Ethan R. Okura
Hawai‘i Herald Columnist
In last month’s column, I discussed the financial impacts of delaying your application for Social Security, applying early and applying right on schedule at your full retirement age. I also noted that even if you decide to delay applying to receive Social Security retirement income benefits, most people should sign up for Medicare at age 65 or potentially face higher premiums for Medicare Parts B and D in the future. What are these Medicare “Parts,” and how do they work?
First, a bit of history . . . In July 1965, President Lyndon Johnson signed the Social Security Amendments of 1965 into law, adding health care to the program. Medicare Parts A and B were created for people age 65 and over at that time. Part A was designed to cover hospital expenses and Part B was intended to pay for medical expenses such as doctor’s fees and other outpatient costs.
Part A was, and still is, free to participants in their retirement, as it is prefunded by payroll deduction taxes (like the basic Social Security fund). However, Part B continues to be optional, obtaining its funding through monthly premiums and general tax revenues.
Originally, Medicare recipients could receive care from any provider who accepted Medicare according to a fee schedule set by Medicare (“fee for service”). The plan was never intended to cover the full cost of health care. Rather, it was intended to help with the majority of the cost, leaving some deductible and co-insurance expenses for the recipient to pay. These and other coverage “gaps” in Medicare led private companies to design “Medigap” insurance, also called Medicare supplement (or Med supp) insurance. Med supp insurance picks up some of the costs not covered by Medicare, including deductibles, co-insurance and even some preventive care.
In the 1970s, Health Maintenance Organizations, or HMOs, became quite popular. HMOs have networks of hospitals, doctors and other care providers whom their members can consult. Individuals could join an HMO as a member for a predetermined monthly premium. Instead of the doctor or other care provider being paid a traditional fee for services received, the members “cost-share” by making co-payments for the services they receive from the network. This method of coordinating and funding all of the health care services an individual receives to maximize benefits and minimize costs is called “managed care.”
Congress embraced this concept and passed the Health Maintenance Organization Act of 1973. Then, in 1982, the law was updated further with the Tax Equity and Fiscal Responsibility Act, making it more attractive for HMOs to accept Medicare. Rather than traditional fee-for-service payments in which doctors bill Medicare directly, recipients could now join an HMO and receive their medical care from that private network. The HMO would receive monthly payments from Medicare for each Medicare recipient that participated in its plan, and the doctors and other providers of services would bill the HMO, rather than Medicare, for their services.
The Balanced Budget Act of 1997 introduced Medicare Part C (previously called Medicare+Choice), which provided more options for managed care than just HMOs. Medicare recipients now had the choice of selecting from many private companies, including HMOs, preferred provider programs (PPOs), private fee for service plans (PFFS), provider-sponsored organizations (PSO), high-deductible medical savings accounts (MSAs) and fraternal plans.
Besides the traditional fee-for-service coverage of Part A and Part B, recipients could also choose from the many options provided by private companies under the Medicare+Choice program. These plans offered a variety of additional benefits, but had to at least match the benefits available under original Medicare Part A and Part B.
However, the biggest changes to Medicare came after almost 40 years with the passage of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA 2003). Some of the changes included new names for the Medicare program: Part A and Part B were renamed “Original Medicare” and Part C, Medicare+Choice, was renamed “Medicare Advantage.” Finally, a new Medicare Part D was introduced for prescription drug coverage. Medicare Part D is an optional prescription drug benefit plan to help retired Americans with the rising cost of prescription drugs.
Thanks for wading through the legislative history with me. Hopefully, you now understand enough of the background to follow what comes next, which is how to choose a specific plan for yourself.
When signing up for Medicare, there are two basic paths from which you can choose.
Start by selecting Original Medicare (Part A, hospital insurance, and Part B, medical insurance). You then decide whether or not you want to add Part D (prescription drug coverage). Finally, you decide whether you want to add a private Medicare Supplemental Insurance policy (Medigap) to help with deductibles, co-payments, etc.
The second option is to select a Medicare Advantage plan (Part C, like an HMO or PPO). Most Medicare Advantage (Part C) plans already include Part D (prescription drug coverage). However, if it does not include Part D, you can add Part D to your plan or get a stand-alone Part D plan in addition to your Medicare Advantage plan. If you choose this path, there is no need to get a Medicare Supplemental Insurance policy (Medigap). Furthermore, it is illegal for an insurance salesperson to sell you a Medigap policy if you already selected a Medicare Advantage (Part C) plan.
For more information, refer to the free educational booklet “Medicare and You,” which is published by the Centers for Medicare and Medicaid Service.
© OKURA & ASSOCIATES, 2019
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Ethan R. Okura received his doctor of jurisprudence degree from Columbia University in 2002. He specializes in estate planning to protect assets from creditors, probate, estate taxes and nursing home costs.
This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.