Medicare Supplements, Advantage
Plans & Part D Prescription Drug Plans
by Thomas Day
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History of Health Insurance and Medicare
Medicare Eligibility and Cost
Original Medicare (Medicare Fee for Service)
What is "assignment" in the Original Medicare?
Gaps in Original Medicare Coverage
Seniors with No Supplemental Protection for the Medicare Gap
Medigap Policies (Typically Called "Medicare Supplement Policies")
The Medicare Modernization Act of 2003
Medicare's Special Health Plans--Medicare Advantage Plans
Medicare Part D-New Prescription Drug Plan
Understanding the Coverage

• What Is The Basic Coverage?
• Who Offers the Insurance?
• What do PDP Plans Cost?
• What Are the Enrollment Options?
• What Drugs Are Available?
• What Is the Penalty for Failure to Enroll?
• What about Those People Who Have Existing Drug Coverage?
• How Are the Premiums Paid?
• How Are the Private Plans Designed?
• What Are the Subsidies for a Third of Medicare Beneficiaries?
• What Happened -- Why Is It so Confusing?

Choosing a Plan

• If I Have No Current Drug Coverage and I'm Taking No Medications or the Ones I'm Taking Are Not Very Costly Should I Buy into a New Drug Plan?
• If I Have No Current Drug Coverage and Want a Plan, Should I Buy an Individual, Stand-Alone Drug Plan or Should I Consider Buying Drug Coverage in Combination with a Medicare Advantage Plan?
• If I Have a Medicare Supplement Policy with Drug Coverage, Should I Drop the Drug Coverage and Buy a Stand-Alone Plan? Or Should I Drop the Supplement in Favor of an Advantage Plan with Drug Coverage?
• If I Have Current Drug Coverage through a Former Employer Can I Drop That Coverage in Favor of a PDP? If so Will It Cost Me More Money, or Should I Keep It or Buy a New Plan?
• What is the Best Way to Gain Knowledge and to Sign up for a Plan?
• Who Can Help Me Evaluate Plans?
• I Don't Understand the Financial Implication of the Coverage Gap or Doughnut Hole, How Do I Deal with It?
• How Can I Compare Plans Myself?
• How Do I Get More Details on the Plan Such As Tiered Co-Pays, Pharmacy Network and Formulary Lists?
• Can I Sign up without Meeting with an Insurance Agent?
• Can I Change My Mind?

Working With the Pharmacist and Doctor on the Formulary
General Rules for Enrolling In or Leaving Advantage and Prescription Drug Plans

History of Health Insurance and Medicare

Limited forms of prepaid medical services have been available for hundreds of years. But the concept of universal health insurance for all citizens is a development of the 20th century. Around the turn-of-the-century, Germany was the first country to institute universal health care. By the 1920s most European countries had initiated government health programs.

Attempts from 1910 through 1970 to institute government health care in this country were met with failure. Again in 1993 President Clinton failed as well. The only exception has been the creation of Medicare in 1965.

The most successful attempts to create private health insurance programs across the country began in the 1930s with the Blue Cross plans. These were prepaid hospital service plans that were initially tied to each hospital that sponsored the plan but were later changed so that participants could use any hospital in a designated service area. A participant would pay as an example six dollars a month to guarantee a 20 day hospital stay. Additional days of care beyond the guarantee would have to be paid out of pocket.

In the early 1940s the American Medical Association endorsed the creation of Blue Shield plans as a defensive measure against a national insurance program. These were plans designed like Blue Cross to allow for prepayment of physician services instead of hospital services. Eventually both plans consolidated, forming the well-recognized Blue Cross and Blue Shield plans which are still as a group the largest health insurers in the country. (Technically they're not insurance companies but that's how we will classify them)

There are many reasons why national health insurance has never become a reality in the United States . One reason has been the continued opposition from the American Medical Association. Another is the popularity of employer sponsored insurance which has forestalled the need for a federal plan. Federal laws allowing tax-free payment of premiums by employers and employees have helped encourage the growth of these private plans. Primarily because of employer group sponsored plans, the number of insured's exploded from a total enrollment of 20,662,000 in 1940 to nearly 142,334,000 in 1950. With employers bearing most of the burden Congress did not have a pressing need to provide national insurance.

Another reason for the lack of national health insurance was the post World War I backlash against the Germans. Since Germany had started the concept of government-sponsored health insurance, public reaction during the 1920s that any national health care program would be a derivation of the German system prevented any further discussion or action during the 1920s and into the 1930s.

