Decoding alphabet soup pt. 1

Part 1: How Medicare works

Some business practices in farming, including legally minimizing reported income, may benefit the business for a while. However, in some cases, cleverly managed tax returns and waiting too long to enroll in government financial and health security programs can backfire.

Paula Ledney, Penn State Extension program specialist in ag economics, sociology and education, recently discussed Medicare and how it affects farmers.

“Medicare is a federal health insurance program for people 65 and older, certain young people with disabilities and people with end-stage renal disease,” Ledney said. “Health costs increase greatly in old age and at the same time, our income almost always declines. The cost of adequate private health insurance is more than older persons could afford. Prior to Medicare, only a little over half of those ages 65 and over had any type of hospital insurance.”

Lyndon B. Johnson amended the Social Security Act to establish Medicare; Medicaid was established as a medical assistance program for those with low income. The original Medicare program Part A is hospital insurance and Part B is medical insurance. Today, these two parts are called Original Medicare.

The Medicare Prescription Drug Improvement & Modernization Act of 2003 (MMA) resulted in major changes to the Medicare program. Under the MMA, private health plans approved by Medicare became known as Medicare Advantage Plans. These plans are sometimes called Part C or MA Plans. The MMA also expanded Medicare to include an optional prescription drug benefit, Part D, which went into effect in 2006.

“Think of hospital insurance (Part A) as anything that happens when you go to the hospital,” Ledney said. “Part A helps cover in-patient care in the hospital, in skilled nursing facilities, hospice care and home healthcare. Part B is medical insurance and covers services from doctors and other healthcare providers, outpatient care, home healthcare, durable medical equipment (wheelchairs, walkers, hospital beds) and preventative services like screening, immunizations and vaccines in early wellness visits.”

To be eligible for premium-free Part A, applicants must be age 65 or older and they or their spouse worked and paid Medicare taxes for at least 10 years.

Ledney said farm families do a good job minimizing their farm taxes but may not have earned the required 40 quarters of credits. They reach retirement and may not be eligible for Social Security and are not eligible for free Part A but had no idea that was even an issue. Ledney urges farmers to plan ahead and make sure they qualify.

Most people don’t pay a premium for Part A, but everyone must pay for Part B. The monthly premium for Part B is deducted from Social Security, the Railroad Retirement Board (RRB) or civil service retirement. If a person doesn’t receive any of these payments, Medicare sends a bill for the Part B premium every three months.

For Medicare Part B, a person must have had a minimum amount of wages or net profit for a given year or quarter of a year to qualify for benefits, which is the same way someone qualifies for Social Security benefits. Individuals earn one credit per quarter in which a minimum required wage or net profit is achieved.

Part C is the Medicare Advantage plan. Those who don’t want to stay with Original Medicare can switch to Medicare Advantage, which is a Medicare-approved plan from a private company that offers an alternative for health and drug coverage. Such plans include Parts A and B and sometimes Part D (a drug plan). Medicare Advantage plans may offer benefits not covered by Original Medicare.

“With Medicare Advantage, in most cases you have to use doctors who are in the plan’s network, which may be similar to what you had while you were still working full-time,” Ledney said. “Such plans may have lower out-of-pocket costs than Original Medicare, and some may offer additional benefits not covered by Original Medicare such as vision, hearing and dental services.”

Medicare Part D is drug coverage, which helps cover the cost of prescription drugs and many recommended vaccines. Individuals can join a Part drug plan in addition to original Medicare or purchase Part D through a Medicare Advantage Plan that includes drug coverage. Plans that offer Medicare drug coverage are from private insurance companies that follow the rules set by Medicare.

Medicare Supplement Insurance (Medigap) is extra insurance purchased from a private company that helps pay costs that Parts A and B don’t cover.

“These policies are standardized, and in most states are named by letters such as Plan G, Plan F or Plan K,” Ledney said. “The benefits in each letter plan are the same no matter which insurance company sells it.” There are additional lettered plans, so be sure to understand all that are available.

Ledney emphasized the importance of strategizing paying wages to at least one person in the farm family. Be sure at least one spouse has qualified for Social Security and Medicare so benefits can be extended to both spouses when they reach 65. People can get Medicare if their spouse is eligible, even if they aren’t eligible on their own. Because Medicare is individual insurance, spouses can’t be on the same plan, but they may be eligible for Medicare based on their spouse’s work history.

“Think about how you are reporting your income,” Ledney said. “Not only will minimizing taxable income result in not qualifying for benefits if you don’t obtain the required 40 credits, minimal wages and profits will affect the actual payment amount of Social Security benefits which are calculated on your 35 highest earning years.”

The Social Security website states “Even if you do not retire at age 65, you may need to sign up for Medicare within three months of your 65th birthday to avoid a lifetime late enrollment penalty. Special rules may apply if you are covered by certain group health plans through work.”

“For younger folks coming in, looking at the requirements and planning ahead can be valuable,” Ledney said. “Decide what type of business you need to run and whether if it can be profitable enough to provide the opportunity for a comfortable retirement.”

To establish a Social Security account and prepare for Medicare, visit ssa.gov/myaccount/create.html.

by Sally Colby