On the Money Trail
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Medicare Complexity: Decisions!  Decisions!
by Al Jacobs, author of Nobody's Fool
August 2007

Much in life starts off manageably, but becomes more complex as the years pass  Though your first day in kindergarten requires only that you announce your name to your new classmates, by tenth grade you find yourself wrestling with quadratic equations.  So it is with Medicare.  When it began, with enactment of Title XVIII of the Social Security Act of 1965, it seemed controllable, offering reasonably priced health coverage for most Americans 65 and over as well as to those with certain disabilities.  Medicare’s first year saw benefits readily administered with only $1 billion in expenditures, but by 1971 it became clear that Uncle Sam had a bear by the tail, with conflicting regulations and an annual cost of nearly $8 billion.  Since that time it metamorphized into a Frankenstein monster, with expenditures of $330 billion in 2005.  It’s currently undergoing radical change, so to prevent self-destruction.  And for those of us receiving Medicare benefits, there are more variables to consider than ever before.  Let me describe the factors that must be considered if you are to get the most from your involvement in the program.

There are four areas of Medicare, known as Parts A, B, C, and D.  Part A includes critical access hospitals and skilled nursing facilities, for which all Social Security recipients are entitled at no cost.  Part B covers physicians’ services, outpatient care, and other medical services not included in Part A, at a monthly cost to the recipient.  Part C pertains to Medicare Advantage Plans, which are health plan options that combine Parts A and B, affiliated with such groups as Preferred Provider Organizations (PPOs), Health Maintenance Organizations (HMOs), and other Medicare-approved private companies.  Part D is Prescription Drug Coverage, also operating through public companies, and for which a monthly premium is paid.  Whereas Part A is offered cost-free, and Part C involves negotiated contractual matters with health provider companies, we shall concentrate our attention on the two areas over which we exercise some control, Parts B and D, in which participation is optional.

Part B.  January 1, 2007, marks the day that Part B Medicare became an uncertain benefit for many Americans.  Prior to that date a uniform and modest assessment applied to all recipients, with the monthly premium slowly rising each year during the period 2000 through 2006 from $45.50 to $88.50.  Thanks to a largely unnoticed provision of the 2003 Medicare drug legislation, means testing is now a factor, in which the premium is tied to the retiree’s adjusted gross income from a prior year.  As with all government mandates, confiscation starts small but escalates over time.  In 2007 the monthly premium for individuals with 2005 incomes not exceeding $80,000 (or joint returns of $160,000) is $93.50—only $5 more than the prior year—but rises over four brackets to $161.40 for persons whose 2005 income exceeded $200,000 (joint returns $400,000).  Though future increases are tied to a somewhat involved formula, it’s estimated that in 2009, the lowest premium will be $116.50 whereas the highest becomes $372.60.  Isn’t it obvious that Medicare Part B is evolving into a system that will require higher-income retirees to consider the advisability of opting out?  When the anticipated annual Part B reimbursements become less than the premiums paid, enrollment may no longer be justified.  At that point you might consider terminating the option.  In this analysis, there are two additional factors to be considered.

The first concerns a provision in the regulations that states: “If you don’t take Part B when eligible, the cost of Part B will go up 10% for each full 12-month period that you could have had Part B but didn’t sign up for it.  You may have to pay this penalty as long as you have Part B.”  Thus, you’ll need to consider some imponderables.  Even though your current income and health costs render Part B uneconomic, is there a likelihood that things will change in the foreseeable future?  This requires more than just a sharp pencil point; it necessitates a bit of clairvoyance.

The second factor relates to any Medicare supplemental insurance policy you may possess.  The inquiry you must make is whether opting out of Medicare Part B also terminates your supplemental Part B coverage.  This can normally be determined from your policy contract.  In my case, with United American Insurance Company as carrier, the terms are clearly stated: “If You are not covered by either Medicare Part A or Part B, We will pay the benefits provided as though You had been covered by Medicare.”  It’s my guess that most other major companies contain a similar provision, but it’s up to you to verify this with your own carrier.

Part D.  This portion of Medicare, that commenced January 1, 2006, offers drug coverage through a myriad of approved insurance companies under a variety of plans.  The programs, with monthly premiums mostly ranging from $20 to $40, normally provide for a yearly deductible of several hundred dollars, next the sharing of drug costs between company and insured in some coinsurance ratio to a total of $2,400, then a coverage gap where the insured pays everything up until $3,850 (known as the “donut hole”), and thereafter all or most all drugs paid by the insurer.  In general, most commonly prescribed drugs are covered, and each company provides a list of the medications included under their plan.  Although the many competing plans require extensive scrutiny in deciding which may be best, the determination thereafter as to whether to retain a plan is fairly cut and dried; if the amount saved annually in drug costs is greater than the total premiums for the year, stick with the program.  I did this calculation for both my wife and myself for first full year of operation in 2006.  Because of a couple of high-priced medications covered by the program, I came out ahead by a several hundred dollars.  The savings on my wife’s inexpensive generics did not equal the premiums.  Accordingly, I remain on Part D in 2007; my wife opted out.  In your analysis, however, you must take one other factor into consideration.  The following provision, somewhat similar to that in Part B, applies: “If you don’t join a Medicare drug plan when you are eligible to join, and there is a period of 63 continuous days or more during which you don’t have creditable prescription drug coverage, you may have to pay a late enrollment penalty when you do join.  This amount changes every year.  You will have to pay a penalty as long as you have Medicare prescription drug coverage.”

I’ll conclude with a final thought: In connection with the delivery of medical services to senior Americans, one thing must be recognized.  Medical technology becomes increasingly complex and costly.  At the same time, the number of retirees eligible for Medicare, many with little or no financial resources, passed forty million and continues to grow steadily.  This country is presently responding the only way possible.  It is searching for ways to reduce services and attendant costs.  It should be painfully clear that the only future for Medicare—and incidentally, the entire Social Security system—is that both will, within a generation or so, become federal welfare programs.

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Al Jacobs has been an entrepreneur for forty years. His business experience ranges from property management and securities investment to appraisal, civil engineering, and the operation of a private trust company. In his book, Nobody's Fool - A Skeptic's Guide to Prosperity, Al presents his Ten Ground Rules for Success for achieving wealth and a prosperous life by outlining a philosophy for spending, borrowing, making sound investments, and how to avoid being victimized by America's many intimidating institutions.