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A guide to health reform changes to Medicare Posted: November 14th, 2010

By Maryalene LaPonsie

Established in 1965, Medicare is one of the largest health insurance programs in the country. According to the Kaiser Family Foundation (KFF), some 47 million seniors and disabled individuals are enrolled in the program. This represents 12 percent of federal spending and 23 percent of our nation's overall health care spending.

Although the Patient Protection and Affordable Care Act (PPACA) did not set out to change Medicare, it was inevitable that the health reform law would have some impact on a program that provides health insurance to so many Americans. During the next 10 years, the federal government is expected to spend $105 billion on Medicare. With the AARP estimating that 79 million people will rely on Medicare in 2030, the PPACA not only makes short-term changes but also looks to the long-term solvency of the Medicare Trust Fund.

Like most major pieces of legislation, the PPACA will be phased in over time. Many reforms go into effect by 2014; however, there are several important dates for Medicare beneficiaries to know, including:

March 23, 2010

  • The PPACA is signed into law

June 2010

  • First checks mailed to seniors who hit the Medicare "donut hole"

January 1, 2011

  • Seniors with Medicare Part D who fall into the coverage gap receive a 50 percent discount off prescriptions
  • Seniors on Medicare begin to receive free preventive care
  • Medicare Advantage payments to providers are limited
  • Quality standards for Medicare services are to be reviewed
  • New transitions program helps seniors who have been hospitalized
  • Quality standards for Medicare services will be reviewed

October 1, 2011

  • A new advisory board reviews ways to bring down Medicare costs

January 2013

  • Medicare payroll taxes increase for high-income taxpayers

January 2020

  • The "donut hole" for prescription coverage should be eliminated

Closing the donut hole

Prior to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, Medicare recipients did not have prescription drug coverage as part of their benefits. However, this legislation gave seniors coverage for their medications. In 2006, supplemental Medicare Part D plans were rolled out across the nation, and all Medicare beneficiaries were eligible to purchase this additional coverage.

Unfortunately, these private plans were governed by a complex cost-sharing mechanism that resulted in some seniors experiencing out-of-pocket expenses reaching more than $4,000 per year in some cases. As originally enacted, annual prescription costs under Medicare Part D were split into the following categories:

  • Deductible. The first $310 for prescriptions, annually, is the responsibility of Medicare recipients.
  • Initial coverage limit. Prescription costs from $310 to $2,830 are split with 25 percent paid by the Medicare recipient and 75 percent paid by the private health insurance company.
  • Coverage gap (donut hole). Prescription costs from $3,610 to $6,440 are paid by the Medicare recipient.
  • Catastrophic coverage limit. Once total prescription costs reach $6,440 in a year, catastrophic coverage kicks in. This is shared with 5 percent paid by the Medicare recipient, 15 percent paid by the private medical insurance company and 80 percent paid by Medicare.

It is not clear why Congress included the coverage gap when it passed the legislation that created Medicare Part D. Most likely it was intended to save the government money and keep health insurance premiums low. Regardless of why it was included originally, it quickly became controversial among politicians and unpopular among seniors.

For seniors on Medicare, the most important change instituted by the health reform legislation may be the elimination of the coverage gap or the "donut hole" as it is currently known. By 2020, the coverage gap should be closed, and seniors will only pay 25 percent of prescription drug costs until they qualify for catastrophic coverage; the deductible and catastrophic coverage limits remain the same.

Until 2020 arrives, the government is taking steps to make prescription costs more manageable for seniors who hit the donut hole. In June 2010, the federal government began issuing $250 refund checks to seniors who already hit the coverage gap. Seniors who exceed the initial coverage limit later in the year can expect to receive similar refund checks within 45 days of entering the donut hole.

Finally, in January 2011, seniors who enter the coverage gap are eligible for a 50 percent discount on the price of their prescriptions. This benefit applies to certain brand name drugs in 2011 and eventually expands to other medications.

Other health reform benefits for seniors

Beyond closing the coverage gap, seniors should see other benefits from the health reform legislation. Medical insurance companies are required to expand their services while new government teams work to ensure quality care.

On January 1, 2011, three new initiatives will be rolled out to assist seniors on Medicare. The first requires health insurance companies to cover 100 percent of preventive care services for those on Medicare. This means a medical insurance company is no longer allowed to charge a co-payment or co-insurance for care such as annual physicals, routine testing and other preventive services. All Medicare plans, including Medicare Advantage policies, are subject to the rule.

The next two provisions work to ensure seniors receive the care they deserve. A Community Care Transitions Program works with seniors at high-risk of repeat hospitalizations to help them get the care they need at home. Once discharged from the hospital, these seniors receive personalized care that coordinates their health care needs with community resources to provide a smooth transition home.

Also in 2011, a new Center for Medicare & Medicaid Innovation is expected to issue its findings. The center has been charged with the task of reviewing all methods available to provide quality services to seniors, children and others who rely on government health care programs.

Maintaining the long-term solvency of Medicare

According to the KFF, prior to the passage of the PPACA, the Medicare Part A Trust Fund was expected to become insolvent in 2017. With the recently passed reform legislation, the new estimate is 2029.

In order to buy that time, the PPACA relies on a number of provisions that are intended to reduce costs and increase Medicare revenues. Among them are plans to:

  • Require Medicare Advantage plans to spend at least 85 cents of every dollar on health care costs instead of administration costs or health insurance company profits
  • Increase premiums for Medicare beneficiaries who make $85,000 a year as an individual or $170,000 for a married couple
  • Increase the Medicare Part A payroll tax from 1.45 percent to 2.35 percent for those earning more than $200,000 as an individual or $250,000 for a married couple
  • Create an Independent Payment Advisory Board to recommend other ways to reduce Medicare spending. However, these proposals cannot ration care, reduce benefits, increase cost-sharing, modify payments and eligibility or raise taxes

While health reform does not solve the long-term problem of Medicare funding, it may buy some time to formulate new solutions.