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The Basics Of Medicare

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2.1 - The Basics of Medicare

Medicare is a significant part of the American health care delivery system. Producers who work with seniors and who are intent on providing service as well as products must become familiar with the benefits of the Medicare program as well as its limitations. The required knowledge level for those who market Medicare Advantage and Part D plans specifically is even higher. Understanding the basics of Medicare is necessary for those who sell MA, MAPD, and/or stand-alone Part D plans. Lack of producer understanding of the Medicare program in general and of these plans in particular was the cause of much of the dissatisfaction and unrest with the new MA and Part D programs when they were introduced.

Upon completing this chapter, you will understand:

  • the basics of Original Medicare;
  • what Medicare Part A does and does not cover;
  • what Medicare Part B does and does not cover; and
  • how each aspect of Medicare—Parts A, B, C, and D—is funded.
2.2 - The Original Medicare Program

To understand Medicare Advantage and Medicare Part D, you should first understand the basics of what we now call the Original Medicare program. Medicare Parts A and B represent Medicare’s foundation. Understanding Parts C and D is possible only by referencing these original elements of the program. The Original Medicare program remains strong and viable and is the preferred approach for approximately 75 percent of Medicare beneficiaries.

The Basics of Original Medicare

As you’ve learned, the Medicare program originally consisted only of Part A and Part B. Part A covers costs associated with hospitalization and related services; Part B covers physician fees and certain other out-patient services. When the new programs—Parts C and D—were introduced, it became necessary to distinguish the way services are delivered and paid for; hence, Parts A and B were reclassified as a distinct segment of the Medicare program and were identified as Original Medicare.

It is particularly important that the Medicare Advantage producer understand what Original Medicare covers, because that coverage is the foundation of what the MA plan must cover. To be unaware of the basic underlying benefits and coverages that MA plans must provide to match or even exceed the benefits and coverages of Original Medicare is to be derelict in representing Medicare Advantage products. In fact, it may lead to misrepresentation. Unfortunately, such offenses have occurred, and MA companies must assist producers in understanding these basic fundamentals to ensure that their representatives are not caught in the position of engaging in deceptive marketing practices.

Medicare Parts A and B are, and always have been, fee-for-service plans. In other words, Medicare pays a provider based on the fee for the service rendered. These fees (the “allowable charges”) are set by Medicare in advance based on its determination of “reasonable” charges per zip code.

Hospitals, physicians, and other care providers that work with Medicare on this basis are referred to as participating providers. Those who have agreed to accept Medicare’s allowable charge as full payment for the covered service are said to accept assignment. When a Medicare-covered person “assigns” his or her claim to a provider, he or she is effectively assigning the Medicare payment for the service directly to the provider.

Medicare Part A Coverages

Medicare Part A helps cover the costs associated primarily with hospitalization. It includes the following expenses:

  • hospital stays—after the payment of a deductible:
    • days 1 through 60—fully covered by Medicare
    • days 61 through 90—requires a daily co-pay by the beneficiary
    • days 91 through 150—requires a (larger) daily co-pay by the beneficiary;
  • care in a skilled nursing facility—for a certain number of days, within certain requirements and limitations, and only for skilled care. The care must be associated with a prior hospitalization of at least three days, not counting the day of dismissal from the hospital, and the patient must have been “admitted” to the hospital, not classified as “under observation”;
  • some home health care—again, within certain restrictions and requirements;
  • hospice care—for a terminal patient, either at home or at a hospice;
  • blood—a certain number of pints after a three-pint “deductible” received in a hospital or skilled nursing facility during a covered stay; and
  • some inpatient mental health care.
Medicare Part B Coverages

Medicare Part B helps cover costs associated with outpatient health care and covers the following:

