A recent lawsuit filed by three Medicare-eligible individuals on October 9 in the U.S. District Court for the District of Columbia has brought renewed attention to private contracting with Medicare beneficiaries. The lawsuit was the subject of a recent editorial in the Wall Street Journal. If the plaintiffs are successful in this case, physicians, hospitals, and other providers may face potentially fewer obstacles and disincentives to entering into lucrative private contracts to treat Medicare beneficiaries.

The lawsuit alleges that the Social Security Administration (SSA) and the Department of Health and Human Services (HHS) adopted policies that improperly prohibit retirees from collecting Social Security benefits if they opt out of the Medicare Part A program. The plaintiffs are challenging rules issued in 1993 and 2002 that require retirees to participate in the Medicare Part A program in order to collect Social Security benefits. The lawsuit seeks to temporarily and permanently enjoin SSA and HHS from denying Social Security benefits to retirees who refuse Medicare Part A benefits.

Enrollment in Medicare Part A is automatic for any person who is receiving Social Security or railroad retirement benefits. Part A covers, among other things, hospital inpatient care, some skilled nursing facility care, certified home health care, and certified hospice care. Part A is separate from Part B, which covers doctor visits and outpatient procedures, and the Part D drug benefit program, both of which are voluntary and not tied to Social Security benefits. Beneficiaries bear no upfront cost for enrolling in Part A. As discussed below, however, disenrolling from Part A requires that Social Security payments be withheld from the individual. In other words, if an eligible individual refuses Part A coverage, they are not entitled to receive Social Security benefits.

SSA Policies at Issue

In 1993, SSA added two provisions to its Program Operations Manual (POM) to address the fact that "[S]ome individuals entitled to monthly [Social Security] benefits have asked to waive Hospital Insurance (HI) [Medicare Part A] entitlement because of religious or philosophical reasons, or because they prefer other health insurance." The first rule provides that "Individuals entitled to monthly benefits which confer eligibility for HI may not waive HI entitlement. The only way to avoid HI Entitlement is through withdrawal of the monthly benefit application. Withdrawal requires repayment of all Retirement, Survivors, Disability Insurance (RSDI) and HI benefit payments." POM, 801.002. The second rule states, "To withdraw from the HI program, an individual must submit a written request for withdrawal and must refund any HI benefits paid on his/her behalf .... An individual who filed an application for both monthly benefits and HI may: (i) Withdraw the claim for monthly benefits without jeopardizing HI entitlement; or (ii) Withdraw the claim for both monthly benefits and HI. The individual may not elect to withdraw only the HI claim." POM, 801.034. In 2002, SSA added the following rule to its Program Operations Manual: "The claimant can withdraw an application for: (i) RSI [Retirement or Survivors Insurance, i.e., Social Security] cash benefits only; (ii) RSI cash benefits and HI insurance coverage ..., or (iii) Medicare [Part B] only. However, a claimant who is entitled to monthly RSI benefits cannot withdraw HI coverage only since entitlement to HI is based on entitlement to monthly RSI benefits...." POM, 206.020.

Plaintiffs’ Allegations

The plaintiffs allege that the policies at issue are substantive rules that were finalized without notice or a public comment period, and were never published in the Federal Register, in violation of the Administrative Procedure Act. The complaint further charges that the rules violate the Social Security Act since, according to the plaintiffs, applying for Social Security benefits and enrolling in Medicare are voluntary and the applications for each of these programs are not dependent on each other. Finally, the plaintiffs allege that forced participation in Medicare infringes on an individual’s right to privacy and to make necessary choices about their own health care, which the plaintiffs say violates the First, Fourth, Fifth, Ninth, and Fourteenth Amendments to the Constitution.

According to the plaintiffs, Medicare offers inferior health care to what they are able to obtain on their own. Furthermore, they believe that federal budget constraints may continue to reduce benefits payable by Medicare in the future. The plaintiffs claim that they have adequate health care coverage and enough resources to pay privately for their health care needs. While they want to voluntarily forgo Medicare, they do not want to give up their Social Security benefits by declining Part A benefits.

HSAs and Private Contracting

The lawsuit has brought renewed focus to the debate on whether Medicare beneficiaries should be allowed to maintain health savings accounts (HSAs) and privately contract with providers in place of receiving Medicare-covered care. The lawsuit underscores an ideological debate on Medicare’s role in health care that was highlighted during the October 7 presidential debate where the candidates disagreed on whether health care is a right, privilege, or responsibility. The lawsuit comes at the end of a congressional session during which the Medicare Beneficiary Freedom to Choose Act was introduced by Rep. Sam Johnson (R-TX) in September. The bill, H.R. 7148, which is before the Energy & Commerce Committee, would allow individuals to opt out of Medicare Part A if they had a high deductible insurance plan and made pre-tax contributions to an HSA. The legislation also would allow a Medicare beneficiary to privately contract with a physician to pay for medical care without penalty. Under current law, private contracting with physicians is allowed but rare, since physicians are barred from Medicare participation for two years once they privately contract with patients. Physicians opting out of Medicare by privately contracting can create situations in which beneficiaries don’t receive care from their preferred physician, since that physician can no longer treat an individual who wants to pay for the care through Medicare.