Why is Health Insurance So Confusing?
Story by Frank Holden
A December 2020 New York Times article titled, “It’s Not Just You: Picking a Health Insurance Plan is Really Hard,” took a deep dive into the complexities of choosing healthcare insurance. According to the article, Anya Samek, (Associate Professor of Economics and Strategy at the Rady School of Management at UC San Diego), got so “frustrated she gave up, determining the task too complicated.” And she’s smart and young.
Paul Krugman, a Nobel Prize-winner in Economics and a NYT columnist, is quoted in the same article as finding his search for a suitable plan “incomprehensible.” He’s smart and over 65.
Financial advisors recommend an annual review of your insurance plan to make sure it still meets your and your family’s needs. But with so much confusion, it seems easier to do like Dr. Samek and Dr. Krugman and just throw up your hands.
Health insurance is complex. If you are planning to retire or helping your aging parents make healthcare plans, it gets worse.
While we are still working, most of us just take whatever insurance our employer offers. But as you approach retirement, or if you or keep working after age 65, things get really confusing. Medicare covers the basics, but what other coverage should you add and why?
If you are between the ages of 50 and 65, planning for a comfortable retirement is probably a crucial concern. On top of that, your parents may be living past their 70s into their 80s and beyond, and you will likely play a vital role in supporting them.
In both situations, Medicare options will become a pivotal building block. Medicare and Medicaid are often misunderstood, but there are simple and significant differences. Medicare is a premium-based health insurance program funded partly by taxes you pay while you are working, monthly premiums when you retire and federal Treasury contributions. Medicare is an entirely federal program. It is mandatory to sign up for Medicare when you reach age 65, unless you are still working and covered by your employer, but signing up for Medicare may make sense even if you are still working.
There is much chatter, especially in election years, about the cost of Medicare. Here is how it is funded: Original Medicare (including Part A, Part B, and Part D) is funded by federal General Fund Revenue (43%), Payroll Taxes (36%), and Premiums (15%), another 4% comes from intra-government transfers, interest and other sources.
Medicaid is a benefit for disabled, poor and elderly people who have limited resources. Medicaid is administered by each state but largely funded by the federal budget. Federal funds are granted to each state and matched by state funds. In Alabama, the federal part is about 73.7%, and the state contributes the rest. Each year, the Medicaid federal portion is adjusted by a multiplier rate. For 2022 it is higher because additional funds were provided to mitigate the impacts of COVID-19.
Confusion often arises when adult children are trying to help Mom or Dad get into a nursing home. Medicare will pay for a short post-hospitalization “rehabilitation” stay in a nursing home, but not for living in a nursing home. Medicaid will pay for long-term care in a “skilled nursing facility,” but only if the financial resources are so low that the cost cannot be otherwise covered by Mom’s assets or income. (Neither Medicaid nor Medicare pay for Assisted Living or Memory Care assisted living costs.)
If you are the adult child of a senior trying to figure out the best plan for aging parents or approaching retirement yourself, it can be a daunting assignment to craft an efficient healthcare plan. Here are some important facts to know as you begin to untangle the Medicare maze:
Medicare has several different parts:
Medicare Part A (Hospital Insurance)
Part A covers inpatient hospital stays, care in a skilled nursing facility for rehabilitation, hospice care, and some home health care. Most people don’t pay a premium for Part A. If you worked long enough (usually about 10 years), you will qualify for no premium Part A.
If you are eligible for Social Security benefits, you’ll get Medicare Part A automatically when you’re first eligible and don’t need to sign up. Medicare will send you a “Welcome to Medicare” packet 3 months before you turn 65. You’ll still have other important deadlines and actions to take, so read all of the materials in the packet. The packet gives you options to select Parts B and D, which are explained briefly below.
Medicare Part B (Medical Insurance)
Part B covers certain doctors’ services, outpatient care, medical supplies and preventive services. Everyone pays a monthly premium for Part B. The amount will vary based on income and when your enrollment began.
Medicare Part D (prescription drug coverage)
Part D adds prescription drug coverage to:
- Original Medicare
- Some Medicare Supplemental Plans
- Some Medicare Private-Fee-for-Service Plans
- Medicare Medical Savings Account Plans
Medicare Advantage Plans
Advantage plans have different brand names and are offered by private companies that contract with Medicare. Medicare Advantage Plans provide all of your Part A and Part B benefits but also allow you to include additional coverages such as dental, co-pay and other benefits not covered by original basic Medicare. Advantage Plans may also offer prescription drug coverage that provides the same benefits as Medicare Part D.
If you sign up for a Medicare Advantage plan, you will be required to pay a monthly premium for the additional coverages you select, in addition to the premium for Part B coverage, which will be deducted from your Social Security benefits.
Both Medicare and Advantage Plans will also require you to pay deductibles and co-pays for hospital and doctor visits. Adding to the confusion are similar plans referred to as Medigap coverage or Medicare Supplement Insurance. These are similar to Advantage Plans, but they have significant restrictions.
And the fun doesn’t end there! After you see a doctor, go to the hospital or use other coverage provided by your plan, you will get an accounting of the charges and who paid what. It’s called an EOB — Explanation of Benefits.
For example, you will see the provider charge, followed by the “Medicare Allowed” amount and the amount Medicare actually paid. You are responsible for the difference between what Medicare paid and the Medicare Allowed amount. It is not unusual to be shocked at the disparity between the provider’s charge and the amount Medicare allows.
This is where some financial planning gymnastics become really important. When making your decision about which of the plans to choose, consider how much out-of-pocket financial risk you are comfortable taking. Some plans will cover most of your costs, and all the plans have annual deductibles.
As with any financial decision, it is important that you consider all aspects of the purchase, your personal financial circumstances, the total costs and the amount of risk you are willing to assume. If you are planning your retirement or caring for an aging parent, find a reliable adviser, estate planner or elder law attorney.
Frank Holden was President of the Assisted Living Association of Alabama from 2001-2018. After retirement, he co-founded SeniorSmart.com, a resource for Seniors and their families.