Strengthening Medicare and Seniors’ Finances

Someone drawing blood from an arm

That’s hardly a formula for preserving Medicare, is it? Someone else was willing to assume full financial responsibility for your claims, but Social Security rules forced you to enroll in Medicare and forego some of the financial benefits of your group coverage. And then faced with the loss of financial benefits of a Health Savings Account, you shifted the entire financial responsibility for your care to Medicare.

William G. (Bill) Stuart

Director of Strategy and Compliance

January 13, 2020

I recently met with a very influential organization in Washington, DC, that you’ve probably never heard of. I was unaware of it until not too long ago because the organization is focused on advocacy and doesn’t seal services or give its seal of approval to commercial products. It’s sole raison d’etre is to protect the integrity of the Social Security and Medicare programs for current and future senior citizens. It wields enormous influence over legislative and regulatory issues around these programs because of its long history of advocacy, its thorough studies, its passionate energy, and the strength of the population that relies on these programs.

Several colleagues and I met with the organization with what might seem like an unusual request. Usually, we meet with influential members of Congress or the executive branch, asking them to incorporate our ideas into legislation (and frequently offering text of a proposed bill, just to make the request easy to support). But in this case, we were asking the group merely not to oppose us if it couldn’t support our policy initiative.

Erasing the Disadvantage that Low-Income Working Seniors Endure

What we discussed at the meeting was correcting a flaw in current practice that discriminates against Social Security recipients who remain active at work and enrolled in a Health Savings Account program. If you’re a frequent reader of this column, you’re already familiar with the problem.

To illustrate this problem, let’s put you into the example:

You and I work at the same large company. We both turned age 66 last fall. I manage the accounting department and make $115,000 annually. You used to be a product manager in another industry. Then, you had to retire prematurely to take care of your wife, who was diagnosed with a terminal illness. After she passed, you returned to the work force. But you struggled to find a position comparable to your old job. Dejected, you accepted a position as a night security guard, earning about $30,000 annually. You need $45,000 to cover your living expenses, so you applied for Social Security benefits when you turned age 66 (your full retirement age).

The company offers us only one medical plan – HSA-qualified coverage with a $3,000 self-only deductible. The company contributes $1,500 in January to each employee’s Health Savings Account to help us manage our out-of-pocket expenses.

You and I were both looking forward to that deposit because we both incurred qualified expenses during the past few months. And we were both planning to set aside another $3,050 of our own money into our accounts to pay for upcoming qualified expenses and reduce our taxable incomes.

But you didn’t receive a contribution when the rest of us did. Then the payroll department told you that you can’t make or receive contributions because you’re enrolled in Medicare. That’s news to you, because you didn’t apply for Medicare coverage. But you call the Social Security office and learn that when you’re age 65 or older and receive Social Security benefits, you’re automatically enrolled in Medicare Part A. Period. You can’t disenroll without suspending your Social Security benefits.

So here I am, making $115,000 annually, pocketing a $1,500 employer Health Savings Account contribution, and saving another $1,000 or so in taxes by deferring $3,050 of my income into my account.

And there you are, making $30,000 a year and collecting another $15,000 in Social Security benefits. You’re bringing in 39 cents for every dollar that I earn. Yet you can’t collect any Health Savings Account contributions from the company, nor can you save $700 or so on your taxes by paying your medical providers through your account.

That doesn’t seem fair. In fact, from your perspective, it’s nothing short of discrimination against lower-paid working seniors. And you’re right.

A Logical Reaction

When the advantages of enrolling in an HSA-qualified no longer apply, your most likely reaction is to disenroll from the group plan with the $3,000 net deductible and enroll in other Parts of Medicare. You’re already enrolled in Part A (which covers inpatient, home-health, and hospice services) with no premium. You can enroll in Part B (outpatient services like office visits, outpatient therapy, imaging, day surgery, and lab work) and Part D (prescription drug coverage) for about $2,000 in annual premiums.

Look at what just happened. Your employer-sponsored plan covered all your claims before you began collecting Social Security benefits and were auto-enrolled in Part A. Medicare had no financial responsibility for your care. But once you lost the benefits of the Health Savings Account program, you disenrolled from the group plan and enrolled in Medicare as your only coverage. You’re now paying premiums of about $170 per month for outpatient and prescription coverage under Medicare. That’s about a quarter of the cost of this coverage; the other 75% is subsidized by the federal government’s general budget. In other words, taxpayers.

The financial responsibility for your treatment – whether it’s just a routine physical, a couple of sick visits, and a few prescriptions, or a bout with cancer or a joint replacement – shifts from your company’s plan to Medicare. Medicare is now responsible for reimbursing your providers, even though you don’t want this coverage and are working for an employer whose insurer otherwise would pay these claims.

That’s hardly a formula for preserving Medicare, is it? Someone else was willing to assume full financial responsibility for your claims, but Social Security rules forced you to enroll in Medicare and forego some of the financial benefits of your group coverage. And then faced with the loss of financial benefits of a Health Savings Account, you shifted the entire financial responsibility for your care to Medicare.

Approaches to Addressing the Problem

So how do we solve this problem? At least three solutions have emerged in recent years.

