Medicare Coverage
The Medicare Program
Fact Sheet
David Gross, AARP Public Policy Institute
Normandy Brangan, AARP Public Policy Institute
April 1998
Table of Contents
- What Is Medicare?
- Who Is Covered Under Medicare?
- What Services Are Covered?
- How Much Do Medicare Beneficiaries Pay for Their Health Care Needs?
- How Is Medicare Financed?
- How Are Medicare Services Delivered?
- Medicare Payments to Providers
- Medicare Program Costs and Projections of Future Spending
- Footnotes
What Is Medicare?
Medicare is a federal health insurance program that provides benefits to those aged 65 and older, disabled workers, and certain people with end-stage renal disease (ESRD).
Medicare is a social insurance program. Individuals are entitled to Medicare by virtue of paying into the Social Security system during their working years. Beneficiaries continue to help fund Medicare through premiums and taxes.
The Medicare program is made up of Part A, which covers inpatient hospitalization, some home health care visits, and limited post-hospital care, and Part B, which covers physician, outpatient, certain home health visits, and other medical services.
Who Is Covered Under Medicare?
Medicare covers all who qualify, regardless of age, medical condition, or ability to pay. At age 65, individuals qualify for Medicare Part A if either they or their spouse paid into the Social Security or Railroad Retirement system for at least 40 calendar-year quarters (at least ten years of work). No premium is required for enrollment in Part A because beneficiaries paid into the system during their working years; those who lack sufficient work history may purchase Part A coverage. Individuals qualify for Medicare Part B upon turning 65; if they wish, they may enroll in Part B by paying the monthly Part B premium1. In 1997, 98% of older Americans were enrolled in Medicare.2
Individuals under age 65 who have been entitled to Social Security or Railroad Retirement disability benefits for at least 24 months are eligible for Medicare Part A, and may also choose to enroll in Part B. Individuals with end-stage renal disease who paid into the system for 40 quarters, or whose spouse did so, also qualify.
Medicare enrollment in 1997:
Part A:
33.1 million aged persons;
4.8 million disabled
persons3
32.1 million aged persons;
4.3 million disabled persons4
Top of PageWhat Services Are Covered?
Part A coverage includes:
- Inpatient hospital care, for up to 90 days per benefit period5 and 60 lifetime reserve days.
-
- Skilled nursing facility care, for 100 days following a hospital stay of at least 3 days.
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- Home health care, for up to 100 visits following a hospital stay of at least 3 days.
-
- Hospice care.
-
- Inpatient psychiatric care, for up to 190 days during a beneficiary's lifetime.
Part B coverage includes:
- Physician services (including office visits, surgeries, consultations).
-
- Medical equipment; lab, diagnostic, and screening tests.
-
- Outpatient hospital services.
-
- Physical and speech therapy.
-
- Outpatient mental health services.
-
- Home health care not preceded by a hospital stay and any visits over the 100-day Part A limit.
The 1997 Balanced Budget Act (BBA) authorizes expanded preventive services under Part B, including annual mammograms, diabetes screening, annual pap smears for those at high risk, colorectal cancer screening, and (as of 2000) prostate cancer screening.6
|
Totals may not sum to 100% due to rounding.
Source: 1997 Annual Report of the Board of Trustees.
How Much Do Medicare Beneficiaries Pay for Their Health Care Needs?
Medicare pays about half of beneficiaries' health care expenses, on average.7 The remainder is paid by beneficiaries, private supplemental coverage, Medicaid, and other public sources.
On average, Medicare beneficiaries age 65 and older who live in the community paid about $2,149, or 19% of their income, out-of-pocket for health care in 1997.8 This includes Medicare cost-sharing payments, Medicare Part B and private insurance premiums, balance billing by physicians, and payments for goods and services not covered by Medicare. It does not include the cost of home health care services or nursing home care.9
|
Medicare-Related Beneficiary Costs in 1998:
Beneficiary Coinsurance Requirements: Part A-- Hospital inpatient care: $191/day for days 61-90, $382 per additional day, up to limit of 60 lifetime reserve days. -- Skilled nursing facility care: $95.50/day for days 21-100 in skilled nursing facility.
