Medicare part by part, what A, B, C and D cover and who pays

Picture a man in the months before his sixty-fifth birthday. This is a hypothetical, but I suspect you know him. His mailbox fills with glossy brochures. His phone rings with offers. A friendly voice wants to know whether he is "ready for Medicare," and he realizes he has no idea what that means, only that the alphabet is involved. Part A, Part B, Part C, Part D, and then something called Medigap that sounds like a clothing store. Nobody ever sat him down and explained it, and the people most eager to help are selling something.

That is a scandal of a quiet kind. Medicare is the health insurance on which tens of millions of Americans depend, and the single most common experience of it is confusion. So let's fix that. I will go part by part, tell you what it covers and who pays, and then do something that will surprise some of my friends and annoy some of my critics: I'll show you how much of the program has Republican handwriting on it. This is a post about how things work. The politics comes along for the ride, but the mechanics come first.

Where it came from

Medicare was signed into law by President Lyndon Johnson on July 30, 1965, at the Truman Library in Independence, Missouri, with former President Harry Truman beside him. It was part of the Social Security Amendments of 1965, the same law that created Medicaid. Those two programs are cousins and people confuse them constantly. Medicare is the federal insurance program for people 65 and older and for certain younger people with disabilities. Medicaid is a means-tested program run jointly by the federal government and the states, built for people of limited income. Here we stay with Medicare.

The shape of the 1965 law was a compromise, and the compromise had a Republican in it. The Johnson administration pushed a hospital insurance plan financed through Social Security payroll taxes. Representative John Byrnes of Wisconsin, the senior Republican on the House Ways and Means Committee, offered a competing plan that covered physician services with a voluntary program supported partly by premiums and general revenue. The chairman, Wilbur Mills, did not choose between them. He combined them, along with an expansion of aid to the poor, and the result was often described as a layer cake. The hospital layer became Part A. The physician layer, born in that Republican alternative, became Part B. The third layer became Medicaid. So the next time somebody tells you Medicare was a purely partisan invention, tell him the doctor-visit half of the program started as a Republican idea.

Part A: hospital insurance

Part A covers inpatient hospital stays, skilled nursing facility care after a qualifying hospital stay, hospice care, and some home health care. It is called hospital insurance, and it is financed mainly by a payroll tax. The tax is 1.45 percent on the worker and 1.45 percent on the employer, for 2.9 percent in total, and unlike the Social Security tax it has no cap on wages. Higher earners pay an additional Medicare tax on wages above a threshold, added by the Affordable Care Act. The money goes into the Hospital Insurance Trust Fund.

Most people pay no monthly premium for Part A, because they or a spouse paid Medicare payroll taxes for enough years, which is generally 40 quarters of work, about ten years. Part A is not free in the sense that you owe nothing when you use it. There is a deductible for each benefit period, and coinsurance for long hospital and nursing facility stays. I will leave the dollar amounts out, because they change every year. Medicare.gov publishes them.

Who pays, in plain terms: today's workers and their employers, through the payroll tax, plus you at the point of care through the deductible and coinsurance. That "today's workers" point matters. Like Social Security, Part A is largely pay-as-you-go, and the trustees' annual report is the place to see how the trust fund is projected to hold up. Read it yourself. It is the best nonpartisan briefing on the question.

Part B: medical insurance

Part B covers doctors' services, outpatient care, preventive services, durable medical equipment and some home health care. It is voluntary, but if you do not sign up when you are first eligible you will usually pay a permanent penalty of 10 percent of the premium for each full 12-month period you could have had it and did not. Your initial enrollment period is seven months: the three months before the month you turn 65, the month itself, and the three months after.

The money works like this. You pay a monthly premium, which for most people is deducted from a Social Security check. Higher-income beneficiaries pay a larger, income-related premium. The premiums cover only part of the cost. The rest comes from the general revenue of the federal government, which means taxpayers, which means the working family that may be a decade behind on its own savings. You then pay a yearly deductible and, generally, 20 percent coinsurance of the approved amount for most services. There is no cap on that 20 percent under Original Medicare, which is the problem Medigap exists to solve.

This is where I'd like you to pause on a fact that few people say aloud. Part B is financed mostly by general taxpayers and not by a dedicated payroll tax. That is a big reason why the program's fiscal pressure is a pressure on the whole federal budget. For a view of that budget, our explainer twelve questions about the national debt, answered straight is a good companion.

Part C: Medicare Advantage

Parts A and B together are called Original Medicare. Part C is an alternative: you choose a private plan, such as an HMO or a PPO, that contracts with Medicare, and the plan provides your Part A and Part B benefits and usually more, often including drug coverage and some extras. You still pay the Part B premium, and the plan may charge its own. The federal government pays the plan a fixed monthly amount for each enrollee, adjusted for factors such as health status.

The history is a Republican one in an important sense. Private plan choice entered Medicare in the Balanced Budget Act of 1997, the law signed by President Clinton after a deal with the Republican Congress, as the Medicare+Choice program. The Medicare Modernization Act of 2003 renamed and reworked it as Medicare Advantage. The idea behind it is competition: let private plans compete for seniors, and let the possibility of savings and extra benefits discipline costs.

The tradeoff is networks. A plan has a list of doctors and hospitals, and you generally need to use them, and some services need prior approval. Original Medicare lets you see almost any provider who accepts Medicare nationwide. The honest advice is to check the plan's network against your own doctors and your own prescriptions every year, since plans can change from one year to the next. Critics say the payments to plans are too generous and defenders say the plans deliver extra benefits and coordination. I have no number for you on either claim, and you should be wary of anyone who is sure. The MedPAC reports to Congress and the Congressional Budget Office are the places to check.

