History of Health Insurance and Medicare
History of Health Insurance and Medicare
Limited forms of prepaid medical services have been available for hundreds of years. But the concept of universal health insurance for all citizens is a development of the 20th century. Around the turn-of-the-century, Germany was the first country to institute universal health care. By the 1920s most European countries had initiated government health programs.
Attempts from 1910 through 1970 to institute government health care in this country were met with failure. Again in 1993 President Clinton failed as well. The only exception has been the creation of Medicare in 1965.
The most successful attempts to create private health insurance programs across the country began in the 1930s with the Blue Cross plans. These were prepaid hospital service plans that were initially tied to each hospital that sponsored the plan but were later changed so that participants could use any hospital in a designated service area. A participant would pay as an example six dollars a month to guarantee a 20 day hospital stay. Additional days of care beyond the guarantee would have to be paid out of pocket.
In the early 1940s the American Medical Association endorsed the creation of Blue Shield plans as a defensive measure against a national insurance program. These were plans designed like Blue Cross to allow for prepayment of physician services instead of hospital services. Eventually both plans consolidated, forming the well-recognized Blue Cross and Blue Shield plans which are still as a group the largest health insurers in the country. (Technically they're not insurance companies but that's how we will classify them)
There are many reasons why national health insurance has never become a reality in the United States . One reason has been the continued opposition from the American Medical Association. Another is the popularity of employer sponsored insurance which has forestalled the need for a federal plan. Federal laws allowing tax-free payment of premiums by employers and employees have helped encourage the growth of these private plans. Primarily because of employer group sponsored plans, the number of insured's exploded from a total enrollment of 20,662,000 in 1940 to nearly 142,334,000 in 1950. With employers bearing most of the burden Congress did not have a pressing need to provide national insurance.
Another reason for the lack of national health insurance was the post World War I backlash against the Germans. Since Germany had started the concept of government-sponsored health insurance, public reaction during the 1920s that any national health care program would be a derivation of the German system prevented any further discussion or action during the 1920s and into the 1930s.
Congress was only successful in establishing a national plan for the aged called Medicare in 1965. And Medicare only came about because of the savvy political expertise of President Lyndon B. Johnson and a majority Democratic Congress.
Medicare part A was modeled after traditional hospital insurance plans available in the 1960s. A defined amount of hospital care was provided upfront and any additional care would have to be covered by the patient. Such plans are easy to design and costs are easy to control since the insurance provider has a predetermined benefit it will pay. Any costs beyond the predetermined amount are covered by the insured. One disadvantage to such a plan is that increasing hospital medical costs since 1965 have resulted in a dilemma for the insured. Any costs borne by the insured beyond the initial hospital plan could be so expensive as to destroy financially the unlucky patient requiring more care. As a result modern hospital plans have evolved into catastrophic plans where the insured covers some of the cost upfront but is spared from financial disaster by the plan where the insurance will pick up 100% of the cost after a certain out-of-pocket limit is reached. Unfortunately the Medicare hospital coverage has stayed the same and has not evolved into a modern plan.
Medicare part B was created by Congress to engender support from the AMA. Initially it paid 80% of the cost of physician services up to a reasonable amount and the patient paid 20% and any additional costs of the billed services beyond the reasonable amount. This design essentially guaranteed that doctors would not be subject to price controls from the government. Over the years part B has changed into a cost control plan where prices are now dictated by Medicare to doctors who provide services under the plan.
Medicare Eligibility and Cost
A detailed description of Medicare enrollment is found in the following Medicare booklet:
"Enrolling in Medicare" (60 pages) http://www.medicare.gov/Publications/Pubs/pdf/11036.pdf
In order to be eligible for Medicare a person must be 65 years of age or older and also be eligible for receiving Social Security or Railroad retirement. It is extremely important to note that a person does not have to be receiving one of these retirement incomes in order to sign up for Medicare. For various reasons persons may not have elected retirement at age 65. Anyone receiving one of the above retirements prior to age 65 or signing up for Social Security or above retirement options at age 65 will automatically be enrolled in Medicare Part A and B when that person turns 65.
Medicare is also available to about 4 million disabled Americans under the age of 65 who have applied for Social Security disability and have received it at least two years. Also anyone at any age with end-stage renal disease can automatically qualify for Medicare. Altogether about 42 million Americans are covered by Medicare. Very few retired elderly over the age of 65 are not covered.
Under Social Security anyone born after 1938 will have his full retirement benefits eventually moved out to age 67 depending on the year of birth. Some people may choose to keep working beyond the age of 65 and not apply for Social Security. By not applying, Medicare Part A may not be offered automatically. If the person is under a group plan, the group plan may force enrollment in Medicare at age 65. This does not mean the person loses his group coverage, it simply means Medicare and the group plan share costs. If the group plan covers less than 20 full-time employees, Medicare becomes the primary payer and the group plan becomes the secondary. With 20 or more employees the group plan is primary and Medicare is secondary.
In the case of someone turning 65, not retiring and not having group coverage, Medicare may not remind that person to sign up. There is no penalty for failure to sign up after age 65 unless the person is not eligible for Social Security and must pay premiums. Then there may be a penalty applied. But there is a penalty to sign up late for Part B. Failure to sign up for Part B during the initial enrollment period three months either side of a person's 65th birthday will result in a penalty on those premiums. If a person has equivalent group coverage or is on Medicaid the penalty is waived when signing up later.
Medicare is financed by payroll deductions from all employees and self-employed persons paying into Social Security. When a person becomes eligible for Medicare, these payroll deductions pay for the Part A premium and there is no cost to the Medicare beneficiary. There is a cost for Part B. Part B was designed to be a cost-sharing program. Medicare payroll deductions cover 75% of the cost and the Medicare beneficiary pays 25% of the cost. The Part B premium for 2005 is $78.20 per month. Since medical costs are increasing every year this premium also increases every year. For 2006 the premium will be $88.50 per month. The Medicare Modernization Act of 2003 also requires individuals in higher income brackets starting in 2007 to pay a greater percentage of the Part B premium.
These beneficiaries will see a reduction in the government subsidy of their Part B premium from the 75% currently provided. The reduction is phased-in (in equal increments) over five years. The schedule for the changes in the premium subsidy is:
Income thresholds reflect income for 2007 and then are indexed to increase annually by the Consumer Price Index (CPI). Thresholds for married couples are twice the amounts shown. An estimated 3% of Part B enrollees will be affected in 2007 increasing to 6% in 2013.
If someone is not eligible for Social Security and does not have a spouse that is eligible for Social Security that person can still get Medicare but may have to pay the equivalent part A premium. As an example, prior to 1985, non-federal Government employers were allowed to opt-out of the social security system. A handful of cities and counties did choose to opt-out. As an example, if a person is single and worked exclusively for an opt-out employer, or his spouse has never worked or the spouse also worked for the opt-out employer that person may have to pay for his or her Medicare Part A cost. Eligibility for Social Security requires at least 40 quarters under Social Security which is the equivalent of 10 years of work under the system. Suppose someone had worked his entire career for a county that did not participate in social security. That person may not have enough quarters from another employer and would have to pay for Medicare. A person desiring to enroll in Part A and pay premiums must already have Part B or be currently enrolling in it.
Here are the Part A premiums for 2005:
Participation in Medicare is voluntary. A person can elect not to take Part A but by so doing is not eligible for Part B. (The exception to this is a person who must pay premiums for Medicare Part A, can buy Medicare Part B separately without having to buy Medicare Part A). A person can also retain Part A but elect not to take Part B. There is no reason we can think of why someone would not take Part A. There may be a number of reasons for not taking Part B.
There are three opportunities to sign up for Part B. The first is the "Initial Enrollment Period" which is the first three months before the month in which a person turns 65 and the three months after that period. Seven months total.
Some people for whatever reason may simply have failed to sign up during the initial enrollment period. The cost of Medicare Part B will go up 10% for each full 12-month period a person could have had Medicare Part B but didn't take it, except in certain special cases. This extra amount (called a premium surcharge) will have to be paid as long as Medicare Part B is in effect. Someone who missed the initial enrollment opportunity can sign up for Part B between January 1 and March 31 each year with a 10% premium penalty applying for each full year the sign-up was delayed. This is called the "General Enrollment Period".
Another reason for not taking Part B might be the cost. For someone with adequate income who could afford the premium, not taking this coverage makes absolutely no sense. The government automatically subsidizes up to 75% of the cost of this coverage. For someone with low income the premium may not be affordable. Generally people in this category can receive help either through Medicaid or through a state "Medicare Savings Program". States provide these programs for people with limited income and resources. The plan will pay for Medicare premiums and, in some cases, might also pay Medicare deductibles and coinsurance. Apply for these programs if
The person has Medicare Part A (If paying a premium for Medicare Part A, the Medicare Savings Program may pay the Medicare Part A premium.) and
The major reason most people fail to sign up for Part B during the initial enrollment period is because they are receiving the equivalent benefit through their group coverage. Some 65 year-old and older people may still be working and receiving group coverage which in many cases will be better than Medicare Part B. These people do not need to pay Medicare an extra premium to duplicate the group policy coverage. Besides for people 65 and older and still working, the group plan becomes the primary payer of benefits and Medicare if it is applicable is secondary. Special rules allow someone losing group coverage in the future to sign on with Part B at a later age with no penalty.
