An Overview of Medicare Chapter 21

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3 Social Security Created in 1935 and expanded subsequently Created in 1935 and expanded subsequently Cash benefits paid based upon eligibility Cash benefits paid based upon eligibility Eligibility established through years of work in covered jobs (40 quarters) Eligibility established through years of work in covered jobs (40 quarters) Funded by Federal Insurance Contribution Act (FICA) taxes paid by currently working people Funded by Federal Insurance Contribution Act (FICA) taxes paid by currently working people Funds flow into and out of the Old Age and Survivors Insurance (OASI) trust fund Funds flow into and out of the Old Age and Survivors Insurance (OASI) trust fund 40.1 million received OASI benefits in million received OASI benefits in 2005

4 Disability Created in 1956 to provide cash benefits to disabled people Created in 1956 to provide cash benefits to disabled people Eligibility determined by application to CMS Eligibility determined by application to CMS Funded by FICA taxes paid by currently working people Funded by FICA taxes paid by currently working people Funds flow into and out of the Disability Insurance (DI) trust fund Funds flow into and out of the Disability Insurance (DI) trust fund 8.3 million received DI benefits in million received DI benefits in 2005

5 Medicare Created in 1965 and expanded most recently in 2003 Created in 1965 and expanded most recently in 2003 Has four parts: Has four parts: Part A—inpatient services Part A—inpatient services Funded through Hospital Insurance (HI) trust fund Funded through Hospital Insurance (HI) trust fund Part B—physician/ambulatory services Part B—physician/ambulatory services Funded through Supplementary Medical Insurance (SMI) trust fund Funded through Supplementary Medical Insurance (SMI) trust fund Part C—managed care Part C—managed care Funded through HI and SMI trust funds Funded through HI and SMI trust funds Part D—prescription drug Part D—prescription drug Funded through SMI trust fund Funded through SMI trust fund

6 Medicare Part A Eligibility is determined just like Social Security Eligibility is determined just like Social Security 10 years of work in covered job 10 years of work in covered job Coverage begins at age 65 Coverage begins at age 65 One may purchase Part A coverage One may purchase Part A coverage $423 per month in 2008 $423 per month in 2008 ~ 1 percent of beneficiaries buy Part A ~ 1 percent of beneficiaries buy Part A Funded by FICA taxes paid by current workers Funded by FICA taxes paid by current workers Funds flow into and out of the HI trust fund Funds flow into and out of the HI trust fund 42 million beneficiaries have Part A coverage 42 million beneficiaries have Part A coverage

7 Coverage Under Medicare Part A Per Spell of Illness: Per Spell of Illness: Up to 90 days on inpatient hospital care Up to 90 days on inpatient hospital care $1,024 deductible per spell of illness (in 2008) $1,024 deductible per spell of illness (in 2008) $0 copay for days 1 – 60 $0 copay for days 1 – 60 $256 copay for days 61 – 90* $256 copay for days 61 – 90* Up to 100 days of skilled nursing facility care following a 3 or more day hospitalization Up to 100 days of skilled nursing facility care following a 3 or more day hospitalization $0 copay for days 1 – 20 $0 copay for days 1 – 20 $128 copay for days 21 – 100** $128 copay for days 21 – 100** 60 day inpatient lifetime reserve 60 day inpatient lifetime reserve Lifetime reserve of 60 additional inpatient hospital days Lifetime reserve of 60 additional inpatient hospital days $512 copay for each day*** $512 copay for each day*** Up to 100 home health visits following a 3 or more day hospitalization Up to 100 home health visits following a 3 or more day hospitalization Lifetime limit of 100 days of inpatient psychiatric care Lifetime limit of 100 days of inpatient psychiatric care Hospice care Hospice care Blood Blood *,**,*** Copay set by law at 25%, 12.5% and 50%, respectively, of the spell of illness deductible

8 Spell of Illness Out of a hospital or skilled nursing home for 60 days Out of a hospital or skilled nursing home for 60 days