Congress was only successful in establishing a national plan for the aged called Medicare in 1965. And Medicare only came about because of the savvy political expertise of President Lyndon B. Johnson and a majority Democratic Congress.

Medicare part A was modeled after traditional hospital insurance plans available in the 1960s. A defined amount of hospital care was provided upfront and any additional care would have to be covered by the patient. Such plans are easy to design and costs are easy to control since the insurance provider has a predetermined benefit it will pay. Any costs beyond the predetermined amount are covered by the insured. One disadvantage to such a plan is that increasing hospital medical costs since 1965 have resulted in a dilemma for the insured. Any costs borne by the insured beyond the initial hospital plan could be so expensive as to destroy financially the unlucky patient requiring more care. As a result modern hospital plans have evolved into catastrophic plans where the insured covers some of the cost upfront but is spared from financial disaster by the plan where the insurance will pick up 100% of the cost after a certain out-of-pocket limit is reached. Unfortunately the Medicare hospital coverage has stayed the same and has not evolved into a modern plan.

Medicare part B was created by Congress to engender support from the AMA. Initially it paid 80% of the cost of physician services up to a reasonable amount and the patient paid 20% and any additional costs of the billed services beyond the reasonable amount. This design essentially guaranteed that doctors would not be subject to price controls from the government. Over the years part B has changed into a cost control plan where prices are now dictated by Medicare to doctors who provide services under the plan.

Medicare Eligibility and Cost

A detailed description of Medicare enrollment is found in the following Medicare booklet:

"Enrolling in Medicare" (60 pages) http://www.medicare.gov/Publications/Pubs/pdf/11036.pdf

In order to be eligible for Medicare a person must be 65 years of age or older and also be eligible for receiving Social Security or Railroad retirement. It is extremely important to note that a person does not have to be receiving one of these retirement incomes in order to sign up for Medicare. For various reasons persons may not have elected retirement at age 65. Anyone receiving one of the above retirements prior to age 65 or signing up for Social Security or above retirement options at age 65 will automatically be enrolled in Medicare Part A and B when that person turns 65.

Medicare is also available to about 4 million disabled Americans under the age of 65 who have applied for Social Security disability and have received it at least two years. Also anyone at any age with end-stage renal disease can automatically qualify for Medicare. Altogether about 42 million Americans are covered by Medicare. Very few retired elderly over the age of 65 are not covered.

Under Social Security anyone born after 1938 will have his full retirement benefits eventually moved out to age 67 depending on the year of birth. Some people may choose to keep working beyond the age of 65 and not apply for Social Security. By not applying, Medicare Part A may not be offered automatically. If the person is under a group plan, the group plan may force enrollment in Medicare at age 65. This does not mean the person loses his group coverage, it simply means Medicare and the group plan share costs. If the group plan covers less than 20 full-time employees, Medicare becomes the primary payer and the group plan becomes the secondary. With 20 or more employees the group plan is primary and Medicare is secondary.

In the case of someone turning 65, not retiring and not having group coverage, Medicare may not remind that person to sign up. There is no penalty for failure to sign up after age 65 unless the person is not eligible for Social Security and must pay premiums. Then there may be a penalty applied. But there is a penalty to sign up late for Part B. Failure to sign up for Part B during the initial enrollment period three months either side of a person's 65th birthday will result in a penalty on those premiums. If a person has equivalent group coverage or is on Medicaid the penalty is waived when signing up later.

Medicare is financed by payroll deductions from all employees and self-employed persons paying into Social Security. When a person becomes eligible for Medicare, these payroll deductions pay for the Part A premium and there is no cost to the Medicare beneficiary. There is a cost for Part B. Part B was designed to be a cost-sharing program. Medicare payroll deductions cover 75% of the cost and the Medicare beneficiary pays 25% of the cost. The Part B premium for 2005 is $78.20 per month. Since medical costs are increasing every year this premium also increases every year. For 2006 the premium will be $88.50 per month. The Medicare Modernization Act of 2003 also requires individuals in higher income brackets starting in 2007 to pay a greater percentage of the Part B premium.

