Understanding Medicare

By Christopher L. Hudson, CIMA

Medicare was signed into law by President Lyndon B. Johnson on July 30^th, 1965 at the Truman Library in Independence, Missouri. The location was in homage to President Harry S. Truman who, 20 years earlier, had proposed government health insurance for all senior citizens.

Officially named the Social Security Act Amendments, it was more popularly known as the Medicare bill – establishing both Medicare, a health insurance program for the elderly, and Medicaid, a health insurance program for the poor.

Medicare was created to provide medical insurance to individuals age 65 and over who had paid into the system over their career. Prior to the establishment of Medicare, just over one-half of all citizens over the age of 65 had some type of hospital insurance and fewer yet had insurance covering any type of surgical costs or out-of-hospital physicians’ costs. The law established Original Medicare: Part A (Hospital Insurance) and Part B (Medical Insurance). After paying a deductible, Medicare pays a large share of the Medicare-approved costs, while you pay a much smaller share (coinsurance, copays and deductibles). Medicare Part D (prescription drug coverage) was established by the Medicare Prescription Drug Improvement and Modernization Act, signed by President George W. Bush, which went into effect on January 1^st 2006. Medicare Part D is provided by private health plans that are approved by Medicare.

So how does Medicare work today in the 21^st century? Well let’s take a closer look at the ins-and-outs of Medicare today: from eligibility, to when you need to apply, to the individual parts that make-up today’s Medicare coverage.

When am I eligible for Medicare coverage?

 You are eligible for Medicare starting at age 65. People under the age of 65 with certain disabilities and people with End Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant) are also eligible.

You are eligible for premium-free Part A (hospital insurance) if you are age 65 or older and you, or your spouse, worked and paid Medicare taxes for at least 10 years. You are also eligible for premium-free Part A coverage if you are age 65 or older and:

• You are receiving retirement benefits from Social Security or the Railroad Retirement Board.
• You are eligible to receive Social Security or Railroad benefits but you have not already filed for them.
• You, or your spouse, had Medicare covered government employment.

If you are under the age of 65, you are still eligible to receive premium-free Part A benefits if:

• You are on kidney dialysis or are a kidney transplant patient.
• You have been entitled to Social Security, or Railroad Retirement Board, disability benefits for 24 months.

If you, or your spouse, are age 65 or older and did not pay Medicare taxes while you worked (but you are U.S. citizens or permanent residents of the United States), you may be able to buy Part A coverage by paying a monthly premium.

When should I apply for Medicare?

Generally people sign-up for Part A (Hospital Insurance) and Part B (Medical Insurance) at the same time. Your Initial Enrollment Period last for seven months, starting 3 months before you turn age 65 and lasting 3 months after the month that you turn 65. If you miss your 7 month Initial Enrollment Period, you may have to wait to sign-up and pay a monthly late enrollment penalty for as long as you have Part B coverage. The penalty will go up the longer you wait.

If you are already receiving Social Security prior to the age of 65, you will automatically be enrolled in Medicare Parts A and B. However, because you must pay a premium for Part B coverage, you have the option of turning it down.

If you do not enroll in Medicare Part B during the Initial Enrollment Period, you will have another chance during the General Enrollment Period. The General Enrollment Period lasts from January 1^st to March 31^st each year. If you choose not to enroll for Part B coverage during the 7 month Initial Enrollment Period, your monthly premium will go up by 10% for each 12-month period you were eligible for Part B coverage but not enrolled unless you qualify for a “Special Enrollment Period”.

The Special Enrollment Period (SEP) is extended to individuals who currently have medical coverage under a group (or company) health plan through their (or their spouse’s) current employment. These individuals may not need to apply for Medicare Part B coverage at age 65 or during the initial enrollment period. The Special Enrollment Period allows these individuals to apply for Part B coverage during:

• Any month they remain covered under their group health plan or their spouse’s plan.
• The 8-month period that begins in the month after their group health plan coverage ends or their employment on which it is based ends, whichever comes first.

If you need to enroll in Medicare Part D for the first time, you would typically do so either during the Initial Enrollment Period, the Fall Open Enrollment Period (October 15^th to December 7^th) or, if you qualify, during a Special Enrollment Period. Additionally you must also:

• Have Part A and/or Part B and
• Live in the Part D plan’s service area

Your Part D Initial Enrollment Period is the same as the Initial Enrollment Period for Part A and Part B (the seven month period beginning 3-months prior to the month you turn 65 and continuing three months after the month you turn 65). You should enroll in Part D as soon as you are eligible to avoid a potential late enrollment penalty and any gaps in coverage. You may have a late enrollment penalty if you miss the Initial Enrollment Period and enroll in Part D for the first time during the Fall Open Enrollment Period.

