Medicare and Medicaid: An Overview

Medicare and Medicaid are the nation's main public health insurance programs and, after Social Security, are the largest federal entitlement programs. Together, they provide federally funded health insurance coverage to millions of low-income, disabled, or elderly beneficiaries.

The Medicare program was enacted in 1965 to provide health insurance coverage to Americans age 65 and over, and eligibility for the program was expanded in 1972 to include individuals under age 65 who qualify for Social Security disability benefits. People who are under 65 and disabled become eligible for Medicare 24 months after they become entitled to Social Security benefits. When Medicare was enacted, only about half of the elderly had any private health insurance, which generally covered only inpatient hospital costs, and even that coverage was often quite limited.¹ Much of the health care spending incurred by the elderly was paid out of pocket by the individual or family members.

Part A of Medicare, or Hospital Insurance, covers inpatient services provided by hospitals and skilled nursing facilities as well as hospice care. Part B, or Supplementary Medical Insurance, covers services provided by physicians and other practitioners, hospitals' outpatient departments, laboratories, and suppliers of medical equipment. Part B also covers a limited number of drugs, most of which must be administered by injection in a physician's office.² Depending on the circumstances, home health care may be covered by either Part A or Part B. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 added a prescription drug benefit that became available in 2006 under a newly created Part D.

Part A benefits are financed primarily from a payroll tax. Premiums paid by beneficiaries cover about one-quarter of the cost of the Part B program, and the rest comes from general revenues.³ Enrollees' premiums under Part D are set at a level to cover about one-quarter of the cost of the basic prescription drug benefit, but receipts from premiums cover less than one-quarter of the total cost of the Part D program because some of the outlays for that program (such as subsidies for low-income beneficiaries and for employers that maintain drug coverage for their retirees) are not included in the calculation of premiums.

In 2006, Medicare spending totaled an estimated $381.9 billion, of which $374.9 billion (or 98 percent) covered benefits for enrollees. About 32 percent of the spending on benefits paid for inpatient hospital care, and 26 percent paid for services provided by physicians and other professionals as well as outpatient ancillary services (see Table A-1).⁴ About 15 percent of Medicare expenditures were for the Medicare Advantage program (discussed below), and 9 percent paid for prescription drug benefits under Part D.

Most Medicare beneficiaries receive their Part A and Part B benefits in the traditional fee-for-service program, which pays providers for each covered service (or bundle of services) they provide. Beneficiaries must pay a portion of the costs of their care through deductibles and coinsurance. Unlike many private insurance plans, Medicare does not include an annual cap on beneficiaries' cost sharing. Nearly 90 percent of beneficiaries who receive care in the fee-for-service program, however, have supplemental insurance that covers many or all of Medicare's cost-sharing requirements. The most common sources of supplemental coverage are plans for retirees offered by former employers (held by 37 percent of beneficiaries in the fee-for-service program), individually purchased medigap policies (34 percent), and Medicaid (16 percent).⁵ The percentage of Medicare beneficiaries who have coverage as retirees, as well as the generosity of that coverage, is expected to decline in the future as employers respond to the financial stresses of rising health care costs. The evidence on trends in such coverage over the past decade is mixed: Some studies have found that the percentage of employers that offer the coverage has fallen during that period, while other studies have found that that percentage has remained stable. However, in recent years, some employers have sought to reduce their future costs for health coverage for retirees by increasing premiums and cost-sharing requirements and eliminating coverage for future retirees.⁶

As of June 2007, 18 percent of Medicare beneficiaries were enrolled in private health plans under the Medicare Advantage program (also known as Part C of Medicare). Such plans submit bids indicating the per capita payment for which they are willing to provide Medicare Part A and Part B benefits, and the government compares those bids with county-level benchmarks that are determined in advance through statutory rules. Plans are paid their bids (up to the benchmark) plus 75 percent of the amount by which the benchmark exceeds their bids. Plans must return that 75 percent to beneficiaries as additional benefits (such as reduced cost sharing on Medicare services) or as a rebate on their Part B or Part D premiums.

Under current law, benchmarks are required to be at least as great as per capita expenditures in every county that are incurred in the fee-for-service portion of Medicare and are higher than those expenditures in many counties. For 2007, the Congressional Budget Office (CBO) calculates that benchmarks are 17 percent higher, on average, than projected per capita fee-for-service expenditures nationwide, and that payments to plans will be about 12 percent higher than per capita spending in the fee-for-service portion of the program.

Medicaid is a joint federal–state program that pays for health care services for a variety of low-income individuals. The program was created in 1965 by the same legislation that created Medicare, replacing an earlier program of federal grants to states to provide medical care to people with low income. In 2006, federal spending for the program was an estimated $180.6 billion, of which $160.9 billion covered benefits for enrollees. (In addition to benefits, Medicaid's spending includes payments to

hospitals that treat a "disproportionate share" of low-income patients as well as costs for the Vaccines for Children program and administrative costs.) The federal government's share of Medicaid's spending for benefits varies among the states but currently averages 57 percent.