9 Medicare Part B Voluntary program Voluntary program ~94 percent took Part B coverage in 2005 ~94 percent took Part B coverage in 2005 Monthly premium of $96.40 in 2008 Monthly premium of $96.40 in percent of cost of Part B comes from premiums 25 percent of cost of Part B comes from premiums 75 percent comes from general federal taxes 75 percent comes from general federal taxes Beginning in 2007, high-income beneficiaries (individuals with incomes >$80K) pay a higher percentage of the total cost Beginning in 2007, high-income beneficiaries (individuals with incomes >$80K) pay a higher percentage of the total cost Funds flow into and out of the SMI trust fund Funds flow into and out of the SMI trust fund

10 Coverage Under Medicare Part B $135 Annual Deductible (in 2008) $135 Annual Deductible (in 2008) 20% coinsurance rate applicable to Medicare reasonable fees 20% coinsurance rate applicable to Medicare reasonable fees Physician services including office visits & a one-time physical for new beneficiaries Physician services including office visits & a one-time physical for new beneficiaries Durable medical equipment Durable medical equipment Outpatient hospital services Outpatient hospital services Outpatient mental health services Outpatient mental health services Clinical laboratory and diagnostic tests Clinical laboratory and diagnostic tests Outpatient occupational, physical & speech therapy Outpatient occupational, physical & speech therapy Home health care not preceded by a 3 day hospital stay Home health care not preceded by a 3 day hospital stay Some preventive screening services* Some preventive screening services* Blood Blood *Limitations and the deductible and coinsurance may apply.

11 Medicare Part C Medicare Advantage Medicare Advantage Medicare+Choice, Medicare HMO coverage Medicare+Choice, Medicare HMO coverage Those with Part A and Part B may choose to take Part C instead of traditional Medicare Those with Part A and Part B may choose to take Part C instead of traditional Medicare ~13 percent of beneficiaries had Part C in 2004 ~13 percent of beneficiaries had Part C in 2004 Typically more coverage but a narrower range of providers Typically more coverage but a narrower range of providers Prescription drugs, annual physicals, eyeglasses Prescription drugs, annual physicals, eyeglasses There may or may not be an additional premium There may or may not be an additional premium

12 Percentage of Medicare Beneficiaries in Part C in Selected Years Sources: data from Gold (2006), Kaiser Family Foundation (2005) Percent

13 States with the Largest Percentage of Medicare Beneficiaries in Part C, 2005 Percent Rhode Island 33 California29 Arizona26 Oregon24 Pennsylvania24 Colorado21 Florida18 Source: data from Kaiser Family Foundation (2005)

14 Medicare Part C Payment System Medicare Advantage plans submit bids on the price they will accept for Medicare Part A and Part B services, for supplemental benefits (if any), and for Part D drug benefits Medicare Advantage plans submit bids on the price they will accept for Medicare Part A and Part B services, for supplemental benefits (if any), and for Part D drug benefits Bids compared to CMS benchmarks Bids compared to CMS benchmarks If bid is below the benchmark: If bid is below the benchmark: 25 percent of difference goes to CMS 25 percent of difference goes to CMS 75 percent to be distributed to beneficiaries 75 percent to be distributed to beneficiaries In 2005, 95 percent of bids were below the benchmark In 2005, 95 percent of bids were below the benchmark

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16 Medicare Part D Began January 2006 Began January 2006 Part D drug plans are voluntary and privately run Part D drug plans are voluntary and privately run New drug-only insurance for traditional Medicare New drug-only insurance for traditional Medicare Medicare Advantage plans may offer drug coverage Medicare Advantage plans may offer drug coverage In regions with fewer than two competing plans, beneficiaries will be served with a single government- sponsored cost-plus plan (federal fallback) In regions with fewer than two competing plans, beneficiaries will be served with a single government- sponsored cost-plus plan (federal fallback) Medigap prohibited from offering drug coverage Medigap prohibited from offering drug coverage Although current Medigap beneficiaries may retain coverage Although current Medigap beneficiaries may retain coverage

