Medicare (United States)

President Johnson signing the Medicare amendment. Former President Harry S. Truman (seated) and his wife, Bess, are on the far right

A Medicare card, with several areas of the card obscured to protect privacy.
There are separate lines for Part A and Part B, each with its own date.
There are no lines for Part C or D, as a separate card is issued for those benefits by the private insurance company.

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Terminology
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Medicare is a national social insurance program, administered by the U.S. federal government, that guarantees access to health insurance for Americans ages 65 and older and younger people with disabilities. In 1965, Congress created Medicare under Title XVIII of the Social Security Act to provide health insurance to people age 65 and older, regardless of income or medical history. Before Medicare, only half of older adults had health insurance, with coverage either unavailable or unaffordable to the other half. Older adults had half as much income as younger people and paid nearly three times as much for health insurance. Medicare also spurred the integration of thousands of waiting rooms, hospital floors, and physician practices by making payments to health care providers conditional on desegregation.

In 1972, Congress expanded Medicare eligibility to younger people who have permanent disabilities and receive Social Security Disability Insurance (SSDI) payments and those who have end-stage renal disease (ESRD). Congress further expanded Medicare in 2001 to cover younger people with amyotrophic lateral sclerosis (ALS, or Lou Gehrig’s disease). In 2010, Medicare provided health insurance to 48 million Americans—40 million people age 65 and older and eight million younger people with disabilities. Medicare serves a large population of old, sick, and low-income people. Without Medicare, many of these people would not have access to health insurance and would have to forgo needed medical care.

Medicare has four parts: A, B, C, and D. Initially, traditional Medicare - sometimes called "original Medicare" - was the only option available to enrollees. Medicare included only Part A (the Hospital Insurance program), which covers inpatient hospital, skilled nursing facility, home health, and hospice care, and Part B (the Supplementary Medical Insurance program), which covers physician, outpatient, home health, and preventive services. Medicare Parts A and B cover all “reasonable and necessary” medical services and hospital services, including lab tests, skilled nursing and some home health care and excluding vision, hearing, dental and long-term care. "Traditional medicare" employs single-payer health care model with a standard benefit package which is accepted by nearly every doctor and hospital in the country. Congress later established Part C (Medicare Advantage), which allows Medicare enrollees to participate in private health plans that must cover all the Part A and B benefits as an alternative to traditional Medicare. In 2003, Congress created Part D, which covers outpatient prescription drugs, also through private plans.

Medicare today offers enrollees the choice of an open-network plan (traditional Medicare), where the federal government pays directly for health care, or a network plan (Medicare Advantage), where the federal government pays private health plans that can offer additional benefits. A majority of Medicare enrollees have traditional Medicare (76 percent), and the rest have a Medicare Advantage plan (24 percent). Medicare enrollees generally have Parts A and B. If they elect to participate in Medicare Advantage, they also will have Part C. In addition, if they need prescription drug coverage, they might have Part D.

On average, Medicare covers about half (48 percent) of health care costs for enrollees. Medicare enrollees must cover the rest of the cost. These out-of-pocket costs vary depending on the amount of health care a Medicare enrollee needs. They might include uncovered services—such as long-term, dental, hearing, and vision care—and supplemental insurance.

Administration

Health care in the United States
Government Health Programs
Federal Employees Health Benefits Program Indian Health Service Veterans Health Administration Military Health System / TRICARE Medicare Medicaid / State Health Insurance Assistance Program (SHIP) State Children's Health Insurance Program (CHIP) Program of All-Inclusive Care for the Elderly (PACE) Prescription Assistance (SPAP)
Private health coverage
Health insurance in the United States Consumer-driven health care Flexible spending account (FSA) Health reimbursement account Health savings account High-deductible health plan (HDHP) Medical savings account (MSA) Private Fee-For-Service (PFFS) Managed care (CCP) Health maintenance organization (HMO) Preferred provider organization (PPO) Medical underwriting
Health care reform law
Emergency Medical Treatment and Active Labor Act (1986) Health Insurance Portability and Accountability Act (1996) Medicare Prescription Drug, Improvement, and Modernization Act (2003) Patient Safety and Quality Improvement Act (2005) Patient Protection and Affordable Care Act (2010)
State level reform
Massachusetts health care reform Oregon Health Plan Vermont health care reform SustiNet (Connecticut)
Municipal health coverage
Fair Share Health Care Act (Maryland) Healthy Howard (Howard Co., Maryland) Healthy San Francisco