States administer their Medicaid programs under federal guidelines that specify a minimum set of services that must be provided to certain poor individuals. Mandatory benefits include inpatient and outpatient hospital services, services by physicians and laboratories, and nursing home and home health care. Groups that must be eligible (according to federal requirements) include poor children and families who would have qualified for the former Aid to Families with Dependent Children program, certain other poor children and pregnant women, and elderly and disabled individuals who qualify for the Supplemental Security Income program. In general, a Medicaid enrollee must have both a low income and a low level of assets, although the minimum financial thresholds vary depending on the basis for an enrollee's eligibility.

Within broad statutory limits, states have the flexibility to administer the Medicaid program and determine its scope. Partly as a result, the program's rules are complex, and it can be difficult to generalize about the types of enrollees who are covered, the benefits that are offered, and the cost sharing that is required. States may choose to make additional groups of people eligible (such as individuals with high medical expenses who have "spent down" their assets) or to provide additional benefits (such as coverage for prescription drugs and dental services) and have exercised those options to varying degrees. Moreover, states often seek and receive federal waivers that allow them to provide benefits and cover groups that would otherwise be excluded under Medicaid. By one estimate, total spending on optional populations and benefits accounted for about 60 percent of the program's expenditures in 2001.⁷

On the basis of administrative data, CBO estimates that about half of Medicaid's 61 million enrollees in 2006 were poor children and that another one-quarter were either the parents of those children or poor pregnant women.⁸ Per capita costs for those groups are relatively low, though, while expenses are higher for elderly and disabled beneficiaries, many of whom require long-term care. Although the elderly and disabled constitute about one-quarter of Medicaid's enrollees, they account for two-thirds of the program's spending (see Table A-2). Overall, one-third of Medicaid's spending in 2006 was for long-term care, which includes nursing home services, home health care, and other medical and social services for people whose disabilities prevent them from living independently.


		Enrollees		Federal Benefit Payments		Percentage of Benefit Payments for Long-Term Care
		Number (Millions)	Percent	Billions of Dollars	Percent	Percentage of Benefit Payments for Long-Term Care

Aged		5.5	9.0	36.7	22.8	70.6
Disabled		9.8	16.1	72.2	44.9	36.0
Children		29.5	48.4	31.1	19.3	7.7
Adults		16.0	26.3	20.8	12.9	1.9

	Total	60.9	100.0	160.9	100.0	34.0

Note: Disabled enrollees include some people who are over age 65 or under age 18. Adult enrollees are adults who are not aged or disabled; they are primarily poor parents and pregnant women.

About 45 percent of Medicaid beneficiaries are enrolled in managed care plans that accept a capitated payment (a fixed amount per enrollee) for providing a comprehensive set of benefits. Those arrangements are more common for families and children, although some states also enroll the elderly and the disabled. About 15 percent of beneficiaries are enrolled in an arrangement that provides what is termed primary care case management, in which enrollees select (or are assigned) a primary care physician or group practice that is paid an additional fee for overseeing and coordinating their care. Many states also use "carve-out" arrangements, in which the states contract with organizations that assume the responsibility and financial risk for providing a subset of Medicaid benefits, such as dental services or mental health care.

See Amy Finkelstein, "The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare," Working Paper 11619 (Cambridge, Mass.: National Bureau of Economic Research, September 2005).

Certain other drugs are also covered under Part B, including oral cancer drugs if injectable forms are also available, oral antinausea drugs that are used as part of a cancer treatment, and oral immunosuppressive drugs used after an organ transplant.

The standard Part B premiums are established each year to cover 25 percent of projected average expenditures in the Part B program. In 2007, the standard monthly Part B premium is $93.50. Beginning in 2007, higher premiums are required of single beneficiaries with an annual income over $80,000 and couples with an annual income over $160,000. Those income thresholds will be indexed to inflation in future years. CBO estimates that about 4 percent of beneficiaries are paying the higher premiums in 2007.

Other professionals include physician assistants, nurse practitioners, psychologists, clinical social workers, and physical, occupational, and speech therapists. Outpatient ancillary items or services include durable medical equipment, Part B drugs, laboratory services, and ambulance services.

See Kaiser Commission on Medicaid and the Uninsured, Medicaid Enrollment and Spending by "Mandatory" and "Optional" Eligibility and Benefit Categories (Washington, D.C.: Henry J. Kaiser Family Foundation, June 2005), p. 11.

The enrollment figure of 61 million includes all people who were enrolled in Medicaid at any time during 2006. About 46 million people were enrolled in the program in June of that year.


		Billions of Dollars	Percent

Inpatient Hospital Services		120.7	32
Physicians' and Suppliers' Services		86.1	23
Medicare Advantage Plans		55.9	15
Prescription Drug Benefits		32.0	9
Hospital Outpatient Services		20.1	5
Care in Skilled Nursing Facilities		19.5	5
Home Health Services		13.2	4
Hospice Services		8.6	2
Other Services		18.8	5

	Total	374.9	100