Because most employees and their dependents are eligible for Medicare on reaching age 65 (and possibly under other circumstances), a provision that eliminates any possible duplication of coverage is necessary. The simplest solution is to exclude any person eligible for Medicare from eligibility under the group contract. However, in most cases this approach conflicts with the Age Discrimination in Employment Act, which prohibits discrimination in welfare benefit plans for active employees.
Medicare Secondary RulesMedicare is often the secondary payer to employer-provided medical expense coverage. Employers with 20 or more employees must make coverage available under their medical expense plans to active employees aged 65 or older and to active employees' spouses who are eligible for Medicare. Unless an employee elects otherwise, the employer's plan is primary and Medicare is secondary. Except in plans that require large employee contributions, it is doubtful that employees will elect Medicare to be primary because employers are prohibited from offering active employees or their spouses a Medicare carve-out, a Medicare supplement, or some other incentive not to enroll in the employer's plan.
Medicare is the secondary payer of benefits in two other situations. The first situation involves persons who are eligible for Medicare benefits to treat end-stage renal disease with dialysis or kidney transplants. Medicare provides these benefits to any insured workers (either active or retired) and to their spouses and dependent children, but the employer's plan is primary during the first 30 months of treatment only; after that time, Medicare is primary and the employer's plan is secondary. It should be noted that the employer's plan could totally exclude dialysis and/or kidney transplants, in which case Medicare would pay. However, the employer is prevented by law from excluding these benefits for the first 30 months if they are covered thereafter. This rule for renal disease applies to medical expense plans of all employers, not just those with 20 or more employees.
Medicare is also the secondary payer of benefits to disabled employees (or the disabled dependents of employees) under age 65 who are eligible for Medicare and who are covered under the medical expense plan of large employers (defined as plans with 100 or more employees). Medicare, however, does not pay anything until a person has been eligible for Social Security disability income benefits for two years. The rule applies only if an employer continues medical expense coverage for disabled persons; there is no requirement for such a continuation.
When an employer's plan is primary, Medicare payments are made for any expenses that are covered by Medicare but not by the employer's plan. For purposes of these payments, Medicare deductibles, copayments, and percentage participation generally do not apply, although Medicare benefits are limited to what would have been paid in the absence of the employer's plan.
Medicare Carve-Outs and SupplementsAn employer's plan may cover certain persons aged 65 or older who are not covered by the provisions of the Age Discrimination in Employment Act—specifically, retirees and active employees of firms with fewer than 20 employees. Although there is nothing to prevent an employer from terminating coverage for these persons, many employers provide them with either a Medicare carveout or Medicare supplement.
With a Medicare carve-out, plan benefits are reduced to the extent that benefits are payable under Medicare for the same expenses. (Medicare may also pay for some expenses not covered by the group plan.) For example, if a person who incurs $1,000 of covered expenses is not eligible for Medicare, $720 in benefits is paid under a medical expense plan that has a $100 deductible and an 80 percent coinsurance provision. However, if the same person is eligible for Medicare and if Medicare pays $650 for the same expenses, the employer's plan pays only $70, for a total benefit of $720.
Some medical expense plans use a more liberal carve-out approach and reduce covered expenses (rather than benefits payable) by any amounts received under Medicare. In the previous example, the $650 paid by Medicare would be subtracted from the $1,000 of covered expenses, which would leave $350. After the deductible and coinsurance are applied to this amount, the employer's plan would pay $200, so the covered person would receive a total of $850 in benefits, or $130 more than a person not eligible for Medicare.
As an alternative to using a carve-out approach, some employers use a Medicare supplement that provides benefits for certain specific expenses not covered under Medicare. These include (1) the portion of expenses that is not paid by Medicare because of deductibles, coinsurance, or copayments and (2) certain expenses excluded by Medicare, such as prescription drugs. Such a supplement may or may not provide benefits similar to those available under a carve-out plan.
