MONEY Medicare

How to Shop for Medicare Drug Coverage

Q: I have a retiree medical plan sponsored by my former employer. It is a PPO with a $400 deductible per person and 20% co-insurance. The plan’s costs are reasonable, and it covers a wide range of drugs. There’s a $1,000 annual out-of-pocket maximum and one month of free maintenance drugs when you buy a 90-day supply from the preferred pharmacy. I will be Medicare eligible in 2016, and I do not think that my former employer will continue to offer a retiree health plan. Is there any insurer that will offer similar drug coverage to what I have now with no penalty for pre-existing conditions? How can I find such a plan, regardless of annual cost? Is there any way to avoid the $5,000 per year out-of-pocket cost that I hear is standard with Medicare Part D plans? Thank you. — Gary, N.Y.

A: Gary’s question is a great opportunity to talk about the challenges that more and more retirees face as they shift from employer-sponsored group health plans to Medicare.

As retiree health benefits have become increasingly expensive, many companies are dropping this coverage. In the best case scenario, the employer gives these retirees a lump sum, which is deposited into a health reimbursement account (HRA). The retiree can use the HRA funds to help buy an individual Medicare policy. But all too often, the employer may simply end the retiree health plan and provide no further support.

Still, there is some good news. Gary won’t face pre-existing condition limitations as long as he signs up for Medicare on a timely basis. If he meets the enrollment deadlines, any pre-existing conditions he has will not affect him when purchasing Part D, or when signing up for Original Medicare (Parts A and B) or Medicare Advantage (Part C).

If Gary chooses Original Medicare, he may want to buy a Medicare supplement policy, which also is called Medigap. Original Medicare pays only 80% of insured expenses, after beneficiaries pay annual deductibles and co-pays; policyholders must pay the other 20%. Medigap policies will pay that 20% plus other services that Medicare does not cover. If you purchase Medigap coverage at the time you become eligible for Medicare, you have guaranteed issue rights—you cannot be penalized for pre-existing conditions.

So Gary has two basic options. He can enroll in Original Medicare, with or without a Medigap plan, and then get a stand-alone Part D drug plan. Or he can purchase a Medicare Advantage plan, which will pay for everything that Original Medicare does, including (in most cases) Part D drug coverage and often additional benefits as well.

There are some drawbacks to Medicare Advantage. Unlike fee-for-service Original Medicare, most Medicare Advantage plans are health maintenance organizations (HMOs), which require people to get their care in the plans’ provider network of doctors, hospitals and other providers. So be sure you’re comfortable with the health-care network before you sign on.

Now for bad news. Neither Original Medicare or Medicare Advantage is likely to offer Gary Part D coverage that is as good a deal as his employer-sponsored drug plan. Still, the costs may not be as steep as Gary fears. There are ceilings on Part D drug expenses, but they differ by plan. And despite what he heard, out-of-pocket costs for many policies are less than $5,000.

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It may also help Gary that shopping around for affordable drug coverage is getting easier. Medicare now offers an online tool called Plan Finder—just plug in your ZIP code, and you’ll see a list of all Part D plans from private insurers that are offered where you live. The list will include the premiums and other rates, as well as out-of-pocket maximums.

The Plan Finder tool also will let you enter your list of prescription medications and compare the costs of these drugs under different plans. If a plan does not include a specific drug in its roster of available drugs (called a “formulary”), you will see this as well. You can connect directly to plans that interest you and ask any additional questions you might have.

Read next: Why Medicare Premiums May Jump 50%

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY Medicare

Medicare Wants Doctors to Get Paid to Discuss End-Of-Life Issues

The government is accepting public comments on the proposal and will make a decision in November.

Remember the so-called death panels?

When Congress debated the Affordable Care Act in 2009, the legislation originally included a provision that would have allowed Medicare to reimburse doctors when they meet with patients to talk about end-of-life care.

But then Sarah Palin argued that such payments would lead to care being withheld from the elderly and disabled. Her comment ignited a firestorm among conservatives and helped fuel the opposition to the legislation.

Her assertions greatly distressed Dr. Pamelyn Close, a palliative care specialist in Los Angeles.

“It did terrible damage to the concept of having this conversation,” she said.

Amid the ensuing political uproar, Congress deleted the provision. And the lack of payments and concerns about the controversy further discouraged doctors from initiating these talks, according to Close.

“We just are not having these conversations often enough and soon enough,” Close said. “Loved ones who are trying to do always the right thing, end up being weighed with tremendous guilt and tremendous uncertainty without having had that conversation.”

When done right, according to Close, these counseling sessions often delve into end-of-life treatment options and legal documents, such as advance directives and living wills. The issues to be covered are complex and typically require a series of discussions.

Right now, Medicare only pays doctors for this sort of advanced care planning if it happens during the first visit for new Medicare enrollees. But the government recently has again proposed that Medicare reimburse doctors for including these conversations in their practice, whenever they occur.

