Medicare is the federal health insurance program created in 1965 for all people age 65 and older, regardless of their income or medical history, and now covers 47 million Americans. Medicare, in conjunction with Social Security, plays a vital role in helping to provide financial security to seniors and younger beneficiaries with disabilities.

In 2010, Medicare spending is estimated to account for 12% of total federal spending and 23% of total national health spending. Most people age 65 and older are entitled to Medicare Part A if they or their spouse are eligible for Social Security payments and have made payroll tax contributions for 10 or more years. Medicare was expanded in 1972 to include people under age 65 with permanent disabilities. Nonelderly people who receive Social Security Disability Insurance (SSDI) generally become eligible for Medicare after a two year waiting period, while those diagnosed with end stage renal disease (ESRD) and amyotrophic lateral sclerosis (ALS) become eligible for Medicare with no waiting period.

The Affordable Care Act of 2010 includes a number of provisions that affect Medicare, including enhanced benefits (prevention benefits and phasing in coverage in the Part D “doughnut hole”), spending reductions affecting plans and providers, delivery system reforms, premium increases for higher-income beneficiaries, and a payroll tax on earnings for higher-income individuals. In addition, the law includes a new Independent Payment Advisory Board tasked with constraining the growth in Medicare spending over time.

Medicare covers a diverse population; nearly half of all people on Medicare (47%) live on incomes below 200% of poverty ($21,660 for individuals and $29,140 for couples in 2010). More than one quarter of all beneficiaries has a cognitive/mental impairment, and roughly the same percent report being in fair or poor health. Eight million beneficiaries (17%) are nonelderly people with disabilities. Two million beneficiaries (4%) live in a long-term care facility.

Medicare is organized into four parts.

Part A covers inpatient hospital stays, skilled nursing facility stays, home health visits (also covered under Part B), and hospice care, and accounts for 36% of benefit spending in 2010 (including home health). Part A benefits are subject to a deductible ($1,100 in 2010) and coinsurance.
Part B covers physician visits, outpatient services, preventive services, and home health visits, and accounts for 29% of benefit spending in 2010 (including “other services”. Part B benefits are subject to a deductible
($155 in 2010), and cost sharing generally applies for most Part B benefits.

Part C refers to the Medicare Advantage program, through which beneficiaries can enroll in a private health plan, such as a health maintenance organization (HMO), and receive all Medicare-covered benefits and often extra benefits, such as eyeglasses or reduced cost sharing. Medicare Advantage now accounts for 23% of benefit spending. More than 11 million beneficiaries are enrolled in a Medicare Advantage plan in 2010.

Part D is the voluntary, subsidized outpatient prescription drug benefit, with additional subsidies for beneficiaries with low incomes and modest assets. The Part D benefit is offered through private plans that contract with Medicare, both stand-alone prescription drug plans (PDPs) and Medicare Advantage prescription drug plans (MA-PDs). Part D accounts for 11% of benefit spending. Nearly
28 million beneficiaries are enrolled in a Medicare Part D plan in 2010.

Medicare has relatively high deductibles and cost-sharing requirements, no limit on outof- pocket spending, and (until 2020) a coverage gap (“doughnut hole”) in the prescription drug benefit. Moreover, Medicare does not pay for many services of critical importance to elderly and disabled beneficiaries, such as long-term care, dental, or vision services.

To help with Medicare’s cost-sharing requirements and fill in the benefit gaps, most beneficiaries have some form of supplemental insurance.

Employer-sponsored retiree health plans are the primary source of supplemental coverage, covering nearly 3 in 10 beneficiaries, but the share of employers offering retiree health benefits has dropped from 66% in 1988 to 29% in 2009. Approximately 2 million beneficiaries are estimated to have primary coverage under an employer plan because they or their spouse are still working, with Medicare as the secondary payer.

About one in five beneficiaries purchase Medicare supplemental policies, known as Medigap.

Medicaid helps pay for Medicare’s premiums and cost-sharing for roughly 9 million beneficiaries with low incomes and modest assets (known as “dual eligibles”). Most of these beneficiaries also qualify for full Medicaid benefits, which include long-term care.

Ten percent of Medicare beneficiaries had no supplemental coverage in 2008. The under-65 disabled, the near poor (incomes between $10,000 and $20,000), rural residents, and blacks were disproportionately represented among those without supplemental coverage.

With health costs rising faster than beneficiaries’ income, median out-of-pocket costs for premiums and other health spending, including dental and long term care expenses, as a share of income has increased from 11.9% in 1997 to 16.2% in 2006.

Medicare spending is projected to grow from $519 billion in 2010 to $929 billion in 2020, taking into account Medicare savings enacted in the Affordable Care Act of 2010. Medicare spending is projected to increase at an average annual growth rate of 5.8% between 2012 and 2020. The annual growth in Medicare spending is influenced by factors that affect health spending generally, including both increasing volume of services and rising prices.

Medicare is financed by a combination of general revenues (43%), payroll taxes (37%), beneficiary premiums (13%), and other sources.

Part A is funded mainly by a dedicated tax of 2.9% of earnings paid by employers and employees (1.45% each) deposited into the Hospital Insurance Trust Fund. The health reform law increases the Medicare payroll tax for higher-income taxpayers (more than $200,000/individual and $250,000/couple) by 0.9 percentage points (from 1.45% to 2.35%), beginning in 2013. As a result of the changes in the 2010 health reform law, the Medicare Hospital Insurance Trust Fund is projected to be solvent for an additional 12 years, through 2029.

Part B is funded by general revenues and beneficiary premiums ($110.50 per month in 2010). Most beneficiaries pay the lower 2009 monthly premium ($96.40) due to a provision preventing beneficiaries’ Social Security income from declining because of no cost-of-living increase for 2010. Beneficiaries with higher incomes ($85,000 for individuals; $170,000 for couples in 2010) pay a higher, income-related monthly Part B premium, ranging from $154.70 to $353.60 per month in 2010. Beginning in 2011, the health reform law freezes the income thresholds at 2010 levels through 2019.

Part C (Medicare Advantage) plans are funded through beneficiary premiums and general revenues. The average premium for Medicare Advantage drug plans in 2010 is $44 (weighted by enrollment).

Part D is funded by general revenues, beneficiary premiums, and state payments. The average premium for PDPs in 2010 is $37 (weighted by enrollment). The health reform law establishes a new income-related Part D premium similar to the Part B premium, beginning in 2011, projected to range from $45.90 to $104.80 per month in 2011 for higher-income beneficiaries, depending on their income (Medicare Trustees 2010). Looking to the future, Medicare is expected to play a major role in ongoing discussions about the state of the economy and the federal deficit, and the challenge of providing health and financial security for an aging U.S. population. Medicare faces a number of critical issues and challenges, perhaps none greater than providing quality care to an aging population while keeping the program financially secure for future generations.

The 2010 health reform law includes numerous changes designed to improve Medicare benefits, slow the growth in Medicare spending, extend the life the Medicare Part A Trust Fund, and improve the quality and delivery of care through system reforms. Monitoring the effects of these changes on access to care, quality of care, Medicare spending, and beneficiaries’ out-of-pocket costs will be high on the policy agenda.

You can access more information on Medicare at www.kff.org/medicare/factsheets. cfm