Part B
Beneficiary Deductibles:
Beneficiary Premiums: |
Some Services Not Covered by Medicare:
--
Most outpatient prescription drugs
--
Long-term care
-- Some
preventive health care
--
Hearing aids, eyeglasses
Beneficiaries with Supplemental Coverage:
In 1997, most beneficiaries in the fee-for-service program13 had some type of insurance in addition to Medicare to cover the costs of Medicare deductibles, coinsurance, and some services or products not covered by Medicare.14 Over one-third of beneficiaries in fee-for-service had supplemental insurance provided by employers, and 28% had individually purchased Medigap policies.15 Beneficiaries with Medigap insurance paid an average annual premium of about $1,250, and those with employer-sponsored insurance paid an average of about $730 for premiums in 1997.16
Some private supplemental policies include some coverage of outpatient prescription drugs; virtually none covers long-term care. In 1993, only 10% of individuals buying Medigap had a policy with drug coverage.17 Fewer than 4 million private long-term care insurance policies were sold in 1994.18
In 1997, 20% of Medicare beneficiaries in fee-for-service were protected from some or most out-of-pocket medical and long-term care costs by Medicaid.19 It is usually the very poorest (i.e., those eligible for Supplemental Security Income) who qualify for full Medicaid benefits, but Medicaid may assist with nursing facility and home care expenses for beneficiaries who lack the financial resources to pay for their care.
For beneficiaries with incomes below the poverty level20 who are not eligible for full Medicaid benefits, Medicaid pays Medicare premiums, deductibles, and cost-sharing through the Qualified Medicare Beneficiary Program (QMB). For those with incomes between 100% and 120% of poverty, Medicaid pays only the Part B premium, through the Specified Low Income Medicare Beneficiary Program (SLMB). Under the BBA, states are expected to pay the Part B premium for Medicare beneficiaries with incomes up to 135% of the poverty level.21
Of beneficiaries in fee-for-service, 18% had neither assistance from Medicaid nor private supplemental coverage to help pay for out-of-pocket expenses.22 These people are more likely to have low incomes than those with supplemental coverage.23
Individually purchased supplemental coverage generally is unavailable to disabled Medicare beneficiaries; only a few states require that such supplemental coverage be offered.
How Is Medicare Financed?
Medicare Part A (Hospital Insurance or HI) is financed primarily by payroll taxes; employers and employees each pay 1.45% of wage earnings. In addition to contributions made by employees to the Part A Trust Fund during their younger years, about 6% of Hospital Insurance payroll taxes are estimated to have been paid by older households.24 Also, Social Security beneficiaries with incomes above specific amounts pay federal income tax on a portion of their benefits. A portion of these payments (totaling $4.1 billion in 1996) is designated for the Part A trust fund.25
Medicare Part B (Supplementary Medical Insurance or SMI) is financed by a combination of 1) beneficiary premiums and 2) general federal revenues collected from workers, retirees, corporations, and others that pay federal taxes. Beneficiary premiums cover about 25% of program costs, while general federal revenues finance the remaining 75% through the Part B Trust Fund. In addition to having paid income taxes during their younger years, it is estimated that people age 65 and older will pay about 9% of federal personal income taxes in 1997.26 Personal income taxes represent about 70% of general revenues.
How Are Medicare Services Delivered?
Most Medicare beneficiaries obtain their health care in a fee-for-service system that allows them to choose their own health care provider. However, increasingly, Medicare beneficiaries are choosing to enroll in managed care. As of early 1998, over 14% of beneficiaries were enrolled in Medicare HMOs.27 These plans typically offer beneficiaries reduced out-of-pocket costs and broader coverage that includes preventive services and often some prescription drug coverage as well. Medicare beneficiaries in HMOs are able to change to another HMO or return to fee-for-service coverage on a month-to-month basis.
In 1999, Medicare beneficiaries may be able to enroll in a wider range of health plans, including Preferred Provider Organizations (PPOs), Provider Sponsored Organizations (PSOs), and private fee-for-service plans, through the Medicare+Choice program. Enrollment will be possible as these plans are certified by the Medicare program.
A PPO is a managed care plan that contracts with groups of physicians and other providers to furnish health care services. PPO enrollees may go outside the network to receive services if they are willing to incur higher cost-sharing.28
A PSO is an HMO-like organization that is created by an affiliation of health care providers (i.e., physicians, hospitals, or a combination of the two) to act as an insurer for enrollees.29
A private fee-for-service plan reimburses hospitals, physicians, and other providers on a fee-for-service basis at a rate determined by the plan, rather than by Medicare's payment rules.30 These plans may charge enrolled beneficiaries up to 15% above its payment amount (which may be different from the Medicare-approved amount) in addition to any cost-sharing requirements.