Already, some private insurance companies are starting to do just that.

Read next: How Medicare’s New Rules May Improve Eldercare Benefits

Meanwhile, the Alliance Defending Freedom, a conservative Christian organization, has formally opposed Medicare’s proposal.

“By paying doctors for these conversations, what we’re doing is opening the door to directive counseling and coercion,” said Catherine Glenn Foster, an attorney with the group. Foster says her organization supports end-of-life counseling and planning, but not in a doctor’s office.

“A doctor is not really the person you’d want to be having it with – particularly not a general practitioner who would not be able to advise on the nuances of end-of-life care in the first place,” she says.

But patients seem to want these talks. A 2012 study by the California HealthCare Foundation found that 80 percent of Californians would like to have an end-of-life conversation with their physician, but fewer than one in 10 has done so.

Many doctors who initiate the discussions often do so on their own dime. More often, they don’t have them at all, said Dr. Daniel Stone, an internist with Cedars-Sinai Medical Center in Los Angeles.

“When a doctor has patients scheduled every 15 minutes, it’s difficult to have a face-to-face conversation about values and goals related to the end of life, which is one of the most sensitive topics that you can possibly discuss with a patient,” Stone said.

Dr. Susan Tolle, an internist with the Center for Ethics in Health Care at the Oregon Health and Science University in Portland, says the informality with which such conversations are held now means that family members may not be included. Having the discussion as part of a formal doctor’s appointment can change that, she said.

“What it does is, it gives this really important conversation dignity and standing,” she said.

In Oregon, doctors have been squeezing end-of-life discussions into regular medical appointments for decades, under less-than-ideal circumstances. Over the last five years a quarter of a million Oregonians filed their wishes with a state registry. They use what’s known as a POLST form, which stands for Physician Orders for Life Sustaining Treatment. A version of it has been adopted by some other states, including New York and West Virginia.

Jo Ann Farwell, a retired Portland social worker who was recently diagnosed with a brain tumor, completed the form after talking to her doctor.

“I had surgery and had a prognosis of four to six months to live,” she said, after she was diagnosed with a brain tumor.

She did it, she said, to make sure her last hours are as comfortable as possible.

“I wouldn’t want to be on tube-feeding,” she said. “I wouldn’t want to be resuscitated, or have mechanical ventilation, because that would probably prolong my dying, rather than giving me quality of life.”

In the 1990s, health care workers all over Oregon recognized that the wishes of patients weren’t being consistently followed. So the health care establishment worked with the state and with ethicists to prioritize end-of-life talks; the result was the POLST form.

Rep. Earl Blumenauer, a Democrat from Portland, has introduced the Medicare reimbursement legislation every session since 2009. Until now, he says, the federal government hasn’t placed any value on helping people prepare for death, and he finds that ironic.

“The Medicare program will pay for literally thousands of medical procedures, many of them very expensive and complex, even if the person is at the latest stage of life and it may not do any good,” Blumenauer says.

From a purely financial point of view, the change could save money. But Blumenauer says that’s not what’s driving him.

“I don’t care what people decide,” he says. “If they want to die in an ICU with tubes up their nose, that’s their choice. What we want is that people know what their choices are.”

Farwell, the brain tumor patient, well remembers when her sister was dying from cancer.

“She never talked about death or dying,” Farwell said, “never talked about what she wanted at the end. It was very, very difficult for me to try to plan and give her care.”

Farwell wants her sons to be in a better position when it comes to carrying out her wishes.

The federal government is now accepting public comment on the Medicare reimbursement proposal. It’s expected to make a decision in November.

Kaiser Health News (KHN) is a nonprofit national health policy news service.

MONEY Medicare

How to Time Medicare and Social Security Claims for 2016

Q: I read your informative article on the increased Medicare Part B premium hike that may occur next year, but for only certain groups of Medicare enrollees, mainly those not paying the cost out of Social Security. Of course it seems inherently unfair to charge an individual like myself who has decided to delay Social Security for a higher benefit at age 70 and pay my Medicare out of pocket till then.

My question is can I avoid this increase by taking my Social Security this year and have my Medicare deducted from my benefit, and then next year suspend or withdraw my retirement and start again paying Medicare out of my pocket? When I suspend or withdraw my retirement will I continue to pay the same Medicare benefit as I paid while receiving Social Security, or will my Medicare premium increase because I again would be paying out of pocket?

My birthday is in November and I’ll turn 67 so I would just take the Social Security benefit till early 2016. Your help in answering this question will assist me in deciding to apply for benefits before November. Thanks. –Mike

A: Mike asked the most intriguing question I received on that article, but lots of readers chimed in following the recent disclosure that Medicare Part B premiums are projected to rise for some people by more than 50% next year. The projections were contained in the Medicare trustees’ recent annual report.

And, as it turns out, Mike’s questions involve detailed Social Security rules that can have broader implications for many filers.

