Medicare is a health insurance program that helps older people pay for health care services. It is funded by the federal government. About 45 million people are covered by Medicare. Of these, 38 million are age 65 and older and 7 million are younger but have certain permanent disabilities. Although it is funded by the government, Medicare is administered by private insurance companies, called intermediaries.

Medicare offers two types of health care plans: the original Medicare plan (Part A and Part B) and Medicare Part C, also known as Medicare Advantage. Medicare Part C offers alternative plans for health care, including managed care and fee-for-service care. Medicare Part D offers prescription drug coverage. For a more detailed explanation, see http://www.medicare.gov/default.aspx and http://www.kff.org/medicare/7615.cfm.

Medicare Eligibility: People generally are eligible for Medicare if they are

• Age 65 or older
• On kidney dialysis or have had a kidney transplant
• Under age 65 with certain disabilities

Deductibles and Copayments: Medicare pays only for services it considers appropriate (called covered services). For each covered service, Medicare has what is called an allowable charge. The allowable charge is the maximum amount Medicare will permit health care providers to charge people on Medicare for a service. However, Medicare does not pay for all of the allowable charges for covered services. The first time a certain service is needed, people must usually pay a small fixed amount (called a deductible) before Medicare pays anything. If people need the same service again after a specified time has passed, they have to pay another deductible. After the deductible has been paid, people usually also have to pay a certain percentage of the costs (called a copayment) each time they use a service. For example, in 2009, the deductible for outpatient services (such as a doctor's visit) was $135 for the calendar year, and the copayment for each use of most outpatient services was 20% of the allowable charges. This arrangement means that people pay the first $135 of their outpatient bills. Then, for the rest of the year, they pay 20% of the allowable charges each time they use a service, and Medicare pays 80%. When the calendar year is over, the process starts over, and people must pay another deductible for services used that year.

Supplemental Insurance: Some people have supplemental insurance to help pay for Medicare copayments and other medical expenses that are not covered by Medicare. This insurance is sometimes provided by people's previous employer as part of a retirement benefit. Other people buy supplemental health insurance from private insurance companies. People who have low income and few assets may be eligible for supplemental coverage through the government-funded Medicaid program.

Some people buy supplemental insurance to pay for long-term care. The decision to buy long-term care insurance depends partly on whether people expect to need help paying for long-term care and on whether they can afford the long-term care insurance.

Who Needs Long-Term Care Insurance?
Because people are living longer, more people are likely to need long-term care. Long-term care involves helping people function as well as possible. It includes help with daily activities, such as preparing meals, bathing, and dressing, as well as help with health care. Long-term care may be provided in the home or a long-term care facility, such as a nursing home. Long-term care is expensive and, as suggested by its name, is usually needed for a long time. Thus, many people need help paying for it. Many people mistakenly think that Medicare covers long-term care. Whether to buy long-term care insurance depends on several things: Need: Is long-term care insurance needed? People who do not need this insurance include those Whose only income comes from Social Security and who have limited assets Who qualify for Medicaid or will qualify soon after they enter a nursing home that accepts Medicaid insurance Who have large financial reserves and can afford to pay for long-term care without insurance People who should consider this insurance include those who are neither rich nor poor and Who want to protect their assets or those of a family member Who do not want to depend on a family member for care Who want to make sure they receive high-quality care Who want to have more control over when, how, and where they receive care—for example, in their home rather than in a nursing home Costs: Will buying long-term care insurance cause financial hardship? People should consider whether they can pay the premiums over the long-term, even if their income decreases. They should find out how often and how much premiums increase and how many days a person has to pay for before the insurance pays (the elimination period). Timing: Is it better to buy long-term care insurance now or later? The younger people are, the more cheaply they can buy long-term care insurance. On the other hand, the younger people are when they start paying for it, the longer they are likely to pay before they need to use it. However, if people wait too long, they may develop disorders that make long-term care insurance difficult or impossible to obtain. Coverage: People who have decided to buy long-term care insurance have to decide how many years of coverage they want (the benefit period). The average stay in a nursing home is 2 to 3 years, so most people choose a slightly longer time: 4 to 6 years. People must also decide what maximum amount is needed to pay for each day of care (the daily benefit). The amount should be close to the average cost of care at local nursing homes. Policies vary in many important details, so they must be carefully evaluated. For example, people must decide the following: Whether they want built-in inflation protection Whether they want a well-defined trigger for the start of benefits—for example, when they can no longer do a basic daily activity, such as bathing or dressing Whether benefits for home care are comparable with those for nursing home care Whether the policy has certain tax advantages, such as deduction of premiums from taxable income as medical expenses and exclusion of benefits from taxable income (called tax-qualified plans)

Original Medicare Plan

Available nationwide, the original Medicare plan operates on a fee-for-service basis. It has two parts:

• Part A (often referred to as hospital insurance) covers hospital services and some outpatient services commonly needed for a short time after a hospital stay.
• Part B (often referred to as medical insurance) covers outpatient services, including doctors' fees.

