Personal Finance

Two items buried in Trump's budget call for big changes to Medicare

Key Points
  • Trump's budget is essentially a rundown of administration priorities and goals versus a mandate, and any changes to the program would need to make it through Congress.
  • One of the proposals would let Social Security recipients opt out of Medicare Part A, which currently is tricky to do.
  • The other aims to give Medicare recipients the ability to contribute to health savings accounts and to medical savings accounts.

About 115 pages into President Trump's proposed 2021 budget are two line items that Medicare beneficiaries might want to take note of.

While the president's proposals pertaining to Medicare are largely aimed at behind-the-scenes shifts — i.e., lowering reimbursement rates to providers and rooting out waste or fraud — the budget also includes changes that would make it easier for older Americans to opt out of Medicare and would allow recipients to put money in tax-advantaged accounts earmarked for health-care costs.

Trump's budget is essentially a rundown of administration priorities and goals versus a mandate, and any changes in funding or to the program would need to make it through Congress. And while details are slim regarding either of these changes — and how they would interact with existing rules — here's the gist of the two line items (which are found under the heading "Reduce government-imposed burden in Medicare").

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Opting out of Medicare Part A

The first proposal would allow individuals to opt out of Medicare Part A (hospital coverage) without the move interfering with their Social Security benefits.

The proposal isn't a new one. A court case from a decade ago challenged the rule, and is supported in some conservative circles.

Currently, if you start taking Social Security before age 65, you automatically get signed up for Part A when you hit that Medicare-eligible age. Waiting until after age 65 to tap Social Security results in automatic sign-up, as well. And while you could choose to opt out of Part B (outpatient care) if you have coverage elsewhere, you must remain enrolled in Part A or pay a steep price.

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"The only way they can opt out of Part A is either not to apply for Social Security in the first place or, if they already have, repay the Social Security Administration all the money they've received and anything Medicare has spent on their health care," said Medicare expert Patricia Barry, author of "Medicare for Dummies."

She explained that the rule has been around since the program's beginnings, when most people retired at age 65 and started both Social Security and Medicare at that time.

Meanwhile, although Part A is free as long as you have at least a 10-year work history of contributing to the program through payroll taxes, it can also cause snags if your other insurance is a high-deductible health plan with a health savings account, or HSA. That's because under current rules, you cannot contribute to an HSA if you are on Medicare, even if only Part A (more on that below).

The budget notes that the change would have no effect on revenue.

Contributing to HSAs

HSAs, offered in conjunction with high-deductible health savings plans, come with a triple tax benefit: Contributions, earnings and qualified withdrawals are tax-free. However, as mentioned, you can't contribute to an HSA if you're on Medicare, even if just Part A.

Trump's budget would change that by allowing beneficiaries with high-deductible health plans to make tax-deductible contributions to HSAs or to medical savings accounts, also called MSAs.

These accounts are similar to HSAs, although they exist only in the Medicare world. Basically, MSA plans combine a high-deductible Advantage Plan (which some recipients choose) with an MSA. However, a small fraction of Medicare's 62 million beneficiaries — about 6,000 — are estimated to use MSA plan, according to the Kaiser Family Foundation.

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In contrast to HSAs, however, an individual currently cannot contribute to MSAs. The insurer that offers the plan makes the contributions — an amount that could vary from year to year — and you can make tax-free withdrawals to cover medical expenses.

Also, MSA plans do not include Part D prescription drug coverage, according to the Centers for Medicare and Medicaid Services.

This isn't the first time the Trump administration has pushed to let beneficiaries contribute to such accounts. In an executive order last year, the president called for the same change.

The budget estimates the change would cost the government about $16.3 billion over 10 years.

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