Medicare is a health insurance program administered by the federal government for individuals age 65 and older, individuals under age 65 with certain disabilities, and individuals of all ages with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant).
Medicare is administered by the Centers for Medicare and Medicaid Services (CMS), a component of the Department of Health and Human Services (HHS), although some parts of Medicare insurance are available from private insurance companies.
There are four main components of Medicare insurance:
Medicare Part A helps pay for inpatient hospital care, treatment in critical access hospitals (small facilities in rural areas that provided limited inpatient and outpatient services), care in skilled nursing facilities (not custodial or long-term care), hospice care, and certain home health care services.
There is no monthly premium for Part A if you meet the eligibility criteria. An individual can qualify for a premium waiver in several ways, however the most common way is through length of employment, or more precisely, the period of time they or their spouse have paid Medicare taxes. If you or your spouse have paid Medicare taxes for at least 40 quarters (equivalent to 10 years employment), you do not need to pay for Part A. According to the Centers to Medicare and Medicaid Services, approximately 99 percent of Medicare beneficiaries do not pay a premium for Part A.
If you have paid Medicare taxes for less than 40 quarters, you can still obtain Medicare for a monthly fee. Table 1 below shows the monthly fees payable based on quarters of Medicare-covered employment each year since 2000:
|40+ Quarters of |
|30 to 39 Quarters of Covered Employment||Less than 30 Quarters of Covered Employment|
Medicare Part A requires beneficiaries to pay a deductible if they are admitted as a hospital inpatient. This covers all inpatient care for the first 60 days in a hospital or the first 20 days in a skilled nursing facility during a benefit period. If longer care is required, co-insurance must be paid at a daily rate. Table 2 below shows the applicable rates each year since 2000:
|Year||Deductible||Co-insurance Cost Per Day|
|Covers days 1-60 of hospital inpatient care and days 1-20 in a skilled nursing facility||Days 61-90 of hospital inpatient care||Days 91-150 of hospital inpatient care||Days 21-100 in a skilled nursing facility|
After 150 days of hospital treatment or 100 days of care in a skilled nursing facility, a beneficiary must pay the full cost of treatment.
Medicare Part B helps pay for medical services such as doctors’ services, outpatient care, and some other medical services not covered by Part A. Part B is optional and available for a monthly, but most people eligible for Medicare choose to pay for Part B.
The base premiums for Part B are shown in the Table 3 below.
|2010||$110.50 or $96.40 1|
|2011||$115.40 or $110.50 or $96.40 1|
Since 2007, individuals and married couples with higher incomes are required to pay higher premiums for Part B based on their modified adjusted gross income. These higher rates affect less than 5% of Medicare beneficiaries. For 2011, individuals with annual modified adjusted gross income above $85,000 and married couples filing jointly with modified adjusted gross income above $170,000 will pay a higher premium. The rates for higher-income beneficiaries are published each year by the Social Security Administration.
An annual deductible applies to services received under Part B and beneficiaries must also pay 20% of the Medicare-approved amount for services over and above the deductible. Many beneficiaries choose to purchase a Medicare Supplement plan to cover this cost.
The Balanced Budget Act of 1997 gave Medicare beneficiaries the option to receive their Medicare benefits (Part A and Part B) through a private health insurance plan, rather than directly through the government. These became known as Part C plans. Six years later, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added further enhancements, allowing the addition of Part D prescription drug coverage (see below) to these plans. Note that standalone Medicare Part D did not come into effect until 2006 (see below for further details). At this point Part C plans also became known as Medicare Advantage (MA) plans. Plans that include Part D prescription drug benefits are known as a Medicare Advantage Prescription Drug (MA-PD) plans.
Medicare Advantage plans are not Medicare Supplement plans, but take the place of “original” Medicare. The real question is why would an individual choose a Medicare Advantage plan over original Medicare Parts A, B, and D? Let’s take a look at some of the key considerations:
Traditional Medicare allows an individual to obtain medical care from almost any provider in the country. Medicare Advantage plans typically have a network of providers that members can use, similar to a Preferred Provider Organization (PPO) health plan. Using a provider outside the network may cost more and need to be approved in advance.