A number of people may be retired but have a contract or retirement arrangement through an employer to continue to receive group coverage. They may be paying premiums or in many cases this may be free coverage. For someone over 65, retired and receiving group benefits, equivalent or typically better Part B benefits are part of the group package. The better benefits usually reflect additional features provided by a typical Medigap policy. Special enrollment rules also waive the penalty if these people lose coverage in the future.
Original Medicare (Medicare Fee for Service)
A new booklet from Medicare describes in detail all of the available Medicare plans for 2006. This includes original Medicare, Medicare Advantage and the new prescription drug plan. Go to
"Medicare and You 2006" (104 pages)
he benefits outlined below are a scanty description of the major points of Medicare coverage. A more complete description can be found in the following Medicare publication.
"Your Medicare Benefits" (52 pages)
Medicare Part A - Hospital Insurance (2005)
Deductibles and Coinsurances
Skilled Nursing Facility (3 full days hospital, skilled need)
Home Health Care (homebound, skilled need)
Hospice (diagnosed as terminal or deteriorating)
Medicare Part B - Doctors and Outpatient Services (2005)
Part B Premium
Outpatient Services and Emergency Room
What is "assignment" in the Original Medicare?
Assignment is an agreement between people with Medicare, their doctors and other providers, and Medicare. The person with Medicare agrees to let the doctor or other provider request direct payment from Medicare for covered Part B services, items, and supplies. Doctors or providers who agree to (or must by law) accept assignment from Medicare can't try to collect more than the Medicare deductible and coinsurance amounts from the person with Medicare, their other insurance, or anyone else.
If assignment isn't accepted, doctors and providers may charge more than the Medicare-approved amount. For most services, there is a limit on the amount over the Medicare-approved amount doctors and providers can bill. The highest amount of money that can be charged for a Medicare covered service by doctors and other providers who don't accept assignment is called the limiting charge. The limiting charge is 15% over Medicare's approved amount. The limiting charge applies only to certain services and doesn't apply to supplies and items. In addition, a Medicare beneficiary using services that are not assigned may have to pay the entire charge at the time of service. Medicare will send its share of the charge to the beneficiary when the claim is processed.
In some cases, health care providers and suppliers must accept assignment. For example, with Medicare Part B-covered prescription drugs and biologicals from a pharmacy or supplier that is enrolled in the Medicare Program, the pharmacy or supplier must accept assignment.
Gaps in Original Medicare Coverage
Defining the Gaps
Medicare does not have a stop loss feature. Fortunately, there are really only two benefits under Medicare that would result in very large out-of-pocket costs. The first is the coverage for a hospital stay and the second for a nursing home stay. Here is what selected lengths of stay in a hospital would cost a Medicare beneficiary assuming the beneficiary uses up his 60 lifetime reserve days. These numbers are for 2005
beneficiary must generally pay 20 percent of the approved amount (plus any charges above the approved amount).
Even though there is not a stop loss on other Medicare services, they are covered to such an extent that it would be unlikely for a beneficiary to experience a catastrophic out-of-pocket cost with the other services.
Plugging the Gaps
In 2000 Medicare offered Medicare + Choice plans which were basically a redesign of the original Medicare offered by HMOs. These plans were designed as modern health insurance with stop loss and typically also covered prescription drugs. Over the years many HMOs have pulled out of this market and forced many beneficiaries back to original Medicare. Latest estimates are that managed plans serve about 11% of Medicare beneficiaries, down from about 17% in 2000. In the Medicare Modernization Act of 2003 Congress authorized a new form of private Medicare insurance similar to the previous managed plans. These new plans are now called "Medicare Advantage" and existing HMO plans have also been relabeled as "advantage plans". Enrollment in Medicare Advantage began in 2005 through special open enrollment periods and these special periods will extend through June of 2006. Thereafter in 2007, enrollment in advantage plans will occur between January 1 and March 31 of each year. We will discuss advantage plans and Medigap policies in further detail below.
Seniors with No Supplemental Protection for the Medicare Gap
As noted from the graph above about 1 out of every 13 seniors in the year 2000 was content with original Medicare. These people were not spending additional money to supplement the gaps in coverage. Are these people exposed to a tremendous risk? Probably not but it depends.
The biggest single risk is staying too long in a hospital. According to CMS, the average hospital stay for a Medicare beneficiary is about 5.8 days. Longer stays are certainly possible but the condition being treated is almost always a predictor of the length of stay. Generally if the beneficiary does not have one of those chronic conditions that would require a long hospital stay, the risk is very low for spending too much time in the hospital. However we cannot rule out those fluke cases where for example, someone develops a resistant infection which could result in a very long hospital stay.
Medicare uses "Diagnostic Related Guidelines" or DRG's to calculate how much to pay a hospital for certain services. These guidelines are summaries of the over 13,000 treatment codes that hospitals use to identify services. In 2004 Medicare defined 543 of these treatment categories. In 2006 Medicare is proposing a set of 573 treatment categories. The list gets bigger every year.
The list below represents the 90th percentile of DRG procedures that required a hospital stay on average of 30 days or longer. Three of the procedures below required a length of stay on average of 60 days or longer. The 90th percentile represents the last 10% of the distribution of length of stay in that category that went the longest. Note that all of these long-lasting hospital stays were associated with surgery. Some of these procedures represented intensive care with the use of tracheotomy, some were due to Burns or to HIV but most were a result of transplants. The other 532 DRG categories probably had very few lengthy hospital stays. Surgery TRACH W MV 96+HRS OR PDX EXC FACE,MOUTH, & NECK DX W/MAJ OR
The chart below is derived from CMS sources and shows the length of all Medicare stays in acute care hospitals for 2001. From this table we can derive the risk. Based on the table below the risk of a hospital stay under Medicare longer than 91 days is about one out of every 2,500 discharges. In comparison the risk of a house burning down is about twice as likely as spending 91 or more days in the hospital. Unfortunately the risk for longer stays is not available but it would go down as the number of days goes up. From the previous chart, we see that a 90 day stay in a hospital would cost $7,752 in 2005 (assumes using up to 60 days of lifetime reserves) which is an amount very close to stop loss amounts in more recent group health insurance plans. Since an elderly person would probably not use a hospital more than two or three times in his remaining life, the $2,400 a year that person would spend on supplemental coverage could be set aside instead to pay for the extremely rare case of a long hospital stay.
Medicare Short-Stay Hospital Discharges by Length of Stay, 2001
SOURCE: CMS/ORDI November 2003
The other major risk with Medicare is paying for nursing home rehabilitation after a three-day hospital stay. Medicare covers the first 20 days at full cost, and if a longer stay is required, the beneficiary must pay a $114 per day co-pay for an additional 80 days for the year 2005. Paying for 80 days of co-pay would be $9,120. This amount goes up every year with inflation. It is important to point out that a nursing home stay is not an entitlement under any health insurance plan. Medicare is no different from group plans which may offer a short stay acute care nursing home alternative to a hospital. Most of these plans are also limited to 20 or 30 days. In other words every insured individual in the country takes the same risk with lengthy nursing home coverage.
From the chart below we see that only about half of all nursing home admissions come from a hospital. These would be the only ones to qualify for Medicare assistance. And not all of these admissions will meet the Medicare requirement of three full days in the hospital and a skilled need. It has also come to light in the past year or so that some hospitals are "cheating" by keeping someone three full days without a medical necessity. Medicare is cracking down on this abuse and it won't be possible in the future for the family to pressure the doctor or hospital into assuring that Medicare will pay for nursing home after a hospital stay. Also according to CMS data the average stay in Medicare rehabilitation in a nursing home is about 23 days not the full 100 days. Remember the first 20 days are paid at full cost.
Source: The Statistical Abstract of the United States 2005
As a final note, seniors are not exposed to the same open-ended risks of medical care that younger people are. When the money runs out, bankruptcy is not necessary since the senior will now be eligible for Medicaid or other state assistance programs. It is a baffling paradox that the elderly are paranoid about large medical costs and completely ignore the greatest financial risk they will ever face -- long-term care. Long-term care is 1,200 times more likely to occur than a 90 day stay in the hospital. Long-term care on average is six times more expensive than the average cost a senior spends each year on medical care. People will go to all lengths to make sure unanticipated medical costs are covered by insurance but yet fail to insure for long-term care which is only covered if they are impoverished. In other words an elderly person paradoxically is not bothered by destroying $50,000 of savings in a spend down to qualify for Medicaid but would never be willing to spend $50,000 of savings for medical care not covered by Medicare.
