Medicare LECTURE 13

By the end of this lecture, you should be able to: Explain who is covered by Medicare Explain what Medicare covers: Parts A – D Explain how Medicare is financed Describe the financing challenge facing the Medicare system Describe how the new Rx drug benefit will work

Medicare Overview Established in 1965 (as part of LBJ’s “Great Society”) Health insurance at age 65: 44.1 Million Total Beneficiaries, 7.2 M disabled Two Traditional Parts Part A: Hospital Insurance (HI) Part B: Supplementary Medical Insurance (SMI)

Medicare Eligibility Part A (hospital) is available to anyone over age 65 as long as entitled to Social Security, railroad retirement or civilian employee of federal gov’t. Coverage also extended to: Persons age 65+ if dependent of fully insured worker over age 62 Survivor age 65+ if eligible for SS survivor benefit Disabled persons at any age if eligible to receive SS benefits for two years because of disability Also covers end-stage renal (kidney) disease for those requiring dialysis or kidney transplants These individuals receive Part A at no cost

Medicare Eligibility, cont. Persons 65+ not otherwise eligible for Medicare can voluntarily enroll, but they must pay a monthly part A premium (and must enroll in both parts A and B) $244/month: Calendar Quarters $443/month: Less than 39 Calendar Quarters

Medicare Eligibility, cont. Part B: Automatically covered if receive part A Charges monthly premium $96.40 per month in 2008 if take as soon as eligible ($85K/$170K or less Income) At $213/426K--$ Cost goes up 10% per year that you were eligible but did not take Annual Deductible: $ Premium covers only about 25% of expected costs of part B benefits

Part A Benefits (Hospital) Hospital stays Semi-private room, meals, general nursing, and other hospital services and supplies Skilled nursing facility care: 21 days paid Only after related 3-day inpatient hospital stay $ thereafter from days Home health care but limited in scope Hospice care Blood

Part B Benefits (Dr. Visits) Provides benefits for most medical expenditures not covered by Part A Physician and surgeon fees Diagnostic tests, Physical therapy Radiation therapy, Medical supplies Medical equipment rental, Prosthetics Lots more Part A and B together are fairly comprehensive for hospital and doctor visits

How Part B Works Part B has $135 annual deductible Medicare covers 80% of approved charges above this deductible A select list of charges are covered in full (flu shots, some outpatient procedures, etc) Center for Medicare and Medicaid Services (formerly the Health Care Financing Administration) sets a fee schedule – most providers accept assignment of benefits & are thus prohibited from collecting more than set fee Providers are not required to see Medicare patients

What is Missing from Coverage? Health care outside of US Long-term care (nursing homes) Rx Drugs (this changed on Jan !) Routine physical, eye, and hearing exams Routine foot care Immunizations (with a few exceptions) Cosmetic surgery (with exceptions) Dental care Eyeglasses, hearing aids, orthopedic shoes

Multiple Plans Original Medicare Plan Fee-for-service plan managed by federal government Medicare Advantage Includes Medicare HMOs, Medicare PPOs, and other plans

“Original” Medicare You can go to any doctor that accepts Medicare and to any hospital You pay a deductible Hospital: $1068 per stay for of 1-60 days $267per day for days $534 for days All costs for longer stays $135 Medicare Part B Above deductible, Medicare pays 80%

Medigap A health insurance policy sold by private insurance companies Designed to cover “gaps” in Medicare coverage: Coinsurance, deductibles, etc. Other benefits such as travel outside of the US In 47 states, the policies must be one of 12 standardized policies regulated by federal law

“Medicare Advantage” Formerly known as Medicare+Choice (Part C) Health Maintenance Organizations (HMOs): generally must get care from within a network of doctors Preferred Provider Organizations (PPOs): you pay less if stay in network, more if go outside network

Part D Prescription drug coverage Passed into law in late 2003 as part of “The Medicare Prescription Drug, Improvement, and Modernization Act of 2003” Coverage took effect on Jan 1, 2006 Highly controversial (for both programmatic and budgetary reasons) More on this next time

Financing of Medicare HI (part A) is financed by payroll taxes paid by workers and employers Payroll tax of 2.9% (half employer, half employee) Unlike SS, wages are not capped – 2.9% is paid on all earnings (even if you earn $1 billion) Primarily “pay as you go” – today’s taxes pay for today’s beneficiaries SMI (part B) is financed primarily be transfers from the general fund of the US Treasury and by monthly part B premiums paid by beneficiaries ($96.40—$ )

Overall State of Medicare’s Finances From the 2007 Medicare Trustee’s Report “As we reported last year, Medicare’s financial difficulties come sooner – and are much more severe – than those confronting Social Security.” “While both programs face essentially the same demographic challenge, underlying health care costs per enrollee are projected to rise faster than wages per worker on which the payroll tax is paid.” “As a result, while Medicare’s annual costs are currently 3.2% of GDP, or about 60% of Social Security’s, they are projected to pass Social Security expenditures in 2028 and reach almost 11% of GDP in 2082.”

Overall Status, continued The projected 75-year actuarial deficit in the HI Trust Fund is now 3.55 percent of taxable payroll The fund again fails our test of short- range financial adequacy. Date of HI Trust Fund exhaustion

What is Driving Costs? Demographics (just like SS) # of Beneficiaries 1999: 39.2 million 2006: 43.2 million 2080: 108 million Rising Health Care Costs Avg Cost per beneficiary 1999: $5, : $7,500 (6.4% annual growth for past 5 years) 2006: $10,205 (first year of large scale Rx coverage)

Part A (HI) Finances HI income is expected to fall short of payouts IN 2013 (vs 2017 for SS) The “Trust Fund” exhaustion date is 2019 To bring into balance just over next 75 years would require a 108% increase in revenue or 48% reduction in outlays Much bigger changes required to make system permanently solvent

Part B (SMI) and D (Rx) Finances Technically, both B and D are “projected to be adequately financed into the indefinite future” But this is because current law automatically sets financing each year to cover costs! Just because program is “adequately financed” does not mean there is no problem This will result in: Drain on general revenue rising from 1.0% of GDP today to 11% in 2081 General revenue covers 75% of costs Substantial increases in beneficiary premiums Premiums theoretically cover 25% of costs

FICA Taxes in Total (as % of earnings) OASIDIOASDIHITotal Employees Employers Total Earnings for tax purposes are capped for OASDI but not HI

Funding Sources (2007) ($ Billions) SourceOASIDIHISMI Payroll Taxes General Revenue 1178 Interest Premiums 351 Benefit taxes Other 17 Total

Chart B-Social Security and Medicare Cost as a Percentage of GDP Source:

Chart C-Income and Cost Rates [Percentage of taxable payroll] Source:

General Revenue Cost of Part B/D SMI general revenue financing was <9% of federal income taxes in 2003 If income taxes stay constant as share of GDP, then growth in SMI costs as % of federal tax revenue would be: 14% by % by % by 2078

Key Dates for SS and Medicare OASDIHI First year outgo exceeds income (excl. interest) First year outgo exceeds income (incl. Interest) Trust Fund exhaustion

Chart D-Medicare Expenditures and Non-Interest Income by Source as a Percent of GDP

SMI Costs to Individuals Part B and D greatly reduce the costs that beneficiaries would otherwise face for health care But individual financial burden will still increase Part B premiums and coinsurance for typical Medicare beneficiary = 16% of average SS benefit in 2006 Once part D is included, premiums + coinsurance for Medicare as a fraction of SS benefit will be: 35% by % by % by 2078 Note: this overstates picture a bit because in absence of part D, they would still incur Rx drug costs out of pocket