All Medicare Advantage plans must be approved and must offer equivalent or better coverage than the original Medicare standards. However, certain benefits and/or costs may be modified. For example, lower costs in one area may be offset by reduced benefits in another or vice versa.
By limiting the choice of providers to a preferred network, savings may be achieved that allow the provision of additional benefits not covered by original Medicare, such as vision care, dental care, and gym memberships. Medicare Advantage plans generally also provide a greater emphasis on preventive care in an effort to keep long term patient costs down, and often include annual physical check-ups.
Enrolment in a Medicare Advantage plan will usually require an additional monthly fee over and above the standard Part A (if any) and Part B costs to cover additional benefits such as prescription drug coverage.
Medicare Part D, which provides prescription drug coverage, was initially made available through Medicare Advantage plans and then introduced as a standalone component of Medicare in 2006. Anyone eligible for Medicare Part A or B is eligible for Part D.
Unlike original Medicare Parts A and B, Part D is not standardized and only available through private insurers. It requires the payment of an extra monthly premium and co-pays which vary depending on the type of coverage received. Deductibles may also apply. Members may obtain their prescriptions at pharmacies or through mail order services.
Almost all prescription drug plans (PDPs) and most Medicare Advantage Prescription Drug (MA-PD) plans have a coverage gap known as the “donut hole” (or it spelling variant “doughnut hole”).
It is called a donut hole because a temporary coverage gap (with “nothing to eat”) can arise. You eventually get out of the hole (and “continue eating”) after you exceed a certain amount of out-of-pocket costs.
Not everyone will reach the coverage gap. You will only find yourself in this situation if the combined costs of you and your insurance company exceed a certain limit. When you are in the donut hole, you may still receive some financial assistance. For example, in 2011:
Some plans offer additional coverage during the gap, typically through an increase in coverage for generic drugs, however you are likely to pay a higher monthly premium for this benefit.
Chart 1 below illustrates the donut hole situation with an example based on the following assumptions:
Continuing the example above, Table 5 below shows the total amount you would pay in a range of annual drug cost scenarios. Actual amounts may vary depending on your plan, and the amounts below do not take into any discounts received while in the donut hole.
|Annual Drug Cost||You Pay||Insurer Pays||Your Effective Share of the Cost||Insurer Effective Share of the Cost|
The table below shows all the possible Medicare coverage options, excluding any Medicare Supplement plans. Medicare Supplement plans may be added to provide additional coverage.
|Medicare Options||If you want:|
|Part A Only||Parts A and B||Parts A, B and D||Parts A and D||Part B Only||Parts B and D|
|Option 1||Option 2||Option 3||Option 4||Option 5||Option 6||Option 7||Option 8||Option 9|
|Original Medicare |
|Original Medicare |
|Medicare Advantage (Part C) without Prescription Drug Coverage|
|Medicare Advantage (Part C) with Prescription Drug Coverage|
|Original Medicare |
Note: To enroll in Part D, you must be enrolled in Part A and/or Part B. You cannot enroll in Part D by itself.
If you are already enrolled in a Medicare Advantage Plan with prescription drug coverage (MA-PD) and you join a Part D plan, you will be dis-enrolled from your Medicare Advantage Plan and returned to original Medicare.
Medicare is financed by payroll taxes. The Medicare component of payroll taxes is known as “Hospital Insurance” tax. For each employee, the tax is equal to 2.9% of wages, salaries and other compensation earned in connection with employment. This tax burden is shared equally between the employer and the employee, with each paying 1.45%. If an individual is self-employed they must pay the full 2.9%, however they are entitled to claim half of this amount as a deduction when calculating their income tax expense.
Prior to January 1, 1994 the total amount of Medicare tax that could be imposed in relation to any individual employee was limited due to a restriction on taxing compensation above a specified amount (in 1993 the maximum amount of compensation subject to the tax was $135,000). This limit was removed and now all compensation is taxable.
Beginning in 2013, the rate will increase to 3.8% for earned income above $200,000 for individuals and $250,000 for married couples filing jointly.
If you would like to know more about Medicare, Medicare.gov, an official government website, contains specific information about eligibility, benefits, plans, and enrollment.