If you want to understand Medicare, don’t ask your doctor. Medicare details are not taught in medical school and with most physicians now being employed by either hospitals or large group practices, physicians do not need to understand the intricacies of Medicare in order to run their medical practice. I am a physician who was formerly the treasurer of a $1.5 million physician group practice and formerly the medical director of a 200-bed hospital but it was not until I turned 64 and started to plan for Medicare that I realized how little I knew about it. As the annual Medicare open enrollment period begins, seniors are getting inundated with advertisements to join commercial insurance Medicare Advantage plans. But what are these plans and are they right for you or your patients?
- Medicare and Medicare-related insurance plans are incredibly complex.
- Most Americans and most physicians do not fully understand the nuances of Medicare-related health insurance options for people over age 65.
- Cheaper Part C and Part D plans are sometimes the most expensive option in the long run.
What is Medicare?
In simplest terms, Medicare is nationalized healthcare for Americans who are either over age 65 or who are disabled. There are additionally two medical conditions that qualify a person to be eligible for Medicare: kidney disease requiring dialysis and amyotrophic lateral sclerosis (ALS). Medicare is primarily funded in two ways: (1) federal payroll (FICA) taxes deducted from paychecks when Americans are employed and (2) Medicare monthly premiums after Americans turn age 65. The payroll taxes cover Medicare Part A and the monthly premiums pay for Medicare Parts B & D.
Medicaid is a different but related program that pays for healthcare for low-income individuals, low-income families, and disabled citizens. Unlike Medicare that is entirely funded through the federal government, Medicaid is funded by both the federal government and state governments. As a result, each state makes its own rules about Medicaid resulting in Medicaid eligibility and services varying widely from one state to another.
Medicare (Parts A & B) and Medicaid were created in 1965 by Title XVIII of the Social Security Act. Prior to that time, 40% of American seniors had no health insurance and had no way of paying for healthcare. Since 1965, Congress has passed additional laws expanding or clarifying Medicare coverage including the creation of Medicare Part C in 1997 and Medicare Part D in 2006.
Currently, according to the most recent CMS data, 18.4% of Americans are covered by Medicare and 17.8% are covered by Medicaid. However, because most healthcare costs occur in elderly people, Medicare accounts for a disproportionately higher percentage of total U.S. healthcare expenditures at 21.1%. Although not shown in the graph below, the percentage of healthcare costs paid by Medicare fell in 2020 because of federal COVID programs that are included in the “Other Third Party Payers and Programs” (maroon line).
The components of Medicare include Parts A, B, C, and D. In addition, there are Medigap plans that can supplement Parts A & B.
Medicare Part A
Medicare Parts A and B are often called “traditional Medicare” or “original Medicare” since these were the components when Medicare was originally created in 1965. Medicare Part A covers hospital charges for inpatient admissions and also covers skilled nursing facility charges. Once a person turns age 65, Medicare Part A is free if that person (or their spouse) has been employed and paid payroll taxes for at least 10 years. You do not get Medicare Part A automatically, you must sign up for it, preferably 3 months before your 65th birthday. If a person (or their spouse) has not been previously employed and paid payroll taxes for 10 years, then they can purchase Medicare Part A at a cost of either $274 or $499 each month, depending on the total number of years that person or their spouse did pay payroll taxes.
Medicare Part A does not cover all hospital charges, however. There is an annual $1,556 deductible that the individual must first pay. After paying the deductible, the portion of hospital charges that Medicare Part A covers depends on the duration of hospitalization:
- Days 1-60: $0 after the Part A deductible.
- Days 61-90: $389 copayment each day.
- Days 91-150: $778 copayment each day while using the 60 lifetime reserve days
- After day 150: all hospital charges paid by the individual
There is a similar payment scale for skilled nursing facilities with Medicare Part A covering all costs for the first 20 days. For days 21-100, there is a $194.50 co-payment per day. After 100 days, the individual is responsible for all daily charges.
Medicare Part B
Medicare Part B covers physician charges (both inpatient and outpatient) as well as office visits, outpatient hospital charges, chemotherapy, and many intravenous drugs administered in a physician office. Unlike Medicare Part A, a person must pay monthly premiums in order to receive Medicare Part B, starting at age 65. It is important to sign up within 3 months of turning 65 because failure to sign up in time will result in a 10% monthly penalty (in addition to the monthly premium). The monthly premium depends on the person’s annual income. This is based on the modified adjusted gross income (MAGI) reported to the IRS two years ago (thus, your 2022 Medicare Part B premiums are based on your 2020 income tax forms. The MAGI includes income such as employment wages, pensions, 401(k)/403(b)/457 withdrawals, interest, dividends, and social security payments.