  • medical and other services, such as:
    • doctor’s services (excluding routine physical exams)
    • outpatient medical and surgical services and supplies
    • diagnostic tests
    • urgently needed care
    • X-rays, CAT scans, EKGs, lab tests, HIV screenings, and pulmonary rehabilitation
    • ambulatory surgery center facility fees for approved procedures and outpatient chemotherapy
    • ambulance transportation for medically necessary services when other transportation would endanger the insured’s health, including air transportation when ground transportation is not available to the closest health care facility
    • physical, occupational, and speech therapy
    • durable medical equipment, such as wheelchairs, hospital beds, oxygen, and walkers
    • medical supplies
    • second surgical opinions
    • outpatient mental health care
    • outpatient physical and occupational therapy, including speech-language therapy;
  • clinical laboratory services—blood tests, urinalysis, and more;
  • home health care—within certain requirements and limitations for costs not covered by Part A, and for medically necessary and skilled nursing care or medical social services;
  • outpatient hospital services—hospital services and supplies received as an outpatient, under a doctor’s care;
  • blood—pints of blood received as an outpatient or as part of a Part B covered service, with a three-pint deductible and a 20 percent co-pay for additional pints;
  • prosthetic devices, including artificial limbs and eyes, and their replacement parts, including arm, neck, and leg braces;
  • kidney dialysis, services and supplies, kidney disease education services, and kidney transplants;
  • heart, liver, lung, pancreas, intestine, bone marrow, and cornea transplants under certain conditions and when performed at Medicare-certified facilities; and
  • certain preventive services:
    • bone mass measurements
    • colorectal cancer screening and abdominal aortic aneurysm screening
    • diabetes services and supplies and foot exams and treatment for diabetes-related nerve damage and diabetes self-management training
    • glaucoma screening
    • mammogram screening and clinical breast exams
    • Pap test and pelvic examination, including cervical and vaginal cancer screenings
    • prostate cancer screening
    • vaccinations—shots for flu (one per season), pneumococcal pneumonia, and hepatitis B
    • cardiovascular screenings every five years to test cholesterol, lipid, and triglyceride levels
    • one pair of eyeglasses with standard frames (or one set of contact lenses) after cataract surgery that implants an intraocular lens
    • certain chiropractic services (subluxation)
    • medical nutrition therapy services

The Medicare Modernization Act of 2003 added the following preventive benefits to Part B:

  • a one-time initial wellness physical exam (called “Welcome to Medicare”) within 12 months of the day an individual first enrolls in Medicare Part B;
  • screening blood tests for early detection of cardiovascular disease;
  • diabetes screening tests for those at risk of getting diabetes; and
  • smoking cessation counseling, if ordered by a doctor.

PPACA 2010 further expanded the “preventive” measures of Medicare coverage by

  • eliminating the deductible and coinsurance amounts for most preventive services;
  • providing coverage for annual wellness visits, where beneficiaries receive a personalized prevention plan service at no charge;
  • covering obesity counseling and weight management programs;
  • providing screening and behavioral counseling interventions in primary care to reduce alcohol misuse;
  • covering screening for depression; and
  • covering sexual orientation counseling and screening for sexually transmitted diseases.
2.3 - What Medicare Does Not Cover

Nearly as important as being able to tell prospects and clients what Medicare covers is the ability to tell them—or forewarn them—of what Medicare will not cover. Health care costs that are not covered include, but are not limited to:

  • acupuncture
  • ambulance services (except in emergencies or when the individual’s health would be in danger if other transportation was used)
  • chiropractic services, except for some limitations
  • dental care and dentures (with only a few exceptions)
  • cosmetic surgery
  • custodial care (help with bathing, dressing, using the bathroom, and eating) at home or in a nursing home
  • health care while traveling outside of the United States (except in limited cases)
  • eye care—routine exams, eye refractions, and most eyeglasses
  • hearing aids, hearing exams, and hearing tests that haven’t been ordered by a doctor
  • long-term care, such as that delivered in most nursing homes (custodial care)
  • orthopedic shoes (with only a few exceptions)
  • outpatient prescription drugs (with only a few exceptions)
  • routine foot care (with only a few exceptions)
  • routine physical exams (beyond the annual wellness visits)
  • screening tests (with some exceptions)
  • shots (vaccinations—except those approved)
  • some diabetic supplies (like syringes or insulin unless it is used with an insulin pump)
  • first three pints of blood
  • additional charges for a private hospital room
  • private nursing care
  • skilled nursing care costs beyond 100 days a year
  • meals delivered to the home
  • medical charges billed by relatives
  • personal comfort items
  • intermediate care
  • custodial care
  • services not considered reasonable or medically necessary by Medicare
Medicare Deductibles and Co-Payments