Medigap Policies (Typically Called "Medicare Supplement Policies")
Choosing A Medigap Policy 178 pages
Understanding Supplement Policies
Medigap policies or as they are more commonly called "Medicare Supplement Policies" are very popular with the elderly. In the year 2000 about 21% of Medicare recipients were buying stand-alone supplement policies to fill the gaps in Medicare coverage. But another 34% of beneficiaries were also receiving similar benefits through employer sponsored group health plans. Some of the over age 65 people on group plans are still working and the group plan is the primary payer of benefits.
Some people receiving group benefits are retired and in this case Medicare becomes the primary payer of benefits and the group plan becomes the secondary payer. For those who are retired and over age 65 and receiving employer-sponsored benefits, the additional coverage on the group plan over original Medicare Parts A and B becomes a supplement policy. What Medicare doesn't pay, the group plan will pick up. Adding on those beneficiaries receiving Medigap equivalent group coverage to those buying stand-alone supplement policies could put the number of people receiving additional coverage to cover the gap in Medicare at about 40% to 50% of the total Medicare beneficiary population. Another 22% are covered by Medicaid or Advantage Plans which by law do not integrate with a supplement policy thus making the supplement unnecessary. Only about 8% of all beneficiaries are not covered by some sort of supplemental insurance.
We have already discussed the major gaps in Medicare coverage as well as the risk of paying out-of-pocket for those gaps in the section above. With the exception of a long hospital stay, which has a very low risk of happening, Medicare is a pretty decent health care plan. So why are the elderly so concerned about paying extra money out-of-pocket to supplement their Medicare coverage? Here are a few reasons that we can offer.
Stand-alone supplement policies are sold by private insurance companies. There may be 20 to 40 companies offering these kinds of policies in each state. In 1992, in order to avoid confusion with the buying public, Medicare standardized stand-alone supplement policies into 10 major policy forms and all companies must now sell only one or more of these policy forms. Standardized policies are labeled with alphabet numbers from A through J. Supplemental insurance offered to retired Medicare recipients through employer sponsored group plans is not regulated by Medicare and these plans often have a number of additional benefits that stand-alone plans lack. The states of Massachusetts , Minnesota , and Wisconsin stipulate somewhat different forms of standardized Medigap plans than are sold in all other states.
Beginning in 2006, supplemental plans H, I and J will no longer be sold with prescription drug benefits. Anyone already owning one of these plans can keep the drug benefits through 2006 and beyond but there would be no reason to do so. This Medigap policy benefit would be more expensive and less comprehensive than the new Medicare Part D which is a government-subsidized drug benefit. If a person on one of these plans elects a new Part D benefit, the existing drug benefit will be removed and the premiums decreased accordingly. In addition beginning in 2006, Medicare has defined two new supplement plans K and L, which are less comprehensive in coverage than the preceding 10 plans, A through J, but are also less expensive.
Here is a description of what Plans A through J pay in addition to the basic benefits.
Plan A Covers
Plan B Covers
Plan C Covers
Plan D Covers
Plan E Covers
* Medigap policies cover some preventive care that isn't covered by Medicare
Plan F* Covers
Plan G Covers
Plan H Covers
* Starting January 1, 2006, you won't be able to buy Medigap policies covering prescription drugs. However, if you buy a policy with prescription drug coverage before January 1, 2006, you will have to decide if you want to keep this coverage.
Plan I Covers
* Starting January 1, 2006, you won't be able to buy Medigap policies covering prescription drugs. However, if you buy a policy with prescription drug coverage before January 1, 2006, you will have to decide if you want to keep this coverage.
Plan J* Covers
* Plan J has a high-deductible option
** Starting January 1, 2006, you won't be able to buy Medigap policies covering prescription drugs. However, if you buy a policy with prescription drug coverage before January 1, 2006, you will have to decide if you want to keep this coverage.
*** Medigap policies cover some preventive care that isn't covered by Medicare
Plan K pays
Note: Plan K has a $4,000 out-of-pocket annual limit. Once you meet the annual limit, the plan pays 100% of the Medicare Part A and Part B copayments and coinsurance for the rest of the calendar year. Charges from your doctor that exceed Medicare-approved amounts, called "excess charges" aren't covered and don't count toward the out-of-pocket limit. You will have to pay these excess charges. The out-of-pocket annual limit can increase each year because of inflation.
Plan L pays
Note: Plan L has a $2,000 out-of-pocket annual limit. Once you meet the annual limit, the plan pays 100% of the Medicare Part A and Part B copayments and coinsurance for the rest of the calendar year. Charges from your doctor that exceed Medicare-approved amounts, called "excess charges" aren't covered and don't count toward the out-of-pocket limit. You will have to pay these excess charges. The out-of-pocket annual limit can increase each year because of inflation.
Medicare select policies are supplemental policy designs that use a managed-care network such as an HMO or PPO. Most insurance companies have selected the Medigap Plan C for the chassis of their select policies. Because of the managed network the premium for a Select C Plan would be cheaper than a regular Plan C. But using a hospital or doctor out of the network would cost more out-of-pocket since the plan may pay nothing for out of network services.
How Supplemental Policies Are Priced
Even though all insurance companies are required to sell the same 10 standard policies, the cost for the same policy form and at the same ensuring age is going to be different for each company. Some are going to charge the same person less and some more with exactly the same coverage. Why is this? One reason might be the insurance company with a lower rate is more efficient in operation, it may pay lower commissions or it may buy back some premium by refusing to pay certain claims. Some companies engage in a strategy called "buying business" where they will charge a premium lower than other companies in order to get someone enrolled with the intention of raising the rates at some future date. Another reason for different pricing might be the way premiums are determined. Insurance companies are allowed to use three pricing methods for supplemental insurance.
The first pricing method is called "community rating". This means premiums are the same for everyone in the same service area regardless of age. A 65-year-old will pay the same as the 75-year-old and the only time premiums can go up is for a state allowed rate increase for everyone under the insurance plan. Those who are buying supplement policies know that rate increases are quite frequent due to the ever increasing costs and utilization of health care services.
The second pricing method is called "Issue-age-rating". Premiums are based on the age at the time of purchase. As with the first pricing method premiums do not go up as a person gets older, only when a price increase for all insureds has been granted.
The third pricing method is called "attained age rating". Younger people pay a lower premium than older people but as a person who owns the policy turns older, the prices go up. Here is an example:
Mrs. Anderson buys a Medigap policy at age 65. She pays a $165 monthly premium. Her premium will go up every year.
Mr. Dodd buys his Medigap policy at age 72. He pays a $175 monthly premium. His premium is higher than Mrs. Anderson's because it is based on his current age. Mr. Dodd's premium will go up every year.
Remember there is no such thing as a "free lunch". Over time, all honest companies selling supplemental policies will experience the same claims rates and the same costs and theoretically will over time charge the same total premiums. A younger person might get by cheaper by buying an age attained policy but will make up for the lower cost at an older age by paying higher premiums. There is no such thing as a "good deal" when buying a supplemental policy.
The Cost of Supplemental Policies
We include examples of Medicare supplement policy premiums below.
The cost of supplemental coverage from the same company will vary from region to region due to higher or lower medical costs in some areas but mostly due to different utilization rates of health care services by the elderly in that area.
The AARP offers the same standardized Medicare supplement policies all over the United States . An "A plan" in Utah is going to offer exactly the same benefits as an "A plan" in southern Florida . Also these AARP plans are being offered by the same insurance company using the same price rating methods. The difference in price is due entirely to where the Medicare beneficiaries live. Health care service utilization rates are typically low in Utah and high in southern Florida and the rate charts below reflect this in the cost of Medicare supplement premiums.
These premiums are for community rated policies. The rates above also do not reflect 2006 policy design which requires no prescription drug coverage for new Plans H, I and J sold in 2006 and beyond. The rates above should be lower for those plans next year. The AARP is also not quoting the two new Plans K and L.
The open enrollment period for a Medigap or supplement policy lasts for six months. It starts on the first day of the month in which the applicant is both
The earliest a person can apply for Part B is three months before his 65th birthday in order to have it effective on the first day of the month in which the person turns 65. As soon as the red, white and blue Medicare enrollment card is received, evidence of enrollment in part B is available for signing up for a Medigap policy as the date of coverage will be indicated on the card.
There are three times when one can enroll in Medicare Part B. These are called:
Once the six-month Medigap open enrollment period for a Medicare supplement policy starts, it can't be changed. During this period, an insurance company can't
Also during the open enrollment the insurance company in most cases must shorten the waiting period for pre-existing conditions if the applicant had existing coverage for health insurance prior to applying. In some cases, if there is a health problem before the Medigap policy started, a Medigap insurance company can refuse to cover that health problem for up to six months. This is called a "pre-existing condition waiting period." The insurance company can only use this kind of waiting period if the health problem was diagnosed or treated during the six months before the Medigap policy started. This means that the insurance company can't make one wait for coverage of the condition just because it thinks that person should have known to see a doctor.