In certain circumstances, you may have a Special Enrollment Period to sing-up for Part D coverage if:

• You had credible drug coverage during that time
• You have job-based drug coverage through your, or your spouses, employer.

When does my Medicare coverage Begin:

The start of your Medicare coverage is dependent upon when you sing-up and which sign-up period you are in.

Part A coverage begins in the month that you turn age 65. If you are born on the first of the month, coverage begins the month before you turn age 65.

The start of Part B coverage is based upon the month that you sign-up.

• If you sign-up before the month that you turn 65 – Coverage begins the month you turn age 65.
• If you sign-up the month that you turn 65 – Part B coverage begins the following month.
• If you sign-up one month after turning 65 – Your coverage begins 2 months after signing-up.
• If you wait 2 or 3 months after you turn 65 – Your Part B coverage will begin 3 months after you have signed-up.

If you miss the Initial Enrollment Period, you can only sign-up for Medicare Part B (and/or Premium Part A) during one of the other enrollment periods.

The General Enrollment Period runs from January 1^st to March 31^st each year. If you sign-up for Part B Medicare coverage during the General Enrollment Period, Your coverage will begin on July 1^st of that year. Keep in mind that you may also pay a monthly late enrollment penalty as well.

You may qualify for a Special Enrollment Period as well. There are certain situations that allow you to sign-up for Part B coverage, outside of the Initial Enrollment Period, without paying the late enrollment penalty. Two examples of this would be if you have health insurance through your employer and you are still working or you have group health plan coverage. Keep in mind that the Special Enrollment Period is only available for a limited amount of time. If you are eligible but miss the Special Enrollment Period, you will have to wait for the next General Enrollment Period (January 1^st to March 31^st) and will most likely have to pay a late enrollment penalty. If you sign-up for Part B during a Special Enrollment Period, your coverage generally begins the next month.

Like with Part B, Medicare Part D (Prescription Drug) coverage is dependent upon when you sign-up. If you sign-up for coverage prior to the month you turn 65, your Part D coverage will begin on the first day of the month that you reach age 65. If you sing-up for Part D in the moth that you turn age 65, your coverage will begin on the first of the following month. If you sign-up during the 3 month period after the month that you turn 65, your Part D coverage will begin on the first of the month following the month you that signed-up.

If you miss the Initial Enrollment Period (the 3 months prior to the month you turn age 65 through the 3 months after the month you turn age 65) you will have to wait for the next Annual Election Period (October 15^th to December 7^th) to sign-up for coverage. During that time period, you will have to pay for all prescription drug costs out of pocket and could pay a penalty of 1% per month for every month you could have been enrolled but were not. If you sign-up for Part D coverage during the Annual Election Period, your coverage will begin on January 1^st.

What Does Medicare Cover:

Medicare, as we know it today, is made up of Part A (Hospital Insurance), Part B (Medical Insurance) and Part D (Prescription Drug Coverage). Each can carry costs to the individual in the form of premiums, deductibles, co-pays and co-insurance.

Medicare Part A:

Medicare Part A (Hospital Insurance) covers inpatient hospital stays, care in a skilled nursing facility immediately following a hospital stay and some home health care and hospice care.

There is no monthly premium for Part A coverage (often called premium free Part A) if you are age 65 or older and you, or your spouse, worked and paid Medicare taxes for at least 10 years.

Although there is no monthly premium associated with Part A coverage, individuals are subject to deductibles, copays and coinsurance costs.

Part A covers hospital services you receive when admitted to a hospital by a doctor’s order. Coverage includes semi-private rooms, meals and general nursing and drugs for inpatient treatments. The hospital must also accept Medicare.

Medicare Part A covers inpatient hospital care in a variety of facilities including:

• Acute care hospitals
• Critical access hospitals
• Inpatient rehabilitation facilities
• Long-term care hospitals
• Inpatient psychiatric facilities
• Inpatient care as part of qualifying clinical research study

You can also receive short-term care at a skilled nursing facility following a qualified stay at an inpatient hospital of at least three days. Covered services within the skilled nursing facility include a semiprivate room, meals, skilled nursing care and other services such as physical and occupational therapy. Other covered services include: speech / language pathology, medical social services, medication, medical supplies and equipment used in the facility, ambulance transportation to the nearest provider of needed services that are not available at the facility and dietary counseling.

