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Health Care Reform Medicare

What You Need to Know Now About: Medicare

Arguably the greatest volume of reforms through the Patient Protection and Affordable Care Act (“Affordable Care Act”) signed into law on 03/23/2010 involve Medicare. Some of the provisions are direct reforms to Medicare while other provisions of the Affordable Care Act may have an indirect, but intentional, impact on the program. The following Q&A will give you an overview of the reforms to the Medicare program and how they are all intended to work together.

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1.  What is the history of Medicare?

As early as 1945, President Harry S. Truman proposed a government administered national social insurance program. It was not until the Social Security Act of 1965 signed into law by President Lyndon B. Johnson that the Medicare program was created. The first senior enrolled into the Medicare program was former President Harry S. Truman. Former First Lady Bess Truman was the second senior enrolled.

The first two programs created in 1965 were Medicare Part A and Medicare Part B. Since that time, Medicare Part C (1997) and Medicare Part D (2006) have been added.

Medicare Part A is hospitalization insurance providing coverage to the Medicare enrollee for inpatient hospital stays. Medicare Part A also pays for other facility-based skilled services such as care at a skilled nursing facility, but, on a limited basis. Most Medicare enrollees do not pay a premium for Medicare Part A coverage because they (or a spouse) have paid enough into the program through payroll taxes prior to retirement. Medicare enrollees do have to meet a Medicare Part A deductible before any benefits are paid. In 2010, the Medicare Part A deductible is $1,100 for an inpatient stay up to 60 days.

Medicare Part B is medical insurance providing coverage to the Medicare enrollee for outpatient services provided by a physician. Services include physician services, nursing services, x-ray, laboratory and diagnostic tests, vaccinations, renal dialysis, outpatient hospital procedures, etc. No benefit is provided for prescription drugs unless the drug is administered by a physician. Participation in Medicare Part B is voluntary if an eligible retiree wishes to participate; the premium amount will be deducted from his social security benefit. In 2010, Medicare Part B monthly premium, on average, is $100.50. The Medicare Part B enrollee also has to meet a $155 deductible and then pay 20% coinsurance.

In 2008, there were 45 million enrollees in Medicare making it the nation’s largest single health care payer in the nation. By 2030, it is expected that enrollment will reach 78 million. In 2008, Medicare spending reached $599 billion which was 20% of the total federal government spending. At $599 billion, Medicare is only surpassed by Social Security and defense spending.

Medicare Part C, also known as “Medicare+Choice”, was created by the Balanced Budget Act of 1997. At that time, the government was attempting to cut $155 billion from the Medicare program by allowing private insurers in the health insurance industry to offer “Medicare Advantage” plans to Medicare beneficiaries. For every Medicare beneficiary who enrolled in a Medicare Advantage plan, the Medicare program pays a subsidy to the private insurer. 

Whereas traditional Medicare Parts A & B offers a standard benefit package that covers medically necessary care, the Medicare Advantage plan can provide an expanded level of coverage including prescription drugs, dental care, vision care, and even health club memberships. Medicare Advantage enrollees often have a variety of plan designs to choose from very similar to the types of employer-sponsored plans they had access to pre-retirement. The plan may have a limited provider network for the enrollee to seek care; however, if the enrollee uses an in-network doctor, he may receive a greater level of benefit than he would through traditional Medicare. Another important distinction between traditional Medicare and Medicare Advantage plans is that the latter, typically, encourages preventive care and wellness care at little to no out-of-pocket cost for the enrollee.

Of course, with the expanded level of coverage the Medicare Advantage enrollee typically will pay an additional premium for the coverage in addition to the Medicare Parts A & B premium. Still, the popularity of the Medicare Advantage plans continues to grow. In 2008, 10.3 million of all Medicare eligible seniors (22%) were enrolled in a Medicare Advantage plan. This is double the enrollment from 2003.

Medicare Part D went into effect in 2006 after the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Medicare Part D is similar to the Medical Advantage plans in that they are designed and administered by private health insurance companies, however, the coverage is limited to prescription drugs. Any enrollee in traditional Medicare Parts A & B can also enroll in Medicare Part D. Unlike Medicare Parts A & B, the coverage designs of Medicare Part D plans are not standardized and private insurers can offer a variety of plan design options within certain guidelines.