In addition to the specified services Medicare does not cover, additional coverage gaps exist because of the program’s system of deductibles and co-payments. Medicare was designed to be a cost-sharing program. It requires the participant to assume a portion of the cost of his or her care. For example, an individual entering the hospital must pay a “per benefit period” deductible ($1,184in 2013) before Medicare Part A will cover the costs and, if the stay is longer than 60 days, he or she will be required to assume a portion of the daily cost.0F2 (In 2013, the daily cost-share for the recipient is $296 for days 61 through 90 and $592 for days 91 through 150.)

Enrollment in Part B requires the payment of a monthly premium and, for services covered by Part B, an individual must first pay an annual deductible ($147 in 2013) before Medicare will provide any benefit. In addition, for each covered Part B service, the enrollee may have to share a portion of the cost (typically 20 percent), depending on the service provided.

Medicare’s deductibles and co-payments are subject to increase every year. As Medicare is used by an even greater number of recipients, and as the general cost of hospitalization and medical care rises, it is fairly certain that these amounts will, in fact, increase. It is important to understand that even though a Medicare Advantage plan must cover what Medicare covers, there is no relationship between the deductibles and co-payments associated with Original Medicare and those charged by Medicare Advantage programs. Original Medicare’s deductibles and coinsurances are entirely different from those of MA plans. Each MA plan will have its own deductibles and co-payment amounts, and variations between plans may be great. The astute MA producer must point out to prospects that they are not dealing with Original Medicare, but indeed, an MA plan, which will reflect different deductibles and co-pays than Original Medicare.

Answers to Client Questions

Producers must be prepared to answer any number of questions that prospects and clients may have about Medicare and, as noted, must have a fundamental understanding of the Original Medicare program to properly and accurately present a Medicare Advantage plan. Producers must take full advantage of the educational and training materials offered by their companies, as well as the publication “Medicare and You,” updated and available every year from Centers for Medicare and Medicaid Services as a printed document, or from its Web site at www.Medicare.gov.

2 Under Original Medicare, a benefit period is the measure of an individual’s use of hospital or skilled nursing care services. It begins the day the person enters the hospital or skilled nursing facility and ends once he or she has received no in-patient care for a continuous 60 days.

 

 

 

2.4 - How Medicare Is Funded

The answer to “How is Medicare funded?” may seem complicated, but in reality, it is not. Even with the addition of Medicare Part D, the basics are fairly simple. Following is a brief explanation of how the funding for each part of the Medicare program is derived.

Part A—Hospital Insurance (HI)

Part A Hospital Insurance (HI) is financed largely from payroll taxes paid by workers and their employers. These taxes are withheld from workers’ paychecks—from each worker’s paycheck, 1.45 percent is deducted to help fund this program. The employer pays the same amount per each employee. Thus, for every $100 an individual earns, $2.90 is “contributed” to the federal HI Trust Fund. Monies paid into this fund are used to cover the costs and benefits associated with Medicare Part A.3 Unfortunately, the strength and stability of the HI Fund are of concern to many as the swell of baby boomers enters retirement, as medical costs rise, as current Medicare expenditures continue to erode the fund, and as the “pay ahead” concept drifts toward a “pay as you go” proposition.

Part B—Supplementary Medical Insurance (SMI)

Part B Supplementary Medical Insurance (SMI), the medical expense portion of Medicare, is financed primarily by general revenues appropriated by the U.S. government. Another portion is paid by Part B recipients through monthly Part B premiums paid into the program. Traditionally, the Part B funding has been on a 75/25 basis, with SMI general revenue allocations covering about 75 percent of the program’s costs, and the recipients paying about 25 percent of the costs. As costs of medical care rise, so do the Medicare Part B premiums. Part B premiums have risen significantly during the early part of the decade. In 2000, the basic monthly premium was $45.50; by 2013 it had climbed to $104.90. Those whose incomes are greater than certain thresholds pay more.