Also beginning in 1999, up to 390,000 beneficiaries will be allowed to open Medical Savings Accounts (MSAs).31 An MSA insurance plan is a combination of a personal savings account and a high deductible insurance policy. (The annual deductible is limited to $6,000 in 1999, but it may increase over time to account for price inflation.)
Medicare will make an annual payment for each beneficiary enrolled in an MSA. These funds are to be used to pay the premium for the high-deductible insurance policy first; any remaining funds are put in the MSA. Beneficiaries are responsible for first paying for their medical services from the savings account. Once the cost of the deductible of the insurance policy is met, the insurance plan will pay for additional expenses for Medicare-covered services. The insurance policy must cover all Medicare-covered services.
Medicare Payments to Providers
Beginning in 1983, Medicare implemented payment systems designed to slow the growth in program spending (see the next section for a discussion of Medicare spending). The BBA included additional provisions regarding provider reimbursement in order to slow the growth rate even further. Medicare's payment systems include:
Hospital Inpatient Reimbursement:
In 1983, Medicare began paying a fixed prospective rate for
inpatient hospital care rather than the amount hospitals billed
or spent. Prospective payments are determined in advance, based
on the average cost of treating patients with various medical
conditions ("diagnosis related groups" or DRGs).
Medicare pays an extra amount for cases that are extremely costly
("outliers"). The payment rate is adjusted to
recognize: area wages; the indirect costs of medical teaching
programs; and a hospital's disproportionate share of patients
with low incomes. Medicare uses a formula-based approach to
determine payments to hospitals for capital and equipment.
Physician Reimbursement:
In 1984, Medicare established a participating provider program in
which physicians agree to accept the Medicare-approved amount as
payment in full ("accept assignment") for all services
provided to beneficiaries. By participating in this program,
physicians are listed in a directory supplied to beneficiaries;
their claims are processed more quickly; and they receive higher
Medicare payments than do non-participating physicians. If a
physician chooses not to participate, Medicare reimburses 95% of
the payment amount. In 1989, Medicare limited the additional
amount non-participating physicians can charge beneficiaries.
Currently, they can only charge up to 15% above the
Medicare-approved amount. In 1997, 82% of all physicians were
participating providers.
In 1992, Medicare spending on physician care was limited through physician payment reform, which was fully phased in by 1996. This reform established a physician fee schedule and a system of limiting payment increases when the total cost of physician services billed in a year exceeded estimated levels (called volume performance standards, or VPS).
Hospital Outpatient Reimbursement:
Currently, hospital outpatient reimbursement is not set
prospectively. Rather, payment is generally a blended amount that
reflects the hospital's costs and its actual charges (less
deductibles and coinsurance).32
The BBA requires that a prospective payment system be adopted
beginning in 1999 for covered outpatient department services. A
classification system for services will be developed so that the
payment reflects the type of service being provided and the
resources necessary to deliver it.
The current payment formula for most hospital outpatient services results in beneficiaries' paying a coinsurance amount of 20% of whatever the hospital charges, rather than 20% of Medicare's allowable charge. As a result, beneficiaries pay a larger portion of the total hospital payment than they do for other Part B services.33 Under the new system, beneficiaries' coinsurance will be phased down to 20% of Medicare's payment. However, this phase-in will be accomplished gradually over the next 20 years.
Managed Care Reimbursement:
Prior to 1998, Medicare paid risk HMOs34 95% of what it paid per beneficiary,
on average, in the fee-for-service sector. Beginning in 1998,
Medicare pays plans the greater of: (1) a fixed rate per enrollee
that takes into account both the cost of providing services in
their local area and the average cost of services nationwide; (2)
a minimum set amount (i.e., "floor") per enrollee; or
(3) a minimum percentage increase per enrollee from the previous
year's rates. This method is intended to lessen the
difference in payments between high-cost urban and low-cost rural
areas.
Medicare is required to institute, by the year 2000, a system in which payments to plans reflect differences in the health status of each plan's enrollees. This new system is intended to reduce incentives for managed care plans to enroll only the healthiest beneficiaries.
