Medicare November 1, 2006. By the end of this lecture, you should be able to: Explain who is covered by Medicare Explain what Medicare covers: Parts A.

Medicare

November 1, 2006

By the end of this lecture, you should be able to:

Explain who is covered by MedicareExplain what Medicare covers:

Parts A – D

Explain how Medicare is financed Describe the financing challenge facing the Medicare systemDescribe how the new Rx drug benefit will work

Medicare Overview

Established in 1965 (as part of LBJ’s “Great Society”)Health insurance for the agedTwo Traditional Parts + Rx Drugs

Part A: Hospital Insurance (HI)Part B: Supplementary Medical Insurance (SMI)Part D: Prescription Drug Coverage

Medicare EligibilityPart A (hospital) is available to anyone over age 65 as long as entitled to Social Security, railroad retirement or civilian employee of federal gov’t. Coverage also extended to:

Persons age 65+ if dependent of fully insured worker over age 62Survivor age 65+ if eligible for SS survivor benefitDisabled persons at any age if eligible to receive SS benefits for two years because of disabilityAlso covers end-stage renal (kidney) disease for those requiring dialysis or kidney transplants

These individuals receive Part A at no cost

Medicare Eligibility, cont.Persons 65+ not otherwise eligible for Medicare can voluntarily enroll, but they must pay a monthly part A premium (and must enroll in both parts A and B)

Could exceed $300/month, but depends on how many quarters of coverage under Social Security

Medicare Eligibility, cont.

Part B: Automatically covered if receive part ACharges monthly premium • $78.20 per month in 2005 if take as soon

as eligible• Cost goes up 10% per year that you were

eligible but did not take

Premium covers only about 25% of expected costs of part B benefits

Part A Benefits (Hospital)Hospital stays

Semi-private room, meals, general nursing, and other hospital services and supplies

Skilled nursing facility careOnly after related 3-day inpatient hospital stay

Home health careLimited in scope

Hospice careBlood

Part B Benefits (Dr. Visits)

Provides benefits for most medical expenditures not covered by Part A

Physician and surgeon feesDiagnostic tests, Physical therapyRadiation therapy, Medical supplies Medical equipment rental, ProstheticsLots more

Part A and B together are fairly comprehensive for hospital and doctor visits

How Part B WorksPart B has $100 annual deductibleMedicare covers 80% of approved charges above this deductibleA select list of charges are covered in full (flu shots, some outpatient procedures, etc)Center for Medicare and Medicaid Services (formerly the Health Care Financing Administration) sets a fee schedule – most providers accept assignment of benefits & are thus prohibited from collecting more than set feeProviders are not required to see Medicare patients

What is Missing from Coverage?Long-term care (e.g., nursing homes)Health care outside of USRoutine physical, eye, and hearing examsRoutine foot careImmunizations (with a few exceptions)Cosmetic surgery (with exceptions)Dental careEyeglasses, hearing aids, orthopedic shoes

Multiple Plans

Original Medicare PlanFee-for-service plan managed by federal government

Medicare AdvantageIncludes Medicare HMOs, Medicare PPOs, and other plans

“Original” Medicare

You can go to any doctor that accepts Medicare and to any hospitalYou pay a deductible

Hospital: • $912 per stay for of 1-60 days• $228 per day for days 61-90• $465 for days 91-150• All costs for longer stays

$110 Medicare Part B

Above deductible, Medicare pays 80%

Medigap

A health insurance policy sold by private insurance companiesDesigned to cover “gaps” in Medicare coverage:

Coinsurance, deductibles, etc.Other benefits such as travel outside of the US

In 47 states, the policies must be one of 12 standardized policies regulated by federal law

“Medicare Advantage”Formerly known as Medicare+Choice (Part C)Health Maintenance Organizations (HMOs): generally must get care from within a network of doctorsPreferred Provider Organizations (PPOs): you pay less if stay in network, more if go outside networkPrivate fee-for-service: similar to traditional Medicare, but private insurer decides the payment and fee schedule

Part D

Prescription drug coveragePassed into law in late 2003 as part of “The Medicare Prescription Drug, Improvement, and Modernization Act of 2003”Took effect on Jan 1, 2006Highly controversial (for both programmatic and budgetary reasons)

