 65 and older. It also covers certain younger people who receive Social Security disability benefits, as well as people with end stage renal (kidney) disease. President Lyndon Johnson signed it into law 50 years ago, in July, 1965. The Centers for Medicare and Medicaid Services (CMS) is based in Baltimore and is the agency responsible for its administration. As of November 2015, 55.9 million Americans were enrolled in Medicare, with 32.3% of these in private plans (Medicare Advantage). In Maryland, there were 938 thousand Medicare enrollees, but only 8.9% were in private plans.
The Medicare Program is divided into four parts:
- Part A, also known as Hospital Insurance, primarily covers care given in an institutional setting, such as a hospital or skilled nursing facility, as well as hospice care, and some home health care.
- Part B, also known as Supplementary Medical Insurance, covers other medical care and services, such as doctor office visits, laboratory work, outpatient medical care, durable medical equipment (like wheelchairs), and some home health care. Medicare Parts A and B make up the Traditional Medicare program.
- Part C refers to private insurance companies that contract with the government to provide Part A and Part B services. This is an alternative to traditional Medicare and is also known as Medicare Advantage.
- Part D is Prescription Drug coverage. Plans are offered by private insurance companies that have contracted with the government to provide a defined coverage.
Enrolling in Medicare
If you are like most Americans, you (and/or your spouse) have paid Medicare taxes for at least 10 years and are a citizen and resident of the United States. You are therefore eligible to enroll in Medicare Part A for free and Part B, for a monthly cost, when you are turning 65. Everyone with Medicare Part A or Part B may also purchase a Part D Prescription Drug Plan. (There are exceptions to the above rules, so you should contact Medicare if your situation is different. People who receive Social Security disability benefits or with renal disease may also be eligible earlier than age 65.)
While you do not need to claim Social Security benefits to enroll in Medicare, the Social Security Administration is responsible for handling Medicare enrollment. To enroll in Medicare Parts A and B, contact Social Security at 800-772-1213 or visit socialsecurity.gov to enroll online.
Your Initial Enrollment Period (IEP) starts three months before the month of your 65th birthday and continues through three months after the month of your 65th birthday, for a total of seven months. For example, if you will be 65 on July 6, you may enroll between April 1 and October 31 – and this is when you should enroll to avoid penalties.
People who do not enroll during the IEP have a General Enrollment Period every year, between January and March, to sign up, but their coverage will not start until July 1. Additionally, there can be lifetime penalties in the form of higher premiums for Parts B and D (and Part A if you didn’t qualify for free coverage). The Part B penalty is a permanent 10% increase in your premium for each 12-month period that you wait to enroll. The penalty for late enrollment in Part D is a permanent increase in your monthly Part D premium of 1% of the national base beneficiary premium (published each year by CMS – $34.10 in 2016) for each month that you wait to enroll in Part D. The longer you wait the larger the penalties grow, so do not put off your enrollment!
A common exception to having to enroll during the IEP is for people (or their spouses) who continue to work past age 65 and who have group health coverage through their current employer. These people may sign up for Medicare without penalty after the IEP – while they still have group coverage, or during the eight-month Special Enrollment Period after the end of employment or group coverage. There are exceptions here, so if you plan to work past age 65, it is wise to contact Medicare (800-Medicare) to be sure that you qualify and to avoid penalties. Also, some group insurance plans will expect you to enroll in Medicare when you are first eligible, so you need to speak with your insurance plan to determine if it makes sense to enroll in Medicare instead of waiting.
For this same exception to apply to Part D Drug coverage, your current plan at your employer must offer broad enough coverage to be considered “creditable.” Your employer should send you a notice each year advising whether its plan is creditable or not. If not, it may be advisable to enroll in Part D while you are still working to avoid late enrollment penalties down the line. Before doing so, be sure to check with your employer whether moving to Medicare Part D will affect any other portion of your insurance package.
Every year, Medicare enrollees have a chance to change their health and drug coverage for the coming year. This is known as the Annual Open Enrollment Period, and runs from October 15 through December 7. During this time, you may switch between Traditional Medicare and Medicare Advantage, choose a new Medicare Advantage plan, and choose a new Part D plan. The Medicare Plan Finder (available at medicare.gov/find-a-plan) can be used to compare plan types, benefits, estimated total costs, and the plan’s Medicare star rating. The Plan Finder can also be used to enroll in Part C or Part D.
As mentioned above, there is usually no cost to enroll in Medicare Part A. In 2016, Medicare Part B premiums are $121.80 per month for new enrollees, but they may be higher for you if your income from two years ago was above $85,000 (if you filed taxes as an individual) and above $170,000 (if you are married and filed jointly). Part D premiums will depend on the plan that you choose and may also be higher subject to your income. There is an appeals process through which you can contest this high income surcharge if you have experienced a life changing event, such as retirement, that lowers your income from two years before.
If you are receiving Social Security benefit payments, your Part B premium will be deducted directly from your monthly benefit. Otherwise you will receive a bill. (For specific questions about Medicare enrollment, visit medicare.gov or call 800-MEDICARE.)
Medicare Part A and Your Costs
Part A is the side of Medicare that pays for care in hospitals and skilled nursing facilities, as well as hospice and some home health care. In 2013, Medicare Part A spent $179 billion on care, an average of about $4,800 per enrollee. The sections below explain what Medicare will pay for each of these services and what they will cost you.
Hospitalizations – If you are hospitalized, Medicare will pay for a semi-private hospital room, your meals, general nursing, certain drugs, and hospital services and supplies. Other medical services, such as doctors’ charges for services you receive while in the hospital are generally covered by Part B.
