The Medicare health insurance program

AN OVERVIEW OF MEDICARE

The Medicare program provided benefits to some 35.8 million elderly beneficiaries and another 6.7 million disabled beneficiaries in 2005 [Boards of Trustees, Federal Hospital and Insurance and Federal Supplementary Medical Insurance Trust Funds 2006]. In some sense, it is the largest health insurer in the United States. However, unlike private health insurance, only 15.5% of Medicare revenues come from premiums.

Most of its revenues come from taxes. In this article, we provide an overview of the coverage and financing of the two Medicare trust funds and put these in the context of the Social Security funds. The Medicare Hospital Insurance [HI] trust fund largely covers hospital services, while the Medicare Supplementary Medical Insurance [SMI] trust fund covers ambulatory care and prescription drugs.

This article has a twofold purpose. The first is to simply describe Medicare a large and important program. Approximately 93% of Medicare's elderly beneficiaries have some form of health insurance coverage in addition to traditional Medicare.

This additional coverage takes the form of privately purchased supplemental coverage, employee-sponsored retiree coverage, Medicaid, and Medicare Advantage. Medicare Advantage, occasionally called Medicare Part C, is the current name for Medicare managed care options. It is paid for from Part A and Part B programs and typically provides greater benefits, but fewer provider options, than traditional Medicare.

Social Security: Medicare in Context

Social Security was enacted in 1935 as part of President Franklin Roosevelt's New Deal program. Persons age 65 and older who had paid Social Security taxes for a sufficient period of time were eligible for monthly cash benefits. [People born after 1929 are required to work for ten years to be eligible for benefits.] In 1939, the program was expanded to include cash benefits for the spouse and minor children of retired workers and for dependents of prematurely deceased workers.

Revenues collected through the Social Security payroll taxes are paid into a government-run trust fund. The moneys are used to pay benefits, and reserves are invested in special U.S. government securities.

The cash benefits were increased substantially in the 1950s and were indexed for inflation, beginning in 1975. The program was expanded in 1954 and again in 1956 to provide cash benefits for workers with disabilities. When this change was enacted, a second trust fund was established. So today there is the Old Age and Survivors Insurance [OASI] trust fund and the Disability Insurance [DI] trust fund. At the close of 2005, some 40.1 million people received OASI benefits, and 8.3 million received DI benefits. These trust funds had assets of approximately $1.66 trillion and $196 billion, respectively [Boards of Trustees 2006].

Medicare was enacted in 1965 during President Lyndon Johnson's administration. That is, there are essentially two types of coverage: one for hospital services and one for physician services, much as a person then might have obtained hospital coverage through Blue Cross and physician services through Blue Shield. Medicare Part A provides coverage for hospital services; revenue and expenses flow through the Hospital Insurance [HI] trust fund. Physician and other ambulatory services are covered under Medicare Part B. The revenues and expenses of this program flow through the Supplementary Medical Insurance [SMI] trust fund.

As we discuss later in the article, the HI trust fund is financed analogously to the OASI and DI funds; the SMI fund is not. At the close of 2005, approximately 42 million people were covered by Medicare. The HI fund had assets of $286 billion, and the SMI fund had $24 billion [Boards of Trustees 2006]. Medicare beneficiaries may choose to obtain coverage through a Medicare managed care plan.

This option is now called Medicare Advantage and is more formally known as Medicare Part C. Medicare Advantage plans are paid a capitated amount based on the average Part A and Part B [combined] expenditures per beneficiary, adjusted for location and demographic and health conditions of beneficiaries. In December 2003, during President George W. Bush's administration, Congress expanded the Medicare program to include coverage for prescription drugs.

The program allowed Medicare beneficiaries who chose to participate to purchase subsidized private drug coverage. This expansion, called Part D, is financed in the same fashion as Part B and is part of the SMI fund.

1. Reforms in the Small Group Health Insurance Market
Reforms in the Small-Group Insurance Market Because employees in small firms are less likely to be offered health insurance through their employer, states have ...

2. Medicare Hospital Insurance Coverage plan A
Medicare Hospital Insurance Coverage Typically, people become eligible for Medicare Part A ...

3. Medicare Coverage under Supplemental Part B
Medicare Supplementary Medical Insurance Everyone who is eligible for Medicare Part A also is eligible to participate in the ...

4. Medicare Prescription Drug Coverage
Medicare Prescription Drug Coverage Medicare Part D coverage was enacted in December 2003 as part of the MMA and became operational January 1, 2006. The program...

5. Financing Social Security and Medicare
The OASI, DI, and HI trust funds are all funded from payroll taxes assessed on current workers. Often called "FICA contributions" [for Federal Insurance Contribution Ac...

6. Medicare Advantage contains five different types of health plans
Medicare Advantage Medicare managed care plans have been available since the 1970s, were paid on a capitated basis using the Adjusted Average Per Capita Cost [A...

7. Competition between Medigap and Medicare Advantage
Because access to employer-sponsored retiree coverage is typically determined before people retire, most of the short-run competition in the retiree market is between M...

8. Health Insurance firm Medicaid Managed Care
Managed care plays a significant role in Medicaid. By 2003, approximately one-half of all Medicaid r...

9. Medicare services providers and physician capitation
Capitation applied to Medicare Under a capitation system, physicians are paid a predetermined amount for each patient for whom they are responsible. As ap...

10. Indemnity payments and marginal costs for Medicare patients
Indemnity advantages The primary advantage of indemnity payments is that Medicare patients will face the full marginal cost of consuming expensive medical...