If a Medigap policy is bought during the Medigap open enrollment period, and there was at least six months of previous health coverage that qualifies as "creditable coverage", the company can't apply a pre-existing condition waiting period. If there was less than six months of creditable coverage, this waiting period will be reduced by the number of months of creditable coverage in effect.
These types of health care coverage may count as creditable coverage for Medigap policies:
A group health plan (like an employer or union plan)
A health insurance policy
Medicare Part A or Medicare Part B
A medical program of the Indian Health Service or
A state health benefits risk pool (sometimes called a
state high risk pool)
TRICARE (the health care program for military
dependents and retirees)
A Federal Employees Health Benefit plan
A public health plan
A health plan under the Peace Corps Act
There is typically not a guaranteed right to switch Medigap policies. But, if given the opportunity, make sure to compare benefits and premiums before switching policies. If the Medigap policy was issued before 1992, it may offer better coverage than a newer policy. On the other hand, older Medigap policies may have bigger premium increases than newer standardized Medigap policies currently being sold.
If a decision is made to switch, don't cancel the first Medigap policy until a decision is made to keep the second policy. There is a 30 day free look waiting period to cancel the new policy and go back to the old one.
As a general rule, anyone changing to a new company after the initial guaranteed enrollment period does not have to be accepted by the new company. The new company will ask health questions and go through a process called "underwriting" to determine if it is willing to accept someone changing plans. The new company may also impose a new waiting period on pre-existing conditions.
There are some cases where someone can lose coverage from one company and be guaranteed new coverage without "underwriting" or penalty. If there was fraud involved or if the company goes out of business generally a guaranteed new purchase will be granted. Also if someone signs up for a new Medicare advantage plan and drops his existing supplement policy, that person has a 12 month period to change his mind and go back to the original supplement without penalty.
Medicare Supplements for People under Age 65
For those 4 million or so disabled people or those who have end-stage renal disease who are under the age of 65 and are receiving Medicare there might be a possibility to also purchase a Medicare supplement policy. The following states require insurance companies to offer at least one kind of Medigap policy to people with Medicare under age 65:
The Medicare Prescription Drug
(Typically shortened to "Medicare Modernization Act of 2003")
Source: Centers for Medicare and Medicaid Services
The Medicare Modernization Act of 2003 or MMA was primarily enacted to provide prescription drug coverage for Medicare beneficiaries. But it also had other goals as well.
The chart above shows percentages of Medicare beneficiaries receiving supplemental benefits in 2000. Percentages of employer-sponsored insurance and Medicaid have probably stayed about the same since 2000 but the enrollment under managed plans -- prior to the act called Medicare + Choice -- has declined to about 11% in 2005. Experts cite two reasons for the decline. First of all reimbursement rates were not flexible enough and the managed plans were losing money and secondly complicated rules made the plans difficult to manage. In an effort to revitalize these plans the MMA authorized a new private form of Medicare called "Medicare Advantage Plans". The old managed plans will receive new funding formulas and increases in reimbursement and will be renamed "advantage plans" as well. The new advantage plans will be described in the section below. They may also offer additional flexibility over the old managed plans.
Medicare has always used private insurance companies to administer its claims processing. (Although beginning in 2004 the agency can now use independent third-party administrators which should save a great deal of money and claims hassle.) Medicare is also not a primary provider of care but contracts with private industry to provide care for beneficiaries. In addition Medicare funds through its private insurance administrators the cost of health care for 41 million beneficiaries. But with the Balanced Budget Act of 1997 Congress created the Medicare + choice program to modernize Medicare benefits and to see if private insurers could run the Medicare program more efficiently than the government. Managed plan providers were paid roughly the equivalent monthly amount that Medicare paid under its traditional plan in the care providers' area. Depending on the area of the country this might be anywhere from $600-$700 a month. The managed plan would then use the money to provide benefits in a modern insurance plan designed with co-pays, stop loss and drug coverage. Some managed plans charged an additional premium for these modernized benefits and some tried to do it without any additional cost.
With the Medicare modernization act of 2003, Congress sought to revitalize private Medicare plans and the funding formulas were improved to encourage these plans to remain in force. Congress also created with the act an extension of Medicare private plans by authorizing the new Medicare advantage plans. These private plans and other changes in the act are an attempt to privatize the Medicare system. Proponents in Congress who want to move Medicare in this direction feel that privatized health insurance can, over time, save money and operate more efficiently than the current system. Opponents are distrustful of private industry and fear that privatizing the system will eventually rob seniors of what is now considered to be a secure health plan. Proponents are probably hoping that the experiment will be successful and that someday the whole system can be moved to private industry with Congress only providing the funding.
But the new Medicare advantage plans in the short run are going to cost more money. Over the next eight years the CBO (Congressional Budget Office) estimates that incentives for private insurance companies to implement advantage plans will cost an additional $29 billion in subsidies. Also an additional $12 billion will be set aside to encourage the establishment of PPO's (preferred provider organization networks) that will cover Medicare beneficiaries over a wide area consisting of one or more states. The set-aside is necessary to provide an incentive for establishing provider networks in rural areas where none currently exist.
Medicare advantage plans are tightly controlled by Medicare. Enrollment rules, funding and oversight are maintained by The Centers for Medicare and Medicaid Services. However, beginning in 2010, Congress has authorized, under the act, a direct competition between traditional Medicare and the new private plans in six large metropolitan areas in the United States . It is assumed that Medicare beneficiaries will be enrolled randomly in a private plan or in traditional Medicare and both plans will be provided the same funding and a five-year test period will determine which plan is most efficient. The assumption is if the private plan wins out, the entire Medicare system will be privatized.
The Medicare modernization act also improved certain funding in current Medicare operations and authorized reporting procedures to help implement "pay for performance" incentives. Also a number of preventive services were added to Medicare coverage. It was also felt that Medigap plans should not be allowed to offer drug coverage in addition to the new prescription drug program and that the 35% or roughly one third of Medicare beneficiaries receiving health benefits from employer group plans should be encouraged to stay with those plans that offer drug coverage. As a result Congress will actually pay employers a tax-free incentive fee, estimated to be about $668 per retired employee per year. The purpose for this subsidy is to discourage employers from canceling current plans thereby forcing retired employees to a stand-alone part D plan. Employers also have the option of providing their own in-house Part D coverage and it appears that there are currently a number of insurance Company/employer partnerships offering these plans to retired workers.
Various government accounting agencies estimate the 10-year cost of the act from 2004 through 2013 to be anywhere from $395 billion to $450 billion. The actuary office for the Medicare trust funds has different estimates of the overall cost of implementation. It also estimates the cost of shoring up existing HMO plans and implementing new PPO advantage plans to be $12 billion for the stabilization fund and another $34 billion due to the higher payment rates starting in 2004 and the restructured payment formula in 2006 and later. The office estimates that HMO enrollment would increase from its 2004 level of about 12 percent to 16 percent and that PPO enrollment would also reach 16 percent in 2009 and later. If this is true, in the next three years, managed advantage plans will increase from their 2004 enrollment of about 12% to about 32% or roughly one third of all Medicare beneficiaries. These new enrollees will come primarily from beneficiaries on traditional Medicare who are buying Medicare supplement policies. The supplements disappear when the beneficiary enrolls in an advantage plan since the advantage plan eliminates the need for a supplement.
Although the provisions of the act are quite complex and detailed, we have provided some of the key provisions that we feel are most important to our readers.
Medicare Prescription Coverage (Part D) starting in 2006
Low Income Seniors Rx Cost Sharing
Approximately one third of all Medicare beneficiaries with low incomes and few assets will receive various levels of subsidies to cover the new prescription drug plan premiums as well as reduce costs under the plan.
Employer Retiree Rx Coverage
Starting in 2006, employers with retiree drug coverage that offer retirees "actuarially equivalent" to the Part D coverage or greater will receive a government subsidy for 28% of drug costs between $250 and $5,000 per person.
Health Savings Accounts
Health Savings Accounts (HSAs) are established starting in 2004, as a tax advantaged savings account for disbursement of medical expenses in combination with a high deductible insurance plan, that must be opened before age 65 and can be funded either solely by employer contributions, through pre-tax payroll deductions under a cafeteria plan, or by an employee without employer involvement
Medicare Part B Changes
Demonstration Plan and Competition for Medicare Advantage (Part C Managed Care)
Medicare Spending "Cost Containment"
Ends existing loopholes in the Hatch-Waxman law by making changes to the 30 month stay and 180 day provisions. New drug applicants will receive only one 30 month stay per product for patents submitted prior to the filing of a generic drug application. In addition, modifies rules relating to generic company's 180 day exclusivity. Specifically, it enables multiple companies to qualify for the 180 day exclusivity if they all file their application on their first day of eligibility. Additionally, contains provisions relating to declaratory judgments which are designed to accelerate generic company's ability to enter the marketplace.