With the original Medicare plan, choice of doctor and hospital is not limited. However, some doctors require that people pay the bill and fill out the paperwork (file the claim) for reimbursement by Medicare. Other doctors file the claim themselves and receive payment directly from Medicare.

Some doctors do not accept Medicare payments as full payment (that is, they do not accept “assignment” from Medicare). They may charge more for a service than Medicare pays. (Medicare pays a set amount—what it considers a usual, customary, and reasonable amount—for each service it covers.) Generally, these doctors charge up to an extra 15% of the Medicare-approved amount. Paying any extra charges is the person's responsibility. So people should ask doctors in advance if they accept Medicare as full payment.

Part A: Enrollment in Part A is automatic for most people when they reach age 65. Anyone who is eligible for Social Security, Railroad Retirement, or Civil Service Retirement benefits has Part A. Such people are sent their Medicare card about 3 months before their 65th birthday. Part A is paid for by a federal tax that is automatically deducted each month from payroll checks (as for Social Security). Thus, people who are enrolled in Part A do not have to pay monthly fees for it. People who continue to work after age 65 should enroll in Part A during open enrollment (the 6-month period starting 3 months before their 65th birthday and ending 3 months after). Enrolling after this period often costs more. People who are not eligible may be able to purchase Part A.

Part A helps pay for the following:

• Hospital care
• Care in a skilled nursing facility but only if services are needed daily after a related minimum 3-day stay in a hospital
• Hospice care but only for people nearing the end of life

When hospice care is selected, the hospice organization manages all benefits from Medicare (and Medicaid).

For people who are homebound and need part-time skilled nursing care or rehabilitation, Part A helps pay for home health care, including help with personal care (such as bathing, going to the bathroom, and dressing). Part A does not pay for home health care or long-term care that does not involve skilled nursing care.

Part A pays for care on the basis of benefit periods. A benefit period begins when people are admitted to a hospital or skilled nursing facility and ends when they have been out of the facility for 60 days in a row. If they are readmitted after the 60 days, a new deductible must be paid. There is no limit to the number of benefit periods.

Part B: This part is optional. If people are eligible for Part A, they are eligible for Part B. People who choose to enroll can purchase Part B insurance for a fee paid each month. The fee is usually deducted from their Social Security, Railroad Retirement, or Civil Service Retirement check. The best time to sign up for Part B is during open enrollment. Otherwise, the rates may be higher. At age 65, some people are still working, or their spouse is still working. Many of these people have health insurance through their or their spouse's employer. These people have a delayed enrollment option, which enables them to enroll in Part B later but at the open-enrollment rate. The open-enrollment rate for Part B changes every year. In 2009, the rate was $96.40 a month per person, but it was higher if annual income was more than $85,000 for single people or more than $170,000 for married people who file a joint tax return. These rates range from $134.90 to $308.30, depending on people's income.

Part B helps pay for many services and supplies that are used on an outpatient basis and that are medically necessary, such as the following:

• Doctor's fees
• Emergency department visits
• Outpatient surgery (with no overnight stay in the hospital)
• Transportation by ambulance when other types of transportation are likely to be unsafe
• Rehabilitation
• Diagnostic tests
• Outpatient mental health care
• Reusable (durable) medical equipment, such as wheelchairs, for home use

Part B may pay for home health care for homebound people when Part A does not. If surgery is recommended, Part B helps pay for a second opinion and, if opinions differ, a third opinion. For people with diabetes, Part B pays for some of the costs of monitoring sugar (glucose) levels in the blood. Part B helps pay for some preventive care. Examples are an annual influenza (flu) vaccine and screening tests such as mammography, Papanicolaou (Pap) tests, bone density measurements, and tests for prostate cancer and colorectal cancer. It helps pay for glaucoma tests for people who are at increased risk because they are black and over 50, have diabetes, or have a family history of glaucoma.

Limitations of Parts A and B: Neither Part A nor Part B covers the following:

• Private-duty nursing
• A telephone and television in the hospital
• A private hospital room (unless medically necessary)
• Most prescription drugs and all nonprescription drugs
• Personal care at home or in a nursing home unless people also need skilled nursing care or rehabilitation
• Hearing aids
• Vision care
• Dental care
• Care outside the United States, except in certain circumstances
• Experimental procedures
• Some preventive care
• Cosmetic surgery
• Most chiropractic services
• Acupuncture

Medicare Part C

Medicare Part C (Medicare Advantage) allows people to enroll in a private health insurance plan instead of the traditional fee-for-service Medicare (additional information is available at the Medicare web site). For this plan, Medicare makes arrangements with other organizations, such as insurance companies, hospital systems, or managed care organizations, to provide care. The Part C option is available in many areas of the United States. Part C plans vary from state to state.

Most Medicare Part C plans are managed care plans. However, some are unrestricted, private fee-for-service plans. In these fee-for-service plans, people can choose any doctor or hospital, and the plan pays for a share of the cost. However, a private company, not Medicare, decides how much a service costs, so costs may be higher than when the original Medicare plan is used.

