Medicare Benefits and Financing

Background

Medicare coverage has four parts. Part A covers inpatient hospital care (including inpatient drugs), some home health services, limited skilled-nursing home care, and hospice care. Part A requires no premiums. Part B, known as Traditional or Original Medicare, covers physician services, some home health services, and outpatient services. It does require a monthly premium. Assistance is available for beneficiaries with low incomes. An alternative to traditional coverage is Part C, better known as the Medicare Advantage (MA) program. It covers private health plans that contract with Medicare. MA accounts for just over one-third of Medicare enrollees, and that share is growing. Part D covers outpatient prescription drugs and can be purchased through a stand-alone plan or as part of an MA plan.

In 2017, about 34 percent of Medicare beneficiaries enrolled in MA plans (see Medicare Advantage). Medicare beneficiaries may also enroll in Part D for outpatient prescription drug coverage. This coverage is available through a “stand-alone” drug plan or MA plan.

Benefits: Beneficiaries in Traditional Medicare may obtain covered services from any provider who accepts Medicare patients, which most physicians across the country do. Because Traditional Medicare pays for about 80 percent of the cost of a covered service, many Medicare beneficiaries purchase private Medicare Supplement Insurance to help pay cost-sharing expenses. This supplement insurance is known as Medigap. Some Medicare beneficiaries with low incomes receive assistance with cost-sharing through a Medicare Savings Program or a state Medicaid program.

Individuals enrolled in MA plans typically receive all their care through their plan, choosing physicians and facilities from the plan's network. Those who obtain services from providers in the network usually have lower (or no) cost-sharing. Unlike Traditional Medicare, MA plans have an out-of-pocket spending cap. Some MA plans charge an additional plan-specific premium to enrollees.

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 who are eligible for Social Security 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 92 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. For these Medicare beneficiaries with low incomes, 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 paid higher Part D (prescription drugs) premiums as well.

Fiscal pressures: Medicare faces long-term financial challenges that must be addressed. The 2018 Medicare trustees’ report estimates that the Hospital Insurance Trust Fund, which funds Part A and is mainly financed by payroll taxes, will be solvent until 2026. In that year, current projections indicate that the trust fund will be able to cover 91 percent of Part A benefits unless policymakers can agree on some combination of raising additional revenue and maximizing the value of every dollar spent.

Continued increases in medical costs, rapid changes in medical technology, and the aging of the boomer generation—which will add 21 million enrollees to the program by 2030—require the consideration of Medicare reforms in future years. Medicare must remain a strong, broadly supported social insurance program so that it can continue to protect current and future generations.

The fiscal pressures facing Medicare reflect the general trend in the overall health care market. Overall, health care spending has been growing faster than the overall economy for decades. Annual cost increases place upward pressure on premiums and expenditures 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, Medicare spending per beneficiary had the lowest five-year growth rates from 2010 through 2015 since the program’s inception. Total Medicare spending per beneficiary grew an average of 1.4 percent per year during these five years. Low per beneficiary spending growth continued in 2016 and 2017. As a result of slower spending growth, the 2018 Medicare trustees’ report projected that the Hospital Insurance Trust Fund (Part A) would be solvent until 2026—nine years longer than was projected in 2009.

Despite slower spending during the past decade, 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 58 million in 2017 to 80 million in 2030. We must find viable solutions to ensure adequate and affordable benefits while making the program sustainable for future generations.

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 (voucher) system, means testing, altering the program’s financing structure, and privatizing the program.

Solutions to address Medicare’s long-term financial outlook should not simply shift costs to current and future Medicare beneficiaries. Instead, a first step should look 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, such as by encouraging innovative payment and delivery models, but much more can be done.

Americans of all ages recognize Medicare’s role in helping to ensure financial security in retirement.

MEDICARE BENEFITS AND FINANCING: Policy

MEDICARE BENEFITS AND FINANCING: Policy

Equity

The Medicare program should not be means-tested. Eligibility should not be based on income or assets.

Any major changes to Medicare should first be evaluated in demonstrations or pilots. They should 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 socioeconomic differences.

The Centers for Medicare & Medicaid Services should work to eliminate racial, ethnic, and socioeconomic disparities in care.

Benefit adequacy and affordability

Medicare’s benefit package should continue to provide access to all covered services for all beneficiaries, without regard to income, geographic location, health status, or coverage option.

Medicare should cover vision care (including eyeglasses), hearing care (including hearing aids), dental care, 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.

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

Medicare reforms should not shift burdensome financial risks to Medicare beneficiaries.

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

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. This can be done through payment and delivery system reforms that encourage higher-value care and discourage inappropriate use of services.

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

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

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

The eligibility age for Medicare should not be raised.

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.

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

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

The Social Security Administration should continue to notify potential Medicare beneficiaries several months before they reach Medicare eligibility at age 65 about the steps to take if they want to enroll, the circumstances under which Part B premium penalties may be assessed, and the guaranteed issue period for purchasing a Medigap policy.

Quality and efficiency

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 eliminate waste, fraud, and abuse to ensure appropriate use of program resources.

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

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 Medicare Advantage 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. The results of its findings should be published.

Medicare should be simple and transparent for beneficiaries and providers.

Medicare should seek administrative efficiencies (see also 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 rapidly test and evaluate the use of comprehensive geriatric assessment instruments.