Part D: prescription drugs

Part D is the newest layer, and it is the one with the clearest Republican signature. President George W. Bush signed the Medicare Modernization Act on December 8, 2003, and the drug benefit began on January 1, 2006. Before that, Medicare generally did not cover outpatient prescription drugs, even though drugs had become central to medicine in a way they were not in 1965.

Part D works through private plans. You choose a stand-alone drug plan, or a Medicare Advantage plan that includes drug coverage, and those plans compete. You pay a monthly premium to the plan, a deductible in many plans, and copayments or coinsurance. Lower-income people can get extra help. The government subsidizes the plans heavily, and the competition among plans is the part conservatives point to as a model.

Penalties exist here too: if you go without creditable drug coverage for a period after you are first eligible, you may pay a late enrollment penalty. For Part D that penalty is 1 percent of the national base beneficiary premium for each full month you delayed, added to your premium for as long as you have the coverage.

I will say something about Part D that does not always get said at conservative gatherings. It was a large new entitlement, enacted without a dedicated way to pay for it, and a number of conservatives opposed it for that reason at the time, and some still do. Others defend it as the cheapest, most market-friendly way to cover drugs, and note that it has cost less than early projections. Both are true enough to argue about. We cover the philosophy and the politics in Compassionate Conservatism, No Child Left Behind and Medicare Part D and What conservatives should learn from No Child Left Behind and Medicare Part D.

Medigap: filling the holes in Original Medicare

Remember that Original Medicare has deductibles, coinsurance and no yearly cap on what you may spend out of pocket. Medigap, formally Medicare Supplement Insurance, is a private policy you buy to cover some of those gaps. Medigap works with Original Medicare. It is not available to supplement a Medicare Advantage plan.

Medigap policies are standardized. They are identified by letters, such as Plan G, and each lettered plan offers the same basic benefits no matter which company sells it, so you can compare on price. The best time to buy is during your Medigap open enrollment period, which lasts six months and begins the month you are 65 or older and enrolled in Part B. During that window, insurers generally cannot turn you down or charge you more because of your health. Miss it and in most states the insurer may use medical underwriting. States regulate Medigap, so the details vary.

Here's the choice in a sentence. Original Medicare plus Medigap plus a stand-alone Part D plan gives you broad provider choice and predictable costs for a higher premium. Medicare Advantage often gives you a lower premium and extra benefits in exchange for a network. Neither is a scam and neither is a free lunch.

The comparison in one view

The idea that keeps coming back: premium support

Now for the Republican reform idea that you will hear about every time somebody proposes touching the program. It is called premium support. The principle is that instead of the government running a single program and paying whatever bills come due, it gives each beneficiary a fixed contribution toward the plan of his choice, and plans compete on price and quality, including a traditional government-run option. It is in many ways what Part D and Part C already do in part.

The history is more bipartisan than people remember. A national commission in 1999, chaired by Senator John Breaux, a Democrat, and Representative Bill Thomas, a Republican, considered a version of it. Years later, House Republicans led by Paul Ryan put forward versions as part of their budgets. The argument for it is that competition does what central pricing cannot, and that a defined contribution limits the open-ended liability that falls on taxpayers.

The objection is just as clear. Critics say a fixed contribution that grows more slowly than health costs shifts risk to seniors, who would then pay more out of pocket over time, and that a competitive market for the sickest and oldest may not work the way it does for a cell phone plan. Supporters answer that the contribution can be adjusted for health status and that the current system is already shifting risk onto younger taxpayers.

Notice what this debate really is. It is not about whether seniors should have health coverage. Republicans and Democrats have both agreed to that since 1965. It is about who steers: a government pricing board or a market of plans. That is a values question and you are entitled to your answer. What you are not entitled to is the pretense that the choice is between "saving Medicare" and "destroying Medicare." Both sides say that. Neither side is being straight.

What to do with all this

If you are within a few years of 65, put the dates on your calendar. Your seven-month window is the one that matters. If you are still working and covered by an employer plan, ask the plan's administrator how it works with Medicare before you decide to delay Part B, because the rules about penalties depend on the size of the employer and on whether the coverage counts. Talk to your State Health Insurance Assistance Program, which offers free counseling, and compare plans each fall during the annual open enrollment period at Medicare.gov. Do not sign anything over the phone with someone who called you first.

If you are a younger worker, understand that the 2.9 percent coming out of every check is paying for somebody else's hospital stay today, and that your own turn will depend on choices that Congress makes in the next decades. The funding side is the same story as Social Security's repair options laid side by side in one table and How Social Security works and the promise built into its 1935 design.

The bottom line

• Medicare is four lettered parts plus an optional private gap policy. Learn which part pays for what before you shop, not after.
• Your enrollment window around your 65th birthday is seven months. Missing it can cost you a permanent penalty on Part B and Part D.
• Compare Original Medicare plus Medigap against Medicare Advantage every year, using your own doctors and your own prescriptions, not a brochure's promises.
• Medicare is both a Democratic and a Republican creation. Part B and Part D carry Republican fingerprints, and premium support is a serious Republican reform idea worth judging on its merits.
• Ask any candidate who promises to "protect Medicare" what he would do about the trust fund, then listen for numbers and dates instead of adjectives.