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Health care financing is one of the most complicated and rapidly changing aspects of the entire delivery of care. This chapter will give you some of the basics to help you make an informed choice about health insurance. We will review the Medicare and Medicaid programs and explore other methods of paying for health care.
A unique aspect of financing health care for older people is the high proportion of funding that comes from public sources (65 percent versus 30 percent for those who are younger than 65). The rationale for establishing public funding such as Medicare (for people over 65) and Medicaid (for people below poverty line) was the large number of older people who are below the poverty line and the need to improve access to care. Between 1965 and the present, the proportion of people over age 65 who live below the poverty line has dropped dramatically from 25 to 12 percent. However, because of the increase in the cost of medical care for older people, the proportion of income that older people pay out-of-pocket for health care actually increased from 15 percent to 18 percent. Most people are not able to finance their own health care.
The federal government program Medicare was enacted in 1966 as a provision (Title XVIII) of the Social Security Act, and it is today the nation's largest insurance program for older people. Health care under the Medicare program is not free. You must pay a percentage of the charges. Even if you are eligible for Medicare, you must apply for the benefits; enrollment is not automatic. Fortunately almost anyone over age 65 can enroll in Medicare; few are refused. But, if you have not paid enough social security, you may have to pay a little over $200 per month to buy into the program. A free book called The Medicare Handbook can help answer your questions on eligibility and benefits. You can obtain one by calling (800) 234-5772 or by visiting your local social security office.
The Health Care Financing Administration (HCFA) is the executive branch agency in the federal government that oversees and administers the Medicare and Medicaid programs. HCFA contracts with private firms, mainly insurance companies, to process the claims and to make payments to providers. These contractors are either "intermediaries" (part A of Medicare) or "carriers" (part B). The coverage for hospital services (part A of the Medicare program shown in Table 7) originated in the movement toward national health insurance in the late 1940s. By contrast, coverage for physician services (part B of Medicare shown in Table 8) was actually offered by some members of Congress as an alternative to part A. Table 9 lists some additional services that are usually covered by Medicare; some of the services that are not covered by the program are listed in Table 10. As a result of these separate origins, the financing, administration, participation, reimbursement, and data collection for the two parts of the program are separate.
In part A, the hospital insurance pays for all hospitalization costs after you pay a deductible ($716 in 1995). In a few special circumstances part A will also pay for 150 days of skilled nursing home care, home care, and hospice care. The expenditures for part A are paid out of the hospital insurance trust fund and are financed through the social security tax. Part B provides medical insurance and pays for 80 percent of the approved doctor's fee. Part B covers outpatient hospital services, diagnostic tests, ambulance transportation, and medical equipment such as wheelchairs. Expenditures for part B are paid out of a different fund, which is financed by general tax revenues and premiums paid by beneficiaries. Tax revenues make up 75 percent while premiums make up 25 percent. The premiums paid by older persons finance less than 10 percent of the entire Medicare program. To participate in part A of the program, beneficiaries need only to be eligible for social security, whereas participation in part B is voluntary and requires that the beneficiary pay an additional payment of a monthly premium ($46.10 in 1995).
Table 7. Coverage for Services Under the Medicare Program, Part A
Table 8. Coverage for Services Under the Medicare Program, Part B
Table 9. Additional Services Usually Covered by Medicare--Parts A and B
Despite the costs, 95 percent of the people who are eligible to participate do so in part B (you should too!). Other differences between the two parts of the program relate to their reimbursements, which are shown in Tables 7 and 8. You may be able to save money if your doctor has agreed to accept Medicare's approved amount as full payment. Doing this is called accepting Medicare assignment; about half of the doctors in the United States accept assignment. This approach saves you money because the charge is less and your doctor submits the insurance form. A list of participating doctors is available free from your Medicare carrier. Check The Medicare Handbook for the name of your carrier. If Medicare refuses to pay for a particular service (called denying the claim), you can appeal. It is very important to note the time limit for appealing decisions printed on each denial notice. These time limits are strictly enforced and you could lose an important opportunity to appeal. The appeal process is complicated and legal assistance is helpful.
Table 10. Services Not Covered by Medicare
A major problem with the future financing of part A of the Medicare program is that it depends totally on revenues from the social security payroll tax. Even with very optimistic projections, it seems likely that Medicare expenditures will be depleted shortly after the turn of the century.