Medicare's Special Health Plans
Medicare Advantage Plans
A new booklet from Medicare describes all of the available Medicare plans for 2006. This includes original Medicare, Medicare Advantage and the new prescription drug plan. Go to
"Medicare and You 2006" (104 pages)
As mentioned in the previous section The Medicare Modernization Act of 2003 carried over previous managed-care plans but added new Advantage Plans plus providing opportunities for specialized care plans for certain high need individuals. We provide a description below taken from the Medicare web site.
"Medicare Health Maintenance Organization (HMO) Plans
These are the general rules for how Medicare HMOs work. For some of these rules, plans may differ slightly, so it's important to read plan materials carefully.
Medicare Preferred Provider Organization (PPO) Plans
Medicare PPOs use many of the same rules as Medicare HMOs listed above. However, generally in a PPO you can see any doctor or provider that accepts Medicare. You don't need a referral to see a specialist or any provider out-of-network. If you go to doctors, hospitals, or other
providers who aren't part of the plan ("out-of-network" or "non-preferred"), you will usually pay more. You may want to contact the plan before you get services to find out how much you will have to pay and to determine if the service you want is covered. Generally, you will get more benefits for lower costs than the Original Medicare Plan. Every PPO plan must pay for all covered services you get out-of-network, but every plan is different in what you must pay. Contact the PPO plan you are interested in to find out more.
Starting in 2006, regional PPOs will be available in most areas of the country to give choices for Medicare health care coverage. Also, local PPOs are now available in more areas of the country. Unlike local PPOs, which serve individual counties, regional PPOs will serve an entire region, which may be a single state or multi-state area. This will help bring more plan options to people with Medicare. Just like local PPOs, regional PPO members also will be able to get their Medicare prescription drug coverage from the PPO plan. In a regional PPO, members will have an added protection for Medicare Part A and Part B benefits. There will be an annual limit on their out-of-pocket costs. This limit will vary depending on the plan.
Medicare Special Needs Plans
In 2005, Medicare Health Plans started to offer "Special Needs" Plans. These plans may limit all or most of their membership to people
Special Needs Plans are available in limited areas. The Special Needs Plan must be designed to provide Medicare health care and services to people who can benefit the most from things like special expertise of the plans providers, and focused care management. Special Needs Plans also must provide Medicare prescription drug coverage. In most of these plans, generally there are extra benefits and lower copayments than in the Original Medicare Plan.
For example, a Special Needs Plan for people with diabetes might have additional providers with experience caring for conditions related to diabetes, have focused special education or counseling, and/or nutrition and exercise programs designed to help control the condition. A Special Needs Plan for people with both Medicare and Medicaid might help members access community resources and coordinate many of their Medicare and Medicaid services.
To find out if any Medicare Special Needs Plans are available in your area visit www.medicare.gov on the web. Select "Search Tools" at the top of the page.
Medicare Private Fee-for-Service (PFFS) Plans (special advantage plans)
Medicare Private Fee-for-Service Plans are fee-for-service plans offered by private companies. The general rules for how Medicare Private Fee-for-Service Plans work are below.
Medicare Cost Plans
These are the general rules for how Medicare Cost Plans work. For some of these rules, plans may differ slightly, so it's important to read plan materials carefully.
Demonstrations are special projects that test possible future improvements in Medicare coverage, costs, and quality of care. Demonstrations are usually for a specific group of people and/or are offered only in specific areas. The results of demonstrations have helped shape many of the Changes in Medicare over the years.
PACE (Programs of All-inclusive Care for the Elderly)
PACE plans are offered in some states as an option under Medicaid.
It's important to note that these special Medicare plans have nothing to do with Medigap or supplement policies. Supplement policies are only associated with the original Medicare or traditional Medicare plan. They simply plug the gaps in coverage in this plan.
Special Medicare health plans are modernized insurance coverage offered through independent insurance providers and funded by Medicare. Although formulas for funding can be complicated, in a nutshell Medicare gives these companies what it normally would have paid health care providers under its traditional plan for the average monthly cost of health care services in the service area. As an example for one service area this might be about $685 a month per beneficiary enrolled in the Medicare special health plan. With special Medicare health plans there is no need for supplemental insurance.
Below is a comparison of one major insurance company's Private Fee for Service advantage plan for a specified service area. This plan also includes the new Medicare part D prescription drug coverage. For this particular service area, health care utilization rates are low and the advantage plan charges no additional premium. Someone in the area buying a Medicare supplement for $150 a month could go to this plan and save the $150 per month. Please note also that this plan does not charge anything for prescription drug coverage even though the national average is about $33 per month for this coverage. Again this is probably due to low utilization rates in this particular area.
Please note also that even though this plan does not require a Medicare supplement, it does put more burden for paying costs on the Medicare recipient than a Medigap or supplement policy would. In this particular service area a Medicare supplement costing $150 per month would probably pick up close to 100% of the costs not covered by Medicare in the plan description below. If a person buying a supplement chose to keep the supplement and not buy the advantage plan below, he or she could buy stand-alone prescription drug coverage from another company but it would likely cost a monthly premium in addition to the supplement monthly cost.
Enrolling In or Leaving Advantage Plans
Enrollment dates and rules between Medicare advantage plans and the new Medicare prescription drug plan are intertwined and since a number of people will be buying drug coverage included in an advantage plan we moved these rules to the end of the section below on the Medicare part D prescription drug coverage.
Medicare Part D-New Prescription Drug Plan
http://www.thedesk.info/PartD/choosingaPDP.htm (choosing a prescription drug plan)
According to the chart below, only about a quarter of Medicare beneficiaries in 2002 were without drug coverage with about another 15% having coverage with Medigap drug plans which typically provide only partial coverage. It is this group of Medicare supplement policies or Medigap plans plus Medicaid recipients plus the 24% of beneficiaries without coverage that the new Part D is targeting. This represents a little over half of all Medicare beneficiaries. Employer-sponsored and Medicare + Choice plans are anticipated to keep most of their members on existing drug coverage. In fact employers with current coverage for retired employees are being given a tax-free, 28% of cost subsidy for retired employees with drug costs between $250 and $5,000 a year. This subsidy which is estimated to average about $668 a year per employee is meant to encourage employers to keep current drug coverage. Employers also have the option of offering additional wraparound coverage on existing plans or offering their own stand-alone, Medicare funded drug plans.
About one third of all Medicare beneficiaries have an income level and assets such that they will qualify for one of three levels of government subsidy with the drug plans. This includes the 12% of beneficiaries on Medicaid. These people will receive premium subsidies and or subsidies to help cover the internal costs of the plans they choose. Medicaid will be automatically converting all of its beneficiaries to the new drug program. Subsidies will probably be offered to many of the 24% of beneficiaries in the chart below who are currently without drug coverage as well.
Understanding the Coverage
What is the Basic Coverage?
It includes the following features:
No one can adequately explain the origin of the doughnut hole. Some experts contend it was necessary to keep the 10-year cost at $400 billion but still provide continuity in coverage so that catastrophic costs would also be covered. In other words, if there is not enough filling and dough to fill a whole pie tin, create the pie with a hole in the middle to conserve ingredients.
Who Offers the Insurance?
These plans cannot be sold through Medigap or supplemental insurance policies. Existing HMO Medicare private plans not offering drug plans will be adding these plans and private HMOs already offering drug coverage may modify their coverage to include a new PDP. Employers who offer drug coverage to retired employees are allowed to offer these plans as a replacement for existing coverage. The plan provider for employee plans will likely be one or more of the insurance companies allowed to sell this insurance by Medicare.
From a search of lists on the Medicare web site it appears there are 71 insurance organizations nationwide offering stand alone drug coverage. There are 311 organizations offering Medicare advantage, stand-alone drug coverage or combination coverage. About 20 insurance companies offer PDP coverage in most states and a number of Blue Cross regional organizations offer PDP coverage in their areas. Nationwide there are about 40 to 50 different standalone plans in each state. California with the largest population in the country at last count has 19 companies offering 47 different plans. Florida with its large population of elderly has 19 companies offering 43 different plans.
Lists from the Medicare web site for Medicare Advantage Plans with built-in prescription drug coverage indicate about the same number of companies nationwide offering combination plans. For instance Orange County , California has 12 companies offering 23 combination Medicare advantage and prescription drug plans. Broward County , Florida (with the highest concentration of elderly in the country) has 21 companies offering 53 combination plans.
What do PDP Plans Cost?
The Medicare Modernization Act does not allow companies to offer any less coverage than the basic coverage outlined above. However, companies can improve on the basic coverage and charge higher premiums if they choose to do so. Most of the plans out there improve on the basic coverage with some improvements being minor and others being substantial. The better plans typically eliminate the yearly deductible and the coverage gap making the better plan into a "normal" drug insurance plan. These improved plans essentially offer no lapse in coverage and do away with the onerous "doughnut hole".
What Are the Enrollment Options?
In order to get a PDP plan a Medicare beneficiary must be enrolled in either Medicare Part A OR Part B. There is no requirement to be enrolled in both parts. However, if a person is enrolling in a Medicare Advantage Plan that also includes drug coverage that person must be enrolled in Medicare Part A AND Part B.
