Medicare

Medicare is a federally legislated program that provides low-cost hospitalization and medical insurance primarily for American seniors over the age of 65, who currently account for about one third of all health care dollars spent in the United States—more than $300 billion annually. Although a presidential committee considered creating a health insurance program for the elderly as early as 1934, it was not until 1965 that President Lyndon Johnson signed Medicare into law as part of the Social Security Act. Medicaid, a health safety net program for low-income Americans, was enacted the same year. Initially, both programs were the responsibility of the Social Security Administration. As the programs expanded and became more complex, the Health Care Financing Administration (HCFA) was created in 1977 to effectively coordinate and manage them. Further growth of the programs prompted the restructuring of HCFA in 2001, which was renamed the Centers for Medicare and Medicaid Services. This organization has three general divisions. First, the Center for Medicare Management focuses on traditional Medicare programs and government contracts with health care organizations. It sets up Medicare policies, determines reimbursement rates for service providers, and manages Medicare paperwork. Second, the Center for Beneficiary Choices codifies and regulates supplemental programs that provide coverage for services that traditional Medicare plans do not cover. Third, the Center for Medicaid and State Operations coordinates the Medicaid program with state governments.

In 2004, Medicare served approximately 42 million Americans, of which 35.4 million beneficiaries were people over the age of 65 who either paid into Medicare throughout their working lives or enrolled by paying an extra premium. Another 6.3 million beneficiaries were individuals who required dialysis due to end-stage renal disease and low-income people with disabilities who had received Social Security disability benefits for 2 years. In the fiscal year 2004, Medicare benefit payments totaled $295 billion, accounting for 17% of the nation's total health spending, or 2.8% of the gross domestic product. It is the second largest nondefense program in the federal budget (12%), after Social Security.

Five trustees, which include the secretary of the Treasury, the secretary of Labor, the secretary of Health and Human Services, and two private citizens, monitor the finances and report periodically on the economic health and sustainability of the two main Medicare funds. First, the Hospital Insurance program (“Part A” of Medicare) primarily covers inpatient hospital care, hospice care, and care in skilled nursing facilities. This “Part A” program is funded mainly through a payroll tax contributed by employers and employees, each paying 1.45% of the employees' income. Payments into the Hospital Insurance Fund are based on the number of workers paying into the system and are not adjusted each year, so the fund can become insolvent, that is, unable to meet all incurred debts. According to the 2005 Medicare Board of Trustees' projection, spending of Hospital Insurance trust fund assets might exceed income starting in 2012, and the fund's reserves might be exhausted in 2020.

Second, the Supplementary Medical Insurance program (“Part B”), which covers physician services, outpatient hospital care, laboratory tests, physical and occupational therapy, and most home health care, is financed by beneficiary-paid premiums ($78.20 per month in 2005) and general federal tax revenues, the latter of which makes up approximately three quarters of revenues for Part B. This fund is adjusted annually to cover the cost of Part B services and therefore cannot be overdrawn. These two plans do not cover custodial long-term care services, but low-income beneficiaries may also enroll in and receive such coverage from Medicaid (“dual eligibles”), a program that offers health services to Americans of all ages who have limited income and resources.

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