The subject of Medicare is something that inflames people’s financial passions from a number of sides. First, there are the people who are receiving Medicare such as the elderly and retired, who largely depend on Medicare to pay for their regular medical expenses. Then there are the working people, mostly under the age of 55, who see their paychecks reduced every other week by the Medicare tax, many who do not believe they will ever see any benefit from their tax “contributions” to the system. Then there are the politically inclined and economists who have any opinions but few solutions on how to bring the cost of Medicare to reasonable levels and make it available for the current working class.
To begin with, Medicare is not Social Security. While Medicare is connected to Social Security by becoming available when turning age 65 (the rules are always subject to change) they come from two different parts of the government budget. Everyone gets Medicare Part A upon turning age 65, while Part B is optional. Parts C and D will only be touched on briefly in this article.
Employees Paying Into the System
Now for the employee’s side of the story. You pay a 1.45% Medicare tax on all of your earned income (including tips) up to $200,000 a year. For people who make more than that, an additional .9% tax is charged on any remaining earned income if you are single, $250,000 for the combined incomes of people who file as married, and only $125,000 for people who file their taxes as married filing separately. Hidden from the employee is the fact that the employer has to pay 1.45% as well for each employee’s annual earned income, totaling 2.9% the Federal government gets from the employee and employer.
As the rule of taxes is applied: the more you make, they more they take. It definitely pays to work things out with an alienated married partner if you are married but filing separately for tax purposes – unless you make less than $125,000 a year. Employees need to consider that the raise you get will cost your employer at least 1.45% more, just for the Medicare tax.
On the Medicare recipient end of things, there are four separate parts to be considered: A, B, C, and D. In general, Medicare is the best deal for retirees who do not have a significant amount of money saved for retirement or who have developed a chronic disease as they have aged. One of the most ironic things about Medicare is it does not pay for three of the most common medical problems people face as they age: dental, hearing, and vision problems. There are Medicare Advantage plans that are strongly recommended by organizations such as AARP but not every Medicare Advantage plan works to your financial advantage.
The cost of Part A to the recipient is $0. Part A covers your hospitalization up to 180 days, and after that it is best you have a secondary insurance plan lest you end up losing your savings and any real property to pay for medical expenses.
Part B covers doctor and laboratory expenses, as well as selected drugs not covered by Part D. Most people will pay $137 a month for Part B, and those who receive Social Security will find it directly taken out of their monthly check. Be warned that the monthly premium is not always what it seems, as the rate can be affected by outside forces as many people discovered in 2016 when their increase in Social Security was gobbled up by an increased but unseen Part B deduction.
Part C is officially known as the Medicare Advantage Plan, and many people who have Medicare have opted for the plan as it carries a number of benefits left uncovered by regular Medicare. The other side of the story is that some people who work in the healthcare insurance industry say regular Medicare is to be preferred.
Finally, Part D is the (in)famous Prescription Drug Coverage piece of Medicare that pays for your prescription drugs based on what is known as a formulary. The basic way it works is that you pay a percentage of your prescription drugs costs based on their expense, whether the drugs are generic or brand name, and the amount of out of pocket expenses you have spent during the year. In general, people using Part D will pay about 20% of the total cost of their prescription drugs.
The Official Breakdown
Here we will only cover the bulletpoints since there is so much detail it could make any sane person stop reading and take a nap.
The data from the Department of Health and Human Services:
- Part A will cost $202.8 billion gross fee-for-service in calendar year 2018.
- Part B will cost taxpayers $201.9 billion gross fee-for-service in calendar year 2018.
- Part C will cost taxpayers $203.0 billion gross spending in calendar year 2018.
- Part D will cost taxpayers $96.8 billion gross spending in calendar year 2018.
That is a total of $704.6 billion, with Part D costing about half of the other Medicare provisions. It is equally worth noting that despite many Medicare recipients paying premiums for Part C, the government still foots the bill for as much as Parts A and B.
An important part not to be overlooked when looking at what Medicare costs is who is getting all the money. Here is the skinny on who gets most of that $700+ billion.
- Managed Care – 29%
- In-Patient Hospital Services – 20%
- Drug benefit – 15% (this would include both Part B medications and Part D coverage)
- Other – 12%
- Physicians – 10%
- Outpatient Hospital Services – 7%
- Hospice and Home Health Care – 3% each
- Skilled Nursing Services – 1%
So Part A expenses take up about 50% of the total Medicare expenditures, while doctors get $1 of every $10 paid out (not billed).