The “Hold-Harmless” Rule

First, though, let’s recap the news about next year’s Part B premiums, which cover doctors, outpatient expenses and other services. The rules say that these premiums must be deducted from Social Security payments if someone is receiving Social Security and Medicare. Since those costs are expected to rise more next year than they have in recent years, Medicare must boost premiums that it will begin collecting next January.

However, overall inflation this year is expected to be low. Current levels of inflation determine whether Social Security beneficiaries will receive a cost of living adjustment (COLA) in 2016. The way it looks now, the trustees said, there likely will be no COLA at all.

When this happens, Social Security’s “hold harmless” provision kicks in. This rule says that no existing Social Security beneficiary paying the basic Part B premium ($104.90 this year) can be forced to receive a smaller Social Security benefit in one year than they did the previous year. These folks, roughly 70% of beneficiaries, would therefore continue paying $104.90 a month next year in Part B premiums.

Yet Medicare must raise about 25% of total Part B expenses from its recipients. So the program will have no choice but to collect all of this required revenue from the remaining beneficiaries, who will not be held harmless.

This group includes new Social Security beneficiaries, existing beneficiaries who have modified adjusted gross incomes above $85,000 ($170,000 if filing joint tax returns), and those who pay their Part B premiums directly to Medicare instead of having them withheld from their monthly Social Security payments. This last group represents people on Medicare such as Mike who have not yet begun receiving Social Security.

Medicare officials have said they will work to reduce the projected 52% hikes in Part B premiums faced by these three groups. But if the Social Security COLA does come in at zero when it is announced in October, the hold-harmless provision will trigger a big increase in Part B premiums for this sizable minority of Medicare recipients.

Suspend and Avoid

To return to Mike’s question, there’s some good news. Dorothy Clark, a spokeswoman for Social Security, says it looks like he can, indeed, avoid getting dinged with a big Part B increase by suspending benefits. She said there are four conditions that must be satisfied (the bold words are hers):

The individual is entitled to (i.e., actually receiving) Social Security benefits for the months of November and December,

Medicare Part B premiums for December and January are deducted from those benefits,

The individual receives a cash benefit for November, and

Solely because the increase in the Part B premium is so high compared to the Social Security benefit payable, the Social Security benefit payable would be lower in January than in December.

Mike’s November Social Security payment is lagged a month, meaning he won’t receive it until December. When he does, his Medicare Part B premium for December will be deducted from that initial Social Security payment. By beginning Part B deductions before the end of 2015, Mike will qualify to be held harmless in 2016.

So far, so good. But can Mike then suspend or withdraw his Social Security payment in 2016, and resume paying his Part B premiums to Medicare at the same hold-harmless rate he was paying in 2015?

Short-Term Gain

We have a split decision here. Ms. Clark said he absolutely can suspend his benefits in 2016 and continue to be held harmless. However, he cannot withdraw his benefits and receive this treatment. The reason is that suspending benefits maintains a person’s eligibility to receive them, while withdrawing from Social Security ends it. Without that eligibility, there is no basis for the person to be held harmless.

(Not to get too detailed, but if Mike withdrew his benefits, he would need to repay any payments from Social Security, and he would effectively get a do-over, meaning he would be regarded as never having filed for Social Security benefits at all. And when Ms. Clark uses the word “eligibility” she means Mike has currently filed to receive benefits. If he were not receiving benefits but was qualified to file for them, he would be considered “entitled” for benefits.)

To summarize, Mike can file for Social Security in time to receive his November payment in December, qualifying him to be held harmless against any Part B premium increase in 2016. He then can suspend his Social Security early in 2016 and continue to be held harmless in 2016. While his Social Security benefits are suspended, they will qualify for delayed retirement credits, permitting them to rise in value at the rate of 8% a year.

Mike will need to go to a lot of trouble to be held harmless, however, and the savings may be short-term. Even if Part B premiums do rise for the unlucky minority, they are likely to be rolled back once Social Security starts paying COLAs again. Back in 2010 and 2011, there were no COLAs either, and the hold-harmless provision raised the lowest Part B premium from $96.40 a month in 2009 to $110.50 in 2010 and $115.40 in 2011. With the reinstatement of a COLA in 2012, Medicare could spread the financial pain to everyone, and the premium dropped to $99.90 a month.

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

Read next: Why Social Security Is More Crucial Than Ever for Your Retirement

MONEY Workplace

Why Your Paycheck Is So Much Smaller Than Your Salary

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Ian Jeffery—Getty Images

Count the deductions.

Gross salary? Net salary? FICA? You may notice when you add up a years’ worth of paychecks, the sum doesn’t match your promised salary. Check out some of the reasons these numbers aren’t equal below.

1. Income Tax

Income in the U.S. is taxed at the federal, state and local government levels. The IRS administers federal income tax progressively, meaning rates are determined by income level. Your first income dollar is taxed differently than your highest-income dollar. (You can see which tax bracket you fall into here.) The W-4 form you filed when you were first hired dictates how much is taken out for the federal government and it is deducted incrementally from each paycheck. (You may owe more or less than this estimate and thus may get a tax bill or refund come tax time.) State and local taxes vary based on location but also can be deducted from your paycheck.

