Winners and Losers: Rules Would Benefit the Older, Sicker and Poorer

At least on paper, Medicare’s new catastrophic care program is a good deal for most Americans 65 and older. It offers a panoply of new and expanded medical benefits for a modest price tag of just $48 this year.

But this bargain for the majority--nearly 60% of those over 65--is possible only because the rest of the elderly must pay the rest of the cost through a new surtax. It is this surtax--15% of income tax payments, up to a maximum of $800 per elderly taxpayer--that has become the target of an angry grass-roots movement.

The “winners” from the catastrophic care program are more likely to be older, sicker and poorer than those who are paying the bulk of the cost. They are less likely to have a pension or income from savings and investments.

Consider a 79-year-old widow who receives $5,000 a year from Social Security and $4,000 from other sources. Because she owes no income tax, she pays no Medicare surtax; her entire cost for the catastrophic care program is $48 in 1989.

Suppose she falls ill and spends 65 days in the hospital. Under the old Medicare law, she would have to pay $135 a day for her hospital treatment after the 60th day. Now, thanks to the catastrophic care program, Medicare picks up that cost, for a savings of $675.

Suppose she must spend $75 a month for prescription drugs when she recovers and goes home. Her annual drug bill is $900, and as of 1991, Medicare will pick up $150 of that total--half of all costs after she pays the first $600.

The “losers” from catastrophic care--those who pay more for their new benefits than they get--are more likely to be younger, healthier and more well-to-do. They probably have pensions, and are more likely to have their own supplemental health insurance, either through their old employer or from individual policies.

In this category is a hypothetical couple in their late 60s with an income of $36,000 this year, including Social Security benefits of $11,000. That is enough income that they pay $2,193 in income taxes--and that in turn means that they pay a Medicare surtax of $329.

In addition, the husband and wife pay the $48 catastrophic care premium that falls on all Medicare beneficiaries, for a total bill of $425.

But their benefits are zero. Their former employers already provide them with “Medigap” insurance that kicks in where the original Medicare program left off. Not only do they pay more and receive no cash benefits from the new program, but they do not even gain the additional peace of mind that was a main goal of expanding Medicare’s coverage.

Typically, for single taxpayers, the surtax applies to those with incomes of about $7,000 or more on top of their Social Security benefits, according to the Institute for Research on the Economics of Taxation (IRET). For elderly couples, the surtax will be paid by those with non-Social Security income of about $11,500 or more.

Only a small minority of the elderly--1.8 million, or 5.5% of the total--will pay the maximum surtax in 1989. IRET said single taxpayers with average Social Security benefits will pay the full $800 if they earned $30,400 in other income. For couples with average Social Security benefits, the full surtax of $1,600 will kick in at about $57,400 in outside income.

Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.), a staunch defender of the program, says the best-buy private supplemental insurance policy for the elderly costs more than $600. So for most people, he says, the catastrophic care program is a great bargain.

Not everyone is convinced. Retired members of the United Auto Workers, for example, receive fully paid health insurance from their former employers. They already get the coverage promised by the new Medicare program.

“Our retirees do not get any new benefits, but they have to pay new premiums,” said Alan Reuther, the UAW’s associate general counsel. “People who are hit the hardest are a two-earner couple who both get pensions and Social Security and have some outside income.”

Employers whose coverage duplicates some or all of Medicare’s catastrophic benefits must pay their retirees a rebate equal to the average benefits their retirees could expect to receive under the new Medicare program.

The maximum rebate this year, for a retiree who already has all the benefits that the new Medicare program is offering, is just $65, barely more than the $48 minimum payment that the elderly must make for the new government program. For federal employees, the rebate is about $37.

The rebate will grow in 1990, when new catastrophic care benefits kick in for doctor bills. But after 1990, rebates will no longer be required. At that point, employers will be the big winners because they will be able to drop much of their insurance coverage for their pensioners.

WHO PAYS,WHO DOESN’T Most of Medicare’s nearly 33 million beneficiaries will not have to pay the catastrophic care surtax on their 1989 income.

Number who 1989 Surtax must pay Nothing 19.2 million Less than $100 4.0 million $100 to $199 2.8 million $200 to $299 2.0 million $300 to $399 1.1 million $400 to $499 626,000 $500 to $599 335,000 $600 to $699 460,000 $700 to $799 261,000 $800 1.8 million

Source: Congress’ Joint Committee on Taxation