Medicaid, which was created in 1966 as part of the Social Security Act (Title XIX), is a joint federal and state program financed almost totally from state and federal taxes. The Medicaid program is complicated because it is administered by the state. States have discretion in deciding which services will be reimbursed so that no two programs are the same. The federal government pays from 55 to 80 percent (the average is 60 percent) of the cost, the percent of federal payment depending upon the state's per capita income relative to the national per capita income. Eligibility for this program depends upon your income or assets being below a specified level, and access to this fund is limited to people with low income who qualify for certain "categorical" programs. Fewer than 40 percent of people whose incomes are below the federal poverty level are currently covered by Medicaid.
Unlike members of other age groups, if you are 65 and older, you are eligible for Medicaid under provisions made for those who are "blind, disabled, or aged." Thus all people who are 65 and older can receive Medicaid if their income including social security benefits falls below a certain federally set level.
This broad eligibility enables most people age 65 or older with moderate or low incomes and limited assets who need nursing home care to qualify for Medicaid. Because of this, services to people 65 and older comprise nearly 40 percent of the program's expenditures in 1989 (the vast majority of payments went to chronic nursing home care).
One of the critical considerations in approaching the financing of long-term care is the issue of Medicaid "spend-down," which is when people admitted to nursing homes have to spend down their personal assets to Medicaid income levels in order to be poor enough to qualify for Medicaid during their nursing home stay. One recent innovation is the program introduced in Connecticut and pending in several states to allow people who purchase private longterm care insurance to exclude from the assets considered in determining eligibility for Medicaid coverage an amount equal to the benefit paid by the private insurance company.
Obviously Medicare was not designed to cover all of your health care costs. As we have seen, it covers sudden catastrophes requiring hospitalization. But you have other health expenses, and for all your health care bills Medicare will only pay about half. To cover those expenses not paid by Medicare, private companies sell insurance, sometimes called Medigap. You may not need Medigap insurance if you are covered by Medicaid because Medicaid pays almost all health care expenses. In addition, you may have group health insurance if you remain employed and may be able to connect it to a supplemental Medicare policy.
If you decide to buy supplemental Medigap insurance, your first step is to understand exactly what Medicare does and does not cover so that your supplemental policy fills the coverage gap. As a general rule you will need only one supplemental policy--having more than one is a waste of money. Ideally, supplemental policies should cover all out-of-pocket expenses you might be required to pay before Medicare pays (the deductible expense) and the amount of the bill not covered by Medicare. Unfortunately, ideal policies do not exist. Most supplemental policies do not cover services such as private duty nursing care, rest home care, or routine health care that Medicare does not cover. You should be very cautious in purchasing a policy to take the place of one you already have. Your new policy may not cover any diseases you already have. You should always pay for the policy by a check made payable to the insurance company. Never pay cash and never make out the check to the insurance agent. Also, it makes no sense to buy a disease-specific policy that pays for treatment of only one disease such as cancer.
Because of the high cost of long-term care and the low likelihood that the government will expand Medicare coverage to include nursing home costs, there has been a growing interest in private long-term care insurance. Although the impact of private insurance on nursing home financing is still very small (about 1 percent), the number of long-term care insurance policies has increased from fewer than 100,000 in 1986 to more than 2 million policies in 1990, with about 5 percent of those over age 65 now having some type of long-term care insurance.
Over 40 percent of all people will need some stay in a nursing home during their lifetimes. Those who enter a nursing home stay an average of 2.8 years at an average annual cost, as of 1993, of $27,600. Although averages are useful for overall planning purposes, they hide the significant variation of risk by sex and length of stay. For example, women face an average lifetime cost of $37,500 compared with $15,900 for men. The 9 percent of people who stay more than five years account for 65 percent of the total cost at a rate of over $115,000 per person.
The biggest factor in trying to decide whether to buy a longterm care policy is the cost of the coverage. Your policy must be able to adjust the amount paid to correspond to rising costs (this is sometimes called an inflation adjustment). If your financial status is secure and substantial, a long-term care policy may provide good protection of your estate. Those with more moderate means should consider transferring assets to family members at least 30 months before nursing home care is needed. Transferred assets do not count in determining Medicaid eligibility provided the transfer takes place 30 months before entering the nursing home. When resources have been thus depleted, Medicaid will cover the cost of nursing home care.