2. Social Security

To help you cope with loss of regular income in retirement, the federal government requires employers to withhold a certain percentage (currently 6.2% from both employee and employer) of employee paychecks for Social Security benefits. The Social Security Administration takes the average of your highest-earning 35 years of covered wages, indexes for inflation and provides you with some income in the form of benefits.

3. Medicare

Similar to Social Security, Medicare withholdings are mandatory. These taxes go toward the Medicare insurance that you will qualify for once you are 65. Both employer and employee pay 1.45% of gross income into the system on the employee’s behalf and it provides coverage for major medical expenses. As of 2013, there is an additional tax for those with $200,000 of annual income or more.

4. Retirement Contributions

Plans like 401(k)s and 403(b)s are tax-deferred through your employer. These contributions can be taken directly out of your regular paychecks and go toward your retirement savings. The more you assign toward these accounts, the lower your federal income tax withholding will be.

5. Insurance Deductions

Health care (like medical and dental) and life insurance premiums paid through your employer are taken out at payroll as a deduction. Your health insurance premiums are not subject to FICA or Medicare taxes.

Even though your net income may not be all you hoped for when you got your salary statement, it is important to know where that money is going and how it may help you in the future.

More From Credit.com:

MONEY Medicare

Why Medicare Premiums May Jump 50%

Some 30% of Medicare beneficiaries, including new enrollees, may be hit with higher Part B premiums.

This story corrects an earlier column, “3 Ways to Dodge Big Medicare Premiums Next Year,” which included inaccurate information.

Earlier this week, I wrote a piece for Money about 50% increases in Part B premiums that Medicare trustees projected would be levied next year on about 30% of Medicare users. My heart was in the right place but not my facts.

The story had some inexcusable gaffes. Thanks to Money readers who pointed them out. Apologies to all Money readers for receiving bad information, which led me to deliver some equally bad advice.

The gist of the piece is that the law requires Medicare to recover 25% of Part B expenses for covered doctor, outpatient and medical equipment expenses through Part B premiums. These expenses are rising, causing the trustees to project a fairly large hike in Part B premiums. Normally, all Medicare beneficiaries with Part B coverage would pay higher premiums.

This is not expected to be the case in 2016, however. That’s because most Part B premiums are paid out of people’s monthly payments from Social Security, and it has what’s called a “hold harmless” provision. According to this rule, Medicare beneficiaries who pay the lowest Part B premium this way—about 70% of all beneficiaries—can’t be required to pay premium increases next year that are larger than the amount of the annual cost-of-living adjustment (COLA) in their Social Security benefit that they receive.

This year there’s been little inflation. So, as the trustees said in their annual report on Medicare, there likely won’t be a Social Security COLA in 2016. Holding all those basic-premium payers harmless means they will continue to pay $104.90 a month for Part B in 2016—the same amount they are paying this year.

Still, Medicare has to recoup that 25% of Part B expenses somehow. It has no choice but to look to the other 30% of beneficiaries to pick up the entire tab for higher Part B premiums. This group includes seniors with higher incomes, those new to Medicare next year, and those who aren’t paying Part B through Social Security, mostly because they haven’t begun taking Social Security yet.

Read next: How Medicare’s New Rules May Improve Eldercare Benefits

These beneficiaries thus could be saddled with premium hikes the trustees projected at 52%. Medicare officials say they will look for ways to soften the blow but the hikes are still expected to be substantial. This is how the trustees’ report breaks them down:

  • For incomes below $85,000 ($170,000 if filing jointly)—Part B premiums would rise from $104.90 to $159.30. (This is what newcomers to Medicare and those who pay premiums directly will pay next year if they are in the lowest income bracket.)
  • For incomes between $85,000 and $107,000 ($170,000 to $214,000 if filing jointly)—from $146.90 a month this year to $223.00.
  • For incomes between $107,000 and $160,000 ($214,000 to $320,000 if filing jointly)—from $209.80 a month this year to $318.60.
  • For incomes between $160,000 and $214,000 ($320,000 to $428,000 if filing jointly)—from $272.20 a month this year to $414.20.
  • For incomes above $214.000 ($428,000 if filing jointly)—from $335.70 a month this year to $509.80.

The measure of income used to calculate these brackets is called Modified Adjusted Gross Income, or MAGI for short.

Up to this point, my reporting was accurate, but then I made two big mistakes:

I said higher-income taxpayers could try to soften the blow next year by taking steps to reduce their reported MAGI this year. This can’t happen because Social Security uses a two-year look-back period in determining the MAGI used to calculate Part B premiums—a key point that I forgot. So, premiums due next year in 2016 will be based on 2014 tax returns. Because of this, there is nothing anyone can do this year to change the income figure that will be used to determine their 2016 Part B premiums.