These beneficiaries will see a reduction in the government subsidy of their Part B premium from the 75% currently provided. The reduction is phased-in (in equal increments) over five years. The schedule for the changes in the premium subsidy is:

• income of: $80,000 -$100,000: 65% subsidy
• income of: $100,000-$150,000: 50% subsidy
• income of: $150,000-$200,000: 35% subsidy
• income above: $200,000: 20% subsidy

Income thresholds reflect income for 2007 and then are indexed to increase annually by the Consumer Price Index (CPI). Thresholds for married couples are twice the amounts shown. An estimated 3% of Part B enrollees will be affected in 2007 increasing to 6% in 2013.

If someone is not eligible for Social Security and does not have a spouse that is eligible for Social Security that person can still get Medicare but may have to pay the equivalent part A premium. As an example, prior to 1985, non-federal Government employers were allowed to opt-out of the social security system. A handful of cities and counties did choose to opt-out. As an example, if a person is single and worked exclusively for an opt-out employer, or his spouse has never worked or the spouse also worked for the opt-out employer that person may have to pay for his or her Medicare Part A cost. Eligibility for Social Security requires at least 40 quarters under Social Security which is the equivalent of 10 years of work under the system. Suppose someone had worked his entire career for a county that did not participate in social security. That person may not have enough quarters from another employer and would have to pay for Medicare. A person desiring to enroll in Part A and pay premiums must already have Part B or be currently enrolling in it.

Here are the Part A premiums for 2005:

• $0 -40 quarters of Medicare-covered employment (10 years)
• $206/month -30-39 quarters
• $375/month - Less than 30 quarters of Medicare-covered employment

Participation in Medicare is voluntary. A person can elect not to take Part A but by so doing is not eligible for Part B. (The exception to this is a person who must pay premiums for Medicare Part A, can buy Medicare Part B separately without having to buy Medicare Part A). A person can also retain Part A but elect not to take Part B. There is no reason we can think of why someone would not take Part A. There may be a number of reasons for not taking Part B.

There are three opportunities to sign up for Part B. The first is the "Initial Enrollment Period" which is the first three months before the month in which a person turns 65 and the three months after that period. Seven months total.

Some people for whatever reason may simply have failed to sign up during the initial enrollment period. The cost of Medicare Part B will go up 10% for each full 12-month period a person could have had Medicare Part B but didn't take it, except in certain special cases. This extra amount (called a premium surcharge) will have to be paid as long as Medicare Part B is in effect. Someone who missed the initial enrollment opportunity can sign up for Part B between January 1 and March 31 each year with a 10% premium penalty applying for each full year the sign-up was delayed. This is called the "General Enrollment Period".

Another reason for not taking Part B might be the cost. For someone with adequate income who could afford the premium, not taking this coverage makes absolutely no sense. The government automatically subsidizes up to 75% of the cost of this coverage. For someone with low income the premium may not be affordable. Generally people in this category can receive help either through Medicaid or through a state "Medicare Savings Program". States provide these programs for people with limited income and resources. The plan will pay for Medicare premiums and, in some cases, might also pay Medicare deductibles and coinsurance. Apply for these programs if

The person has Medicare Part A (If paying a premium for Medicare Part A, the Medicare Savings Program may pay the Medicare Part A premium.) and

• there are resources of $4,000 or less, or a couple with resources of $6,000 or less. (Resources include things like money in a checking or savings account, stocks, or bonds.) and
• as an individual there is a monthly income of less than $1,068, or as a couple a monthly income of less than $1,426. (Income limits will change slightly in 2005. Alaska or Hawaii has income limits slightly higher.)

The major reason most people fail to sign up for Part B during the initial enrollment period is because they are receiving the equivalent benefit through their group coverage. Some 65 year-old and older people may still be working and receiving group coverage which in many cases will be better than Medicare Part B. These people do not need to pay Medicare an extra premium to duplicate the group policy coverage. Besides for people 65 and older and still working, the group plan becomes the primary payer of benefits and Medicare if it is applicable is secondary. Special rules allow someone losing group coverage in the future to sign on with Part B at a later age with no penalty.

A number of people may be retired but have a contract or retirement arrangement through an employer to continue to receive group coverage. They may be paying premiums or in many cases this may be free coverage. For someone over 65, retired and receiving group benefits, equivalent or typically better Part B benefits are part of the group package. The better benefits usually reflect additional features provided by a typical Medigap policy. Special enrollment rules also waive the penalty if these people lose coverage in the future.

In 2000 approximately 35% of Medicare beneficiaries were still receiving benefits through a group plan. The special rules allowing sign up without penalty are called the "Special Enrollment Period ".

