Medicare: America’s Single-payer Healthcare System.
Updated: Aug 7, 2022
Medicare is a national health insurance program started in 1965 to provide coverage for certain health related expenses in Americans age 65 and older. It is also the largest single-payer healthcare system in the US, along with Kaiser Permanente and the Veterans Affairs (VA) medical system. Medicare’s roots trace back to federal health benefits provided to wounded soldiers who fought in the Revolutionary War and in the Civil War. After World War I, these various benefits were brought under one administration, the Veterans Administration in 1930, later renamed the Department of Veteran’s Affairs. After World War II, then President Dwight D. Eisenhower advocated that healthcare benefits should be expanded to include the families of US veterans and the Dependents’ Medical Care Act of 1956 was passed. Using this legislation as a model, Congress decided to create a similar system to provide healthcare to America’s senior citizens. The Social Security Amendments Act of 1965 was signed by President Lyndon Johnson on July 30, 1965, creating the Medicare program. The first enrollees were former President Harry S. Truman and former First Lady Bess Truman.
While initially designed just to cover acute healthcare expenses such as hospitalizations, coverage has been expended several times. In 1972, physical therapy was added as a covered benefit. In 1982, hospice care was added and in 2001, Medicare was extended to include younger Americans with certain disabling illnesses such as Lou Gehrig’s Disease and End Stage Kidney Disease requiring dialysis. Currently, there are approximately 60 million Americans receiving Medicare benefits, with 8 million being younger than 65 who are receiving benefits due to an additional covered disability.
Many people mistakenly believe that Medicare covers all health-related expenses. This is not true. Medicare, like other forms of health insurance, has deductibles, copayments, and exclusions of coverage. Perhaps the most notable misconception is that Medicare pays for long-term care, called “custodial care”, in a nursing home. It does not. While the details of what is covered and what is not can get complicated, here is an overview.
Medicare is divided into four parts. Part A covers hospital, skilled nursing facility and hospice expenses. Part B covers out-patient expenses, such as clinic visits and lab tests. Part C is an option that people can use to sign over their Medicare benefits to a Health Maintenance Organization (HMO). Part D provides coverage of some prescribed drugs at an additional fee to the participant. All the rates given below are approximations as Medicare makes annual adjustments and some rates may then change. The rates given in this article were as posted by Medicare in 2020.
Part A is primarily used to cover hospital expenses. To qualify, the patient must be fully admitted to the hospital as an “in-patient”. Medicare requires the admitting physician to follow certain rules in determining whether an admission qualifies as “in-patient”. If not, then the patient is placed in the hospital for “observation”, but is not considered to be “admitted as an in-patient”. As an in-patient, there is an initial deductible of approximately $1,400. Hospital expenses are then covered for the first 60 days of the hospital stay. After day 60, there is an additional deductible of $1,340 and a copayment of $325 per day. This is per each hospitalization. After 90 days, the patient’s coverage starts using up 60 days of “lifetime reserve days”. After these are used, Medicare does not cover further hospitalization for that illness. Fortunately, the vast majority of hospitalizations last less than 4 days. Even seriously ill patients with prolonged ICU stays are generally in the hospital for only 3 to 6 weeks. Patients who are “placed in observation” are considered “out-patients”, even though they are staying in a hospital bed, and thus Part B covers these expenses.
Part A also covers stays in a Skilled Nursing Facility (SNF). To qualify, there must be an initial 3 day stay (covering 3 consecutive midnights) as an in-patient in a hospital. There must also be a “skilled need” resulting from that hospitalization. A simple way to think of what qualifies as a “skilled need” is that the need of the patient must be something more than a family member could be trained to do. Thus, administration of IV antibiotics, complex wound care and rehabilitation services with physical and occupation therapy would be common examples of qualifying skilled needs. Needs such as assistance with eating, bathing and other so called “activities of daily living (ADLs)” do not qualify. Care is usually provided in a SNF and not in a hospital. Rural hospitals located in communities with limited access to such SNF services may qualify as “Critical Access Hospitals” under which designation they can provide SNF care. This is sometimes referred to as a “swing bed”. Adventist Health Mendocino Coast, Fort Bragg, and Adventist Health Howard Memorial, Willits, are two hospitals in our county that are designated as Critical Access Hospitals. Skilled nursing care is only covered for up to 100 days and some participants may have a lifetime cap on how many skilled days they can use in their lifetime. During the first 20 days of a skilled nursing care stay there is no copayment. From days 21 to 100 there is a daily copayment of $167.50. After day 100, further expenses are the responsibility of the patient.
Part B covers out-patient expenses. Enrollment is optional. Some people will choose not to initially enroll in Part B because a spouse may still be working and have better healthcare insurance through work. There is a penalty for enrolling later, however. Coverage includes things like clinic visits, home nursing visits, out-patient lab tests and x-rays, and some limited ambulance rides. Home medical equipment is covered if the illness qualifies and includes things like walkers, wheelchairs, bedside commodes and home oxygen. There is an annual deductible of $183 and coverage only includes 80% of expenses. The remaining 20% is the responsibility of the patient. Recall that a hospitalization that does not qualify as “in-patient” and instead is classified as “observation” falls under Part B. Thus, 20% of the fees for such a hospitalization can be very expensive. Fortunately, by definition, observation stays are limited to less than 2 days in most circumstances and if the hospitalization extends beyond two days then it usually coverts to “in-patient” and is then covered under Part A. Because of the potential for high expenses, many people will purchase “secondary insurance” if they can afford it. These policies, provided by commercial insurance companies, usually cover those expenses that Medicare does not pay for.
Part C is an option in which a person can sign over their Medicare benefits to a commercial, private HMO. Medicare then pays the HMO a fixed amount of money each year for each person so enrolled. The HMO must then cover the expenses incurred by participants. If they “manage” those expenses well, then they make a profit. If the expenses exceed the annual payment from Medicare, then they lose money. An advantage to signing up under Part C is that the HMO will cover most expenses such as the 20% not covered by Part B. Also, prescription drugs will usually be covered, at least the common ones. A disadvantage is that prior authorizations must be obtained for most services beyond simple medical office visits. Authorization must also be obtained for hospitalizations. The HMO contracts with providers, hospitals and physicians, and pays reduced rates to these providers in return for being a “participating provider”, also known as a “preferred provider”. A potential downside is that not all providers will agree to these contracts and seeing such a provider “out of network” will mean that the person will have higher copayments for those services.
Prior to Part D being added in 2006, Medicare did not cover prescription drugs. Part D adds the option of enrolling in a Prescription Drug Plan (PDP) through a private, commercial insurance provider. Because of this, the PDP out-of-pocket expenses and what is covered varies from plan to plan. Usually there is an annual deductible of $100, with a maximum imposed by Medicare of $415. Copayments are usually 25% of the cost of the medication. “Catastrophic” costs, such as for cancer chemotherapy, usually require a copayment of 5% with a maximum out of pocket responsibility of up to $3,000 per illness. Participation in Part C usually means that drugs are covered and thus Part D would not be necessary.
Hopefully, this information is helpful not only to people over the age of 65, but to all Americans. More and more people are deciding to continue to work past the point when they wish to retire simply to maintain health insurance. Knowing what to expect from Medicare before you get to age 65 can help guide many decisions including saving for your retirement.