I also said people who pay their Medicare Part B premiums directly might be able to join the hold harmless club if they could figure out a way for their premiums to be deducted from their Social Security payments.

This is not true. There is no personal preference at work here. As a passage from the Social Security handbook explains, “Medicare Part B premiums must be deducted from Social Security benefits if the monthly benefit covers the deduction.” So, people do not have a choice. Once again, my advice was wrong. Strike two.

I avoided totally whiffing because my third piece of advice was correct: For those turning 65 and planning to sign up for Medicare next year, consider delaying enrollment. The initial enrollment period begins three months before you turn 65 and includes your birthday month, plus the three months following your birthday. Perhaps you can stay within this window while still pushing your enrollment date into 2017.

Or if you have the choice, you may be better off working another year. Even if they have reached 65, most people need not enroll in Medicare if they are still working and have group health insurance from their employer (the major exception is people who work for an employer with fewer than 20 employees).

It also remains true that avoiding a big Part B premium hike next year can pay off because these unusually high premiums will recede in future years, once Social Security starts paying COLAs again. As I wrote, there were no COLAs in 2010 and 2011, either, and the hold harmless provision raised the lowest Part B premium from $96.40 a month in 2009 to $110.50 in 2010 and $115.40 in 2011. With the reinstatement of a COLA in 2012, Medicare could spread the financial pain to everyone, and the premium dropped to $99.90 a month.

Again, apologies to Money readers for these mistakes. You deserve better.

You Might Also Like:

3 Ways to Dodge Big Medicare Premium Hikes Next Year

These Are the Cheapest and Most Costly States for Retiree Health Care

Why Kids Can Be Social Security Game Changers

Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.

MONEY Health Care

These Are the Cheapest and Most Costly States for Retiree Health Care

Pills and US map
Jill Fromer—Getty Images

California and Hawaii stack up surprisingly well for high-cost states, but retiree medical bills are daunting wherever you live.

Planning for health care costs in retirement is famously difficult. You cannot predict your health, the pace of rising prices, or changes to the national health care system. Yet these costs, which vary state by state, can be so big that you must take them into account—especially if your dreams call for relocating.

Most states fall within a reasonably narrow band for total out-of-pocket health care costs in retirement. But the cheapest and the most expensive states may surprise you, and in certain areas of coverage the differences can be large, according to a recent analysis by HealthView Services, which designs health care cost projection software. For example, Medicare supplemental insurance (covering co-pays and deductibles) in Maryland is 57% higher than in Vermont. Premiums for Medicare Part D (prescription drugs) in Wisconsin are 51% higher than in New York.

Hawaii is the cheapest state for retirees in terms of health care costs, based on an analysis of Medicare Part B (doctor visits and procedures), Part D, and supplemental premiums. For all three coverages, a 65-year-old in Hawaii can expect to pay $2,818 their first year in retirement and $112,528 over 20 years.

But Hawaii is something of an outlier—and note that it is otherwise the most expensive state in the nation. The second cheapest state for retiree health care is Vermont, where first-year expenses total $3,074 and 20-year costs run $124,073. Maine is only slightly more expensive.

Compare those figures to the most expensive states for retirement health care: Michigan, Florida, Nevada, and Maryland. In Michigan, a 65-year-old can expect to pay $3,707 in year one of retirement and $152,175 over 20 years. That’s more than $28,000 above the 20-year costs in Vermont. Michigan’s costs also exceed those in coastal states generally associated with a high cost of living, including New York and California.

The good news for retirees may be that, other than Florida, states favored by snowbirds like New Mexico, Georgia and South Carolina have some of the lowest expected retiree health care costs. In Georgia, for example, first-year costs would be $3,359 and 20-year costs would be $136,663, according to the app.

Three in four pre-retirees express high levels of concern over future health care costs, according to a Bank of America Merrill Lynch report. This is partly because the headline numbers are so daunting. The Employee Benefits Research Institute estimates that a 65-year-old couple with median drug expenses needs $271,000 in savings to have a 90% chance of being able to cover health care expenses in retirement, not counting the costs of long-term care.

The HealthView analysis does little to dispel those fears. In general, the 20-year cost in most states is between $135,000 and $145,000 per person—and these calculations do not include surcharges for retirees who have more than $85,000 (for singles) or $170,000 (for couples) in retirement income. Such surcharges can triple the cost of Medicare parts B and D premiums. The calculations also do not include certain other out-of-pocket costs like vision, dental, and hearing.

On average, a healthy 65-year-old couple will have $266,589 in lifetime costs for Medicare parts B and D and supplemental coverage, HealthView finds in a separate report. When other typical out-of-pocket costs are included that figure rises to $394,954. No matter where you live, that’s a significant chunk of money and must be taken into account in your retirement plan.