Original Medicare (Medicare Fee for Service)

A new booklet from Medicare describes in detail all of the available Medicare plans for 2006. This includes original Medicare, Medicare Advantage and the new prescription drug plan. Go to

"Medicare and You 2006" (104 pages)

http://www.medicare.gov/publications/pubs/pdf/10050.pdf

he benefits outlined below are a scanty description of the major points of Medicare coverage. A more complete description can be found in the following Medicare publication.

"Your Medicare Benefits" (52 pages)

http://www.medicare.gov/Publications/Pubs/pdf/10116.pdf

Medicare Part A - Hospital Insurance (2005)

Deductibles and Coinsurances

Inpatient Hospital

• $912 deductible (first 60 days)
• $228/day coinsurance (61st through 90th day)
• $456/day coinsurance (91st through 150th day)
• $456/day for each "Lifetime Reserve" day used. (60 days total)
• $$$$ All costs for each day beyond 150 days

Skilled Nursing Facility (3 full days hospital, skilled need)

• $0 deductible (first 20 days)
• $114/day coinsurance (21st through 100th day)

Home Health Care (homebound, skilled need)

• $0 deductible (except for Durable Medical Equipment, which is subject to $110 deductible and 20 percent coinsurance)

Hospice (diagnosed as terminal or deteriorating)

• $0 deductible (covered to death but benefits tightly defined)

Blood

• The Deductible you pay covers the first 3 pints used (blood paid for or replaced under Part A of Medicare during the calendar year does not have to be paid for or replaced under Part B)

Medicare Part B - Doctors and Outpatient Services (2005)

Part B Premium

• $78.20 per month (premium penalty may occur for late enrollment)

Annual Deductible

• $110 per calendar year for 2005. After that it increases by the same percentage as the Part B premium increase. Estimated to be $115 in 2006 and increase to $166 by 2013.

Coinsurance

• Most services are paid at 80 percent of the Medicare allowable, after the annual deductible has been met leaving a 20 percent coinsurance. Certain Part B services, such as diagnostic lab tests and flu and pneumococcal (pneumonia) vaccines are paid at 100 percent of the Medicare approved amount.

Outpatient Services and Emergency Room

• Services are paid after $110 deductible and set copayments

Lab Tests

• Typical outpatient lab tests are covered 100%. A large number of preventative screenings such as mammograms, colorectal, prostate and so on are also covered.

Cancer Medications

• Most oral cancer medications are covered

Blood

• Deductible is the cost for the first 3 pints used (blood paid for or replaced under Part B of Medicare during the calendar year doesn't have to be paid for or replaced under Part A).

Please note that with the exception of the limiting days in the hospital and some quirky things like blood, Medicare pays just about everything that a typical group insurance plan would cover.

What is "assignment" in the Original Medicare?

Assignment is an agreement between people with Medicare, their doctors and other providers, and Medicare. The person with Medicare agrees to let the doctor or other provider request direct payment from Medicare for covered Part B services, items, and supplies. Doctors or providers who agree to (or must by law) accept assignment from Medicare can't try to collect more than the Medicare deductible and coinsurance amounts from the person with Medicare, their other insurance, or anyone else.

If assignment isn't accepted, doctors and providers may charge more than the Medicare-approved amount. For most services, there is a limit on the amount over the Medicare-approved amount doctors and providers can bill. The highest amount of money that can be charged for a Medicare covered service by doctors and other providers who don't accept assignment is called the limiting charge. The limiting charge is 15% over Medicare's approved amount. The limiting charge applies only to certain services and doesn't apply to supplies and items. In addition, a Medicare beneficiary using services that are not assigned may have to pay the entire charge at the time of service. Medicare will send its share of the charge to the beneficiary when the claim is processed.

In some cases, health care providers and suppliers must accept assignment. For example, with Medicare Part B-covered prescription drugs and biologicals from a pharmacy or supplier that is enrolled in the Medicare Program, the pharmacy or supplier must accept assignment.

Gaps in Original Medicare Coverage

Defining the Gaps
Modern health insurance policies have catastrophic loss features that pay 100% of the cost after a certain amount of out-of-pocket expenses have been made. This is called "a stop loss". Stop losses as an example may be pegged at $2,000 maximum out-of-pocket per year, or $4,000 per year or possibly $10,000 per year.

