Medicare Benefits and Financing

Background

Benefits—Medicare has several parts. Part A covers inpatient hospital care (including inpatient drugs), some home health services, limited skilled nursing home care, and hospice care. Part B covers physician services, some home health services, and outpatient services. Part C covers private health plans that contract with Medicare. Part D covers outpatient prescription drugs.

Medicare beneficiaries may obtain Medicare-covered services in one of two ways: traditional fee-for-service Medicare (also called Original Medicare) or through Medicare Part C private plans, called Medicare Advantage (MA) plans. In 2015 about 32 percent of Medicare beneficiaries enrolled in MA plans (see this chapter’s section Health Care Coverage: Medicare—Medicare Advantage). Medicare beneficiaries may enroll in Part D for outpatient prescription drug coverage. This coverage is available through a “stand-alone” drug plan or MA plan.

AARP recognizes gaps in Medicare’s benefits, including a lack of coverage for most hearing-, dental-, and vision-related services, and for long-term services and supports. In addition AARP recognizes that the federal government does not require Medicare Part D to eliminate cost-sharing for adult vaccines that are recommended by the Advisory Committee on Immunization Practices (ACIP). These uncovered services can help to maintain good health and functioning. It follows that eliminating cost-sharing for recommended prevention also supports good health.

Medicare lacks a cap to protect people in traditional Medicare from very high out-of-pocket spending; however, MA beneficiaries do have an out-of-pocket spending cap.

Financing—Medicare Part A is mainly financed by payroll taxes. Employers and employees each pay 1.45 percent of wages to the Part A trust fund. Since 2013, high-wage workers pay an additional Medicare tax of 0.9 percent on wages in excess of specified thresholds (the thresholds are $200,000 for single tax filers, $250,000 for married couples filing jointly, and $125,000 for married individuals filing separately).

Most Americans are entitled to Part A at no cost when they turn 65, but participation in Part B is voluntary and requires payment of a monthly premium. About 91 percent of those who participate in Part A also enroll in Part B.

Part B is financed by both beneficiary premiums—which cover about 25 percent of costs—and federal general revenue (which covers the other 75 percent). Medicare beneficiaries with low incomes and limited savings who are enrolled in a Medicare Savings Program or Medicaid do not pay Part B premiums; instead, Medicaid pays their premiums and, for some, their cost-sharing expenses. Individuals with incomes of more than $85,000 and couples with incomes of more than $170,000 have paid higher Part B premiums since 2007, and beginning in 2011 they began to pay higher Part D (prescription drugs) premiums as well.

Fiscal pressures—The fiscal pressures facing Medicare reflect the general trend in the overall health care market. For decades, health care spending has been growing faster than the overall economy. Annual cost increases have been placing upward pressure on premiums and spending for all payers, including Medicare, other federal health programs, private plans, state insurance plans, and people who self-finance their care.

However, because of laws enacted to slow Medicare growth, as well as steps taken by Medicare, private plans, and other payers to restrain cost increases, substantial Medicare savings have occurred in recent years. According to the Medicare Board of Trustees, from 2010 through 2015 Medicare spending per beneficiary had the lowest five-year growth rate since the program’s inception. Total Medicare spending per beneficiary grew an average of 1.4% per year during this five-year period. As a result of slower spending growth, the 2016 Medicare trustees’ report concluded that the taxpayer-financed Hospital Insurance Trust Fund (Part A) will be solvent until 2028—11 years longer than was projected in 2009.

Despite slower spending, Medicare still faces long-term financial challenges that must be addressed. Medicare must grapple with the enrollment growth associated with aging baby boomers and the related declining ratio of workers to beneficiaries. Medicare enrollment is projected to increase from 55 million in 2015 to 81 million in 2030. Beyond 2028, when the trust fund is projected to be exhausted, current benefit levels will not be sustainable without additional revenue. We must find viable solutions to ensure adequate and affordable benefits while making the program sustainable for future generations. To effectively meet these challenges, Medicare must maximize the value of every dollar spent.

There have been a number of proposals to address Medicare’s long-term sustainability. They include, among other changes, raising the eligibility age, converting Medicare from a defined-benefit to a defined-contribution system, means testing, altering the program’s financing structure, and privatizing the program.

AARP believes that meaningful changes to Medicare need not burden older Americans, their children, and their grandchildren. Instead we should be looking at ways to improve the program’s efficiency and integrity. Research literature documents that a significant portion of health care spending fails to yield better care and is therefore wasted. As part of the larger health care system, Medicare must encourage the transformation of service delivery so that care is person-centered, efficient, and of high quality. Congress has already taken steps to help ensure these outcomes, but much more can be done, including reforming provider payment methods to create incentives for desired outcomes.

