Medicare facts 2007

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Medicare paid roughly $425 billion in benefits to senior and disabled Americans in calendar year 2007. In that year, about 44 million beneficiaries, or about 1 out of 7 Americans, were enrolled to receive benefits. During the first 40 years of the Medicare program, the United States has seen improvement in the quality of life of its seniors, which was one of Medicare's primary goals. During this time, the country has seen a surprising increase in the life expectancy at age 65, and the proportion of the elderly who are living below the federal poverty line has declined.

Medicare Is Complicated

Medicare has several parts-Part A (HI or hospital insurance), Part B (SMI or supplementary medical insurance), Part C (generally known as Medicare Advantage or Medicare risk contracts), and Part D (prescription drug insurance). Both the benefits and financing of the Medicare program are complicated. The basic benefit structure is confusing since not all services and products are covered, and payments are limited by deductibles, upper bounds on benefits, and some coinsurance requirements (i.e., the sharing of the cost of benefits between the beneficiary and the program).

Recently, there has been a great deal of media coverage about the difficulties and confusion that some beneficiaries have experienced with enrollment in the new prescription drug program. Some Part D insurers have attempted to provide simplified benefits that modify the basic Medicare program, but that has also created an abundance of hybrid offerings that some seniors have difficulty comparing.

The financing is also complicated. Part A is financed largely from payroll taxes paid by workers and their employers. Part B and Part D are financed partially by premiums paid by beneficiaries and partially by appropriations from the general revenues of the United States. Part C financing effectively is a blend of all of the mechanisms used by A, B, and D, such that the money comes from Medicare in the form of a lump-sum payment.

Trends in Medicare Costs

If Medicare continues under current law, without changes in management and funding protocols, projected Medicare costs will rise to a very high level of federal expenditures and GDP over the next few decades. In this projection, there is roughly a 1.7 percent higher expected trend rate assumed for Medicare costs than for GDP. The observed differences in the past have tended to equal or exceed this level.

Under this projection, by 2080, Medicare costs are expected to consume ever increasing shares of GDP and total federal expenditures. How will this affect national funding in other areas such as education, public infrastructure, or defense? Government projections do not answer this question, but if Medicare consumes about 9 percent more of the federal budget as projected in 2020 versus 2005, this will create a need for substantial reductions in the proportion of the federal budget for other services. Cutting provider reimbursements repeatedly would reduce Medicare expenditures but could also cause seniors to experience substantial reductions in access to health care. Other solutions to reducing Medicare's costs should be considered to avoid these potential problems in the future.

If we do not fundamentally change our direction, Medicare and Social Security together will consume virtually every dollar of the federal budget in a little more than 75 years. Further, note the rapid increase in the amount of funding coming from general Treasury revenue versus dedicated revenues (e.g., Part A payroll taxes and Part B premiums) and the revenue shortfall within Medicare; this portends a rapid acceleration of stress on the federal budget.

The history of Medicare and total national health expenditures shows that they both grow faster than GDP. Certainly, these estimates can vary significantly owing to factors such as growth of medical technology, changes in legislated reimbursement levels, and growth for the economy, etc. But without fundamental restructuring of Medicare, the trends suggested above can be expected to unfold.

Medicare Population Growth, Eligibility, and Design

When Medicare began paying benefits in 1966, the age of eligibility was 65 for seniors. Approximately 20 million people were immediately eligible for benefits. At that time, cost sharing by users was designed to represent a fairly significant part of costs. Compliments of Newsletter 2008

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