Health-care planning: part II

More and more, responsibility for America's health-care price tag is shifting to individuals and families. Medicare faces constant cost pressures, and some people are concerned that the program may eventually become insolvent. Premiums for employer-sponsored insurance have increased 87 percent cumulatively from 2000-2006, compared to a 20 percent increase in wages and an 18 percent increase in overall inflation. In addition, employers are moving to limit the benefits and coverage they will offer to current and future retirees.

Many Americans are rightfully concerned. In this article I focus on governmental health-care financing through Medicare, and Medigap.

Medicare: Federal cornerstone of health care

Introduced in 1965, Medicare provides health insurance for almost everyone age 65 or older as well as some younger people who have disabilities and people with end-stage renal disease. Typically, individuals are eligible if they or their spouse worked for a minimum of ten years in Medicare-taxed employment (including self-employment), are 65 years of age or older, and are citizens or permanent residents of the United States. Even if you have other insurance, such as retirement continuation of an employer-sponsored program, Medicare automatically covers you at age 65. If you have other insurance, it will complement your Medicare coverage and further reduce your out-of-pocket costs.

Originally, Medicare consisted of two parts: Part A for hospital insurance and Part B for medical insurance. Part A helps pay for care in hospitals as well as some skilled nursing facilities, hospice, and some home health care. If you or your spouse contributed to Medicare taxes while working, there are no monthly premiums for Part A. However, there are monthly premiums for Part B, which helps cover doctors fees, outpatient hospital care, and some other medical services such as physical and occupational therapists.

Part C, added in 1997, gives Medicare beneficiaries the option to receive their Medicare benefits through private health insurance plans. Part D, introduced in 2006, adds general coverage options for many prescription drugs. Private companies are responsible for setting up Part D plans, so each one will be slightly different. Part D is not automatic: You must choose to enroll in one of the many prescription drug plans. These plans vary widely in cost structures and drugs covered, and there is a gap in coverage Ð known as the "donut hole" Ð that could prove burdensome. To make your selection easier, Medicare has an interactive online tool called the Prescription Drug Plan Finder, which lets you view and compare program structures and costs in your geographic area based on general attributes or your personalized search criteria. You should also compare the Medicare D plans to drug coverage costs offered under some Medigap policies.

Medigap: Covering 'holes' in Medicare coverage

Out-of-pocket expenses for Medicare can be substantial. For example, Part A has an annual deductible of nearly $1,000 for a hospital stay from 1-60 days as well as substantial co-pays for longer stays. Medicare will pay for the first 20 days of care in an approved nursing home, but only after a hospital stay of at least 72 hours. After 20 days, Medicare charges a co-pay ($124 per day in 2007) and limits total coverage to 100 days in any particular year. For Part B, on top of the yearly deductible, beneficiaries also pay 20 percent of the Medicare-approved amount for any covered services. These "leftover" costs can mount up rapidly.

Medigap was devised to "fill in the gaps" of coverage for the original Medicare (Parts A and B). Most states offer 10 Medigap options. All plans must offer certain Basic Benefits: coinsurance for inpatient hospital care and 365 extra days of hospital care during your lifetime after Medicare coverage ends, Part B coinsurance, and the first three pints of blood per year. Some of the more extensive Medigap plans may also pay such things as coinsurance for skilled nursing, Part A deductibles, preventive care, foreign travel emergencies, and prescription drug costs (as an alternative to Medicare Part D).

While Medigap helps in many ways, it does not cover long-term care. This non-coverage of long-term care applies generally to most group and individual health insurance policies as well as Medicare. And it is long-term care that can be financially devastating for older Americans.

Fortunately, there is a variety of practical solutions for long-term care available today - far more than 20 years ago. This is the second part of a three-part series on the Graying of America. For more information, call me at 689-8704 or e-mail me at william.a.creekbaum@smithbarney.com.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial services firm serving Northern Nevada at 6005 Plumas St., Ste. 200 Reno, NV 89509.