Medicare does not have a stop loss feature. Fortunately, there are really only two benefits under Medicare that would result in very large out-of-pocket costs. The first is the coverage for a hospital stay and the second for a nursing home stay. Here is what selected lengths of stay in a hospital would cost a Medicare beneficiary assuming the beneficiary uses up his 60 lifetime reserve days. These numbers are for 2005

• $912 deductible (first 60 days)
• $228/day coinsurance (61st through 90th day)
• $456/day coinsurance (91st through 150th day)
• $456/day for each "Lifetime Reserve" day used. (60 days total)
• $$$$ All costs for each day beyond 150 days

Coinsurance
Coinsurance is that portion of covered hospital and medical expenses, after subtraction of any deductible, for which the beneficiary is responsible. Under Part A, there is no coinsurance for the first 60 days of inpatient hospital care; from the 61st through the 90th day of inpatient care, the daily coinsurance amount is equal to one-fourth of the inpatient hospital deductible. For each of the 60 lifetime reserve days used, the daily coinsurance amount is equal to one-half of the inpatient hospital deductible. There is no coinsurance for the first 20 days of skilled nursing facility (SNF) care; from the 21st through the 100th day of SNF care, the daily coinsurance amount is equal to one-eighth of the inpatient hospital deductible. Under Part B, after the annual deductible has been met the

beneficiary must generally pay 20 percent of the approved amount (plus any charges above the approved amount).

Even though there is not a stop loss on other Medicare services, they are covered to such an extent that it would be unlikely for a beneficiary to experience a catastrophic out-of-pocket cost with the other services.

Plugging the Gaps
As a general rule, seniors seem to be very concerned about the gaps in Medicare coverage and most have taken steps to protect themselves. We would also like to note here that a large number of seniors do not understand Medicare health benefits and they think they are not covered for their insurance needs unless they buy supplemental coverage. That's unfortunate because with the exception of the hospital stay risk, Medicare by itself is pretty decent coverage. The chart below indicates that only about 7.8% of all seniors in the year 2000 did not have supplemental coverage to close the gaps in Medicare. About one out of every five Medicare beneficiaries purchased a private "Medigap" insurance policy. About one out of every three was covered under an employer-sponsored plan. We have discussed employer arrangements in the previous section.

In 2000 Medicare offered Medicare + Choice plans which were basically a redesign of the original Medicare offered by HMOs. These plans were designed as modern health insurance with stop loss and typically also covered prescription drugs. Over the years many HMOs have pulled out of this market and forced many beneficiaries back to original Medicare. Latest estimates are that managed plans serve about 11% of Medicare beneficiaries, down from about 17% in 2000. In the Medicare Modernization Act of 2003 Congress authorized a new form of private Medicare insurance similar to the previous managed plans. These new plans are now called "Medicare Advantage" and existing HMO plans have also been relabeled as "advantage plans". Enrollment in Medicare Advantage began in 2005 through special open enrollment periods and these special periods will extend through June of 2006. Thereafter in 2007, enrollment in advantage plans will occur between January 1 and March 31 of each year. We will discuss advantage plans and Medigap policies in further detail below.

Source: Centers for Medicare and Medicaid Services

Seniors with No Supplemental Protection for the Medicare Gap

As noted from the graph above about 1 out of every 13 seniors in the year 2000 was content with original Medicare. These people were not spending additional money to supplement the gaps in coverage. Are these people exposed to a tremendous risk? Probably not but it depends.

The biggest single risk is staying too long in a hospital. According to CMS, the average hospital stay for a Medicare beneficiary is about 5.8 days. Longer stays are certainly possible but the condition being treated is almost always a predictor of the length of stay. Generally if the beneficiary does not have one of those chronic conditions that would require a long hospital stay, the risk is very low for spending too much time in the hospital. However we cannot rule out those fluke cases where for example, someone develops a resistant infection which could result in a very long hospital stay.

Medicare uses "Diagnostic Related Guidelines" or DRG's to calculate how much to pay a hospital for certain services. These guidelines are summaries of the over 13,000 treatment codes that hospitals use to identify services. In 2004 Medicare defined 543 of these treatment categories. In 2006 Medicare is proposing a set of 573 treatment categories. The list gets bigger every year.

