Medicare and Medicaid are health insurance programs sponsored by the federal government that cover medical expenses for elderly, disabled, and low-income Americans. Both programs took effect in 1965 and are administered by the Health Care Finance Administration (HCFA) which is part of the Department of Health and Human Services. The U.S. Government provides health care coverage to a variety of groups—including federal employees, military personnel, veterans, and Native Americans—but the Medicare and Medicaid programs account for the largest proportion of the federal government’s health care expenditures.
The cost of administering the programs has increased dramatically over the years with the rapid escalation in health care costs. In fact, the portion of overall federal government spending that was spent to support Medicare and Medicaid increased from 5 percent in 1970 to 20 percent in 2005 and is expected to continue to rise, exceeding 25 percent by 2010. When the estimated costs of a new Medicare prescription drug program that will become effective in 2006 are added to this total, the already high price tag rises even more sharply.
As a result, many experts predict that Americans will not be able to depend upon these programs for their longterm health care needs in the future. For self-employed persons and small business owners, who are less likely to be covered by an employer’s health insurance program, these statistics highlight the need to plan on obtaining private health insurance coverage to supplement Medicare.
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Medicare is the nation’s largest health insurance program, providing coverage in 2003 for 41 million Americans who were at least age 65 or who had a disability. Medicare coverage consists of four parts, labeled Parts A – D.
Part A of Medicare is financed largely through Social Security taxes. It provides for the following services:
- Inpatient hospital services up to 90 days per “spell of illness”
- Skilled nursing facility services for up to 100 days per “spell of illness” following a 3+ day hospital stay
- Home health care up to 100 visits per “spell of illness” following a 3+ day hospital stay
- Hospice care
- Inpatient psychiatric care, for up to 190 days during a beneficiary’s lifetime
- Blood (after the beneficiary pays for the first 3 pints per year) Part B is financed through premiums paid by those who choose to enroll in the program and pay an extra fee for its services, and provides:
- Physicians’ services, including office visits and a onetime physical examination for new beneficiaries
- Durable medical equipment (e.g., wheelchairs, oxygen) and supplies
- Outpatient hospital services
- Outpatient mental health services
- Clinical laboratory (e.g., blood tests, some screening tests, etc.) and diagnostic tests
- Outpatient occupational, physical, and speech therapy
- Home health care not preceded by a hospital stay and visits over the 100-day Part A limit
- Some preventive services (e.g., mammograms, diabetes screening)
- Blood (after the beneficiary pays for the first 3 pints per year) Part C refers to the Medicare Advantage program (formerly known as Medicare+Choice), under which private plans provide Medicare benefits to enrollees.
Part D is a new prescription drug program available as of January 2006 to everyone eligible for Medicare regardless of income and resources, health status, or current prescription drug expenses. There are two ways to get Medicare prescription drug coverage. One is to join a Medicare prescription drug plan, the other is to join a Medicare Advantage Plan or other Medicare Health Plans that offer drug coverage. Whichever is chosen, the plan is designed to help participants cover the cost of both brand-name and generic drugs.
Participants in the new program are required to pay a monthly premium, an annual deductible, and a percentage of the cost of the drugs they acquire (a copayment). The program does offer some assistance for participants who can prove that they have limited incomes. The program is a complicated patchwork of private and competing insurance company policies, each with a list of covered medications and each with a different premium structure. Critics of the plan focus on these complications in addition to its overall high cost as well as the fact that it does nothing to negotiate on the part of all participants for lower prices with pharmaceutical companies. Once the program has been operating for a period of time, assessments of its efficacy will likely be made and amendments to the program may be anticipated.
Qualified people can enroll in the Medicare program by completing an application at their local Social Security Administration office. It is important to note that, once an employee becomes eligible for Medicare, a small business owner is no longer required to offer him or her health insurance continuation coverage under the provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA). Since Medicare does not cover all of an elderly or disabled person’s health care costs, many insurance companies offer Medicare Supplemental Insurance (also known as Medigap coverage) to fill in the gaps. Medigap policies commonly take care of co-payments and over-limit expenses, for example, in exchange for a small premium. Due to past problems with disreputable Medigap providers, experts recommend that individuals shop carefully for this type of coverage.
As the nation’s second-largest health insurance program, Medicaid provided medical assistance to 52 million lowincome Americans in 2004. It was established through Title XIX of the Social Security Act of 1965 to pay the health care costs for members of society who otherwise could not afford treatment. The program is jointly funded by the federal government and the state governments, but is administered separately by each state within broad federal guidelines. Medicaid recipients include adults, children, and families, as well as elderly, blind, and disabled persons, who have low or no income and receive other forms of public assistance. Medicaid also covers the “medically needy,” or those whose incomes are significantly reduced by large medical expenses.
Medicaid covers the full cost of a wide range of medical services, including inpatient and outpatient hospital care, doctor visits, lab tests, X-rays, nursing home and home health care, family planning services, and preventative medicine. A large proportion of the Medicaid population is elderly or disabled, and thus also qualifies for Medicare. In these cases, Medicaid usually pays for Medicare premiums, deductibles, and co-payments, in addition to some non-covered services.
Although many Americans plan to rely on Medicare to meet their health insurance needs later in life, the program as it stood in 2000 actually covered only half of an average elderly person’s medical costs, according to the American Association of Retired Persons (AARP).
Medicare does not provide funds for dental, vision, or hearing care, for example, and 97 percent of the time it does not cover nursing home care. And the program faces significant challenges in the coming years as the babyboom generation reaches retirement age.
The United State’s Congressional Budget Office (CBO) projects that the Medicare program will run a $5.8 trillion cumulative deficit during the period 2003– 2026 when the transfers that the trust fund receives from the general fund are excluded. This means that the revenues coming into the system will be far short of the funds the system will need to pay out. The CBO summarizes the situation this way in its report The Impact of Social Security and Medicare on the Federal Budget. “The looming fiscal strains are not a temporary phenomenon caused by the retirement of post-World War II baby boomers over the next few decades. They reflect a growing imbalance driven by currently prescribed entitlements as well as long-lasting and powerful demographic trends that could have major unfavorable consequences for the economy. Enacting changes to the Social Security and Medicare programs sooner is better than enacting them later because future beneficiaries would have longer to prepare, because the revisions could be less drastic, and because the changes could enhance economic growth.”
The question is not whether or not changes will be made but when will they be made and how will they effect future retirees. All Americans need to include some form of contingency planning for post retirement health care coverage as a part of their retirement planning. And the same advice that the CBO offers our legislature in terms of the benefits of taking action early applies to individuals. The sooner one takes action to plan for the future, the longer one will have to prepare and the less dramatic the process may be.