For the first 60 days that you are hospitalized, Medicare will pay for all costs except for a single charge that you will be responsible for, known as the Part A Deductible. In 2016 it is $1,288. For days 61 through 90 of hospitalization, Medicare will continue to pay for all costs, but you will need to pay a fixed cost for each day you are in the hospital, referred to as Part A Coinsurance. In 2016 this charge is $322. After 90 days in the hospital, you will be responsible for all hospital charges, with one exception: Medicare will allow you 60 days over your lifetime (known as lifetime reserve days) where it will continue to cover costs aside from a fixed cost per day. In 2016 this charge is $644 per day.
Since you are responsible for all charges after your lifetime reserve days are used, there can potentially be very significant costs for a very long hospital stay. It does not happen very often, but I have heard of Medicare enrollees with a bill of several hundred thousand dollars for a long hospital stay. (A Medicare Supplement policy will pay for these costs.)
It is important to note that hospital and skilled nursing coverage works with benefit periods. A benefit period begins the day you enter a hospital as an inpatient. It ends after you have not received inpatient care for 60 days in a row. If fewer than 60 days have passed since you were discharged from the hospital, Medicare will view your new stay as a continuation of the previous one. This can be good if your total time in the hospital is less than 60 days, since you will not have a Part A Deductible or Coinsurance charge for your readmission. But if your second stay brings you beyond 60 days of total hospitalization, it can be more expensive for you (or your Medicare Supplement insurer) than if they were treated as separate periods. If 60 days have passed since your last discharge, a new benefit period will begin, and you will need to pay the Part A Deductible again.
As a simple example, Jonathan is admitted to the hospital on January 1 with pneumonia and stays for 40 days (this is a lot longer than an average stay), until mid-February. He will need to pay the $1,288 Part A Deductible, and Medicare will pay all remaining hospital facility charges (but he likely will have other doctors’ charges that fall under Part B). On March 1 he feels sick again and is readmitted to the hospital. Fewer than 60 days have passed since he was discharged, so his benefit period picks up where he left off. If he is hospitalized for 20 days or less, he will have no additional hospital charges. But suppose he again stays for 40 days. The last 20 days of his second stay are in the phase of his benefit period where he pays $322 per day from days 61-90, so his charges for the readmission will be $6,440. If he would have been readmitted on July 1 instead of on March 1, more than 60 days would have passed since his January stay, and a new benefit period would begin. In that case, he would pay the $1,288 Part A Deductible again, but then there would be no further hospital facility charges for his second stay.
Skilled Nursing Facility Care – Medicare will pay for skilled nursing and other rehabilitative services in a Medicare-approved facility, as well as your meals and the cost of a semi-private room. To be eligible for Medicare’s Skilled Nursing Facility benefit, your need must be certified by a doctor and follow a hospital stay of at least three days.
Medicare will pay all charges for the first 20 days in a benefit period. From days 21-100, you will pay coinsurance each day: $161 per day in 2016. After day 100, Medicare will not pay for skilled nursing facility care until a new benefit period begins. (Many Medicare Supplement policies will pay for your costs from days 21 to 100.)
It is important to note that Medicare’s Skilled Nursing Facility benefit is tied to both medical necessity and a previous hospital stay. This is not the same as the nursing home or assisted living facility charges paid by retirees who can no longer live on their own, for room and board or for non-medical assistance. In Maryland, these costs average $47,000 per year for assisted living facilities and $110,000 per year for a private room in a nursing home. Medicare will not pay for these costs. Instead, people pay out of their savings, rely on income-related government assistance programs, or purchase a long-term care insurance policy.
Hospice Care – Medicare will pay for hospice care for terminally ill patients with less than six months to live. Hospice care includes pain relief and symptom management, medical/nursing/ social services, drugs, respite care, and counseling. Care is generally provided in the home unless your hospice team determines that it must be in a facility. Patients are also entitled to up to five days of inpatient hospice respite care, so that their usual caretaker (a family member) can rest.
Medicare pays for all hospice care costs, aside from up to $5 per prescription drug and 5% of inpatient respite care charges. (Medicare Supplement policies will pay for these charges.)
Home Health Care – Medicare’s Home Health Care benefit pays for part-time nursing, physical and occupational therapy, and speech-language pathology services. To be eligible for Home Health Care you must be homebound, your care be ordered by a doctor, and services be provided by a Medicare-approved agency. Medicare will pay the full cost of your care under Part A if it is connected with a previous inpatient hospital stay.
Home Health Care should not be confused with non-medical assistance given in the home to help with basic activities like eating, dressing, moving around the house, using the restroom, bathing, etc. This is known as custodial care, and Medicare does not pay for it. Some people will purchase a long-term care insurance policy to pay for these services, but it can be pricey.
Blood – Medicare will pay for all blood that the hospital purchases for you, aside from the first three pints. If the blood is donated, you will not be charged.
Tables that summarize what Medicare will pay and what are your costs for each benefit are available and can be shared if you send me an email. In the next article, I will cover the remaining parts of Medicare with a focus on Part B. The third article will discuss what to do to protect yourself against large out-of-pocket cost-sharing charges.
Moshe Nelkin is a Medigap pricing actuary with several years of experience in competitive rate and market analysis. Having seen a number of policies that paid out hundreds of thousands of dollars in a single year, he feels passionate about the value that Medigap provides to seniors, especially seniors on fixed incomes. His insurance agency, Security and Integrity LLC, helps seniors understand their options and choose wisely. Contact him at firstname.lastname@example.org or visit SecurityandIntegrity.com. Copyright 2016 – Security and Integrity LLC