Of course, there is an additional cost to enroll into Medicare Part D. If a Medicare eligible beneficiary does not enroll into Medicare Part D when first eligible and then decides to enroll in the program, they will have to pay a penalty unless they can provide a “Certificate of Creditable Coverage” documenting they had drug coverage through another source at the Medicare Part D level, or better, of coverage. Sources could include an active employer plan because either the Medicare eligible beneficiary or a spouse is still actively employed. Another source could be through an employer-sponsored group early retiree or retiree drug program.   For those employers sponsoring creditable drug coverage, they may be eligible for subsidies from the Medicare program.


2.   How is Medicare Eligibility defined?

In general terms, to be eligible for Medicare, an individual must be:

• Age 65 or older;
• Legal resident of the United States for, at least, 5 years; and
• Paid Medicare taxes for a minimum of 10 years.

If the individual (or a spouse) has not paid Medicare taxes for the minimum of 10 years, they can still enroll in Medicare, but, will be charged a monthly premium.

Medicare taxes are paid through the Federal Insurance Contribution Act (FICA) of 1954. The FICA tax is, currently, 2.9% based upon the worker’s wages, salaries and other compensation in connection with employment. The employee pays 1.45% of the tax with the employer paying a matching 1.45% contribution.


3.  What is the future of Medicare?

What could not have been foreseen in 1965 when Medicare was created was that the United States was coming to the end of the post-World War II “Baby Boom”. More “Baby Boomers” are reaching Medicare eligibility than are being replaced in the work force by younger workers.  With Medicare being funded by FICA taxes, at some point, it mathematically becomes impossible to fund all the benefits for all the Medicare enrollees.

Currently, there are 3.9 workers paying taxes into Medicare for every Medicare enrollee. As the baby boomer generation retires, the number of workers paying taxes into Medicare will shrink to 2.4 by 2030. Beginning in 2008, Medicare first began spending more in benefits than it was receiving in tax funding. Life expectancies continue to increase meaning Medicare enrollees will continue receiving benefits for a longer period of time. Medical inflation continues to rise increasing costs. Many dire predictions are made regarding the solvency of the Medicare program. Some “doom and gloom” estimates are that Medicare will be insolvent by the end of the decade. Others predict that Medicare will still be an option when they retire, however, what it will look like and at what age they will be able to enroll in the program remains to be seen.


4.       So how does the Affordable Care Act reform Medicare?

Primarily, the Affordable Care Act reforms the Medicare program in three ways:

• FICA Tax Changes
• Medicare Part D Reforms
• Medicare Advantage Reforms

5.       What are the FICA Tax Changes?

• $2,830 – After the enrollee pays the first $310 in drug costs (the deductible), the plan pays 75% of the drug cost up to $2,830 with the enrollee paying the other 25%, then
• $2,831-$4,550 – The “donut hole” – The enrollee pays 100% of their drug costs up to $4,550, then
• $4,551+ - “catastrophic coverage” – The enrollee pays a $2.40 copay for generic drugs. For other drugs the enrollee pays either $6.00 or 5% of the drug cost, whichever is greater.

• 2010 – Enrollees in the “donut hole” received $250 rebate checks from Medicare
• 2011 – If an enrollee reaches the donut hole, they will be given a 50% discount on the total cost of the brand name drugs while in the gap. Medicare also will phase in additional discounts on the cost of both brand name and generic drugs.
• By 2020 – Effectively close the donut hole so that the plan pays 75% of the drug cost with the enrollee paying the remaining 25%.

• Employment – With changes in Medicare benefits and options along with increases in the Medicare qualifying age will you see more workers wanting to work well past 65? What impact will that have on your workforce and productivity?
• Benefits – These older employees will also be impacting the cost of the company’s benefit plans. Also, what of the spouses of these employees who may have been covered on a former employer’s now discontinued retiree drug plan? Will you see increased cost as they join your benefit plans?
• Compensation – With changes to the FICA tax rate and the tax on investment income, might you see your highly-compensated employees actually declining pay increases in favor of other forms of compensation?