The list below represents the 90th percentile of DRG procedures that required a hospital stay on average of 30 days or longer. Three of the procedures below required a length of stay on average of 60 days or longer. The 90th percentile represents the last 10% of the distribution of length of stay in that category that went the longest. Note that all of these long-lasting hospital stays were associated with surgery. Some of these procedures represented intensive care with the use of tracheotomy, some were due to Burns or to HIV but most were a result of transplants. The other 532 DRG categories probably had very few lengthy hospital stays. Surgery TRACH W MV 96+HRS OR PDX EXC FACE,MOUTH, & NECK DX W/MAJ OR

The chart below is derived from CMS sources and shows the length of all Medicare stays in acute care hospitals for 2001. From this table we can derive the risk. Based on the table below the risk of a hospital stay under Medicare longer than 91 days is about one out of every 2,500 discharges. In comparison the risk of a house burning down is about twice as likely as spending 91 or more days in the hospital. Unfortunately the risk for longer stays is not available but it would go down as the number of days goes up. From the previous chart, we see that a 90 day stay in a hospital would cost $7,752 in 2005 (assumes using up to 60 days of lifetime reserves) which is an amount very close to stop loss amounts in more recent group health insurance plans. Since an elderly person would probably not use a hospital more than two or three times in his remaining life, the $2,400 a year that person would spend on supplemental coverage could be set aside instead to pay for the extremely rare case of a long hospital stay.

Medicare Short-Stay Hospital Discharges by Length of Stay, 2001

SOURCE: CMS/ORDI November 2003

The other major risk with Medicare is paying for nursing home rehabilitation after a three-day hospital stay. Medicare covers the first 20 days at full cost, and if a longer stay is required, the beneficiary must pay a $114 per day co-pay for an additional 80 days for the year 2005. Paying for 80 days of co-pay would be $9,120. This amount goes up every year with inflation. It is important to point out that a nursing home stay is not an entitlement under any health insurance plan. Medicare is no different from group plans which may offer a short stay acute care nursing home alternative to a hospital. Most of these plans are also limited to 20 or 30 days. In other words every insured individual in the country takes the same risk with lengthy nursing home coverage.

From the chart below we see that only about half of all nursing home admissions come from a hospital. These would be the only ones to qualify for Medicare assistance. And not all of these admissions will meet the Medicare requirement of three full days in the hospital and a skilled need. It has also come to light in the past year or so that some hospitals are "cheating" by keeping someone three full days without a medical necessity. Medicare is cracking down on this abuse and it won't be possible in the future for the family to pressure the doctor or hospital into assuring that Medicare will pay for nursing home after a hospital stay. Also according to CMS data the average stay in Medicare rehabilitation in a nursing home is about 23 days not the full 100 days. Remember the first 20 days are paid at full cost.

Source: The Statistical Abstract of the United States 2005

As a final note, seniors are not exposed to the same open-ended risks of medical care that younger people are. When the money runs out, bankruptcy is not necessary since the senior will now be eligible for Medicaid or other state assistance programs. It is a baffling paradox that the elderly are paranoid about large medical costs and completely ignore the greatest financial risk they will ever face -- long-term care. Long-term care is 1,200 times more likely to occur than a 90 day stay in the hospital. Long-term care on average is six times more expensive than the average cost a senior spends each year on medical care. People will go to all lengths to make sure unanticipated medical costs are covered by insurance but yet fail to insure for long-term care which is only covered if they are impoverished. In other words an elderly person paradoxically is not bothered by destroying $50,000 of savings in a spend down to qualify for Medicaid but would never be willing to spend $50,000 of savings for medical care not covered by Medicare.

Medigap Policies (Typically Called "Medicare Supplement Policies")

Choosing A Medigap Policy 178 pages

http://www.medicare.gov/Publications/Pubs/pdf/02110_LE.pdf

Understanding Supplement Policies

Medigap policies or as they are more commonly called "Medicare Supplement Policies" are very popular with the elderly. In the year 2000 about 21% of Medicare recipients were buying stand-alone supplement policies to fill the gaps in Medicare coverage. But another 34% of beneficiaries were also receiving similar benefits through employer sponsored group health plans. Some of the over age 65 people on group plans are still working and the group plan is the primary payer of benefits.

Some people receiving group benefits are retired and in this case Medicare becomes the primary payer of benefits and the group plan becomes the secondary payer. For those who are retired and over age 65 and receiving employer-sponsored benefits, the additional coverage on the group plan over original Medicare Parts A and B becomes a supplement policy. What Medicare doesn't pay, the group plan will pick up. Adding on those beneficiaries receiving Medigap equivalent group coverage to those buying stand-alone supplement policies could put the number of people receiving additional coverage to cover the gap in Medicare at about 40% to 50% of the total Medicare beneficiary population. Another 22% are covered by Medicaid or Advantage Plans which by law do not integrate with a supplement policy thus making the supplement unnecessary. Only about 8% of all beneficiaries are not covered by some sort of supplemental insurance.