Americans of all ages recognize Medicare’s role in helping to ensure financial security in retirement. While continued increases in medical costs, rapid changes in medical technology, and the aging of the boomer generation will require the consideration of Medicare reforms in future years, there is also a need to ensure that Medicare remains a strong, broadly supported social insurance program so that it can continue to protect current and future generations.

Medicare Benefits and Financing: Policy

Equity

In this policy: Federal

The Medicare program should not be means tested (i.e., eligibility should not be based on income or assets).

Major changes in the Medicare program should first be evaluated in demonstrations or pilots that assess the effects of proposed changes on Medicare costs, access to health care services, continuity of care, quality of care, beneficiary satisfaction, and beneficiaries’ out-of-pocket costs. Evaluations should take into consideration geographic location and socio-economic differences.

Medicare should work to eliminate racial or ethnic and socioeconomic disparities in care.

Benefit adequacy and affordability

In this policy: Federal

Medicare’s benefit package should provide access to effective preventive services and medical treatments for all beneficiaries, without regard to income, geographic location, health status, or coverage option.

Medicare coverage should include vision (including eyeglasses), hearing (including hearing aids), dental, and long-term care, and guarantee coverage across the continuum of care.

Medicare should protect beneficiaries from burdensome out-of-pocket costs and catastrophic health costs.

Medicare should eliminate cost-sharing in Medicare Part D for all recommended adult immunizations that are proposed annually by ACIP.

Program deductibles and coinsurance should not vary by income or assets except to the extent that low-income beneficiaries may receive subsidies that ensure access and affordability.

Medicare reforms should not shift burdensome financial risks to Medicare beneficiaries or create incentives to merely shift costs to other payers.

The government’s share of Medicare benefit costs must keep pace with the growth in those costs and not be tied to arbitrary budget targets.

Sustainability

In this policy: Federal

The long-term cost growth in health care, including Medicare, is unsustainable in part because Medicare also faces substantial growth in enrollment. Therefore reform is essential to strengthen and maintain the viability of the program.

To hold down Medicare’s costs and ensure its long-term solvency, the rate of cost growth throughout the health care system and within Medicare must remain low through payment and delivery system reforms that encourage higher-value care and discourage inappropriate use of services.

Options for increasing revenues to support the program should be considered to ensure the program remains sustainable.

Medicare financing should be broad-based, stable, and progressive; further public health objectives; and keep pace with enrollment.

All Medicare participants (beneficiaries, providers, suppliers, and plans) should contribute to its viability. Shared accountability will differ for providers, beneficiaries, and the program itself, but each should be responsible for ensuring the prudent use of Medicare resources.

Access

In this policy: Federal

Medicare beneficiaries should continue to have access to a choice of health coverage options, including a strong and viable traditional Medicare program (administered by the government) as well as a reasonable choice of private health plan options, each of which should include a reasonable choice of providers.

Medicare payment rates to providers should be fair and encourage the efficient use of resources while maintaining beneficiaries’ access to affordable high-quality care.

AARP opposes raising the age of eligibility for Medicare.

The Social Security Administration should notify potential Medicare beneficiaries several months before they reach Medicare eligibility at age 65 about the steps to take if they want to enroll and about the circumstances under which premium penalties may be assessed.

The existing 24-month Medicare waiting period for Social Security Disability Insurance recipients should be eliminated.

Quality and efficiency

In this policy: Federal

Medicare should discourage overuse, underuse, and misuse of health care services.

Medicare should support efforts to improve care coordination, particularly for people with chronic conditions.

Medicare must rigorously attack waste, fraud, and abuse to ensure appropriate use of program resources.

Medicare should be a leader in health care reform and a cooperative partner with other stakeholders (e.g., Medicaid, states, private purchasers) in achieving an affordable, effective, and efficient health care system.

Traditional Medicare and MA plans should face the same or equivalent requirements for cost, quality, efficiency, and consumer protections.

The current form of payment for health care services in traditional Medicare (i.e., fee-for-service) should evolve to incentivize high-quality, efficient care rather than volume.

Medicare should continually and systematically collect information on the program’s quality and efficiency, and should publish results of its findings.

Medicare should be simple and transparent for beneficiaries and providers.

Medicare should seek administrative efficiencies. (See section below, Medicare Program Administration and Outreach.)

Medicare should take advantage of its position as a large purchaser of health services to obtain the best value.

Medicare should have statutory authority to use its purchasing power to obtain drug price discounts directly on behalf of beneficiaries.

Medicare should rapidly test and evaluate the use of comprehensive geriatric assessment instruments.