During this presidential election year, no topic has become more hotly debated or more polarizing than budget reform. At the center of that debate is Medicare reform. Regardless of your political persuasion, there is no denying two important facts. First, Medicare is an important social program that most seniors rely upon for access to quality and affordable medical care and a measure of economic security during retirement. Second, the unrelenting growth in Medicare spending is unsustainable and is arguably the principal cause of our country’s burgeoning budget deficits. Left unchecked, it would bankrupt our country.

In this first of a series about Medicare let’s discuss what Medicare is, how it works, and the important role it plays in providing retirement security for seniors.

Medicare is America’s national health insurance program. It was enacted in 1965 at a time when over half of our senior citizens had no health insurance coverage at all. Since then it has grown to cover nearly fifty million Americans age sixty five and older and those under sixty five with certain serious health conditions. Medicare provides the same set of benefits regardless of income level, state of
residence or medical history.

Medicare consists of four parts. Part A is the Hospital Insurance (HI) program that within specified limits (and with required deductibles and copayments) covers stays in hospitals and skilled nursing facilities and certain home health care services. For most beneficiaries who are eligible for Social Security, Part A is free.

Part B is the Supplementary Medical Insurance (SMI) program that helps cover physician services, outpatient hospital visits, certain lab and diagnostic tests and preventative services. All Medicare beneficiaries pay a monthly premium (usually about $100) for Part B.

Medicare A and B (also called Original Medicare) provide important coverage for seniors but there are gaps in coverage and requirements that beneficiaries share costs through deductibles and coinsurance. To reduce these out-of-pocket costs and the risk that they could become a significant financial burden, most people supplement their Medicare coverage in one of three ways.

For those whose primary concern is coverage for prescription drug costs, there is Medicare Part D. This program was introduced in 2006 under President Bush’s administration. Part D is offered only through private plans that have been approved through Medicare. The breadth of coverage and therefore the premiums vary widely among the different types of plans. For those beneficiaries who want coverage for services in addition to prescription drugs, they can choose from one of two options offered by private insurance companies. Although both options help to cover the gaps of Original Medicare, there are significant differences between the two that merit serious evaluation.

The first option is Medicare Part C (also known as Medicare Advantage). This choice allows Medicare recipients to enroll in a private health insurance plan specifically approved and contracted by Medicare. These plans are offered by Health Maintenance Organizations (HMO) and Preferred Provider Organizations (PPO). You can consider Medicare Advantage an “umbrella” plan that includes all the underlying benefits of Medicare Parts A and B, plus a menu of additional coverage and benefits (including prescription drug coverage) that you choose from for an additional fee. Medicare Advantage plans are separate from Medicare. An important consideration is that most of these plans require you to go to doctors and other providers within their HMO or PPO service network or pay higher co-pays for going out of network.

The second option for purchasing supplemental coverage to Original Medicare
is through a Medigap plan. These plans are part of the Medicare program (unlike
Medicare Advantage) and therefore impose no restrictions on beneficiaries to
use care providers within a particular HMO or PPO network. Typically this
additional flexibility comes with an additional cost in the form of higher
premiums.

Health care costs are the wild card in retirement planning. Even affluent
households are not immune from catastrophic financial loss as the result of
uninsured medical expenses. Medicare offers seniors access to quality medical
care and a measure of financial security and that means a better quality of
life.

In future blogs, we will examine the role Medicare plays in the health care system, the financing issues and the challenges it presents to our country’s budget.

This blog is for general information only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.

John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com