Medicare managed care is handled by a health maintenance organization (HMO) or preferred provider organization (PPO).

• In HMOs, people choose a primary care doctor within the HMO's network. (The network includes doctors, medical clinics, and hospitals that the HMO has selected and contracted with to care for its members.) The primary care doctor may refer people to other health care practitioners as needed. Practitioners must be part of the HMO network for the HMO to cover care. Emergency care when people are out of the area is an exception.
• In PPOs, people can, within some limits, choose doctors outside the PPO's network. But the monthly fee for PPOs is higher than that for HMOs.

Some HMOs offer a point-of-service (POS) option for an additional monthly fee. As in PPOs, people with this option can choose some doctors outside the HMO's network, and the HMO pays for part of the costs.

Medicare Part C provides all services covered by Parts A and B, including preventive care. Some plans offer coordination of care, lower or no deductibles and copayments, and benefits not covered by the original Medicare plan. For example, the plans may help pay for prescription drugs, eyeglasses, hearing aids, and assessment by an interdisciplinary team that specializes in caring for older people. People with Medicare Part C continue to pay a monthly fee for Part B and may have to pay an additional monthly fee for the extra benefits. The amount depends on the plan they choose. However, the additional fee is still usually less than that for a supplemental Medigap plan.

When deciding about Medicare options, people should consider what they want in terms of out-of-pocket costs, extra benefits, choice of doctors, convenience, and quality.

Medicare Part D

Medicare Part D helps cover costs of prescription drugs. To obtain Part D, people have to sign up for it (enroll) and pay the required monthly premium. Enrollment involves choosing a plan provided by an insurance or other company working with Medicare. There are over 1,600 plans available nationwide. The best time for people to enroll in Part D is when they first become eligible for Medicare. If they enroll later and they have not had another comparable plan for drug coverage during that time, their monthly premium is increased by an additional 1% for each month that they delay.

Covered Drugs: Each plan has a list of drugs it covers—called a formulary. The drugs covered by each plan vary, but the list must include at least two effective drugs in the categories and classes of drugs most commonly prescribed for people who use Medicare. Each plan may make changes to the list of drugs they cover. A plan that covered a person's drugs one year may not cover some of them the next year. Also, doctors may prescribe new drugs that are not covered by the plan. Thus, people must review their plan each year to ensure that the plan continues to meet their needs.

Standard Benefits: Medicare has defined a standard benefit plan. Companies must offer a plan that is at least equal in value. Many companies also offer enhanced plans that provide more coverage (such as a lower deductible or no deductible), but these plans have higher monthly premiums.

Medicare does not cover all drug costs. In 2010, the standard Part D benefit involves the following costs:

• Annual deductible: Before receiving any reimbursement, people must pay the first $310 of drug costs.
• Copayments: For the next $2520 of drug costs (after the $310 deductible), people must pay 25% of costs (the copayment) for each prescription themselves (out of pocket). Medicare pays the other 75%. Thus, the copayment for the first $2830 of drug costs is $630 in addition to the $310 deductible.
• Coverage gap: After the first $2830 of drug costs, people must pay all drug costs on the next $3610 of costs—that is, until total drug costs equal $6440. At this point, people will have spent a total of $4550 out of pocket. This out-of-pocket total includes the deductible and the copayment.
• Reduced copayments: Once total annual drug costs are more than $6440, Medicare pays about 95% of additional drug costs until the end of the year.

In 2007, about 14% of people reached the coverage gap and thus had to pay the full cost of their prescriptions for a while.

Premiums: Monthly premiums vary depending on where people live, whether they have standard or enhanced coverage, and which insurance provider they use. Premiums may also vary depending on income level, as may deductibles and copayments. On average, people pay a premium of about $30 per month, but some pay as little as $10 or as high as $136. For people with a very low annual income and few assets, these costs may be lower or be nothing, and financial assistance with premiums, deductibles, and copayments may be available. Premiums for all types of Medicare plans are higher for people with an annual income of more than $80,000.

Medicare Part D: How Drug Costs Are Divided

Each year, the process starts over, with people having to pay another deductible.

Costs do not remain the same from year to year. Premiums, deductibles, copayments, and out-of-pocket spending limits are expected to increase annually through at least 2013.

PACE Program

The Program of All-Inclusive Care for the Elderly (PACE) is another Medicare option that is designed to provide more comprehensive, better-integrated health care for older people. This program uses funds from Medicare and Medicaid. As a type of managed care, it may require a monthly fee. PACE is available in 13 states.

PACE is designed for older people frail enough to need care in a nursing home. However, the goal of PACE is to enable older people to live at home as long as possible. In PACE, an interdisciplinary team assesses the participant's needs, develops a care plan, and provides all necessary health care. It includes medical and dental care, adult day care (including transportation to and from the facility), health and personal care at home, prescription drugs, social services, rehabilitation, meals, nutritional counseling, and hospital and long-term care when needed.

Last full review/revision February 2009 by Amal Trivedi, MD, MPH