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Social Insecurity: 3. The Medicare Program

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Social Insecurity: 3. The Medicare Program

Medicare is the second pillar of the US retirement security system.  It is a national health insurance program for people aged 65 and older and disabled people of any age.

The next two articles will review the Medicare program architecture, discuss dedicated funding sources and highlight the future fiscal challenges the program faces.

 A Bit of History

Most western industrialized countries have national health insurance schemes covering all citizens.  Germany put in the first such scheme in 1883 and England followed in 1911.

The US has always struggled with the idea of national health insurance.  President Eisenhower established a commission to investigate the status of old age health care in the US and found that 40% of older Americans had no health insurance at all. Unless someone had vested into a corporate (or government) retiree health care plan, the cost of health insurance for old people was simply unaffordable for most citizens.

In 1965, under President Johnson, the original Medicare program was enacted for hospital insurance. There have been a series of modifications over the years, with major changes made under the Clinton administration (Part C Medicare) and the George W. Bush administration (Part D Medicare).

Today, there are 47.8 million people aged 65 and older and 9 million disabled people with Medicare coverage.

 Program Description

 There are four legs to the Medicare stool, as follows:

 Medicare Part A:  Medicare Part A provides hospital insurance.  It is structured like Social Security with dedicated payroll and Social Security benefit taxes funding the entire program and surpluses held in the HI Trust Fund.  Medicare Part A is a fee-for-service payment system.  Medicare Part A is free for eligible beneficiaries (anyone who has made 10 years of FICA payroll tax contributions), but subject to a set of deductibles and co-payments.

 Medicare Part B: This is a voluntary program that provides insurance for outpatient services, with doctor services being the largest cost covered.  Beneficiaries must pay a monthly premium, but the program is highly subsidized by direct general fund government contributions.  This is also a fee-for-service payment system.

 Medicare Part C: This is a private insurance option for Medicare Part A and B services operating under contract with Medicare. It is provided by Health Maintenance Organizations.  Under this program, the government pays a “capitated” fixed amount per beneficiary (instead of fee-for-service), but the insurance companies must still provide all Part A & B services required under law.  Unlike the standard Medicare coverage, beneficiaries are limited to a select network of health care providers.  Premiums are often higher than Plan B as the services offered are often greater.  About 30% of all Medicare beneficiaries operate under Plan C.

 Medicare Plan D:  This is a voluntary insurance program for self-administered prescription drugs. Like Part B, beneficiaries need to pay monthly premiums, but both the federal government and states make heavy subsidies to the program.

None of the Medicare programs cover 100% of the costs for beneficiaries.  All of the programs involve deductibles and co-payments that are substantial.  As a result, most beneficiaries buy approved “Medigap” insurance policies to cover all or a portion of the out-of-pocket costs.

 Costs and Funding of Medicare

There are three dedicated revenue streams supporting the Medicare program.  Payroll taxes of 2.9%, split 50/50 by employee and employer, (plus 0.9% for people earning over $200,000), provide funding for Medicare Part A.  A portion of the income tax on Social Security benefits is another key revenue source.  Last, there are premiums paid on Parts B and D.  These are the “Public Revenues”.

The balance of funding is provided by way of interest and cash redemptions on Medicare Trust Funds and direct general fund contributions.  All of these “Government Payments” flow through the US budget annually.

The chart below summarizes costs, revenues, trust fund balances and participation levels for the Medicare program in fiscal year 2016.

 Summary of Medicare Program Fiscal Year 2016 ($ billions)

 

Part A (Hospital)

Part B (Outpatient)

Part D (Drugs)

Total

Year-End Trust Fund

199.1

88.0

7.6

294.7

 

 

 

 

 

Benefits

 

 

 

 

-Hospital

141.3

49.6

191.0

-Part C Plans

85.2

103.4

188.6

-Skilled Nursing Homes

29.1

29.1

-Home Health Care

7.1

11.5

18.5

-Physician Fees

69.9

69.9

-Prescription Drugs

99.5

99.5

-Other

17.8

55.0

72.8

Total Benefits

280.5

289.5

99.5

669.5

 

 

 

 

 

Admin. Expenses

4.9

3.9

0.5

9.2

 

 

 

 

 

Revenues

 

 

 

 

-Public Revenues

281.9

72.1

13.8

367.8

-Government Payments

8.9

241.1

82.4

332.4

-State Governments

10.0

10.0

Total Revenues

290.8

313.2

106.2

710.2

 

 

 

 

 

Enrollment (millions)

 

 

 

 

-Aged

47.5

43.9

36.1

47.8

-Disabled

9.0

8.2

7.1

9.0

Total Enrollment

56.5

52.1

43.2

56.8

 

 

 

 

 

Average Benefit/Enrollee

$4,968

$5,558

$2,304

$12,829

Source: Medicare Trustees 2017 Annual Report

In summary, the Medicare program provides health care coverage for 56.8 million Americans.  The total program costs were $678 billion in fiscal year 2016, representing 15% of total federal expenditures.

Just over half the expense was covered by dedicated Public Revenues and state government contributions.  The balance of $332 billion was a federal government contribution that must be covered in the budget annually by way of other taxes, additional debt or cost reductions in other programs.

The demographic trends driving Social Security expenditures higher are also driving Medicare expenditures, with the added complication of changes to health care costs over time.  The next article will look at the government’s forecast of Medicare expenditures over the next 10 years and the fiscal challenges ahead.

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