17 “Standard” Part D Benefits $275 deductible in 2008 $275 deductible in percent/25 percent coverage for next $2,510 in expenses 75 percent/25 percent coverage for next $2,510 in expenses No coverage for next $3, No coverage for next $3, The so-called “donut hole” The so-called “donut hole” 95 percent/5 percent coverage for expenditures above $5, percent/5 percent coverage for expenditures above $5, Cutoffs increase annually in proportion to prescription drug spending Cutoffs increase annually in proportion to prescription drug spending Congressional Budge Office (CBO) estimates donut hole to range from $4,000 to $9,000 by 2013 Congressional Budge Office (CBO) estimates donut hole to range from $4,000 to $9,000 by 2013 Insurance payments from other sources do not count toward beneficiary copayments Insurance payments from other sources do not count toward beneficiary copayments

18 Standard Medicare Part D Coverage, 2008 Catastrophic coverage with 5% coinsurance rate No drug coverage (the “donut hole”) Drug coverage with 25% coinsurance rate Deductible $275 $276 - $2,510 $2,511 - $5,726 $5,726 +

19 Part D Premiums Premiums were estimated to be $32.20/month prior to the implementation Premiums were estimated to be $32.20/month prior to the implementation CMS reported in mid-summer 2006 that average premiums were less than $24/month CMS reported in mid-summer 2006 that average premiums were less than $24/month Like Part B, 75 percent of the cost is paid by general federal tax dollars Like Part B, 75 percent of the cost is paid by general federal tax dollars Also like Part B, higher-income beneficiaries must pay a larger share of the premium Also like Part B, higher-income beneficiaries must pay a larger share of the premium

20 Additional Part D Coverage Medicare beneficiaries may buy coverage that exceeds the standard coverage Medicare beneficiaries may buy coverage that exceeds the standard coverage Lower deductible Lower deductible Reduced or eliminated donut hole Reduced or eliminated donut hole May continue to take employer-sponsored retiree coverage with drug coverage May continue to take employer-sponsored retiree coverage with drug coverage Employer gets 28 percent subsidy of drug costs in the range of $250 to $5,000 Employer gets 28 percent subsidy of drug costs in the range of $250 to $5,000

21 Part D—Low-Income Subsidies Beneficiaries below 135 percent of federal poverty line ($13,230 individual or $17,820 couple) Beneficiaries below 135 percent of federal poverty line ($13,230 individual or $17,820 couple) No deductible, no donut hole, minimal copays No deductible, no donut hole, minimal copays CBO estimates 12 million beneficiaries CBO estimates 12 million beneficiaries Beneficiaries between 135 and 150 percent Beneficiaries between 135 and 150 percent $50 deductible, no donut hole, 15 percent coinsurance $50 deductible, no donut hole, 15 percent coinsurance CBO estimates 2 million beneficiaries CBO estimates 2 million beneficiaries Approximately one-third of beneficiaries qualify Approximately one-third of beneficiaries qualify

22 Part D—Enrollment As of June 2006 As of June percent of Medicare beneficiaries had prescription drug coverage from Medicare or a previous employer 78 percent of Medicare beneficiaries had prescription drug coverage from Medicare or a previous employer One-third had stand-alone coverage One-third had stand-alone coverage 87 percent of those who purchased coverage selected a plan with more generous coverage than the standard plan 87 percent of those who purchased coverage selected a plan with more generous coverage than the standard plan ~75 percent of those eligible for low-income subsidy were estimated to have coverage ~75 percent of those eligible for low-income subsidy were estimated to have coverage Source: data from HHS (2006a)

23 Medicare Benefit Payments by Type of Service FY 2006 FY 2016 (projected) Hospital Inpatient 34% 34% 26% 26% Physicians and Others 2414 Part C 1524 Hospital Outpatient 65 Other Part B 54 Part D 517 Skilled Nursing Facility 54 Home Health 44 Hospice22 Source: Figure 21-4 in text (CBO 2007)

24 Financing Medicare (and Social Security) OASI, DI, and HI trust funds are all funded from payroll taxes on current workers OASI, DI, and HI trust funds are all funded from payroll taxes on current workers Sometimes called FICA Sometimes called FICA

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26 Note: historical vs estimated actually demarcated by yellow line!