Medicare Program Costs and Projections of Future Spending
Medicare was projected to have spent about $208 billion for benefits and administration in 1997.35 Prior to the enactment of the BBA, the Congressional Budget Office (CBO) projected that Medicare spending would increase by 8.3% per year between 1997 and 2007. However, as a result of provisions in the BBA, Medicare spending is now projected to increase by 7.2% per year over the same time period.36 Figure 2 describes Medicare cost projections before and after enactment of the BBA.37
Historically, much of the increase in Medicare spending has been due to general inflation.38 The remainder has been due to price inflation in excess of general inflation, increases in enrollment, costs associated with the aging of the population, and increases in the amount of services provided in excess of the rise due to enrollment and aging. As baby boomers become eligible for Medicare beginning in 2011, enrollment growth will become an increasingly important element of Medicare spending growth.
Medicare Part A spending is projected to increase, on average, by 4.8% annually over the next decade, and Part B spending is projected to increase by 10.8% over the same time frame (Figure 2). Medicare Part B spending is projected to grow at a faster rate than Part A because:
1) Most Part A services are controlled by prospective payment while spending for some Part B services is still unrestrained because new payment systems will not be implemented for some time; and
2) Certain kinds of care, such as some types of surgery, are being shifted from inpatient (Part A) to outpatient settings (Part B).
Average Annual Growth Rates of Medicare Spending Before and After the BBA
| Before BBA | After BBA | |
| Part A: | ||
|
Average increase in spending per year (FY1997-2007) |
7.8% | 4.8% |
|
Trust Fund projected to be insolvent: |
FY2001 | FY2010 |
| Part B: | ||
| Average increase in spending per year (FY1997-2007) | 9.3% | 10.8% |
| Medicare Program: | ||
| Average increase in total spending per year (FY1997-2007) | 8.3% | 7.2% |
Medicare Spending Per Enrollee Compared to Private Health
Insurance.
From 1969-1993, Medicare spending per enrollee increased by 10.9%
annually, on average, while private health insurance spending
grew by 12.6%.39 Over the last
few years, increases in the amount and complexity of home health
and skilled nursing facility care provided to Medicare patients
drove up Medicare costs, and increases in managed care enrollment
have reduced overall costs in the private insurance market.
Between 1993 and 1996, Medicare spending per enrollee grew by
8.2% per year, on average, and private health spending grew by
2.9%.40
However, this gap between Medicare and private insurance spending may not continue. The Congressional Budget Office is predicting that the growth in private health insurance costs will increase in 1998, and Medicare spending growth is projected to continue to decrease as a result of policy changes in the BBA of 1997.41
1 Those Medicare-eligible individuals aged 65
and older who choose not to enroll in Part B can still do so
later, but with a financial penalty. Beneficiaries enrolling
in Part B 12 or more months after turning age 65 incur a 10%
premium increase for each 12-month period that they could have
been enrolled but were not. This penalty does not apply to
beneficiaries who have group health insurance from their own
or their spouses' current employer if they follow
Medicare's application rules once such
employment-sponsored coverage ends.
2 AARP PPI calculation based on quarterly
Medicare enrollment estimates from the Health Care Financing
Administration (HCFA) and population figures from the US
Bureau of the Census.
3 HCFA Office of Health Care Information. Totals
are as of September 30, 1997. ESRD enrollees are included in
the counts of the aged and disabled. As of July 1995, there
were 290,290 ESRD beneficiaries enrolled in Part A, and 82,902
were entitled to Medicare solely because of ESRD.
4 HCFA Office of Health Care Information. Totals
are as of September 30, 1997. ESRD enrollees are included in
the counts of the aged and disabled. As of July 1995, there
were 282,174 ESRD beneficiaries enrolled in Part B, and 76,654
were entitled to Medicare solely because of ESRD.
5 A benefit period begins on the first day a
beneficiary receives services from an inpatient hospital. The
benefit period ends 60 consecutive days after discharge from
the hospital if the beneficiary is not readmitted to the
hospital.
6 Congressional Research Service, "Medicare
Provisions in the Balanced Budget Act of 1997," CRS
Report for Congress, August 18, 1997.
7 Laschober, Mary, Health and Health Care of
the Medicare Population, Westat, Inc., Rockville, MD,
November 1997.
8 Gross, David J.; Alecxih, Lisa; et al ,
Out-of-Pocket Spending by Medicare Beneficiaries Age 65 and
Older: 1997 Projections, AARP PPI report #9705,
Washington, DC, December 1997.