Part A also covers hospice benefits. Hospice, is the end-of-life care you receive when you are terminally ill. Covered services include care from doctors, nurses and aides, medical equipment (such as a wheelchair), certain prescription drugs and grief and loss counseling for you and your family.

Some home health care services are also covered. Services such as part-time skilled nursing and home health aides, occupational therapy, speech and language pathology and medical social services. Medicare does not pay for 24-hour-a-day care at home, meal delivery or personal care such as bathing or dressing if that is the only care you need.

Medicare Part B:

Medicare Part B (Medical Insurance) covers two types of services:

• Preventive Service: which are services to prevent illness or to detect an illness at an early stage when treatment is most likely to be successful.
• Medically Necessary Services: which are services, or supplies, that are needed to diagnose or treat medical conditions and meet accepted standards of medical practice.

Medicare Part B will help cover services from your doctor and other health care providers as well as outpatient care, medical equipment (such as wheelchairs, walkers, hospital beds and other durable medical equipment) and many preventive services such as screenings, shots, vaccines and yearly “wellness” visits.

Medicare Part B does not cover dental or vision benefits. It also does not cover anything that is not considered medically necessary or preventative such as cosmetic surgery, routine foot care and acupuncture. Additional, Part B does not cover the cost of hearing aids or long-term care.

You will pay a monthly premium for Part B coverage. Your premium will automatically be deducted from your benefit payment each month if you are receiving Social Security, Railroad Retirement Board or Office of Personnel Management benefits. If you are not receiving any of these benefits at the time you enroll in Part B, you will receive a bill.

Most people will pay the standard premium amount. If your modified adjusted gross income is above a certain level, you may pay an Income Related Monthly Adjustment Amount (also known as an IRRMA adjustment). Medicare uses your modified adjusted gross income from 2 years ago to determine your income level. The reason for this “2 year lookback” is that this is the most recent tax return information provided to Social Security by the IRS.

Along with the monthly premium, you will also pay a small deductible. Once you have met your deductible for the year, you typically pay 20% of the Medicare Approved Amount for:

• Most physician services (including physician services while you are a hospital inpatient)
• Outpatient Therapy
• Durable Medical Equipment

Because you pay a monthly premium, Medicare Part B is optional. If you have reached age 65 and are covered by group health insurance from an employer from whom you, or your spouse, are still actively working and that insurance is primary to Medicare (meaning that it pays before Medicare does) then you can delay Part B enrollment, without a penalty, until the employment stops or the insurance ends.

So if you have not begun taking Social Security benefits, simply delay signing up for Part B when you enroll in Medicare Part A at age 65. If you already are receiving Social Security benefits prior to reaching age 65, you can decline Part B by following the instructions that Social Security provides in the letter accompanying your Medicare card and meeting the specified deadline to decline Part B coverage.

If you are not covered by group health insurance from an employer from whom you, or your spouse, are still actively working you will have an opportunity to sign-up for Part B coverage during the following enrollment periods: 

• The Initial Enrollment Period for Part B begins three months prior to the month you turn 65 through three months after. If you sign-up for Part B during this 7-month period, you will not face a Part B late enrollment penalty.
• The General Enrollment Period which runs from January 1^st to March 31^st of each year. Keep in mind if you wait until the General Enrollment Period and you do not have coverage from a group health care plan through your, or your spouses, current employer, you may be subject to a late enrollment penalty. Your Part B premiums could go up as much as 10% for each 12-month period that you could had Medicare Part B but did not sign-up.
• A Special Enrollment Period which covers the period while you are still covered by an employer or union health plan and the 8 months following the month the employer or union health plan coverage ends, or when your employment ends, whichever comes first.

Medicare Part C:

Medicare Advantage (also referred to as Medicare Part C) is offered through private insurers. A private health insurance company will contract with Medicare to deliver Part A and Part B benefits upon enrollment.

Many Medicare Advantage Plans offer additional benefits above and beyond Medicare Part A and Part B such as hearing care, routine dental and vision coverage (including prescription lenses), fitness program memberships and emergency alert systems ( in the case of a fall or accident). Most plans also include prescription drug coverage that Medicare Part A and Part B do not cover.

Each Medicare Advantage Plan has an annual out-of-pocket spending limit as well which protects the participant from skyrocketing medical costs in the case of a serious illness.

Keep in mind that many Medicare Advantage Plans require you to see doctors within their plan network, although, this is not always the case.