To make an informed estimate of those expenses, run the numbers on a retirement health care cost calculator, like this tool offered by Health View, or sit down with a financial adviser. And consider making moves now to control your expenses and stay healthy and active throughout retirement. There’s reason to be optimistic: recent research shows that the act of retiring itself can do a lot to immediately improve your health as well as your happiness.

Read next: How to Tame the Unexpected Costs of Medicare

MONEY Opinion

Medicare Is Part of the Solution to Rising Health Care Costs

Democratic House Leader Nancy Pelosi Marks 50th Anniversary Of Medicare And Medicaid With Senate And House Lawmakers
Astrid Riecken—Getty Images Seniors listen to Democratic House Leader Nancy Pelosi mark the 50th Anniversary of Medicare and Medicaid on Capitol Hill on July 29, 2015 in Washington, DC. Pelosi was joined by Senate and House lawmakers who oppose any cuts to the important program for seniors.

The health insurance program's massive size gives it the power to set prices that providers will accept.

Medicare turns 50 on Thursday, riding high in the polls but under attack from presidential candidates proposing benefit cuts or even phasing out the U.S. healthcare program for older people.

When President Lyndon Johnson signed the law, half of Americans age 65 or older had no health insurance. Today, just 2% go uncovered.

And the public really, really likes Medicare, which last year covered 54 million Americans. A poll released earlier this month by the Kaiser Family Foundation found strong support across political party lines for Medicare and Medicaid, which insures low-income Americans and became law alongside Medicare.

But Medicare still sticks in the craw of conservatives.

“We need to figure out a way to phase out this program for (people who are not already receiving benefits) and move to a new system that allows them to have something, because they’re not going to have anything,” Republican presidential contender Jeb Bush told an audience of conservatives in New Hampshire last week.

Bush later tried to walk back his comment, but he is not alone in his desire to euthanize Medicare just as it hits midlife.

Fellow Republican presidential candidate Chris Christie has proposed raising the eligibility age for Medicare and Social Security to 69.

Beyond all the noise lies an important question: how to best pay for health care for our aging population.

In 2050, the 65-and-older population will reach 83.7 million, almost double what it was in 2012, according to the U.S. Census Bureau. That, along with rising healthcare costs, means Medicare will account for a rising share of the federal budget in the years ahead.

The line of attack against Medicare is that its finances are not sustainable, but what we really have is a healthcare cost problem, not a Medicare problem.

The program is funded through two trust funds.

The Hospital Insurance fund, which finances Medicare’s Part A hospital benefits, receives money mainly from the 1.45% payroll tax that employees pay and employers match. This fund is projected to run dry in 2030, leaving Medicare able to meet only 85% of that part of the program’s costs.

Meanwhile, the Supplementary Medical Insurance trust fund finances outpatient services and the Part D prescription drug program. It gets 75% of its funding from general tax revenues and 25% from yearly premiums that beneficiaries pay. It will stay solvent because contributions are reset annually to match anticipated spending, but that is expected to put more pressure on government and household budgets in the years ahead, especially if healthcare inflation takes off.

Medicare actually does a better job of restraining spending growth than private health insurance because its massive size gives it the power to set prices that providers will accept. And the Affordable Care Act mandated constraints in provider payments that have been paying off.

Medicare spending has been slowing in recent years. Reflecting that, the annual Part B (outpatient services) premium has been flat at $104.90 for the past three years.

Medicare’s trustees projected last week that the program’s total spending as a percent of the gross domestic product would rise from 3.5% to 5.4% in 2035. That is “not nothing, but neither is it insurmountable,” says Jared Bernstein, an economist and senior fellow at the Center on Budget and Policy Priorities.

The gap can be closed through efficiencies. We could change the law to allow the government to negotiate drug prices with pharmaceutical companies, for example. Or a small increase in the Medicare payroll tax from 1.45% to 1.8% would do the trick.

The conservative plan, however, is to reduce the value of Medicare’s benefits. That can be done by raising the eligibility age, effectively a lifetime benefit cut, or by replacing the program’s set of defined benefits with something called “premium support.”

With that, people would receive a voucher that they could use to purchase private insurance plans. Bush was showcasing that idea in his New Hampshire remarks.

A phase-out or redesign of Medicare will mean higher out-of-pocket costs in a program where the median income of enrollees is just $23,500 per year.

“These folks would unquestionably be worse off in the absence of Medicare,” Bernstein said.

Instead, we should continue working on reforming the delivery of care and negotiate savings with pharmaceutical companies.

And we should wish our most important health insurance program a happy birthday. Medicare, you are part of the solution, not the problem.

Read next: Medicare Turns 50 But Big Challenges Await

TIME politics

How Medicare Came Into Existence

Aug. 6, 1965
Cover Credit: BORIS CHALIAPIN The Aug. 6, 1965, cover of TIME

TIME said the bill—signed on July 30, 1965—created a "welfare state beyond Roosevelt's wildest dreams"

It was 50 years ago Thursday, on July 30, 1965, that President Lyndon Johnson signed the Medicare bill, turning the national social security healthcare program for older Americans into law. But, despite Johnson’s legendary powers of legislative persuasion, the celebratory signing event—complete with the enrollment of the first Medicare beneficiary, former President Harry S. Truman—could have looked very different.

