Medicare(History and Financing)

Yale Forman, MD

Brown University

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Agenda - Objectives

• Whatever you want it to be….

• Medicare overview

• Medicare Part A, B, D, and C

• Understand Financing

• Understand political and policy implications

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Brief History of Medicare

• Enacted in 1965

• Patterned after private insurance products– traditional indemnity– 2 parts

• Hospital Insurance (Part A)

• Supplemental Medical Insurance (Part B and now Part D)

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Medicare (Total) Highlights – TR 2007

• 43.2 million people (36.3 M aged; 7 M disabled) • Total Benefits - $402 Billion• Total Expenditures - $ 408 Billion• Total Income - $437 Billion• Total Assets - $ 339 Billion

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Medicare’s “Dedicated Financing Sources”

• Payroll taxes to the HI Trust Fund; • Income from the taxation of Social Security

benefits that is transferred to the HI Trust Fund;

• Part A*, Part B, and Part D premiums; • State transfers for the Medicare prescription

drug benefit; and • Gifts to the trust funds

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Financing Part A

• 1.45% Payroll tax on total income, matched by employer– No limit– Money flows into trust fund

• There are no restrictions on spending (from current income and trust fund)– Changes in medical practice may result in huge increases (or,

theoretically decreases) in spending which have no influence on budgeting of any given year

– In theory, no access to any funds other than trust fund and current payroll tax revenue

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Trust Fund

• “Special” US treasury securities

• Really an accounting procedure where one arm of the government lends another cash, in exchange for a promise of principal plus appropriate interest– Why does this ultimately matter?

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HI-Medicare Part A• Hospice care (since 1982)• Inpatient Hospital services• Skilled nursing facility care (after a 3 day hospital stay)

– Why?– Who (what?) pays for the majority of SNF bed-days in this

country?

• 22% of beneficiaries actually received HI services in 2002 (slight increase from 1993, when figure was ~ 20%)

• Average expenditure per enrollee increased by 3.3 %; Now $4410 (2006)

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Part A Financing (2007 figures, except where indicated)

• 65 years and older and eligible for any type of SS benefit automatically “entitled.” Requires 40 quarters of Medicare-covered employment; sliding scale for those with less.

• Non-entitled may pay ($410/month; increased from $393)• Co-pay is $248 per hospital day • Deductible is $992 • Co-pay does not “kick in” until day 61 and then has to be paid for up to 30

more hospital days• If hospital stay is longer than 90 days, the co-pay rises to $496 per day for a

lifetime reserve of 30 more days, when you assume all fiscal responsibility• Long hospitalization can have substantial costs to an elderly patient (if no

medi-gap (or RHB) insurance is owned).• Skilled Nursing Facility Care: Totally covered for the first 20 days and then the

patient covers $124 per day for days 21 – 100. No further Medicare benefit.

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Part A Financing• 1966 - Deductible was $40• 2007 - Deductible is $992 (increased from $952;

4.4%)• Benefits and administrative costs are paid from a trust

fund financed by payroll taxes• 1966, payroll tax basis was $6600 max. and rate was

0.35%• Now, tax basis is infinite (since 1993) and rate is 2.9%

11TR, 2007

12TR, 2007

13TR, 2007

14TR, 2006

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Medicare Part B - Supplemental Medical Insurance• Physician services• Home Healthcare• Durable medical equipment (DME)• Outpatient medical services

– Clinical lab tests; Imaging – PT/OT– Emergency Room service

• Ambulance; • Hep B, Flu, Pneumococcal vaccines• Screening: Pap smear, mammography, colon; cholesterol; Diabetes; Glaucoma; Prostate cancer• Prescription drugs which can not be self-administered including certain anti-cancer drugs

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SMI – Part B/2006 Highlights

• 94 % of the 42.9 Million Medicare enrollees are enrolled in Part B

• 95+% of enrollees received services (2000 data)

• Administrative costs are 2.1% of program costs, compared with 1.7% for HI

• Average benefit per enrollee is $4121, increasing 9.6 % in past year

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Part B Financing• Voluntary

• Open to all Part A enrollees and most Americans over 65

• Annual deductible– $50 in 1966– $60 in 1973– $75 in 1982– $100 in 1991 – $124 in 2006– $131 in 2007– If it had kept pace with actual charges, more than $2000 now!

• Co payments - 20% of allowed charges

• 1966 - $3/month

• Until 1976, premium rate was set to cover 50% of program costs

• Since that time and until 1983, the premium rate has been allowed to increase at same rate as SS benefits (Inflation) which is substantially lower than health care inflation

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Part B Financing• Since health care costs have been rising much faster than inflation - - -

premiums covered only 25% by 1983• In 1984, congress tried to fix system and tried to decrease the trend• By 1995, since health care costs had slowed their increases, the monthly

premium of $43.80 covered 25% of actual program costs.• BBA-1997 - Permanently established that premium be 25% of program

expenditures. • 2003 - $58.70/month (8.7% increase); 2004 - $66.60 (13.5% increase);

2005 - $78.20 (17.4 % increase); 2006 - $88.50 (13.2%); 2007 - $93.50**(5.6%)

• During the past five years, Medicare SMI has grown MUCH faster than the economy as a whole.

• SMI outlays were less than 1.1% of GDP last year and will be 4.2% of GDP in 2077; Intermediate assumptions

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** Income related premiums

Initial Threshold set at $80K for individual and $160K for couple

Final Threshold set at $200K for individual and $400K for couple

CURRENTLY indexed to inflation

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Standard Drug Benefit (2007)• Deductible $265; $27.33 monthly premium (average)• 25% co-insurance for next $2135 in drug spending • No coverage for next $3051 in drug spending • Then 5% coinsurance for non-poor and less for poor ($2/$5 for

<135% and 0 for < 100% FPL)• This is a competitively bid product with some government

“reinsurance”• Low Income provisions

– <135% FPL – No Premium; $1/$5 cost-sharing– 136-150% FPL – Reduced Premium; $50 deductible; 15% cost-sharing

• Average Per beneficiary expense for 2006 - $1690

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Drug Benefit

• Requirement that each beneficiary have access to one Prescription Drug Benefit Plan and one Integrated Plan (or two Prescription Drug Benefit plans, if no integrated plan is offered)

• Dual Eligibles are mandated by Federal Benefit but 75% supported by state contribution

• Subsidy to employers to keep coverage

23TR, 2007

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Part B Financing- Premium as Share of Cost (prior to BBA- 1997)

25TR 2007

26TR, 2007

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TR, 2007

28TR, 2007

29TR, 2007

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Medicare Advantage

• Local HMOs, PPOs and Provider-Sponsored (IPAs) organizations (PSOs)

• Private Fee-for-service plans– Much like POS plans– No required to establish a provider network– Not required to report quality measures– Less CMS oversite– Very small, but fastest growing component

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Medicare Advantage

• Previously 95% of regional FFS rate• Now competitively bid

– Bid against county benchmarks– Adjustments made for enrollee risk profile

• Current data suggests that plans are receiving rates that are greater than 100% of risk-adjusted FFS beneficiaries– Why would federal government allow for this?

• In some cases, the beneficiaries are getting more coverage than in the FFS plans

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