It is important to note that you are still on Medicare when you have a Medicare Advantage Plan. You must have Medicare Part A and Part B to qualify, you must live within the plan’s service area and you will continue to pay Part B premiums along with any premium the plan may charge as well (although many Medicare Advantage Plans can have premiums as low as $0 per month). It is also important to point out that you could still pay an annual deductible, copayments and/or coinsurance.

Medicare Part D:

Medicare Part D is prescription drug coverage. This coverage does not come with Original Medicare (Part A and Part B) except in limited situations. If you want coverage for prescription medications that you take at home, you need to enroll in a Medicare Part D prescription drug plan.

There are two primary ways to access a Medicare prescription drug plan:

• Through an “all-in-one” Medicare prescription drug plan, or
• Through a stand-alone Medicare Part D prescription drug plan

Both types of plans are available through private, Medicare approved, insurance companies.

You must have Medicare Part A or Part B to qualify for a stand-alone Medicare Part D prescription drug plan.

Each plan will determine its own premium and deductible. You can have these premiums deducted from you Social Security payment rather than paying your insurer directly if you choose. Generally speaking, plans with lower premiums tend to have higher deductibles.

Also keep in mind if your income exceeds a certain limit, you may have to pay an additional surcharge on your Medicare Part D coverage. This surcharge is known as the Part D Income-Related Monthly Adjustment Amount (or Part D IRMMA). This is not part of your Part D premium.

Medicare does impose a late enrollment penalty if you do not sign up for Part D coverage during your Initial Enrollment Period, which is the seven month period beginning three months before the month you turn age 65 to three months after the month that you turn age 65, or if you have gone at least 63 consecutive days without prescription drug coverage. This penalty is in addition to your monthly premium and typically remains in effect for as long as your Medicare drug coverage continues. In general, the longer you wait to enroll in a prescription drug plan, the higher your penalty will be. For that reason, it is imperative that you enroll in Medicare Part D, or a Medicare Advantage prescription drug plan, as soon as you become eligible for Medicare.

Most Medicare drug plans also have a coverage gap (sometimes known as the “doughnut hole”). What this means, is there is a temporary limit on what the drug plan will cover. The coverage gap begins after you and your drug plan have spent a certain amount on covered medications. This amount could change each year. You can help to prevent, or delay, entering the coverage gap by reducing your prescription drug costs. There are several ways to do this, including:

• Switching to generic, or simply lower cost, medications (after consulting with your physician)
• Using a prescription drug mail-order program if offered by your plan.
• Enrolling in a prescription drug assistance program and/or a Low Income Subsidy program if eligible.

As with every part of Medicare, it pays to do your homework, research and speak to a professional if necessary.

Medicare Supplement Insurance (Medigap):

Let’s end our discussion on Medicare by talking a little about Medicare Supplement Insurance, commonly known as “Medigap”.

Medicare Supplement Insurance (Medigap) is offered through private insurance companies to fill in the holes (or “gaps”) in Original Medicare. A Medicare Supplement Insurance police can help pay some of the remaining healthcare costs not covered by Medicare such as copays, deductibles and coinsurance payments. Some Medigap policies will also cover medical care when you travel outside of the United States. Policies typically do not cover long-term care, hearing aids, eyeglasses, vision, private-duty nursing or prescription drugs (if purchased after January 1^st 2006).

In order to purchase Medicare Supplement Insurance you must first have Medicare Part A and Part B. You will pay a private insurance company a monthly premium for your Medigap policy on top of the monthly premium that you pay for Medicare Part B. You can purchase a Medigap policy from any insurance company that is licensed in your state to sell one. As long as you continue to pay your monthly premium, the insurance company cannot cancel your coverage even if you develop health problems down the road.

It is important to remember that Medicare Supplement Insurance (Medigap) is not a Medicare Advantage Plan (Medicare Part C) and it is against the law for anyone to sell you a Medigap policy if you are already enrolled in a Medicare Advantage Plan.

If you have Original Medicare and you buy a Medigap policy, Medicare will pay its portion of the Medicare-approved costs first and then your Medigap policy will pay its share of the covered costs.

Every Medigap policy must follow both federal and state laws designed to protect the policy holder and the policy must be clearly identified as Medicare Supplement Insurance. Insurance companies are only permitted to sell you “standardized” Medigap policies which, in most states, are typically identified by letters.

Any opinions are those of Christopher Hudson and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss tax or legal matters with the appropriate professional.