9 In 1995, the average annual cost of nursing
home care was about $46,000 (AARP PPI Fact Sheet #27R, June
1997). AARP PPI analysis using Medicare Benefits Simulation
Model found that in 1997, older persons living in nursing
homes paid $15,190 out-of-pocket, on average, for that
care.
10 Physicians who are not part of the
participating provider program are allowed to bill Medicare
patients up to 15% above the Medicare-approved amount (known
as "balance billing"). As of May 1995, state law
protects some or all beneficiaries from physician balance
billing in: CT, FL, MA, NY, OH, PA, RI, and VT.
11 Medicare beneficiaries pay 20% of what the
hospital charges for outpatient care, as opposed to 20% of the
Medicare-approved amount. As a result, beneficiaries are often
liable for more than half of the amount the hospital receives
as payment for diagnostic, surgery and radiology services. The
Balanced Budget Act of 1997 included a provision to gradually
phase down beneficiaries' coinsurance to 20% of
Medicare's payment. This phase-in will occur over the next
20 years.
12 HCFA, Office of the Actuary.
13 The fee-for-service program is the
traditional Medicare program where beneficiaries choose the
physician or other health care provider they wish to see and
pay a fee for each service used. Medicare pays its share of
the bill, and the beneficiary is responsible for paying the
balance.
14 AARP Public Policy Institute analysis using
the Medicare Benefits Simulation Model. Includes beneficiaries
enrolled in Medicare fee-for-service only.
15 Ibid.
16 AARP Public Policy Institute analysis using
the Medicare Benefits Simulation Model.
17 McCormack, L.S., et al., "Medigap Reform
Legislation of 1990: Have the Objectives Been Met?"
Health Care Financing Review, Fall 1996. Information is
not currently available for employer-sponsored supplemental
insurance.
18 Ibid.
19 AARP Public Policy Institute analysis using
the Medicare Benefits Simulation Model. Includes beneficiaries
enrolled in Medicare fee-for-service only.
20 In 1997, the poverty level for Medicaid
eligibility was $7,890 for individuals and $10,610 for
couples.
21 Between 1998 and 2002, beneficiaries with
incomes between 135% and 175% of the poverty level can receive
assistance from Medicaid in paying the portion of the Part B
premium attributable to the transfer of home health visits
(Congressional Research Service, Medicare Provisions in the
Balanced Budget Act of 1997 (BBA97,P.L. 105-33),
Washington, DC, August 1997).
22 AARP Public Policy Institute analysis using
the Medicare Benefits Simulation Model. Includes beneficiaries
enrolled in Medicare fee-for-service only.
23 Ibid.
24 AARP-Barents Group individual income tax
model.
25 1997 Annual Report of the Board of Trustees
of the Federal Hospital Insurance Trust Fund.
26 Ibid.
27 HCFA, Office of Managed Care, Monthly Report,
March 1998.
28 Physician Payment Review Commission,
Annual Report to Congress 1997, Washington, DC,
1997.
29 Ibid.
30 Congressional Research Service, Medicare
Provisions in the Balanced Budget Act of 1997 (BBA97,P.L.
105-33), Washington, DC, August 1997.
31 For general information on Medical Savings
Accounts see, Medical Savings Accounts, AARP PPI
publication #FS56, Washington, DC, 1997.
32 For services provided in a hospital-operated
ambulatory surgical center (ASC), Medicare's payment is
limited to the amount that would be paid to a freestanding ASC
in the same area for the same procedure.
33 Prospective Payment Assessment Commission,
Report and Recommendations to the Congress, Washington,
DC, March 1, 1997.
34 Most HMOs participating in the Medicare
program are risk HMOs. Medicare pays these plans a flat fee
for each beneficiary enrolled in the plan, regardless of the
actual cost incurred in providing care to the
beneficiary.
35 AARP PPI calculations based on Congressional
Budget Office's January 1997 and January 1998 baselines of
Medicare spending.
36 Ibid.
37 Ibid.
38 Unpublished analysis by HCFA, Office of the
Actuary, August 1997.
39 HCFA, Office of the Actuary, "National
Health Expenditures: 1996,"Health Care Financing
Review, Fall 1997.
40 Ibid.
41 Congressional Budget Office, Economic and
Budget Outlook: Fiscal Years 1999-2008, Appendix H,
Washington, DC, January 1998.
Written by David J. Gross and Normandy Brangan, AARP Public
Policy Institute
April 1998
©1998 AARP
May be copied only for noncommerical purposes and with
attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC
20049
Pub ID: FS45r