An Overview of the Medicare Program

Posted by Tom Bradley and Julie Topoleski on
September 18, 2013

In fiscal year 2013, Medicare will provide federal health insurance to 52 million people who are elderly or disabled or have end-stage renal disease. (The elderly make up about 85 percent of enrollees.) People become eligible for Medicare on the basis of age when they reach 65; disabled individuals generally become eligible for the program 24 months after they qualify for benefits under Social Security’s Disability Insurance program. In general, a beneficiary or the beneficiary’s spouse must have worked and paid sufficient Medicare payroll taxes for a specified number of years—10 years for most elderly beneficiaries.

The Medicare program provides a specified set of benefits. Hospital Insurance (HI), or Medicare Part A, primarily covers inpatient services provided by hospitals as well as care in skilled nursing facilities, home health care, and hospice care. Part B mainly covers services provided by physicians and other practitioners and by hospitals’ outpatient departments, and Part D provides a prescription drug benefit. Most enrollees in Medicare are in the traditional fee-for-service program, in which the federal government pays for covered services directly, but enrollees can instead obtain coverage for Medicare benefits through a private health insurance plan under Part C of the program, known as Medicare Advantage. In 2012, net spending for Medicare (that is, with the offsetting receipts that mostly consist of beneficiaries’ payments of premiums taken into account) was $466 billion. Gross spending for Medicare was $551 billion in that year. (Those amounts do not include several billion dollars of administrative costs subject to appropriation.)

The various parts of the program are financed in different ways. Part A benefits are financed primarily by a payroll tax (2.9 percent of all taxable earnings), the revenues from which are credited to the HI trust fund. Beginning in 2013, an additional 0.9 percent tax on earnings over $200,000 ($250,000 for married couples) is also being credited to the trust fund. For Part B, premiums paid by beneficiaries cover just over one-quarter of outlays, and the government’s general funds cover the rest. Federal payments to private insurance plans under Part C are financed by a blend of funds from Parts A and B. Enrollees’ premiums under Part D are set to cover about one-quarter of the cost of the basic prescription drug benefit, although many low-income enrollees pay no premiums; general funds from the Treasury cover most of the remaining cost. Altogether, in calendar year 2012, receipts from the payroll tax were equal to about 36 percent of gross federal spending on Medicare, beneficiaries’ premiums were equal to about 12 percent, and general funds allocated to the program’s trust funds amounted to about 37 percent; the trust funds are also credited with money from other sources.

Cost-sharing requirements in Medicare vary widely, and the program does not set an annual cap on the amount of health care costs for which beneficiaries are responsible. However, the vast majority of beneficiaries who receive care in the fee-for-service portion of Medicare have supplemental insurance that covers many or all of the program’s cost-sharing requirements. According to one recent study, the most common sources of supplemental coverage in 2009 were plans for retirees offered by former employers (held by 43 percent of beneficiaries in the fee-for-service part of Medicare), individually purchased medigap policies (29 percent of beneficiaries), and Medicaid (17 percent of beneficiaries). Many people covered through Medicare Advantage receive additional benefits or purchase additional coverage that provides some supplemental benefits.

A number of provisions of law will constrain the rates that Medicare pays to providers of health care in the future:

  • Payments for physicians’ services in Medicare are governed by the sustainable growth rate mechanism. Under current law, those payment rates will be reduced by about 25 percent in January 2014 and by small amounts in subsequent years, CBO projects. In recent years, legislation has been enacted to block similar reductions that were scheduled to occur.
  • The Affordable Care Act (ACA) contains numerous provisions that, on balance, will reduce federal spending on Medicare. The provisions with the greatest effect on the projected growth of Medicare spending impose permanent reductions in the annual updates to Medicare’s payment rates for many types of health care providers (other than physicians) in the fee-for-service portion of the program.
  • The ACA also established an Independent Payment Advisory Board (IPAB), which will be required to submit a proposal to reduce Medicare spending in certain years if the rate of growth in spending per enrollee is projected to exceed specified targets. The proposal—or an alternative proposal submitted by the Secretary of Health and Human Services if the board does not submit a qualifying proposal—must achieve a specified amount of savings in the year it is implemented while not increasing spending in the succeeding nine years by more than the amount of those first-year savings. The ACA places a number of limitations on the actions available to the IPAB, including a prohibition against modifying Medicare’s eligibility rules or reducing benefits.
  • The Budget Control Act of 2011, as subsequently amended, specifies automatic procedures—sequestration, or the cancellation of funding—that will reduce most Medicare payments to providers for services furnished from April 2013 to March 2022. Under that act, most of Medicare’s spending will be subject to a 2 percent reduction.

To learn more, see yesterday’s The 2013 Long-Term Budget Outlook; you can also visit our Medicare page for a complete set of CBO’s work on this topic.

Tom Bradley is Chief of the Health Systems and Medicare Cost Estimates Unit in CBO’s Budget Analysis Division. Julie Topoleski is an analyst in CBO’s Health, Retirement, and Long-Term Analysis Division.