Part C—Medicare Advantage (MA)

Funding for Medicare Advantage plans comes directly from Medicare in the form of lump-sum payments to the plan. The payment is based on a capitated payment formula, using benchmark levels for services in each county in America. Simply put, in exchange for providing Medicare services, the MA plan receives a monthly per-enrollee payment from Medicare. Enrollees must continue to pay their Part B premium, unless they qualify for an MA plan that covers it.

Benchmark levels are the amounts that Medicare will pay a plan in a specific geographic area, based on Medicare’s fee-for-service schedules and definitions of “reasonable” costs for services. The MA company may then bid to provide services at a cost above or below the benchmark level. The plan bid is the cost at which the plan is willing to deliver Part A and Part B services to each of its enrollees. (Most MA organizations bid below their benchmark level.)

If a plan’s bid is above the Medicare benchmark, enrollees must pay the difference in the form of a base premium. If a plan’s bid is below the benchmark, 75 percent of the difference (the “rebate”) must be passed along to plan enrollees in the form of cost sharing or premium reductions or increased covered services. (The extra 25 percent is retained by the federal government.)

The term capitated comes into play when the benchmark allows for increasing anticipated expenses for the MA company due to the advanced age or chronic conditions of each enrollee. It is significant to note that an enrollee cannot be declined on an MA application because of pre-existing conditions. Therefore, the MA company must be allowed to receive additional monies from Medicare for such instances, knowing that the upper limits will be capitated.

To better explain the financing of Medicare Advantage plans, let’s consider a per month example. Assume that MA Plan #1 Company submits a bid of $600—the per capita (or per enrollee) payment for which it is willing to provide Part A and Part B benefits. The benchmark level for Plan #1’s region is $700. The formula for Medicare’s payment to Plan #1 is calculated as follows:

Benchmark: $700

Plan #1 bid:

$600

Difference:

$100

Medicare’s payment to Plan #1:

$600 + (.75 x $100):

$675

Base premium enrollee must pay:

$0

Now assume that MA Plan #2 Company submits a bid of $750. The benchmark level for Plan #2’s region is also $700:

Benchmark: $700

Plan #1 bid:

$750

Difference:

($50)

Medicare’s payment to Plan #1:

$700

Base premium enrollee must pay:

$50

Again, if the plan’s bid is below the benchmark determined by Medicare, the plan must return 75 percent of the difference to beneficiaries as additional benefits or as a rebate of the Part B or Part D premiums. (This is where part of the funding for Part D premiums in an MA plan that includes Part D comes into play.) If the bid is above the benchmark, Medicare pays the benchmark amount, and the plan is required to charge enrollees the difference between the bid and what Medicare pays.

Medicare pays the MA company directly for the amount of its bid on a per-enrollee, per-month basis. It is then up to the MA company to manage its business affairs and costs—administrative, acquisition (advertising, commissions), claims, profitability, etc.—accordingly.

If the funding from Medicare is sufficient, then the MA company will remain in business. If not, then the company must either

  • cut extra benefits afforded by MA law (such as dental and vision);
  • buy time to “rebid” its efforts with Medicare for the next year;
  • end its contract with Medicare; or
  • close its doors.

During the early 2000s, these events were not uncommon. Several plans (then known as Medicare+Choice) were dissolved, and their sponsoring companies were forced to close down. This forced about 1.5 million enrollees to return to Original Medicare. As a result, several laws were initiated to protect Medicare recipients and Part C enrollees by allowing them to return to Original Medicare (as well as to certain Medicare supplement plans) on a guaranteed issue basis should their Part C plan or Part C provider close down. This process came to be known as involuntary disenrollment.