1.  Redefine Part A as non-disqualifying coverage. This is the approach that we discussed with the agency trying to preserve Medicare. The idea is simple: If a working senior (or disabled younger worker) is eligible to make and receive contributions to a Health Savings Account except for Part A enrollment, his Part A coverage won’t disqualify him. If the law applied to you in our example, you could remain covered on the group plan, receive the company’s $1,500 contribution, and deposit an additional $3,050 into your Health Savings Account, saving you about $700 in taxes. Medicare would have secondary responsibility for paying your inpatient, home-health, and hospice claims, but that liability would be minimal.

This approach preserves Medicare by diverting claims that it otherwise might have to pay as the sole payer. It’s a targeted approach – applying only to seniors who remain employed, are eligible for group coverage, are enrolled in HSA-qualified coverage, and are otherwise HSA-eligible – so the effect on the federal budget is small. Its effect on Medicare is positive because Medicare pays fewer claims than it otherwise would.

2.  Offer an HSA-qualified Medicare Part C benefit. Part C (also called Medicare Advantage, abbreviated to MA) is a private alternative to Original Medicare. Part C plans typically look like a managed-care HMO (or sometimes PPO) plan. They integrate inpatient, outpatient, and prescription-drug benefits into a single plan with one deductible and other cost-sharing, plus some enhanced benefits and discount programs.

Under this approach, you forego the group plan – which you most likely will do anyway, for reasons outlined above – pay your Part B premium, and enroll in Medicare Advantage coverage that’s HSA-qualified. Since you’re HSA-eligible, your employer contributes $1,500 to your account, and you can contribute another $3,050.

Medicare is responsible for paying all claims, since your only coverage is through Medicare. You’re a more engaged consumer, however, so you’re more likely than an Original Medicare enrollee to be more prudent in choosing when, where, and how to receive care.

This plan allows Health Savings Account owners to transition into retirement and continue to benefit from making contributions to their accounts. The federal government would experience a loss of tax revenue, but each enrollee in a Medicare Advantage plan would be more engaged in seeking high-value care at lower cost.

3.  Classify any Medicare coverage as an HSA-qualified plan. This approach is championed by Rep. Ami Bera (D-CA), a physician, and Jason Smith (R-MO). The concept is simple: The Part A deductible in 2020 is $1,408 per inpatient admission. The Part B deductible is $198, after which patient pay 20% of all remaining claims. The statutory minimum annual deductible for an HSA-qualified plan is $1,408 in 2020. So Original Medicare itself meets that requirement for anyone with an inpatient admission. And with an average out-of-pocket expenditure of $5,560, many Original Medicare recipients are effectively enrolled in HSA-qualified coverage.

This plan is the most aggressive in terms of extending the tax advantages of Health Savings Accounts. It has the greatest effect on federal revenues. But every dollar of lost federal tax revenue represents an additional dollar that seniors on a fixed income can devote to paying medical bills promptly or purchasing other necessary goods and services.

Which Approach Is Best?

So, which plan draws your interest? If you’re a working senior, the first plan preserves your eligibility to make and receive contributions to your Health Savings Account. But you have to stop contributing once you disenroll from the group plan.

The second plan gives every Medicare enrollee an opportunity to benefit from opening a Health Savings Account. And retirees – even those who never owned a Health Savings Account during their working lives – remain eligible to make and receive contributions. But they accept enrollment in a high-deductible integrated Medicare plan as the price that they pay for these financial benefits.

The third plan opens the door to Health Savings Accounts to somewhere between 40 million and 50 million Americans. That’s a huge opportunity for those seniors to enjoy discounts on every qualified service that they purchase. Conversely, it reduces federal tax revenues. Its direct effect on the Medicare program is minimal, since it doesn’t change behavior when determining coverage or care. So, it helps seniors without harming the financial viability of Medicare.

The point is that all three approaches benefit seniors financially. And at least two of the three strengthen Medicare long-term by eliminating or reducing Medicare claims costs. Helping seniors manage limited (and usually grossly underfunded) retirement assets . . . Reducing Medicare claims, so that the system remains viable and less of a drain on the general treasury. That sounds like a formula for success that anyone can support.

What We’re Reading

A growing number of people are following this author’s strategy of foregoing reimbursement from a Health Savings Account to preserve account balances for spending later in life. She explains the financial implication of immediate versus future reimbursement with a simple example.

Now that we’ve turned the calendar to 2020, the presidential campaign turns from rhetoric only to actual voting in primaries and caucuses. But what are Americans thinking about healthcare, and what are their core values regarding access and equality? The Commonwealth Fund provides some insight in a recent poll.

Average Health Savings Account balances are growing, according to an industry report, as account owners contribute more and spend less. Learn more here.


3 thoughts on “Strengthening Medicare and Seniors’ Finances”

  1. Bill,

    I continue to find your article extremely informative!

  2. Julie Jennings says:

    No question that we need some changes here. Tying Part A to Social Security does not seem logical to me, and if just this could be changed, it would help workers who are enrolled in HSA plans (especially understanding the complication of creating a 6 month retroactive enrollment in Part A!). As another option,I almost always recommend employer group plans include a non-HSA option for those employees who are not eligible for an HSA, but it still takes a lot of counseling to help employees understand the options and consequences of becoming eligible for Medicare.

  3. Robin Chouiniere says:

    Bill – great article! Thanks for all the hard work!

    Personally I like option 1. I’m finding that people are working longer and not retiring until their full retirement age or by age 67. With more and more businesses offering HSA qualified plans we need to educate our beneficiaries regarding their enrollment (or not) into Part A when they turn 65.

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