The President and his allies ominously warn that the Ryan plan would “end Medicare as we know it.”
But let’s be honest, how much do you really know about Medicare? If you’re under age 65 there’s a good chance that you know very little about the program. You have had no reason to, at least until now.
Five years ago I had to help a Cabinet Secretary and a senior White House staffer get up to speed very quickly on the absolute basics of Medicare, just the broadest brush strokes. They, like you, needed to understand Medicare principally from a top-down budget perspective, rather than as a participant in the system. I created a simple two-page outline for them to study.
I have updated the numbers in that document and offer it here, hoping it can provide some basic facts and context to the Medicare component of the current budget debate. This outline won’t make you an expert, but at least you’ll have a starting point.
All numbers below are from CBO, except enrollment data are from the Medicare trustees.
10 things you should know about Medicare
Who gets it and what they get
1. Medicare is a federal government program that pays for health care for seniors and the disabled.
- About 40 million seniors enter at age 65 get their health care through Medicare.
- You cannot enroll early, as you can with Social Security.
- About 8 million disabled are also enrolled.
- That means 1 in 8 Americans are in Medicare.
2. It was created in 1965 to cover only acute care costs. The cost-sharing structure is “upside down.”
- The benefit was modeled after an early 1960s Blue Cross/Blue Shield benefit.
- It has low deductibles and copayments.
- It does not cover catastrophic costs.
- It generally does not cover long-term care costs (with caveats).
- Part A = Hospital care (+ more)
- Part B = Physician care (+ more)
- Other benefits include home health care, skilled nursing care, hospice, & now drugs (Part D).
- Modern private health insurance instead generally has high deductibles and copayments and often covers catastrophic costs.
3. Most seniors don’t face the costs of the limited deductibles or copayments.
- Many have employer-provided “wraparound” coverage;
- or they purchase supplemental “Medigap” insurance (which is inefficient);
- or the poor have Medicaid cover their cost-sharing.
4. The Bush Administration and Congress added a voluntary drug benefit in 2003.
- Medicare now subsidizes the purchase of privately-offered insurance that covers prescription drug costs, with specific cost-sharing requirements.
How it’s delivered
5. For most it’s a government-financed, government-administered, fee-for-service benefit.
- aka “single payer health care”
- Three-fourths of Medicare beneficiaries are in this “traditional fee-for-service Medicare.”
- Government sets prices in FFS Medicare through laws and administrative mechanisms.
- A senior goes to a doctor or hospital, gets treated. The government reimburses that provider.
- In FFS Medicare, the government therefore directly reimburses and regulates providers of medical goods and services.
- This is slow, bureaucratic, and subject to political influence through the legislative and regulatory processes.
6. One quarter of beneficiaries are in a better “defined contribution” system in which the government finances the purchase of privately-offered health insurance.
- This is “Part C”, aka “Medicare Advantage” or “MA.”
- This looks like employer-provided health insurance, except the government is the premium payer.
- In MA, the government reimburses and regulates private insurers, who in turn reimburse and manage providers of medical goods and services.
- Seniors can choose among competing private health plans. Those plans can more flexibly manage medical providers and costs.
How it’s financed
7. It’s enormous and it’s growing unsustainably fast.
- About $491 billion of net government spending this year. (Compare SS at $727 B.)
- It’s projected to grow ≈ +5.4% per year for the next ten years.
- Medicare spending = 3.8% of GDP today, 4.1% of GDP in 2030.
- Per beneficiary net government spending ≈ $10,200/year
- 70/10 rule: 10% of the seniors account for 70% of the costs. The healthiest 50% of seniors account for only 4% of the costs.
8. It has all the demographic challenges of Social Security, plus unsustainable health care cost growth.
- Medicare is so big that its payment structures are directly responsible for much of the macro- and micro-structure of U.S. health care delivery.
- Politically it’s harder to reform than Social Security because provider groups (doctors, hospitals, etc.) join seniors in lobbying for more funding.
9. There are three main sources of financing the program.
- There are three financing sources: dedicated payroll taxes, beneficiary premiums, & general revenues (income taxes).
- payroll taxes: 2.9% of all wages. ½ paid by employee, ½ by employer.
- premiums: 25% of “part B” costs ≈ $96-115 per month. High income seniors (income > $85K/person) pay higher premiums.
- premiums: a % of “Part D” drug costs. (complex formula). High income seniors pay higher premiums.
- general revenues = total spending – (payroll taxes + premiums)
10. The “Trust Funds” are misleading anachronisms.
- The distinctions between parts A, B, C, and D are historic and irrational.
- Technically, payroll taxes are dedicated to “part A” (hospital) spending, and go into a “Part A trust fund.”
- Technically, part B premiums cover 25% of part B spending, with general revenues covering the other 75%.
- There is some symbolic aspect to the “balance” in the “part A trust fund”, but we think about spending on a cash flow and aggregate basis.
(photo credit: Stanford Medical History Center)