In addition, the effect of MIPPA 2008, which required MA plans to provide regional or national networks in their private fee-for-service (PFFS) plans, resulted in subsequent terminations (involuntary disenrollment) for over 600,000 enrollees. In effect, MIPPA 2008 caused many plan providers to terminate their PFFS plans and turn them into PPO plans for plan year 2010. In the meantime, hundreds of thousands of MA enrollees were involuntarily terminated from existing plans. At the end of 2010, a similar event occurred as more providers terminated their PFFS plans. Estimates ran as high as one million enrollees who lost their coverage and had to find another MA plan or go back to Original Medicare. Those people, as “involuntarily disenrolled,” were allowed to return to a guaranteed issue Medicare supplement plan under the 63-day guaranteed issue provision and were also guaranteed the purchase of a stand-alone Part D plan.

Medicare producers should understand that all MA, MAPD, and Part D plans are contracted with CMS for a period of one year. For that reason, MA, MAPD and Part D plans change each year, and when plans change, enrollees can remain with their original plan, or they can switch to another plan during the Annual Enrollment Period (October 15 through December 7). This is not insignificant. All plans must notify each enrollee of any changes that will go into effect for the following year. As many as two million people received notices of change in their plans in 2012.

Part D—Medicare Prescription Drugs

A Medicare Part D Prescription Drug program, known as a PDP, is available to senior consumers in two ways:

  • as a stand-alone plan for those who are enrolled in Part A and/or Part B; or
  • as part of a Medicare Advantage plan, known as an MAPD plan (Medicare Advantage Prescription Drug plan).

A stand-alone plan is an insurance plan offered by private companies that simply covers prescription drugs through a single policy. Alternatively, Part D benefits may also be available with an MA plan as part of its broad managed care benefits. Part D is a voluntary plan, separate and distinct from Part A and Part B.

Part D plans are financed in two ways: (1) by government appropriations created in MMA 2003, and (2) by premiums paid by Part D participants. If prescription drugs are included in an MA plan, the funding for that portion of the plan is a combination of both, because the bidding process of the MA company sets the amount it will receive from Medicare, whether above or below the Part C benchmark level. In turn, as explained earlier, this bid determines whether money is available to the MA company to be used by the company for Part D benefits or premiums.

Producers must understand that the prescription drug plans are private plans, and premiums are based on several factors. The first factor relates to the plan’s deductibles, co-payments, and treatment of the “donut hole” (explained later in the course). Another factor is whether a drug is covered and, if so, under which of the plan’s “formularies” (also explained later in the course). Other factors are name brand and generic drugs and the price differences between the two. All of these factors affect the cost of Part D benefits, whether as a private, stand-alone policy or as part of an MA plan.

The financing of Part D is a combination of both Medicare (government) payments, beneficiary payments and, in the case of MA plans that offer prescription drug benefits, the cost of the plan. In practice, the producer need not worry about such financing formulae. But in fairness to proponents of Part D and to the various financial techniques employed by the program, the first few years of the program have shown financial success. This success must be attributed to the competitiveness of the system—that of several Part D plans competing for “best buys” with the drug industry.

That picture changed after 2011, however, because Medicare finances a larger part of the Part D program, per PPACA 2010. One of the objectives of PPACA was to “close the donut hole” by having Medicare cover an ever-increasing share of the cost of prescription drugs. Under PPACA, the donut hole will be closed by the year 2020, and a straight 25/75 cost-sharing ratio will be in place (i.e., the enrollee will pay 25 percent of the costs; Medicare will pay 75 percent of the costs).

3 An additional Medicare tax is scheduled to go into effect on January 1, 2013. Wage earners will pay an additional .09 percent if their annual incomes exceed certain thresholds ($200,000 for singles; $250,000 for joint filers).

 

 

 

2.5 - Summary

All producers who represent or sell Medicare Advantage or Medicare Part D must thoroughly know and understand the basics of Medicare. The basis for what a Medicare Advantage plan will and will not cover stems from what Medicare itself will and will not cover. Simply, if Medicare Part A or Part B does not cover an item, the possibility is great that an MA plan will not cover it unless the item is included in the additional benefits of the MA plan. A producer who does not know these basics is destined for difficulty with his or her company and CMS. In addition, a basic understanding of how each program is funded contributes to the producer’s knowledge of how Medicare functions.

 

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