Medicare: The Essentials Juliette Cubanski, Ph.D. Associate Director, Medicare Policy Kaiser Family Foundation for Alliance for Health Reform Washington, D.C. March 11, 2011

Medicare past and present Enacted in 1965 to provide health and economic security to seniors age 65 and older Expanded in 1972 to cover younger beneficiaries with permanent disabilities Now covers more than 48 million people, including 8 million under-65 disabled Covers individuals and spouses without regard to income or medical history Benefits include hospital visits and physician services, and prescription drugs through private plans Private plans have been playing an increasingly larger role in the delivery of Medicare benefits Exhibit 1

Percent of total Medicare population: Income <200% FPL ($21,780 in 2011) Cognitive/Mental Impairment Long-term Care Facility Resident 3+ Chronic Conditions Under-65 Disabled Fair/Poor Health Age ADL Limitations Medicare covers a population with diverse needs and characteristics Exhibit 2 NOTE: ADL is activity of daily living. SOURCE: Income data for 2009 from U.S. Census Bureau, Current Population Survey, 2010 Annual Social and Economic Supplement. All other data from Kaiser Family Foundation analysis of the Centers for Medicare & Medicaid Services Medicare Current Beneficiary 2008 Access to Care file.

Medicare Part A – Hospital Insurance Program –Inpatient hospital, skilled nursing facility, home health, and hospice care –2011 cost-sharing requirements: $1,132 deductible for hospital stays, plus daily copayments after 60 days Daily copayments for skilled nursing facility stays after 20 days –Entitlement to Part A after 10+ years of payroll taxes Medicare Part B – Supplementary Medical Insurance –Physician visits, outpatient hospital, preventive services, home health –2011 cost-sharing requirements: $ monthly premium (income-related) $162 deductible 20% coinsurance for physician visits, outpatient hospital services, and some preventive services 45% coinsurance for mental health services (phasing down to 20% in 2014) –Enrollment in Part B is voluntary, with automatic enrollment at age 65 for Social Security recipients (but can opt out) Exhibit 3 Benefits covered by original fee-for-service Medicare

An alternative to Original Medicare; beneficiaries can enroll in a private plan to receive all Medicare-covered benefits and (often) extra benefits Includes HMOs, PPOs, and private-fee- for-service (PFFS) plans The government pays private insurers a fixed amount per enrollee Medicare pays private health plans on average 9 percent more than traditional Medicare costs Medicare Advantage enrollees: –generally pay the Part B premium –sometimes pay a supplemental premium for additional benefits (e.g., vision, dental) –typically receive drug coverage (Part D) Exhibit 4 Medicare Advantage (Part C) Medicare Advantage Enrollment (in millions) A quarter of all Medicare beneficiaries are enrolled in Medicare Advantage plans in 2011

Medicare Part D – Prescription drug benefit Part D is a voluntary benefit offered through private plans –Stand-alone drug plans to supplement Original Medicare or Medicare-Advantage drug plans Beneficiaries in each state have a choice of at least 29 stand-alone drug plans Plans can offer a standard benefit, but most offer an equivalent alternative design –$32.34 average monthly premium (range $14.80-$133.40) Additional subsidies for people with low incomes and modest assets 87% of beneficiaries have drug coverage in 2011, up from 66% in 2004 –More than 29 million out of 48 million beneficiaries are enrolled in a Part D plan (almost two-thirds in stand-alone drug plans) Nearly 5 million (10%) lack drug coverage Exhibit 5 INITIAL COVERAGE PERIOD COVERAGE GAP CATASTROPHIC COVERAGE $310 Deductible Initial Coverage Limit = $2,840 in Total Drug Costs Catastrophic Coverage Limit = $6,448 in Total Drug Costs Plan pays 75% Brand-name drugs Enrollee pays 50%; 50% manufacturer discount Generic drugs Enrollee pays 93%; Plan pays 7% 2011 Part D Standard Benefit Enrollee pays 25%

Total Benefit Payments = $509 billion NOTE: Does not include administrative expenses such as spending to administer Part C and Part D. SOURCE: CBO Medicare Baseline, August Medicare benefit payments, by type of service, in 2010 Exhibit 6 11% 6% 13% 10% 23% 5% 27% 4% Part A Part B Part A and B Part D

Estimated sources of Medicare revenue, 2010 Exhibit 7 SOURCE: 2010 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. PART A $218 billion PART D $63 billion PART B $219 billion TOTAL $499 billion

Medicare offers important benefits, but there are gaps in coverage Medicare does not cover all medical benefits –No coverage for hearing aids, eyeglasses, or dental care –Generally does not pay for long-term care Medicare has high cost-sharing requirements –Monthly premiums for Part B, Part C, and Part D –Separate deductibles for Part A, Part B, and Part D –Part D coverage gap (doughnut hole) – phasing down from 100% in 2010 to 25% in 2020 No limit on out-of-pocket spending for benefits –Median out-of-pocket spending as a share of income rose from 11.9% in 1997 to 16.2% in 2006 –Part B and Part D premiums and cost sharing are more than 25% of average Social Security benefit Medicare pays less than half (48%) of beneficiaries total health and long-term care spending Exhibit 8

Most Medicare beneficiaries have supplemental coverage, 2008 SOURCE: Kaiser Family Foundation analysis of the CMS Medicare Current Beneficiary Survey Access to Care file, Exhibit 9

The 2010 health reform law included numerous changes to Medicare Benefit improvements –Gradually closes Medicare prescription drug coverage gap (doughnut hole) –New annual wellness visit with personalized prevention plan –Eliminates cost sharing for prevention services –Boosts payments for primary care Delivery system reforms –New Center for Medicare and Medicaid Innovation –New Coordinated Health Care Office for dual eligibles –Numerous programs, pilots, demonstrations to improve quality and efficiency (e.g., ACOs) Medicare savings –Reduces payments to Medicare Advantage plans –Reduces payments for hospitals and other medical providers (not physicians) –New Independent Payment Advisory Board New revenues –Income-related premiums –Increase in payroll tax –Fee on drug manufacturers Net effect –Reduces net Medicare spending by $424 billion over the next decade –Adds 12 years of solvency to the Medicare Part A Trust Fund Exhibit 10