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Medicare
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Topic
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Social Security, Medicare, and Medicaid are entitlement programs that represent a large and growing share of the federal budget. Medicaid is a mean-tested entitlement (income-based), while Social Security and Medicare are not. For all three programs the elderly account for most of the expenditures. Under the President’s 1998 budget, expenditures for Social Security, Medicare, and Medicaid are projected to represent 41% of total federal spending. Efforts to contain the costs that have grown over 300% since 1980 and address the demographic changes facing these programs have been a priority for both Congress and the Administration.
The proposals to reform Medicare are of particular importance to the states because of the magnitude of the program, the link to state Medicaid programs, and the impending insolvency of the trust fund. The purpose of this brief is to provide background information on the complex structure of the Medicare program. The information provides a framework to begin to evaluate Medicare reform proposals and their impact on state Medicaid programs.
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Health Care Trends
Problem Definition
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National health care expenditures have risen rapidly since the 1970s. Health care growth matched the average rate of growth for the economy in that period. However, growth in health care quickly outpaced the economy in the 1980s. Between 1980 and 1995, national health care expenditures increased nearly 300%. The lack of competition in the largely service oriented health care industry and the increasing use of improved, higher cost services are two significant factors contributing to the rise in health care prices.
Simultaneously, the public sector is paying an increasing portion of the national health care expenditures. In 1970, shortly after the inception of the Medicare program, the public sector funded 37% of health care expenditures - this has increased to 46% in 1995.
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National Health Expenditures for Selected Years 1960-1995
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(in billions)
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1960
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1970
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1980
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1990
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1993
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1994
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1995
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National Health Expenditures
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$26.9
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$73.2
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$247.2
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$697.5
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$892.1
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$937.1
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$988.5
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Private
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20.2
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45.5
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142.5
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413.1
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505.5
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517.2
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532.1
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Public
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6.6
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27.7
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104.8
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284.3
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386.5
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419.9
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456.4
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Federal
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2.9
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17.8
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72.0
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195.8
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277.6
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301.9
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328.4
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State/Local
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3.7
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9.9
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32.8
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88.5
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108.9
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118.0
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128.0
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Source: Health Care Finance Administration, Office of the Actuary
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The Aging Population
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Approximately 38 million elderly and disabled persons’ health care services are financed in part through the Medicare program. Nearly 98% of the nation’s elderly are enrolled in Medicare. Enrollment will grow as the baby-boom generation, those born between 1946 and 1964, reach retirement and become eligible for Medicare between 2010 and 2030. In 1995, Medicare enrollees represented 13.6% of the population and program spending was 2.6% of the gross domestic product (GDP). It is projected that in 2030, when the last of the baby boomers retire, Medicare enrollees will represent 22% of the population and 7.5% of the GDP.
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Long term viability
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Both of these factors -- explosive growth in health care prices and the demographic changes in the population – threaten the viability of the Medicare program. According to the latest Congressional Budget Office projections, Medicare spending is expected to increase from $191 billion in 1996 to $314 billion in 2002. This represents an average annual increase of 8.6 percent. Without changes to the program, expenditures will outpace the growth of the resources to finance to program. The Hospital Insurance Fund, or Part A, will be depleted by 2001, while the Supplementary Medical Insurance Fund will depend on an increasing amount of general revenue starting in 2002.
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Medicare
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The Medicare program (Title XVIII of the Social Security Act) was established in 1965 to ensure access to health care services for the nation’s elderly. Medicare provides subsidized health care to persons 65 years of age and older who have, or whose spouse has, contributed payroll taxes for ten years (40 quarters). The program was expanded in 1972 to include individuals with end-stage-renal-disease (ESRD) requiring dialysis or kidney transplants and those with certain disabilities. These individuals were made eligible for Medicare coverage because of their particularly high medical costs.
Medicare recipients’ health care services are covered through two separate funds: the Hospital Insurance Trust Fund and the Supplementary Medical Insurance Fund.
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Hospital Insurance Trust Fund
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The Hospital Insurance Trust Fund (HI), commonly referred as Part A, is funded through a mandatory payroll deduction. Employers and employees are each required to pay 1.45 percent of taxable earnings, while self employed individuals pay a 2.90 percent tax on earnings. Revenue from the payroll tax is credited to the HI fund as interest-bearing government securities. Expenditures are recorded against the fund.