We have already discussed the major gaps in Medicare coverage as well as the risk of paying out-of-pocket for those gaps in the section above. With the exception of a long hospital stay, which has a very low risk of happening, Medicare is a pretty decent health care plan. So why are the elderly so concerned about paying extra money out-of-pocket to supplement their Medicare coverage? Here are a few reasons that we can offer.

• Many elderly mistakenly think that Medicare by itself is incomplete coverage and without a supplement policy a person is not fully insured.
• Many elderly do not like the idea of assuming any out-of-pocket risk for health insurance costs and Medicare together with the right supplement policy essentially pay 100% of the costs in exchange for a monthly supplement policy premium. This is analogous to a younger person buying an additional insurance policy to cover co-pays and deductibles on a group health insurance policy.
• Many elderly understand the deductibles and co-pays associated with Medicare but they prefer to use a supplement policy as if it were a forced monthly savings plan to put aside money to pay for these costs. For healthy people with adequate retirement savings this is not a logical choice, since only about 70% of the supplement premium is actually going towards insurance expenses and the other 30% is lost to commissions, overhead and profit for the insurance company. Also if these people rarely use a hospital or doctor services, they are paying their premiums for unhealthy people who are using most of the insurance company benefit dollars. People in this category would be much better off joining a Medicare advantage plan and putting the equivalent supplement premiums into a savings account to pay for deductibles and co-pays in the new plan. (Medicare advantage plans will be discussed below)

Stand-alone supplement policies are sold by private insurance companies. There may be 20 to 40 companies offering these kinds of policies in each state. In 1992, in order to avoid confusion with the buying public, Medicare standardized stand-alone supplement policies into 10 major policy forms and all companies must now sell only one or more of these policy forms. Standardized policies are labeled with alphabet numbers from A through J. Supplemental insurance offered to retired Medicare recipients through employer sponsored group plans is not regulated by Medicare and these plans often have a number of additional benefits that stand-alone plans lack. The states of Massachusetts , Minnesota , and Wisconsin stipulate somewhat different forms of standardized Medigap plans than are sold in all other states.

Beginning in 2006, supplemental plans H, I and J will no longer be sold with prescription drug benefits. Anyone already owning one of these plans can keep the drug benefits through 2006 and beyond but there would be no reason to do so. This Medigap policy benefit would be more expensive and less comprehensive than the new Medicare Part D which is a government-subsidized drug benefit. If a person on one of these plans elects a new Part D benefit, the existing drug benefit will be removed and the premiums decreased accordingly. In addition beginning in 2006, Medicare has defined two new supplement plans K and L, which are less comprehensive in coverage than the preceding 10 plans, A through J, but are also less expensive.

Standard Designs

The Basic Benefits . Medicare Supplement Plans A through J must pay the following basic benefits.

• 100% for days 61 - 90 of a hospital stay. (You pay the plan A deductible, $912 in 2005)
• 100% for days 91 - 150 of a hospital stay (includes 60 days reserve maximum in your lifetime).
• Up to 365 more days for hospital stays during your lifetime after you use all Medicare hospital benefits.
• Medicare Part B coinsurance or copayment (20% of Medicare allowable expenses or other applicable copayment. You pay Plan B deductible, $110 in 2005.)
• The first three pints of blood or equal amounts of packed red blood cells per calendar year, unless you or someone else donates blood to replace what you use.

Here is a description of what Plans A through J pay in addition to the basic benefits.

Plan A Covers

• Basic Benefits only

Plan B Covers

• Basic Benefits
• Medicare Part A Deductible

Plan C Covers

• Basic Benefits
• Skilled Nursing Facility Coinsurance
• Medicare Part A Deductible
• Medicare Part B Deductible
• Foreign Travel Emergency

Plan D Covers

• Basic Benefits
• Skilled Nursing Facility Coinsurance
• Medicare Part A Deductible
• Foreign Travel Emergency
• At-Home Recovery

Plan E Covers

• Basic Benefits
• Skilled Nursing Facility Coinsurance
• Medicare Part A Deductible
• Foreign Travel Emergency
• Preventive Care*