Medicare Part B has an annual $233 deductible and a 20% co-pay for most charges. Notably, “observation status” admissions to the hospital are considered outpatient visits and are thus covered by Medicare Part B and not Part A. Part A only covers “inpatient status” admissions which generally require a patient to have a hospital stay of greater than 2 midnights. Overall, about 20% of hospitalizations are considered to be observation status but for some hospitals, that number can be as high as 50%. As a result, many patients face unexpected 20% co-pays for hospitalizations.
Medigap. These are health insurance policies that can cover Part A deductibles, Parts A & B co-pays, and foreign travel health costs. There are 10 different Medigap plans, 8 of which are open to new enrollees. Each plan has different degrees of extended coverage. They are sold by commercial insurance companies and the monthly premiums vary but average about $155 per month. There are a number of rules pertaining to Medigap plans:
- You must have Medicare Parts A & B
- You cannot have a Medicare Advantage Plan
- Medigap plans do not cover medications
- If you sign up for a Medigap plan more than 3 months after turning 65, you will pay a penalty and insurance companies can refuse to sell you a Medigap plan
Medicare with other group insurance. Many people over age 65 receive health insurance through their employer, their union, or their retirement system. In this case, healthcare coverage is provided by both Medicare and the commercial group health insurance. There are rules that dictate whether Medicare pays first or the group health insurance pays first. These are sometimes called primary and secondary payers. In general, the group health insurance will provide the same types of coverage that a Medigap plan and a Part D prescription drug plan covers and thus these individuals should not sign up for a Medigap or Part D plan. These group health plans are often more expensive than Medicare Advantage Plans but usually have more comprehensive coverage with lower deductibles and co-pays.
Medicare Part C
Medicare Part C (also known as Medicare Advantage Plans) can best be thought of as privatized versions of Medicare Parts A & B combined with a Medigap policy and a Part D prescription drug plan. Under these plans, commercial health insurance companies are paid each month by Medicare to outsource your healthcare coverage. In return, the commercial insurance companies pay the services normally covered by Medicare Parts A & B. Medicare Advantage plans also pay for charges that would otherwise be covered by a Medigap policy and usually cover prescription drug costs as well. These plans sometimes provide additional services not covered by traditional Medicare Parts A & B such as fitness programs, dental insurance, and vision insurance. Overall, 45% of new Medicare enrollees chose to enroll in Medicare Part C rather than traditional Medicare.
To enroll in a Medicare Advantage Plan, a person must first be enrolled in Medicare Parts A & B. New Medicare enrollees can sign up for a Medicare Advantage Plan at the time of enrollment in Medicare (age 65). People currently on traditional Medicare Parts A & B can also change to a Medicare Advantage Plan during the regular open enrollment period: October 15 – December 7. People currently on a Medicare Advantage Plan can switch to a different Medicare Advantage Plan either during the regular open enrollment period or during the Medicare Advantage Plan open enrollment period: January 1 – March 31.
When a person enrolls in a Medicare Advantage Plan, he/she continues to pay regular monthly Medicare Part B premiums to Medicare and additionally pays the Medicare Advantage Plan monthly premiums to the commercial insurance company. These latter premiums can vary widely from as little as $0 to more than $200 per month. A recent study found that 69% of Medicare Advantage Plans in 2022 had no additional premium and the average Medicare Advantage Plan premium that includes prescription drug coverage is $58 per month. On the surface, the Medicare Advantage Plans appear to be a great deal – for the same price or just a few dollars more than Medicare Part B, you can also get prescription drug coverage, lower co-pays, lower deductible limits, dental care, and vision care. However, like most things in life, you get what you pay for and there are features of Medicare Advantage Plans that can make them less desirable than traditional Medicare to some people:
- Restrictions in which physicians you can see. With traditional Medicare, you can see any physician in the country who accepts Medicare; only 1% of non-pediatric physicians have opted out of Medicare which means that a person with traditional Medicare can see any of 99% of U.S. physicians who treat adults. With Medicare Advantage plans, enrollees are limited to only those physicians who in network for that particular commercial insurance plan. A Kaiser Family Foundation study found that the average Medicare Advantage Plan only covers care by 46% of physicians in any given county. Medicare Advantage Plans generally fall into one of two categories: (1) HMOs that restrict enrollees to seeing only physicians who are members of that HMO and (2) PPOs that have a lower cost for in-network physicians and a higher cost for out-of-network physicians. These restrictions work fine for most healthy people but those requiring specialized care for chronic diseases or those who need elective surgeries can find themselves unable to be treated by specialists of their choice. For example, I specialized in interstitial lung diseases and for many years was the only pulmonologist in Columbus who specialized in these diseases. Patients belonging to a Medicare Advantage Plan sponsored by one of the other health systems in Columbus were not able to see me unless they paid for their office visits themselves, out of pocket.
- Restrictions on which skilled nursing facilities you can use. Each Medicare Advantage Plan will also have a group of in-network skilled nursing facilities. A study published last month found that enrollees in traditional medicare had access to more of the top-rated skilled nursing facilities than enrollees in Medicare Advantage Plans.