According the HI Board of Trustees, disbursements exceeded revenues for the first time in 1995, thus tapping into the Trust Fund balance. The Trustees expect this trend to continue and project the HI Trust Fund to be depleted by 2001.
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Operation of the Hospital Insurance Trust Fund: 1970-2004
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(in millions)
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Calendar Year
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Total Income
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Total
Outlays
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Trust Fund increase from prior year
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Trust Fund at end of year
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1970
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$5,979
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$5,281
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$698
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$3,202
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1980
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26,097
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25,777
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521
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13,749
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1990
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80,327
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66,997
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13,375
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98,933
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1993
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98,187
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94,391
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3,796
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127,818
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1994
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109,570
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104,545
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5,025
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132,844
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1995
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115,027
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117,604
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-2,577
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130,267
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Intermediate estimates:
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1996
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120,281
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129,517
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-9,236
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121,031
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1997
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126,671
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141,652
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-14,981
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106,050
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1998
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130,180
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154,472
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-24,292
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81,758
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1999
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133,849
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167,967
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-34,118
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47,640
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2000
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137,515
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182,173
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-44,658
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2,982
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2001
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141,216
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197,247
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-56,031
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-53,049
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2002
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145,451
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213,089
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-67,638
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-120,687
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2003
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149,536
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230,228
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-80,692
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-201,379
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2004
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153,355
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248,655
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-95,300
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-296,679
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Note: Numbers may not add due to rounding.
Source: 1996 Hospital Insurance Trustees’ Report
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The Hospital Insurance Trust fund covers inpatient hospital care, skilled nursing facilities, home health, and hospice services. Excepting home health services, all the health care services have defined benefit periods and time limits. Beyond that benefit period, the beneficiary must share in the cost of the care. The 1996 cost sharing requirements for Part A beneficiaries are outlined in the chart below.
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Cost Sharing
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Service
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Time Period
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Cost
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Deductible
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Hospital Care
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Per episode of illness
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$736
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Coinsurance
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Hospital Inpatient Care
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Days 61-90
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$184/day
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Hospital Inpatient Care
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60 lifetime reserve days
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$368/day
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Skilled Nursing Facility
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Days 21-100
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$92/day
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Source: American Association of Retired Persons, FS Number 49, 1996
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Supplementary Medical Insurance Fund
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The Supplementary Medical Insurance fund (SMI), known as Part B, provides optional services for beneficiaries. Those eligible for Part A, as well as a few other groups of individuals, may purchase coverage through a monthly premium. This year, eligible recipients pay a monthly premium of $43.80. Beneficiaries are also responsible for sharing the cost of many of the covered services, as well as for deductibles.
The monthly premiums were intended to cover 50% of the Part B program costs when the program began in 1966. However the premiums dropped to 25% of the program costs in 1972 legislation that set premiums to grow at the same percentage as Social Security. Since that time, Congress has consistently voted to keep monthly premiums at 25% of the program costs. The remaining 75% of the program is financed through general revenues of the United States Treasury.
In 1996, the Medicare program covered an estimated $69.1 million in health care services through the SMI fund. The services eligible under Part B include: physician services, lab and diagnostic tests, outpatient services at a hospital, and mental health services.
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Cost Sharing
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Service
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Cost
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Premium
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Part B premium
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43.80/month
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Deductible
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Part B services
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$100/year
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Coinsurance
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Physician care & durable medical equipment
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20% of approved amount plus balance billing of up to 15%.
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Hospital outpatient care
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20% of hospital charge
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Outpatient mental health therapy
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50% of approved amount
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Source: American Association of Retired Persons, FS Number 49, 1996
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MediGap
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The Medicare program does not offer a complete package of benefits compared with other large insurance providers. Medicare does not cover prescription drugs, long-term care, or preventive health care. Because of this, nearly 75% of Medicare beneficiaries elect to purchase private, supplemental insurance policies. These policies, referred to as MediGap, cover deductibles, cost sharing, and services not provided through the Medicare program. According to the American Association of Retired Persons (AARP), half of the MediGap policies cover prescription drugs, and virtually none of the policies cover long term care.