After all, the idea of helping American seniors afford health care took time to gain traction: The idea came up not long after Franklin Roosevelt initiated the modern social-security system in the 1930s. When the coinage “Medicare” first came on the American scene, the program it described was not the one we think of today. In 1960, the term referred to an opposing program proposed by the Eisenhower administration. The big fear at the time was that tying any kind of health aid to social security would quickly deplete the funds available for that then-30-year-old system; Eisenhower’s version, overseen by then-Vice President Richard Nixon, would have been both voluntary and state-funded.

In that year’s Presidential campaign, however, Nixon lost to challenger John F. Kennedy—who, as TIME put it a few years later, “vowed without qualification that his Administration would persuade a Democratic Congress to pass a medicare bill, to be financed under the social security system.” Kennedy died, however, before he could make good on that promise—which is where Johnson comes in. Benefiting from his 1964 election victory, Johnson made it happen. But what exactly it would look like remained to be settled.

By April of 1965, as TIME reported, there were three options in the running: Johnson’s social-security-linked compulsory program; an Eisenhower-esque voluntary program with no link to social security; or an American Medical Association-backed plan called “eldercare,” which prioritized patient choice and was need-based. The solution came, surprisingly, in the form of House Ways and Mean Committee chair Wilbur Mills, who had been a staunch opponent of Medicare. He combined elements of the three plans into one that would succeed. The basics of the plan were compulsory and funded by increasing social-security taxes, while extras were voluntary. The program we now know as Medicaid, for those in need, would also be expanded.

“The medicare bill will not solve all the problems of growing old—but it will certainly make the process much less costly to the elderly,” TIME noted. And that wasn’t all it did, the magazine continued. The medicare bill represented a fundamental change to American political norms:

Almost 30 years ago, Franklin Delano Roosevelt signed into law the Social Security Act. At the moment of signing, he issued a statement that, in retrospect, sounds almost apologetic: “We have tried to frame a law which will give some measure of protection to the average citizen and his family against the loss of a job and against poverty-ridden old age. This law, too, represents a cornerstone in a structure which is being built but is by no means complete. It is a structure intended to lessen the force of possible future depressions.”

Social security was mostly an emergency act in a nation still struggling out of the depths of a depression in which, in F.D.R.’s famed phrase, more than one-third of the nation was “ill-housed, ill-clad, ill-nourished.” The change since then in American life has never been more apparent than last week, when Congress acted on two bills that projected a new sort of welfare state beyond Roosevelt’s wildest dreams. First, the House of Representatives passed and sent to the Senate, where it faces certain swift approval, the Johnson Administration’s $6 billion-a-year medicare bill…

Action on both bills came not in time of depression but in the midst of the most prosperous year that the affluent society has ever known. There were a few squawks about presidential pressure, but it was widely accepted that both measures would achieve great good in making the U.S. even more affluent without turning it into a socialistic society. It was generally conceded that both bills, despite the vastness of their scope, were aimed not at increasing the power of the Federal Government, but at eradicating some remaining blemishes in the Great Society.

Read the full story, here in the TIME Vault: The New Welfare State

MONEY Medicare

Medicare Turns 50 But Big Challenges Await

President Lyndon Johnson signing Medicare Bill in Independence, Missouri while Harry Truman looks on, July 30, 1965.
Universal History Archive—Getty Images President Lyndon Johnson signing Medicare Bill in Independence, Missouri while Harry Truman looks on, July 30, 1965.

Medicare provides coverage to one in six Americans, and federal officials look to find ways to trim the increasing cost and improve how the program operates.

Medicare, the federal health insurance program for the elderly and disabled, has come a long way since its creation in 1965 when nearly half of all seniors were uninsured. Now, the program covers 55 million people, providing insurance to one in six Americans. With that in mind, Medicare faces a host of challenges in the decades to come. Here’s a look at some of them.

Financing – While Medicare spending growth has slowed in recent years – a trend that may continue into the future – 10,000 people a day are becoming eligible for Medicare as the trend-setting baby boomers age. Yet the number of workers paying taxes to help fund the program is decreasing. That means Medicare will consume a greater share of the federal budget and beneficiaries’ share of the tab will likely climb. An abundance of proposals to curb federal expenditures on Medicare exist. They include increasing the eligibility age, restructuring benefits and cost-sharing, raising the current payroll tax rate and asking wealthier beneficiaries to pay more for coverage. Many Republicans have backed a “premium support” model — where the government would give beneficiaries a set amount of money to purchase coverage from a number of competing plans — as a way to limit Medicare spending. Democrats say premium support would undermine traditional Medicare and shift more of the program’s financial risk to beneficiaries. They favor other reforms in the program. By at least two-to-one margins, majorities of Democrats, Republicans and independents favor keeping Medicare as it is rather than changing to a premium support program, according to a recent poll from the Kaiser Family Foundation. (KHN is an editorially independent program of the foundation.)