* Medigap policies cover some preventive care that isn't covered by Medicare

Plan F* Covers

• Basic Benefits
• Skilled Nursing Facility Coinsurance
• Medicare Part A Deductible
• Medicare Part B Deductible
• Medicare Part B Excess Charges (100%)
• Foreign Travel Emergency
• * Plan F has a high-deductible option

Plan G Covers

• Basic Benefits
• Skilled Nursing Facility Coinsurance
• Medicare Part A Deductible
• Medicare Part B Excess Charges (80%)
• Foreign Travel Emergency
• At-Home Recovery

Plan H Covers

• Basic Benefits
• Skilled Nursing Facility Coinsurance
• Medicare Part A Deductible
• Foreign Travel Emergency
• Basic Drug Benefit ($1,250 Limit)*

* Starting January 1, 2006, you won't be able to buy Medigap policies covering prescription drugs. However, if you buy a policy with prescription drug coverage before January 1, 2006, you will have to decide if you want to keep this coverage.

Plan I Covers

• Basic Benefits
• Skilled Nursing Facility Coinsurance
• Medicare Part A Deductible
• Medicare Part B Excess Charges (100%)
• Foreign Travel Emergency
• At-Home Recovery
• Basic Drug Benefit ($1,250 Limit)*

* Starting January 1, 2006, you won't be able to buy Medigap policies covering prescription drugs. However, if you buy a policy with prescription drug coverage before January 1, 2006, you will have to decide if you want to keep this coverage.

Plan J* Covers

• Basic Benefits
• Skilled Nursing Facility Coinsurance
• Medicare Part A Deductible
• Medicare Part B Deductible
• Medicare Part B Excess Charges (100%)
• Foreign Travel Emergency
• At-Home Recovery
• Extended Drug Benefit ($3,000 Limit)**
• Preventive Care ***

* Plan J has a high-deductible option

** Starting January 1, 2006, you won't be able to buy Medigap policies covering prescription drugs. However, if you buy a policy with prescription drug coverage before January 1, 2006, you will have to decide if you want to keep this coverage.

*** Medigap policies cover some preventive care that isn't covered by Medicare

Plan K pays

• 100% for days 61 - 90 of a hospital stay
• 100% for days 91 - 150 of a hospital stay
• Up to 365 more days of a hospital stay during your lifetime after you use all Medicare hospital benefits
• 50% Part B coinsurance after you meet the Part B yearly deductible. ($110 in 2005)
• 100% coinsurance for Part B preventive services.
• 50% of the first three pints of blood or equal amounts of packed red blood cells per calendar year, unless you or someone else donates blood to replace what you use.
• 50% hospice cost-sharing for all Part A Medicare covered expenses and respite care.

Note: Plan K has a $4,000 out-of-pocket annual limit. Once you meet the annual limit, the plan pays 100% of the Medicare Part A and Part B copayments and coinsurance for the rest of the calendar year. Charges from your doctor that exceed Medicare-approved amounts, called "excess charges" aren't covered and don't count toward the out-of-pocket limit. You will have to pay these excess charges. The out-of-pocket annual limit can increase each year because of inflation.

Plan L pays

• 100% for days 61 - 90 of a hospital stay
• 100% for days 91 - 150 of a hospital stay
• Up to 365 more days of a hospital stay during your lifetime after you use all Medicare hospital benefits
• 75% Part B coinsurance after you meet him the Part B yearly deductible.
• 100% coinsurance for Part B preventive services.
• 75% of the first three pints of blood or equal amounts of packed red blood cells per calendar year, unless you or someone else donates blood to replace what you use.
• 75% hospice cost-sharing for all Part A Medicare covered expenses and respite care.

Note: Plan L has a $2,000 out-of-pocket annual limit. Once you meet the annual limit, the plan pays 100% of the Medicare Part A and Part B copayments and coinsurance for the rest of the calendar year. Charges from your doctor that exceed Medicare-approved amounts, called "excess charges" aren't covered and don't count toward the out-of-pocket limit. You will have to pay these excess charges. The out-of-pocket annual limit can increase each year because of inflation.

Medicare Select

Medicare select policies are supplemental policy designs that use a managed-care network such as an HMO or PPO. Most insurance companies have selected the Medigap Plan C for the chassis of their select policies. Because of the managed network the premium for a Select C Plan would be cheaper than a regular Plan C. But using a hospital or doctor out of the network would cost more out-of-pocket since the plan may pay nothing for out of network services.

How Supplemental Policies Are Priced