- Prior authorization requirements. Medicare Advantage Plans almost always require prior authorization before a patient can see a specialist or undergo a procedure. Prior authorization is quite laborious for physicians and office staff and frequently, physicians will just not order a consult or a test because it takes too much time. As an example, many Medicare Advantage Plans require prior authorization when a physician orders a CT scan. The chest CT scan is a standard part of the work-up of every patient with interstitial lung disease. My office staff would typically complete the initial prior authorization forms but after the insurance company does its preliminary review, it would frequently require a “peer-to-peer” review that would require me to speak directly to another physician who works for the insurance company. This would require me to first call the insurance company myself to schedule a day and time for their physician to call me back. Then the physician would call me and almost always approve the CT scan. I would then need to contact the radiology department with the approval number. Not only would this require a minimum of 4 phone calls but I would often be put on hold when calling myself – once I was kept on hold for 45 minutes just to get a routine chest CT approved! As a result of prior authorization, many patients are either unable to get a recommended specialist consult, procedure, or test or there is a delay in getting the consult, procedure, or test.
- Long hospitalizations are more expensive. A recent study found that the average Medicare Advantage plan has lower out-of-pocket costs to enrollees for hospitalizations of 6 days or shorter than traditional Medicare. However, for hospital stays longer than 6 days, the out-of-pocket costs are higher for the average Medicare Advantage Plan than for traditional Medicare.
- Variable deductibles and co-pays. The degree that each Medicare Advantage Plan covers deductibles and co-pays varies considerably and many of the low cost plans can be more expensive than traditional Medicare in the long run. It is essential that seniors look at the fine print of each Medicare Advantage Plan that they are considering enrolling in.
- Variable prescription drug coverage. Each Medicare Advantage Plan covers prescription drugs differently and just because a plan advertises prescription drug coverage does not necessarily mean that the enrollee will save money on the drugs that they take. Plans often restrict enrollees to purchase medications from a specific pharmacy. Co-pays and deductibles for prescribed medications can vary considerably from plan to plan. And perhaps most importantly, each plan will have a different drug formulary listing which drugs the plan will actually cover. There are only 2 drugs approved to treat idiopathic pulmonary fibrosis and each cost about $100,000 per year. Many of my patients who switched to lower cost Medicare Advantage Plans found that these drugs were not on the new plan’s formulary or had co-pays of as much as $40,000 per year. These patients had to either pay out of pocket or stop taking the medication.
Because it would seem that the Medicare Advantage Plans offered by commercial insurance companies provide much more comprehensive medical care at a lower cost than traditional Medicare plus a Medigap policy, many pundits have suggested that all of Medicare should be privatized. However, there is a dark side of the Medicare Advantage Plans. First, they bill Medicare for each senior that they enroll. However, they get paid by Medicare based on how sick each enrollee is. For that reason, the plans have gone to great lengths to document every medical condition that each enrollee has and in many cases, they have exaggerated these conditions by inflating enrollees’ “risk scores”. A report by the Kaiser Family Foundation found that Medicare Advantage Plans overcharged the federal government by $106 billion between 2010-2019. The problem seems to be accelerating as $34 billion of these overcharges were in 2018-2019 alone. There is a bright side to this, however. Because insurance companies are incentivized to document every medical condition that each enrollee has in order to increase patients’ risk scores, the insurance companies are incentivized to get their enrollees screened for as many diseases as possible. This resultant emphasis on screening has led to many Medicare Advantage Plans out-performing traditional Medicare when it comes to disease screening and routine wellness visits.
A second dark side of the Medicare Advantage Plans is that they use prior authorization denial and payment denial in order to avoid paying for costly procedures and tests. An April 2022 report by the U.S. Office of the Inspector General found that 13% of prior authorizations that were denied by Medicare Advantage Plans actually met regular Medicare approval criteria. Furthermore, the OIG found that of services that were performed but that Medicare Advantage Plans later denied payment for, 18% of denials met Medicare criteria and should have been paid. These denials are a strategy used to increase the profits of Medicare Advantage Plans and is potentially dangerous for patients.
A third dark side of the Medicare Advantage Plans is that although they are great for people when they are reasonably healthy, they often limit coverage for people once they become ill. The U.S. Office of the Inspector General found that sicker people who are in Medicare Advantage Plans were more likely to disenroll and return to traditional Medicare than healthy people. This is especially true for seniors who develop cancer and find that cancer specialists or cancer hospitals that they want to utilize are not in the Medicare Advantage Plan’s network.
