1. Medicare November 1, 2006

2. 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

3. Medicare Overview Established in 1965 (as part of LBJ’s “Great Society”) Health insurance for the aged Two Traditional Parts + Rx Drugs Part A: Hospital Insurance (HI) Part B: Supplementary Medical Insurance (SMI) Part D: Prescription Drug Coverage

4. 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

5. 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) Could exceed $300/month, but depends on how many quarters of coverage under Social Security

6. Medicare Eligibility, cont. Part B: Automatically covered if receive part A Charges monthly premium $78.20 per month in 2005 if take as soon as eligible Cost goes up 10% per year that you were eligible but did not take Premium covers only about 25% of expected costs of part B benefits

7. Part A Benefits (Hospital) Hospital stays Semi-private room, meals, general nursing, and other hospital services and supplies Skilled nursing facility care Only after related 3-day inpatient hospital stay Home health care Limited in scope Hospice care Blood

8. 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

9. How Part B Works Part B has $100 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

10. What is Missing from Coverage? Long-term care (e.g., nursing homes) Health care outside of US 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

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

12. “Original” Medicare You can go to any doctor that accepts Medicare and to any hospital You pay a deductible Hospital: $912 per stay for of 1-60 days $228 per day for days 61-90 $465 for days 91-150 All costs for longer stays $110 Medicare Part B Above deductible, Medicare pays 80%

13. 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

14. “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 Private fee-for-service: similar to traditional Medicare, but private insurer decides the payment and fee schedule

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

16. 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 ($78.20 per month in 2005)

17. Overall State of Medicare’s Finances From the 2005 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 2.6% of GDP, or about 60% of Social Security’s, they are projected to pass Social Security expenditures in 2024 and reach almost 14% of GDP in 2079.”

18. Overall Status, continued The projected 75-year actuarial deficit in the HI Trust Fund is now 3.09 percent of taxable payroll The fund again fails our test of short- range financial adequacy. Date of HI Trust Fund exhaustion.. 2020

19. What is Driving Costs? Demographics (just like SS) # of Beneficiaries 1999: 39.2 million 2004: 41.8 million 2080: 108 million Rising Health Care Costs Avg Cost per beneficiary 1999: $5,502 2004: $7,500 (6.4% annual growth for past 5 years) 2006: $10,205 (first year of large scale Rx coverage)

20. Part A (HI) Finances HI income is expected to fall short of payouts this year (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

21. 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 0.9% of GDP today to 6.2% in 2078 General revenue covers 75% of costs Substantial increases in beneficiary premiums Premiums cover 25% of costs

22. FICA Taxes in Total (as % of earnings) OASIDIOASDIHITotal Employees5.300.906.201.457.65 Employers5.300.906.201.457.65 Total10.601.8012.402.9015.30 Earnings for tax purposes are capped for OASDI but not HI

23. Funding Sources (2004) ($ Billions) SourceOASIDIHISMI Payroll Taxes 47380157 General Revenue 1101 Interest 7910152 Premiums 231 Benefit taxes 1519 Other 1 Total 56691184134

24. Chart C-Income and Cost Rates [Percentage of taxable payroll] Source: www.ssa.gov/OACT/TRSUM/trsummary.html

25. Chart B-Social Security and Medicare Cost as a Percentage of GDP Source: www.ssa.gov/OACT/TRSUM/trsummary.html

26. 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 2010 29% by 2030 50% by 2078

27. Key Dates for SS and Medicare (2005 Trustees Report) OASDIHI First year outgo exceeds income (excl. interest) 20172004 First year outgo exceeds income (incl. Interest) 20272012 Trust Fund exhaustion20412020

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

29. 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 = 15% of average SS benefit in 2003 Once part D is included, premiums + coinsurance for Medicare as a fraction of SS benefit will be: 35% by 2010 50% by 2030 80% by 2078 Note: this overstates picture a bit because in absence of part D, they would still incur Rx drug costs out of pocket