Affordability — Most Medicare beneficiaries don’t have a lot of money and spend a large chunk of their finances on health care. Unlike many private health insurance plans, there is no cap on out-of-pocket expenditures in traditional Medicare, and the program does not cover services that many beneficiaries need, such as dental care and eyeglasses. (Private insurers that participate in Medicare Advantage may cover these and other items that traditional Medicare does not.) In 2013, half of all people on Medicare had incomes below $23,500 per person, and premiums for Medicare and supplemental insurance accounted for 42 percent of average total out-of-pocket spending among beneficiaries in traditional Medicare in 2010, according to an analysis from the Kaiser Family Foundation. Medicare does have some programs to help beneficiaries pay their Medicare expenses but the income limits can be as low as $1,001 per month with savings and other assets at or below $7,280 (limits are higher for couples).

Managing Chronic Disease — Illnesses such as heart disease or diabetes can ring up huge medical costs, so keeping beneficiaries with these conditions as healthy as possible helps not only the patients but also Medicare’s bottom line. An analysis from the Urban Institute finds that half of all Medicare beneficiaries will have diabetes in 2030 and a third will be afflicted with heart disease. Nearly half of the people on Medicare have four or more chronic conditions and 10 percent of the Medicare population accounts for 58 percent of spending. Reducing the rate of chronic disease by just 5 percent would save Medicare and Medicaid $5.5 billion a year by 2030 and reducing it by 25 percent would save $26.2 billion per year, the Urban Institute found. As beneficiaries age, many will want to remain in their homes and communities, requiring Medicare to identify ways to serve these beneficiaries as they face physical and cognitive impairments and meet their needs for more personal care, according to the Commonwealth Fund.

Delivery-System Reform — Medicare hopes to better manage beneficiaries’ needs by revolutionizing the way in which it pays for medical care. Federal officials have taken several steps to better coordinate and improve medical care, including implementing the health law’s requirement to reduce preventable hospital readmissions and form accountable care organizations, or ACOs, where doctors and others band together to care for patients with the promise of getting a piece of any savings. Another federal effort uses bundled payments, where Medicare gives providers a fixed sum for each patient, which is supposed to cover not only their initial treatment but also all the follow-up care. Last year, 20 percent of traditional Medicare spending — $72 billion — went to doctors, hospitals and other providers that coordinated patient care to make it better and cheaper. Department of Health and Human Services Secretary Sylvia M. Burwell has said that by the end of 2018 Medicare aims to have half of all traditional program payments linked to quality.

The Growth of Medicare Advantage — Enrollment in these private plans that offer alternative coverage is growing sharply. But the health law seeks to cut the rate at which the government reimburses insurers to make it closer to what it spends on beneficiaries in traditional Medicare. Nearly a third of beneficiaries are enrolled in Medicare Advantage plans. Many of the plans provide benefits beyond what traditional Medicare covers, such as eyeglasses and dental care, as well as lower out-of-pocket costs. But as federal payment rates decline the plans may become less generous. Another factor to watch is concentration in the Medicare Advantage market with just a handful of insurers now accounting for more than half of enrollment.

Kaiser Health News (KHN) is a nonprofit national health policy news service.

Read next: Medicare Is Part of the Solution to Rising Health Care Costs

MONEY

Think Health Care is Pricey? Get Ready to Spend Even More

pile of prescription medicine pills and tablets
Jan Mika—Shutterstock

Soon one out of every five dollars Americans spend will to go healthcare.

For the past six years Americans have gotten a respite from fast-rising health care costs. No more.

With millions of baby boomers entering retirement and pricey new drugs hitting the market, U.S. health care spending, which had increased at relatively moderate 4% rate since the financial crisis, grew 5.5% last year, according to a new government study reported on Tuesday by The Wall Street Journal.

You can expect more too. The actuaries who calculated the figures, project that spending will average 5.8% between 2014 and 2024. By then, health care as a share of the nation’s overall economy will have grown to 19.4% from 17.4% in 2013. In other words, our nation’s medical bills will account for one out of every five dollars we spend.

The changes aren’t totally unexpected. A big part of the extra costs are tied to the fact that baby boomers — many now in their 60s — are requiring more care. Important but expensive new drugs, like one that helps treat Hepatitis C, are also a factor, according the Journal.

Still, the rising costs aren’t good news, especially considering a key promise of the Affordable Care Act, which brought access to health insurance to millions of Americans, was to get the growth in health care spending under control, a goal known as “bending the curve.”

For people who get their health insurance coverage at work, rising costs are likely to mean a continued push by employers toward high-deductible plans, which can have steep out-of-pocket costs. Read here for more on tools for keeping medical bills under control.

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