What Drugs Are Available?
Prescription drug plans also do not cover drugs currently offered under Medicare and paradoxically they also exclude a certain number of drugs that for some reason Congress felt were not to be insured. Many of these might be considered nonessential drugs but essential drugs in the class of Benzodiazepines were dropped as well. Here are some of the potentially useful prescription drugs that are excluded from the list. antacids, acetaminophen, laxatives, certain medications used for anxiety, insomnia, or seizure disorders (examples are Valium, Xanax, Ativan, Klonopin, Restoril). Phenobarbital, used for seizures, prescription vitamins, such as Vitamin B12 injection and Vitamin D capsules, prescription medications used for relief of cough or colds are also excluded. Hopefully this oversight will be corrected in the future and many of these drugs will be added into formulary lists. Here is a current list of categories excluded:
Plan participants must live within the service area for the plan. Drugs are obtained through certain specified pharmacy distributors such as grocery store chains, discount store chains or drugstore chains. Each plan provider has its own network of pharmacies. If a person moves outside of the service area and the plan is not available in the new area there are special rules allowing someone to obtain equivalent coverage either through another company or through Medicare. If a move is made and the plan is available in the new area a transfer will occur and the new premium will be paid for that area.
Prescription drug plans are required to operate a drug utilization management program to reduce costs when medically appropriate and to control fraud, waste, and abuse. This program must include a medication therapy management program for targeted beneficiaries, including persons who have multiple chronic diseases or who are taking multiple drugs. These programs will be implemented by pharmacists and are intended to ensure that drugs are used appropriately and therapeutic outcomes are optimized.
People receiving medications under Medicaid will be converted to receiving medications under the Medicare prescription drug program. This may cause problems where Medicaid programs allow certain medications but new PDP drug plans may not cover these medications. There is a process where patients or their advocates can petition for the right for certain non-covered drugs and possibly receive approval for coverage.
Most of the plans are giving preference to certain drugs over others. This has resulted in so-called "tiered co-pays" for certain classes of drugs. For example, one plan may require no co-pay or a very low co-pay for generic drugs. Another level of co-pay perhaps $10 per prescription more may be required for certain brand-name drugs on the formulary. Other brand names may be on the formulary but require a $20-$30 co-pay because of cost. And finally certain specialty drugs may require a different payment option. We have included below a sample of three typical prescription drug plans from the same company.
Some companies may have instituted restrictive procedures for qualifying for certain drugs. It is extremely important before buying a plan to get a copy of the formulary and to read all of the fine print associated with using it. Here are some of the ways companies are restricting use:
What Is the Penalty for Failure to Enroll?
The penalty is 1% for every full month that a person could have had coverage. Suppose someone missed the May 15, 2006 deadline and had to wait to sign up for the next available option which would be November 15, 2006 through December 31, 2006. In this case coverage would be effective January 1, 2007. This means there were seven full months from June 1, 2006 when an initial enrollment coverage would have been possible, through January 1, 2007. This results in a 7% penalty on the monthly premiums. If the monthly premium would have been $30 a month, the new premium is now $32.10 a month for the rest of the participant's life under that plan. The penalty will also apply to any change in plans in the future. Waiting years to sign up could result in significant penalties. Waiting a few months to sign up may result in insignificant penalties.
If a person has "credible coverage" with another provider such as a former employer, TRICARE, Federal Employees Health Insurance, or the VA there may be no reason to sign up for a prescription drug plan. Credible coverage is defined as drug coverage that is equal to or better than the basic PDP coverage. The existing insurer will send a letter to its participants to let them know that they have credible coverage. If a participant loses the credible coverage in the future, he or she has a period of time to sign on with a PDP and not incur the penalty. Generally drug coverage under Medigap or supplemental policies is not considered credible coverage.
What about Those People Who Have Existing Drug Coverage?
For those people who are receiving limited drug coverage through a Medigap or Medicare supplement policy, there is no reason to keep this coverage. This is because the new PDP plans are being subsidized up to 75% of the cost by the government. Medigap plans receive no such subsidy and the cost-benefit ratio for such plans would not compare favorably with a new PDP plan. A person can still elect to keep the current Medigap plan and sign-up for a Medicare prescription drug plan. That person needs to notify his or her insurance company offering the Medigap plan and that company is required to remove the drug coverage and adjust premiums accordingly.
How Are the Premiums Paid?
How Are the Private Plans Designed?
Sample Drug Plans
What Are the Subsidies for a Third of Medicare Beneficiaries?
Dual eligibles or people on Medicare and Medicaid will automatically be enrolled in the plan of Medicare's choosing my December 31, 2005. This plan and any co-pays and deductibles will be covered by Medicare. If the beneficiary or his or her advocate does not like the plan they can pick another plan.
The most generous subsidy goes to those with the lowest incomes (under $9,630 for individuals and $13,000 for couples in 2006) who are now enrolled in both Medicare and Medicaid. They will face no premiums, no deductibles and no gap in coverage. They'll pay $1 for generics or $3 for brand-name drugs for each 30-day prescription. (Some living in institutions, such as nursing homes, will receive free drugs.)
Enrollees at the next income level ($13,000 for individuals, $17,550 for couples in 2006) who have assets below $6,000 ($9,000 for couples) have the same waiver of premium, deductible and coverage gap but will pay $2 for generics and $5 for brand names.
Those with this same level of income but assets up to $10,000 ($20,000 for a couple) will also have no premium or gap in coverage but will pay a $50 deductible and 15 percent copays.
Those with somewhat higher incomes (up to $14,450 for individuals, $19,500 for couples in 2006) and assets as above will additionally pay premiums on a sliding scale according to income.
What Happened -- Why Is It so Confusing?
But it is also true that signing up for these new benefits is intimidating. The best analogy might be one where someone has to buy a new car. But the ground rules for buying the car require the purchaser to visit two distinct and exclusive sales lots in his area. The first lot has restricted access and 40 or 50 models of cars can only be seen by making an appointment with a number of car salesmen who must also explain the features of each of their particular company's car models. This is analogous to buying a Medicare advantage plan with drug coverage where only an insurance agent of the company can present the plan. Detailed information on these plans is simply not available from any public sources. The second lot is less restricted and people can come and go and examine the product without a salesman but there are over 50 different models, each with different features, and the purchaser does not understand these features and therefore cannot understand how to make comparisons between models. This is analogous to buying a stand-alone prescription drug plan.
Besides the variety of choices, the basic design of the plan is not simple and some seniors don't know how to deal with the financial consequences of the coverage gap or doughnut hole. Fortunately, for those who can't handle this problem, some of the insurance companies offer higher end drug coverage that eliminates not only the basic deductible but also the doughnut hole and seniors buying these plans will find they won't have to deal with this issue. Note: The coverage gap may be bridged only with generics or it may be bridged with generics and name brand drugs. Another intimidating issue is the closed formulary lists. What does one do when one's drugs are not on the list? Or what if one finds an acceptable list but doesn't like the insurance plan? We will also provide suggestions on dealing with this dilemma in the next section.
The reason for the complications in these new plans is due to the political process which produced them. When proponents of the new drug coverage in 2003 approached the issue they decided to tie prescription drug coverage to a modification of the traditional Medicare fee for service plan. Instead of tacking a simple 20/80 plan on to existing Medicare, the decision was made to create private industry plans and bypass traditional Medicare.
There is great concern with many members of Congress not only Republicans but some Democrats as well that Medicare could be run more efficiently. The creation of private HMO Medicare coverage in the balanced budget act of 1997 was one outgrowth of this concern. But these plans did not fare well for various reasons. The Medicare Hospital Insurance trust fund is expected to run out of money by the year 2020 and proponents of privatizing Medicare hope to demonstrate that private industry can be more efficient than government in providing health care to elderly Americans and thus save Medicare from extinction. Proponents of the new Medicare Modernization Act chose to revitalize the original private plans and extend them under the title of Medicare Advantage Plans.
The original version of the act tied prescription drug coverage to the Medicare advantage plans. Modern private plans don't segregate drug coverage from health coverage but include both. The same should be true of Medicare. In order to get drug coverage a beneficiary would have to choose a Medicare advantage plan thus forcing that person off of traditional Medicare. This is also the reason existing Medigap policies are not allowed to supplement the new drug coverage. Medigap or supplemental policies are an extension of traditional Medicare and are designed to support that system.
But opponents of this philosophy and of the act saw this as a blatant attempt to privatize existing traditional Medicare and eventually do away with it. Opponents contend that the system is not broken, it has worked well for 40 years and there is no reason to change it. And they may have a good point. "If it ain't broke don't fix it"
Proponents of the act in its original form simply did not have enough votes in the House of Representatives to pass the bill. President Bush was particularly interested in passage because of the political capital it would generate for him in the upcoming 2004 elections. As a result a lot of pressure was put forth and the bill passed the House with a vote of 220 to 215 but the final provisions were not very "clean". One important change was allowing prescription drug plans to be sold separately thus allowing beneficiaries to stay under original Medicare. This change alone made the decision making process significantly more complex.