Medicare Part D
A Medicare Part D plan is a prescription drug insurance policy sold by a commercial insurance company approved by Medicare. It is required that enrollees have Medicare Part A and/or Part B. Having a Medigap plan is permitted but not required. Seniors can enroll in a Part D plan either when they turn 65 and enroll in Medicare Parts A & B or during the open enrollment period between October 15 – December 7 each year. However, if you do not enroll in a Part D plan when you are first eligible to enroll in Medicare, then you will have to pay a 12% annual penalty if you enroll in a Part D plan at a later date. If you are enrolled in a Medicare Advantage Plan (Medicare Part C), you cannot enroll in a Medicare Part D plan.
The cost of Medicare Part D depends on both the cost of the specific Part D plan and the modified gross annual income of the enrollee. Each Part D plan has different costs, depending on drug coverage. The average Part D base premium is $33.37. Similar to Medicare Part B, there is an additional add-on cost to the base premium for those people with higher modified annual gross income:
Part D plan costs do not stop with monthly premiums, however. In addition, there is an annual deductible that can vary from $0 to more than $480, depending on the individual Part D plan. There are also co-pays on each drug each month. The co-pay amount varies from plan to plan and can vary depending on specific drugs within a plan. A person’s costs also change during the coverage gap (also known as the “donut hole”). Each year, the coverage gap begins when a person has spent $4,430 in out-of-pocket expenses in their Part D plan (for deductible and co-pay amounts). When in the coverage gap, there is a limit that Part D will cover for drugs and the enrollee pays up to 25% of the cost of a drug out-of-pocket. Once a person’s annual out-of-pocket drug expenses reach $7,050, the coverage gap ends and “catastrophic coverage” begins resulting in the individual only having to pay a 5% co-pay for prescribed drugs for the rest of the year.
As with Medicare Advantage plans, each Medicare Part D plan has its own formulary of covered drugs and the drugs on the formulary can change each year. For this reason, it is important that seniors considering a Part D plan look carefully at the plan’s formulary to confirm that their current prescription drugs will actually be covered.
In my opinion, there are really only three realistic options: (1) Sign up for a Medicare Advantage Plan. (2) Sign up for a combination of traditional Medicare + a Medigap plan + a Part D plan. (3) Sign up for Medicare Parts A & B and continue your group health insurance plan through your employer, union, or retirement system. Relying on traditional Medicare alone is risky because Medicare Parts A & B deductibles and co-pays can be financially devastating if you do not have a Medigap policy. Prescription drug costs can be financially devastating without a Part D plan.
Part A. If you or your spouse has previously worked for at least 10 years, Medicare Part A is free – never turn down free healthcare. Sign up 3 months before you turn 65. You sign up through Social Security (on-line or in person).
Part B. Sign up the same time you sign up for Medicare Part A. If you continue to work past age 65 and get comprehensive health insurance through your employer, then sign up when you retire (although some employers will require you to sign up for Medicare Parts A & B at age 65 even if you are continuing to receive employer-provided group health insurance). You sign up through Social Security (on-line or in person).
Medigap. Sign up at the same time you sign up for Medicare Parts A & B. You should only buy a Medigap policy if you are enrolling in traditional Medicare (Parts A & B) and you should not buy a Medigap policy if you intend to sign up for a Medicare Part C Advantage Plan. If you have group health insurance through your employer, union, or retirement system, you do not need a Medigap policy. You sign up through a commercial insurance company.
Part C (Medicare Advantage Plans). Sign up as soon as you have signed up for Medicare Parts A & B and have your Medicare number. Medicare Advantage Plans are usually preferable to traditional Medicare + a Medigap policy + a Part D plan for people who are relatively healthy. People with serious diseases, such as cancer, need to be careful when signing up for a Medicare Advantage Plan since traditional Medicare + a Medigap policy + a Part D plan may be less expensive in the log run and may allow more choices in physician specialists and specialty hospitals. If you have group health insurance through your employer, union, or retirement system, you do not need a Part C plan. You sign up through a commercial insurance company.
Part D. Sign up as soon as you have signed up for Medicare Parts A & B. Only sign-up for a Part D plan if you intend to enroll in traditional Medicare and not in a Medicare Advantage Plan. If you have group health insurance through your employer, union, or retirement system, you do not need a Part D plan. You sign up through a commercial insurance company.
This all seems really, really complicated
When first enacted, the U.S. Federal income tax system was very simple. Since that time, there have been dozens of new tax laws passed that have resulted in the tax code becoming extraordinarily complicated. The same thing has happened with Medicare – when first enacted, it was simple. But since then, numerous pieces of legislation have added, modified, or deleted parts of Medicare coverage resulting in Medicare now becoming so complex that most people need help navigating all of the decisions they must make when signing up for Medicare. It is important to carefully consider factors such as in-network providers, deductibles, co-pays, and medication formularies when selecting among Medicare options. Like most things in life, when it comes to Medicare options, you get what you pay for and often the cheapest option in the short-run can end up being the most expensive option in the long-run.
October 17, 2022