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Medicare-
Medicaid
Relationship
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Medicare beneficiaries are subject to significant out-of-pocket health costs because of the various deductibles, premiums, and coverage limitations. It is estimated that elderly persons at or below 100% of the federal poverty level (FPL) spend 34% of their family income on premiums and out-of-pocket costs. This is compared to 13% for those with incomes at 400% of the FPL.
For needy Medicare recipients, a state Medicaid program may assist in covering the some of the cost of health care. Elderly Medicare beneficiaries qualify for state Medicaid assistance under three categories: dual eligibles, qualified Medicare beneficiaries, and specified low-income Medicare beneficiaries.
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Dual Eligibles
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An individual is considered "dually eligible" if they meet the eligibility requirements of both Medicare and Medicaid. In this instance, the state Medicaid program would pay for the cost-sharing portions of Part A and B. In addition, the state would pay for any services not covered by Medicare. This includes services that are above and beyond the Medicare program, such as prescription drugs, and services that have limited coverage periods, such as skilled nursing facility care.
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Qualified Medicare Beneficiaries
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Individuals who do not meet Medicaid income eligibility requirements may still qualify for state assistance. The state Medicaid program is required to pay for all the cost sharing portions of Part A and B for individuals with incomes below 100% of the federal poverty guideline (FPL). These individuals are referred to as Qualified Medicare Beneficiaries (QMBs).
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Specified Low-Income Medicare Beneficiaries
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Beneficiaries with incomes between 100% and 120% of the FPL, are known as Specified Low-Income Medicare Beneficiaries (SLMBs). States must pay the Part B premium for SLMBs.
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Medicaid Expenditures for Dual Eligibles, QMBs, and SLMBs
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Nearly 6 million elderly and disabled Medicare beneficiaries are covered in part by the Medicaid program. According to the Health Care Finance Administration (HCFA), states and the federal government spent an estimated $53 billion in FY 1995 through the Medicaid program for QMBs, SLMBs, and Dual Eligibles. While only representing 17% of the Medicaid population, the expenditures for these three groups of beneficiaries represent 77% of total state Medicaid spending. Over 70% of the state Medicaid payments for Medicare beneficiaries were for long term care.
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Current Reform Proposals
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Under the balanced budget agreement, $115 billion (8.5%) in spending reductions over five years would be achieved. The savings would be achieved largely through cuts to hospitals, doctors, health care providers, and the elderly. According to the Congressional Budget Office the cuts would be allocated as indicated in the chart below.
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Under the balanced budget agreement, the costs of home health services, approximately $80 billion, would be shifted form Part A to Part B. In addition, Part B premiums would be required to cover 25% of the cost of Part B. In order to maintain the 25-75% balance, Medicare premiums would gradually be increased over the next five years – estimated at $1 a year. States, through the Medicaid Dual Eligible, QMB, and SLMB programs would absorb the increase in Part B premiums for low income elderly.
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Summary
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As Congress proceeds with its effort to balance the federal budget during the FY 1998 budget process, measures to control Medicare spending will continue to surface. Proposals that have significant impact of state budgets will be monitored and reported.
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For further
information
please contact:
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Kerry Wiersma, Staff Associate
National Association of State Budget Officers
444 NorthCapitol Street, N.W., Suite 642
Washington, D.C. 20001-1511
Phone: (202) 624-5382 or Fax: (202) 624-7745
email: kwiersm@sso.org
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NASBO Information Brief
June 10, 1997
Volume 5, Number 2
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Additional Sources of Information
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The Health Care Finance Administration provides consumer and professional/technical information on the Medicare and Medicaid programs.
http://www.hcfa.gov
The American Association of Retired Persons provides consumer information and legislative contacts for Medicare and many other issues.
http://www.aarp.org
The Urban Institute’s health policy research center addresses Medicare and Medicaid policy, trends, and strategic options.
http://www.urban.org
The Henry J. Kaiser Foundation provides research on health policy, including Medicare.
http://www.kff.org
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Policy Resources