27 Reasons for the Declines Retirement of the baby boomers Retirement of the baby boomers Fewer people paying FICA taxes Fewer people paying FICA taxes More people drawing OASI, DI, and HI benefits More people drawing OASI, DI, and HI benefits But in addition, for the HI trust fund But in addition, for the HI trust fund Increasing healthcare prices Increasing healthcare prices Increasing healthcare utilization Increasing healthcare utilization Expanding healthcare technology Expanding healthcare technology

28 Status of the HI Trust Fund Trustees’ goal is to maintain a fund balance equal to one year’s expenditures Trustees’ goal is to maintain a fund balance equal to one year’s expenditures Decline in the fund balance has prompted Congress to take actions Decline in the fund balance has prompted Congress to take actions Medicare PPS Medicare PPS Expansion of Medicare HI tax rate and base Expansion of Medicare HI tax rate and base Balanced Budget Act Balanced Budget Act

29 Source: Boards of Trustees (2006)

30 Projecting HI Trust Fund Revenues and Expenditures Revenue side Revenue side State of the economy State of the economy Number of persons entering/leaving the labor force Number of persons entering/leaving the labor force Distribution and growth of incomes Distribution and growth of incomes Medicare HI tax rates Medicare HI tax rates Expenditure side Expenditure side Number of covered lives Number of covered lives Retirements, deaths, length of remaining life Retirements, deaths, length of remaining life Healthcare costs Healthcare costs Utilization rates, prices Utilization rates, prices Covered services Covered services

31 Long-Term Key Issues Are: Growth in expenditures Growth in expenditures Baby boom retirees Baby boom retirees Growth in healthcare utilization and prices Growth in healthcare utilization and prices Decline in revenues Decline in revenues Retirement of active workers Retirement of active workers

32 Source: Boards of Trustees (2006) If you are 24 in 2008, you are 51 in 2035

33 Status of SMI Trust Fund Exhaustion of the SMI Trust Fund is never an issue Exhaustion of the SMI Trust Fund is never an issue Adjustments to premiums and the call on general tax revenues always generate enough revenue to cover costs. Adjustments to premiums and the call on general tax revenues always generate enough revenue to cover costs. Part B premiums are expected to grow by 30.8 percent between 2005 and Part B premiums are expected to grow by 30.8 percent between 2005 and 2014.

34 Future SMI Premiums Beginning in 2007, there will be a higher income-related premium for those with adjusted gross incomes above $80,000 (individuals) or $160,000 (joint returns) Beginning in 2007, there will be a higher income-related premium for those with adjusted gross incomes above $80,000 (individuals) or $160,000 (joint returns) These folks will pay 35, 50, 65, or 80 of the average program cost depending upon their income level These folks will pay 35, 50, 65, or 80 of the average program cost depending upon their income level A second premium for Part D (prescription drug coverage) began in 2006 A second premium for Part D (prescription drug coverage) began in 2006 Monthly premium estimated to be $37.37 Monthly premium estimated to be $37.37 Expected to grow by 72 percent between 2006 and 2014 Expected to grow by 72 percent between 2006 and 2014

35 Source: Palmer and Savings (2006), Chart D

36 Discussion Question Robert Reischauer (1997), now with the Urban Institute, has summarized several alternative big-idea approaches to solving the Medicare problem: Robert Reischauer (1997), now with the Urban Institute, has summarized several alternative big-idea approaches to solving the Medicare problem: 1. Replace the existing Medicare program with a program in which beneficiaries get a large-deductible Medicare policy; once the annual deductible is satisfied, the beneficiary has full coverage. 2. Replace the existing Medicare program with a voucher program in which Medicare gives each beneficiary a subsidy to buy private health insurance.

37 Discussion Question 3. Replace the existing Medicare program with a redefined set of core covered services and allow private insurers to bid with Medicare to provide these services. Allow beneficiaries to purchase supplemental coverage if they choose. 4. Keep traditional Medicare but cut prices to providers and raise copays, deductibles, and premiums to beneficiaries. 5. Replace the existing Medicare program with a government-run program similar to the current Veterans Affairs system.

38 Discussion Question Any of these options, of course, could be undertaken in the context of higher taxes as well. Any of these options, of course, could be undertaken in the context of higher taxes as well. Discuss some of the advantages and disadvantages of each approach from the point of view of beneficiaries and taxpayers. Discuss some of the advantages and disadvantages of each approach from the point of view of beneficiaries and taxpayers.