The final version of the act failed to achieve an important objective of putting a cap on rising drug costs. Medicare is prohibited from engaging in negotiations with drug companies to set prices. Perhaps this was done to appease the powerful drug lobby. Perhaps there were other reasons. Seniors consume almost a third of all drugs and pay almost 50% of the cost of all medications in this country. If Medicare could represent this buying group, drug companies would have no choice but to negotiate lower prices in order to stay in business. Some proponents feel that just getting a drug benefit in force is necessary in order to take the next step. In other words the door has been opened and in the future drug companies are likely to face price controls from government buying cartels.
Choosing a Plan
About half of all Medicare beneficiaries are going to have to make a decision on choosing a new Part D or forgo the opportunity.
Examining lists from the Medicare web site it appears there are about 20 insurance companies and a number of Blue Cross regional organizations nationwide offering up to 50 different stand-alone plans in each state. California with the largest population in the country at last count has 19 companies offering 47 different plans. Florida with its large population of elderly has 19 companies offering 43 different plans.
Lists from the Medicare web site for Medicare Advantage Plans with built-in prescription drug coverage show about the same number of companies nationwide offering a combination plan. For instance Orange County , California has 12 companies offering 23 combination Medicare advantage and prescription drug plans. But Broward County , Florida (with the highest concentration of elderly in the country) has 21 companies offering 53 combination plans.
Here are the possible choices confronting a first-time buyer of prescription drug coverage through Medicare.
If I have no current drug coverage and I'm taking no medications or the ones I'm taking are not very costly should I buy into a new drug plan?
There is one company offering a prescription drug plan that is aware of this need to maintain coverage and this company is offering a most basic inexpensive policy to fill the need. Humana Insurance offers the basic Medicare design in all 48 contiguous states. By buying this policy you can have continuous coverage and avoid a future penalty. We checked the rates in all states and found this policy sells for about $5 to $10 a month in premium. This is cheap enough that it could be affordable for most people who only desire maintenance coverage. In one state it costs as little as $2 a month and the most expensive premium we found in any state was Georgia at $17.91 a month. But this isn't just a waste of your money.
For example suppose you're paying an average of $50 a month for prescription drugs and the Humana policy costs you an additional five dollars a month. This means your total cost for the year will be $60 for the policy and $600 for the drugs. Or a total of $660 before making insurance claims. Now let's apply the insurance claims. After your first $250 of drug costs the policy will pick up 75% of the balance of $350. Or the insurance will pick up $262.50 of your drug cost for the year. You pay the other $337.50. Your total out-of-pocket for the year using the insurance and paying in addition for premiums is $397.50. Had you not bought the insurance your total out-of-pocket for the year would be $600. You saved over $200 by buying the policy. Even if you had no drug costs for the year it's still worth it to pay $60 a year for insurance in anticipation of a future claim and to avoid a future late enrollment penalty.
If you need a better policy in the future you can switch to a more expensive policy with the same company or with another company during your annual enrollment period From November 15 through December 31 of each year. There is no penalty for doing this.
If I have no current drug coverage and want a plan, should I buy an individual, stand-alone drug plan or should I consider buying drug coverage in combination with a Medicare Advantage Plan?
The cost of this depends on where you live and the type of plan you choose. After checking the plans on the Medicare web site available in many areas we find a large number of basic combination advantage plans with drug plans that cost zero dollars. That's right, they cost you nothing! There are hundreds of combination plans that cost less than $10 a month. This is a no-brainer. Do it!
If you have a current Medicare supplement policy the answer to the question becomes a little more nebulous. Here are the reasons we think people buy supplement policies.
If you're one of those people in category #2 above then stick with your supplement policy and buy a stand-alone drug plan of your choice. You probably won't like the added out-of-pocket risk of a Medicare advantage plan. Buy a cheap drug plan from Humana if you want maintenance coverage or a more expensive plan if you want full coverage.
If you're one of those people in category #1 above you need more education. You may find an advantage plan combined with drug coverage will be much less expensive than your current supplement plan and it may satisfy your needs just as well.
If you're one of those people in category #3 above and you have adequate income and savings, it is not rational for you to stay with a Medicare supplement plan. You should be buying a Medicare advantage combined with drug coverage. Over the long run you will save money by doing this.
If I have a Medicare supplement policy with drug coverage, should I drop the drug coverage and buy a stand-alone plan? Or should I drop the supplement in favor of an advantage plan with drug coverage?
If you want to keep your current supplement, you can sign up for a stand-alone PDP and then notify your supplement company of your action. They are required to remove the drug coverage from the supplement and adjust your premium accordingly.
You may also want to consider dropping your supplement and signing up for a Medicare advantage plan with drug benefits built in.
If I have current drug coverage through a former employer can I drop that coverage in favor of a PDP? If so will it cost me more money, or should I keep it or buy a new plan?
Choice one: If your current plan costs you nothing or very little you should probably stay where you are and wait to see what happens. Many employer-provided plans are working on changing the coverage and either providing PDP type plans in-house or providing wraparound coverage to make their plans better. Remember, your employer plan is receiving a subsidy from the government to do this.
Choice two: Even if your plan is expensive and you might benefit by switching, you should wait to see what happens until the last deadline which is May 15, 2006. If you don't like the current plan by then you can sign up for a new PDP.
If your current coverage is not credible coverage you may want to switch to a new PDP but again our advice is to wait and see what happens. Sometime before the deadline for signing up, your employer plan may be making changes.
If you rush to join a new program you will be automatically disenrolled from your current plan and you may not be able to get back if you change your mind. Be cautious about any decisions you make. Some congressmen are complaining that issues like these and issues relating to understanding how plans work may require extending the initial enrollment period all the way through the end of 2006. We think there is a good possibility this may happen.
What is the Best Way to Gain Knowledge and to Sign up for a Plan?
We highly recommend the use of the Internet. With the exception of providing detailed plan features and formularies, the Medicare web site has all the tools necessary to evaluate plans. You can even use the site to sign up. The site also gives you references to obtaining more detailed information on plans before you make a decision.
The dilemma with the Internet is that very few seniors will use it. It is therefore important for advisers and family members to be involved in this process and to provide help as needed. Seniors who want to do it themselves can have computer and Internet access in the library or in the local senior center. It is likely that their children and grandchildren will also have Internet access. Again we recommend that the family be closely involved in this process in helping their loved ones understand and enroll for the right plan.
Who Can Help Me Evaluate Plans?
Medicare has four basic strategies to educate beneficiaries:
Your medical care providers such as Physicians, pharmacists, social workers, and staff of long-term care facilities can educate you on the various features but Medicare will not allow them to help you choose plans. This is unfortunate since these people are often in the best position to provide this type of advice.
You can also contact your financial advisor, your legal adviser or your tax adviser and they may be willing to sit down with you and help you evaluate plans. We suspect over the next few months that some financial planners will specialize in this area.
I Don't Understand the Financial Implication of the Coverage Gap or Doughnut Hole, How Do I Deal with It?
If you have a basic insurance plan or one that does not cover you through the gap, and your costs for drugs each year run between $2,000 and $5,000, the coverage gap can have a substantial impact on the amount of coverage that is paid. In this range as little as 27% of your total drug costs could be covered including the costs up to $2,000.
If you have had such costs then you obviously have had the means to cover them up till now. This means you probably have enough cash flow to buy a better prescription drug plan. The most expensive plan we have found on the Medicare site is about $110 a month. But depending on where you live you might find a "premium" plan in the range of $70-$80 a month. The "premium" plan will cover you through the coverage gap or doughnut hole thus keeping your insurance covered costs at closer to 70% or more. In other words what we are saying to you is to buy the best policy and the coverage gap is no longer an issue.
How Can I Compare Plans Myself?
How Do I Get More Details on the Plan Such As Tiered Co-Pays, Pharmacy Network and Formulary Lists?
On the right hand side of the page you will see the box at the right with the blue top and white letters in it that say "Medicare Prescription Drug Coverage, Important Links". In the light yellow part of the box you will see the following link "Enroll On-Line". Click on that link.
When the page opens it will ask you for your ZIP code. Enter the ZIP code for the area you want to enroll in then click the "Enroll in a Plan" button. When you get to the new page click on the "View Plan List" button. This will give you a list of all plans and premiums in your area. The pharmacy network is also listed there. To see the plan details and actual formulary lists you must click on the link for the insurance company offering the plan. Medicare will ask you if you want to leave the Medicare site so in response go ahead and click on the company link again. Once you get to the company site you'll be able to examine plan details and print off full formulary lists. You can't get a full list on the Medicare site. You can only search for individual drugs one at a time.
Can I Sign up without Meeting with an Insurance Agent?
Can I Change My Mind?