Financing of MedicareHI (part A) is financed by payroll taxes paid by workers and employers

Payroll tax of 2.9% (half employer, half employee)Unlike SS, wages are not capped – 2.9% is paid on all earnings (even if you earn $1 billion)Primarily “pay as you go” – today’s taxes pay for today’s beneficiaries

SMI (part B) is financed primarily be transfers from the general fund of the US Treasury and by monthly part B premiums paid by beneficiaries ($78.20 per month in 2005)

Overall State of Medicare’s FinancesFrom the 2005 Medicare Trustee’s Report

“As we reported last year, Medicare’s financial difficulties come sooner – and are much more severe – than those confronting Social Security.”“While both programs face essentially the same demographic challenge, underlying health care costs per enrollee are projected to rise faster than wages per worker on which the payroll tax is paid.”“As a result, while Medicare’s annual costs are currently 2.6% of GDP, or about 60% of Social Security’s, they are projected to pass Social Security expenditures in 2024 and reach almost 14% of GDP in 2079.”

Overall Status, continued

The projected 75-year actuarial deficit in the HI Trust Fund is now 3.09 percent of taxable payrollThe fund again fails our test of short-range financial adequacy.Date of HI Trust Fund exhaustion .. 2020

What is Driving Costs?

Demographics (just like SS)# of Beneficiaries

• 1999: 39.2 million• 2004: 41.8 million• 2080: 108 million

Rising Health Care CostsAvg Cost per beneficiary

• 1999: $5,502• 2004: $7,500 (6.4% annual growth for past 5 years)• 2006: $10,205 (first year of large scale Rx

coverage)

Part A (HI) Finances

HI income is expected to fall short of payouts this year (vs 2017 for SS)The “Trust Fund” exhaustion date is 2019To bring into balance just over next 75 years would require a 108% increase in revenue or 48% reduction in outlaysMuch bigger changes required to make system permanently solvent

Part B (SMI) and D (Rx) FinancesTechnically, both B and D are “projected to be adequately financed into the indefinite future”But this is because current law automatically sets financing each year to cover costs! Just because program is “adequately financed” does not mean there is no problemThis will result in:

Drain on general revenue rising from 0.9% of GDP today to 6.2% in 2078

• General revenue covers 75% of costs

Substantial increases in beneficiary premiums• Premiums cover 25% of costs

FICA Taxes in Total(as % of earnings)

OASI DI OASDI

HI Total

Employees

5.30 0.90 6.20 1.45 7.65

Employers

5.30 0.90 6.20 1.45 7.65

Total 10.60 1.80 12.40 2.90 15.30

Earnings for tax purposes are capped for OASDI but not HI

Funding Sources (2004)($ Billions)

Source OASI DI HI SMIPayroll Taxes

473 80 157

General Revenue

1 101

Interest 79 10 15 2Premiums

2 31

Benefit taxes

15 1 9

Other 1Total 566 91 184 134

Chart C-Income and Cost Rates [Percentage of taxable payroll]

Source: www.ssa.gov/OACT/TRSUM/trsummary.html

Chart B-Social Security and Medicare Cost as a Percentage of GDP

Source: www.ssa.gov/OACT/TRSUM/trsummary.html

General Revenue Cost of Part B/D

SMI general revenue financing was <9% of federal income taxes in 2003If income taxes stay constant as share of GDP, then growth in SMI costs as % of federal tax revenue would be:

14% by 201029% by 203050% by 2078

Key Dates for SS and Medicare (2005 Trustees Report)

OASDI HI

First year outgo exceeds income (excl. interest)

2017 2004

First year outgo exceeds income (incl. Interest)

2027 2012

Trust Fund exhaustion

2041 2020

Chart D-Medicare Expenditures and Non-Interest Income by Sourceas a Percent of GDP

SMI Costs to IndividualsPart B and D greatly reduce the costs that beneficiaries would otherwise face for health careBut individual financial burden will still increase

Part B premiums and coinsurance for typical Medicare beneficiary = 15% of average SS benefit in 2003Once part D is included, premiums + coinsurance for Medicare as a fraction of SS benefit will be:

• 35% by 2010• 50% by 2030• 80% by 2078

Note: this overstates picture a bit because in absence of part D, they would still incur Rx drug costs out of pocket