Medicare

The Medicare program is a national health insurance system that currently serves more than 40 million beneficiaries and provides more than $330 million in health care benefits. Participation in the Medicare program is dependent on whether individuals are age 65 or older, have selected disabilities, or have end stage renal disease (ESRD). The majority (about 85 percent) of the Medicare population is aged, while approximately 14 percent of beneficiaries are disabled. The remaining Medicare population (less than 1 percent) is eligible for Medicare benefits because of ESRD. The Medicare program is the largest health insurer in the United States; it is a crucial element in ensuring health care to some of the most vulnerable populations.

The Medicare program actually finds its roots in the Social Security program. Though the original Social Security Act was enacted in 1935, this program to provide minimal income security through social insurance included no provision for coverage of health care expenses. Therefore, despite its goals of providing a basic social safety income net, it became apparent to policymakers that health care costs, particularly for the aged and disabled populations with high health care needs, would quickly undermine the income protections intended to be provided under Social Security. Therefore, after long debate, the Medicare program became law in 1965 as a mechanism to add health insurance to the already existing national Social Security program.

Medicare is partially financed through a combination of payroll taxes, beneficiary premiums, and beneficiary cost sharing. For most of its history, the Medicare program (now commonly referred to as “original Medicare”) consisted of hospital insurance (covered under Medicare Part A) and general medical insurance including physician services (Medicare Part B). Coverage under the original Medicare program worked under a fee-for-service system in which Medicare paid medical providers predetermined rates for specific health care services.

Medicare, however, evolved over time to include new programs. During the late 1980s, the program experimented with provision of Medicare services to beneficiaries through capitated health maintenance programs. Managed care programs, such as health maintenance organizations (HMOs), offered an alternative way for Medicare beneficiaries to receive their benefits. In exchange for enrollment in a Medicare managed care plan, beneficiaries often received additional, non-statutory benefits, including preventive care. Popularity of managed care (known first as the TEFRA HMO program) grew steadily, boosted further through passage of the Balanced Budget Act (BBA) of 1997. Under the BBA, which created the Medicare+Choice program, Medicare expanded the types of managed care organizations eligible to contract with Medicare. Through the Medicare+Choice program, also known as Medicare Part C, managed care organizations could offer new benefit options, including preferred provider organizations (PPOs) and private fee-for-service (PFFS) plans, to the original HMO options. Though a source of great policy interest and change, the Medicare managed care program (currently renamed Medicare Advantage) provides coverage to a minority (about 15 percent) of Medicare beneficiaries.

Possibly the most significant change to the Medicare program came with the enactment of the Medicare Modernization Act (MMA) of 2003. The MMA added a benefit long absent from original [Page 572]Medicare: prescription drugs. The Medicare Part D program, which became effective in January 2006, provides basic and catastrophic prescription drug coverage to beneficiaries through private insurance plans. Under Part D, beneficiaries receive basic coverage of prescription drugs up to (depending on their specific plan) about $2,000. Catastrophic coverage continues after beneficiaries have paid out-of-pocket costs of $3,600. The private plans that provide Part D coverage include a wide range of Medicare prescription drug plans (PDPs) and mandated prescription drug coverage obtained by enrollment in a Medicare Advantage managed care plan. Medicare beneficiaries choose annually which type of mechanism (PDPs or Medicare Advantage plans) they want to elect for their Part D coverage.

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