Working with the Pharmacist and Doctor on the Formulary
The black hole of prescription drug coverage is the formulary. If anything this will make or break the success of the entire system and the credibility of privatized plans. If insurance companies use formularies to routinely deny coverage or restrict use, this practice will backfire and traditional Medicare will prevail in the end.
The dilemma with closed formularies is getting the patient and the doctor on the same page together. It may not be rational for a patient to try to match every medication with every plan since this matching process may result in buying a plan that is more expensive than the patient can afford. On the other hand it may be difficult to meet with one or more doctors and go over alternative medications before a decision has to be made on which plan to buy. We must also assume that doctors are open-minded in changing medications or substituting with generics to help meet a plan requirement. Remember, doctors have absolutely no incentive to prescribe generic medications but they have huge incentives from constant visits from drug company salesmen to use more expensive name brand prescription drugs. Here is a description of a current survey done by the AARP on physicians' attitudes towards prescribing drugs.
It appears from the survey that the common denominator to this dilemma is the pharmacist. Pharmacists also have little incentive to substitute generic drugs since the lower in and cost will cut overall profits. However pharmacists also have a professional duty to their patients and this should outweigh any financial incentives.
Elderly beneficiaries or their family advocates should not be shy in discussing alternative medicines covered under a drug plan's formulary. The participating pharmacist will have a copy of the formulary and will be well aware of what the plan provides. Pressure should be applied to pharmacists to obtain permission from doctors to substitute medications when 0appropriate.
We must not overlook using the same approach when meeting with the doctor or other health care prescribing practitioner. The patient and or the family member should make a copy of the drug plan formulary available to office nurses. The doctor should be reminded when prescribing a medication of the need to check with the formulary first.
General Rules for Enrolling In or Leaving Advantage and Prescription Drug Plans
Here are Medicare rules taken from the Medicare site describing the times and the situations when a person can enroll in the new special plans and in the new prescription drug program. We will discuss the drug program in further detail in the next section but we include enrollment for both plans here because advantage plans and drug plans are often intertwined. There are also special rules for enrollment with combined advantage in drug plans as opposed to stand-alone plans.
Who can join a Medicare Advantage Plan or other Medicare Health Plan?
If you have prescription drug coverage from a former or current employer or union, contact your benefits administrator before you make any changes to your drug coverage.
Who can join a Medicare Prescription Drug Plan?
Caution: Generally, you can only join one plan at a time. If you currently have a Medicare Advantage Plan, other Medicare Health Plan, or Medicare Prescription Drug Plan and you enroll in another Medicare Advantage Plan, other Medicare Health Plan, or Medicare Prescription Drug Plan, you will be disenrolled from the plan you have today when your enrollment in the new plan begins. People in some Medicare Private Fee-for-Service Plans and people in Medicare Cost
Plans may also join a Medicare Prescription Drug Plan and be in both plans at the same time.
When can I join one of these plans?
Note: In special circumstances, you may be able to join a Medicare Advantage Plan, other Medicare Health Plan, or Medicare Prescription Drug Plan at other times. For instance, if you already have a Medicare Advantage Plan and you move, you can join a Medicare Advantage Plan that is offered in your new area.
Special Rule in 2006 for Joining Medicare Advantage or other Medicare Health Plans: In 2006, you have until June 30, 2006 to join a Medicare Advantage Plan or other Medicare Health Plan. However, if you already have a Medicare Advantage Plan or other Medicare Health Plan with prescription drug coverage but want to switch plans, and don't switch plans until between May 15 and June 30, 2006 you can only switch to another Medicare Advantage Plan or other Medicare Health Plan that offers drug coverage. Likewise, if you have a plan without prescription drug coverage but want to switch plans, you can only join a plan that doesn't include drug coverage.
Special Note for Joining Medicare Prescription Drug Plans: If you don't join a Medicare Prescription Drug Plan by May 15, 2006, and you don't currently have drug coverage that covers on average, at least as much as a Medicare Prescription Drug Plan, your premium cost will go up at least 1% per month for every month that you wait to enroll that you don't have coverage at least as good as standard Medicare prescription drug coverage. You will have to pay this penalty as long as you have Medicare prescription drug coverage.
Special Note if you have limited income and resources: If you receive full Medicaid coverage from your state, you can join or switch a plan at any time. If you apply and qualify for extra help, and don't join a plan by May 15, 2006, Medicare will enroll you in a plan. If the plan Medicare chooses doesn't meet your needs, you can switch plans once before December 31, 2006. Generally, your next chance to switch is November 15-December 31 of each year.
How do I join a Medicare Advantage Plan or other Medicare Health Plan, or Medicare Prescription Drug Plan?
Caution: You can't call a Medicare Advantage Plan or other Medicare Health Plan to join over the telephone, unless you are switching to another plan offered by the same company, and the company offers that option. Also, if you join a Medicare Prescription Drug Plan using the web, the plan must send you a bill. The plan can't ask for payment at the time you join.
Special Rules for People with End-Stage Renal Disease
If you have ESRD and are in a Medicare Advantage Plan or other Medicare Health Plan and the plan leaves Medicare or no longer provides coverage in your area, you have a one-time right to join another Medicare Advantage Plan or other Medicare Health Plan. You don't have to use your one-time right to join a new plan immediately. If you change directly to the Original Medicare Plan after your plan leaves or stops providing coverage, and share you will still have a one-time right to join a Medicare Advantage Plan or other Medicare Health Plan at a later date as long as the plan is accepting new members. You may also be able to join a Medicare Special Needs Plan for people with ESRD if one is available in your area.
Can I keep my Medigap (Medicare Supplement Insurance) policy if I join a Medicare Advantage Plan or other Medicare Health Plan?
If you drop your Medigap policy, you may not be able to get it back, (or you may have to go through medical underwriting to get it back) except in certain situations. If you join a Medicare Advantage Plan or other Medicare Health Plan when you first become eligible for Medicare at age 65, or if this is the first time you've joined a Medicare Advantage Plan or other Medicare Health Plan, or a Medicare SELECT policy, generally you have special Medigap protections that give you a right to get your old Medigap policy back or buy a new one later if you choose to leave your plan within the first year. At that time, you may also be able to join a Medicare Prescription Drug Plan. For more information on Medigap policies and protections, visit www.medicare.gov on the web or call 1-800-MEDICARE (1-800-633-4227) and get a free copy of "Choosing a Medigap Policy: A Guide to Health Insurance For People With Medicare" (CMS Pub. No.02110).
Can I join a Medicare Advantage Plan or other Medicare Health Plan if I have employer or union coverage?
Remember, if you drop your employer or union coverage, you may not be able to rejoin it later.
Switching a Medicare Advantage Plan, other Medicare Health Plan, or Medicare Prescription Drug Plan. When can I switch my plan?
Note: Members of Medicare Advantage Plans or other Medicare Health Plans have another chance to switch plans until June 30, 2006.
How do I switch my plan?
If you want to switch from a Medicare Advantage Plan or other Medicare Health Plan to the Original Medicare Plan and buy a Medigap policy, you need to contact your current plan or call 1-800-MEDICARE (1-800-633-4227). Simply signing up for the Medigap policy won't end your Medicare Advantage Plan or other Medicare Health Plan coverage. After January 1, 2006, you won't be able to buy a Medigap policy that includes prescription drug coverage. In some cases, you may not be able to buy any Medigap policy. If you want to talk to someone who can help you decide if this is right for you, call your State Health Insurance Assistance Program.
If you want to switch from a Medicare Advantage Plan or other Medicare Health Plan to join a new Medicare Advantage Plan or other Medicare Health Plan, by June 30, 2006, simply join in the new plan that you have chosen. You don't need to tell your old plan you are leaving or send them anything. You will be disenrolled automatically from your old plan when your new plan coverage begins. You should get a letter from your new plan telling you when your coverage starts.
What if I move out of the plan's service area?
You can choose to join another Medicare Advantage Plan or other Medicare Health Plan if one is available in your new area, or join another Medicare Prescription Drug Plan. You can join the Original Medicare Plan, because you moved out of the plan service area and you will then have the right to buy a Medigap policy without medical underwriting. Remember, no new Medigap policies with prescription drug coverage can be sold after January 1, 2006.
What can I do if my plan leaves the Medicare Program?
Special Rules if you are in a Medicare Advantage Plan or other Medicare Health Plan that leaves the Medicare Program.
You will be automatically returned to the Original Medicare Plan if you don't it you can choose to join another Medicare Advantage Plan or other Medicare Health Plan. You will have the right to buy a Medigap policy. In this case, you should learn as much as you can about your choices before making a decision. No matter what you choose, you are still in the Medicare Program and will get all Medicare-covered services.
If your plan covers prescription drugs and you want to keep getting prescription drug coverage, you need to join another plan that offers this coverage. If you decide to return to the Original Medicare Plan and want to continue to have drug coverage, you will have to join a Medicare Prescription Drug Plan.
What can I do if I have to leave my Medicare Advantage Plan or other Medicare Health Plan because my plan reduces its service area?