Medicare is Not Free and Other Myths About Health Care

When speaking with the millennial generation about Medicare, I continually hear the same misconception about the program time and time again: it is a free health plan. Many think you just pay the 1.45% Medicare tax every paycheck and once you turn 65 years old, you will receive free, all inclusive health care from the government for the rest of your remaining years. However, this millennial belief is the farthest from the reality. It is estimated that a typical older couple may need to save $300,000 to pay for health costs not covered by Medicare alone. But how can this be? Well, here are some basic facts about the program.

Medicare has four basic programs: Part A, B, C, and D. Part A covers hospital insurance; this includes inpatient hospital stays, skilled nursing facility stays, hospice care and home health visits. Part A is primarily financed by a 1.45% payroll tax on all wage and salary income for the worker and the employer. Self-employed persons pay the full 2.9% of earnings. However, hospital insurance is not all covered by the payroll tax. In 2012, a Medicare enrollee who goes to the hospital pays a deductible of $1,156 for the first day in the hospital. The next 59 days are fully covered by Medicare. For days 61 through 90, the patient is responsible for paying $275 a day (called a co-payment), and Medicare covers the rest. For any additional days, the patient can use up to 60 lifetime reserve days, with a co-payment of $550 a day.

A Medicare enrollee in a skilled nursing facility must pay $144.50 for days 21 through 100. For enrollees who have been hospitalized for three days or more, Medicare covers the first 20 days, but does not cover anything past day 100. Medicare also covers home health, with no limit on the number of visits.

Medicare Part B is a voluntary program that helps pay for doctor bills and other outpatient health care. Medicare beneficiaries pay a premium of $99.90 a month for their part B coverage. Part B premiums can be deducted from the beneficiary's monthly Social Security benefit check. The premium is set annually to cover about 25 percent of Part B spending, while the other 75 percent is paid from general revenues. However, Medicare enrollees are also  responsible for paying the first $140 a year in doctor bills—this payment is called the annual deductible. Medicare pays 80% of the approved fee, and the individual pays the remaining 20%, which is called a co-insurance. Doctors may charge more than the Medicare fee schedule under a process called balanced billing. But the patient is not responsible for paying more than 15% above the Medicare fee schedule.

Medicare Part C is known as Medicare Advantage (MA), and gives seniors the option of receiving their benefits through private health plan. Medicare Part D provides prescription drug benefits through private plans that contract with Medicare and Medicare Advantage prescription drug plans. The average monthly premium for Part D is $31. The standard prescription drug plan has a $310 annual deductible in 2010. For the next $2,520 in drug costs, the individual pays 25% ($630), and Medicare pays 75% ($1,890). For spending above $2,830, the beneficiary pays the full charges until spending reaches $6,440 (Obamacare closes this "donut hole" by 2020). Costs in excess of $6,440 are considered catastrophic, and Medicare will pay for 95% of these additional expenses.

As one can see, Medicare is clearly not a free program. There are many deductibles and copayments associated with the program, costing in the thousands of dollars. However, the senior cost is heavily subsidized by the government and is cheaper when compared to normal healthcare insurance plan. Thus, Medicare attempts to provide affordable health care to our senior citizens, but it is definitely not free as many would think.  

Medicare information provided by the National Academy of Social Insurance.