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The New Medicare: Prescription Drug Coverage Explained

October 2005
The New Medicare: Prescription Drug Coverage Explained

By Pavittar Safir, CFP

For the first time since its inception in 1965, Medicare will cover prescription drugs effective January 2006. The prescription drug plan is called MEDICARE PART D and the enrollment will begin November 15, 2005 and end on May 15, 2006. Thereafter enrollment will include a surcharge of 1 percent per month except in certain pre-defined situations. Enrollment after one year of eligibility, for example, will increase the premium by 12 percent. The monthly premium for this voluntary program will vary from state to state but is expected to be around $32.50.

The program will pay 85 percent of the drug costs up to $2,000 after the beneficiary has paid a deductible of $250 or $2,250 in all, not including the premiums Thereafter Medicare will pay nothing until the total drug cost reaches $5,100. At this point Medicare will pay 95 percent of the drug costs for the year. The $2,850 in the middle must be paid out of pocket and is known as the "doughnut hole." Everyone may not be affected, though, as employers, state pharmacy assistance programs, and a few high premium private insurance plans may cover this gap.

Each beneficiary will have a choice of at least two prescription drug plans. Each insurer will have its own formulary ? list of drugs available under the program ? and you should join the one most suitable for you. The insurer can change the plan but must give advance notice and you may also switch the plans once during the year.

Every Medicare beneficiary is encouraged to apply unless the drug coverage is available through the employer or some other entity. If your annual income is $14,500 or less (as a single person) or $20,000 or less (as a married couple) you may be eligible for substantial assistance in paying for prescription drugs, but you must apply as the program is voluntary. The Center for Medicare and Medicaid Services (CMS) believes that at least 30 million of the 42 million eligible beneficiaries will enroll in the prescription drug plan.

It may be useful to briefly review the Medicare program. It can be divided into four major parts:

MEDICARE HOSPITAL INSURANCE (PART A) is an entitlement program and eligibility is not determined by financial needs. Persons who are 65 or over and are eligible for Social Security Retirements Benefits are automatically enrolled. Workers of any age with disabilities also become eligible if they have been receiving Social Security Disability Benefits for a consecutive period of two years. Similarly, widows and widowers aged 50 or over qualify if they have been receiving disability benefits through a spouse for a consecutive period of two years. As a special case, persons who have End State Renal Disease (ESRD) usually become eligible after a waiting period of three months.

MEDICARE PART B is supplemental medical insurance and enrollment is voluntary. It covers medically necessary services received at home, doctor's office, in a hospital or a nursing home. Enrollees pay a monthly premium for this coverage (currently $78.20) and an annual deductible amount ($110 in 2005). Medicare pays 80 percent of the covered expenses. Insurance companies offer many supplemental policies to bridge the gap. These policies are known as Medigap policies and can pay the annual deductible, co-payments, emergency care outside the U.S., and prescription drugs. The coverage varies and one must choose the policy that is suitable and affordable. For the first time, Medicare will also pay for the initial physical exam when you join the program.

MEDICARE PART C, also known as Medicare Choice, was created by the Balanced Budget Act of 1997. Under this program, you can join a Health Management Organization (HMO), a fraternal society's benefit plan, a private fee-for-service plan, or opt for the Medical Savings Account (MSA), which is Medicare's managed care program The MSA is concerned with the way service providers will be reimbursed and not with what services are covered. The new Medicare Advantage program is an HMO program to be offered by private insurers. The hope is that the competition in the market place may provide broader coverage at less cost.

MEDICARE PART D, as discussed before, is the new prescription drug program available in January 2006.

Medicare is a very beneficial program for the elderly but it remains a very basic health care program and, even with the new enhancements, leaves major gaps. Some of the services Medicare does not cover are: preventive physicals, eye or hearing exams, eyeglasses, hearing aids, dental care, most immunizations, and chiropractor services except for conditions detected by an X-ray, full-time private nursing care at home, and so on. Medicare does not cover Long Term Care (LTC) for more than 100 days and you pay a hefty deductible after the first 20 days. Medigap policies only cover the co-payments for the Medicare approved services.

The situation becomes more complicated if you or your loved ones do not qualify for Medicare. This is especially true of elderly parents who joined their children as dependents and have not worked in this country. Prolonged physical illness, disability or cognitive disorder can cause real financial hardship besides the emotional stress.

Fortunately, the market place has responded and many innovative solutions have become available. It is now possible to provide for the unpredictable health problems and yet leave hard-earned assets for your children, if you are lucky to escape serious health problems.

For more information on Medicare, the new prescription drug plans, the application process or to explore other alternatives, please contact us at Shalin Financial for a no-obligation, complementary and confidential consultation.

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