The Centers for Medicare and Medicaid Services (CMS), a component of the Department of Health and Human Services (HHS), administers Medicare, Medicaid, the State Children's Health Insurance Program (SCHIP), and the Clinical Laboratory Improvement Amendments (CLIA). Along with the Departments of Labor and Treasury, CMS also implements the insurance reform provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The Social Security Administration is responsible for determining Medicare eligibility and processing premium payments for the Medicare program.

The Chief Actuary of CMS is responsible for providing accounting information and cost-projections to the Medicare Board of Trustees to assist them in assessing the financial health of the program. The Board is required by law to issue annual reports on the financial status of the Medicare Trust Funds, and those reports are required to contain a statement of actuarial opinion by the Chief Actuary.

Since the beginning of the Medicare program, CMS has contracted with private companies to operate as intermediaries between the government and medical providers. These contractors are commonly already in the insurance or health care area. Contracted processes include claims and payment processing, call center services, clinician enrollment, and fraud investigation.

Financing of Medicare

Medicare has several sources of financing. Part A largely is funded by revenue from a 2.9 percent [payroll tax] levied on employers and workers (each pay 1.45 percent) established by the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act of 1954. Until December 31, 1993, the law provided a maximum amount of compensation on which the Medicare tax could be imposed each year. Beginning January 1, 1994, the compensation limit was removed. A self-employed individual must pay the entire 2.9% tax on self employed net earnings, but may deduct half of the tax from the income in calculating income tax.[citation needed] Beginning in 2013, the 2.9% hospital insurance tax will continue to apply to the first US$200,000 of income for individuals or $250,000 for couples filing jointly and will rise to 3.8% on income in excess of those amounts. Parts B and D are funded by premiums paid by Medicare enrollees and general fund revenue. In 2011, Medicare spending accounted for about 15 percent of the federal budget, and this share is projected to increase to over 17 percent by 2020.

Although the Patient Protection and Affordable Care Act (ACA), which Congress passed in 2010, significantly improved the finances of Medicare, the retirement of the Baby Boom generation—which by 2030 is projected to increase enrollment from 48 million to more than 80 million as the number of workers per enrollee declines from 3.7 to 2.4—and rising overall health care costs pose substantial financial challenges to the program. Medicare spending is projected to increase from $560 billion in 2010 to just over $1 trillion by 2022. In response, policymakers recently have offered a number of competing proposals to reduce Medicare costs.

Eligibility

In general, all persons 65 years of age or older who have been legal residents of the United States for at least 5 years are eligible for Medicare. People with disabilities under 65 may also be eligible if they receive Social Security Disability Insurance (SSDI) benefits. Specific medical conditions may also help people become eligible to enroll in Medicare.

People qualify for Medicare coverage, and Medicare Part A premiums are entirely waived, if the following circumstances apply:

• They are 65 years or older and U.S. citizens or have been permanent legal residents for 5 continuous years, and they or their spouse has paid Medicare taxes for at least 10 years.

or

• They are under 65, disabled, and have been receiving either Social Security SSDI benefits or Railroad Retirement Board disability benefits; they must receive one of these benefits for at least 24 months from date of entitlement (first disability payment) before becoming eligible to enroll in Medicare.

or

• They get continuing dialysis for end stage renal disease or need a kidney transplant.

or

• They are eligible for Social Security Disability Insurance and have amyotrophic lateral sclerosis (known as ALS or Lou Gehrig's disease).

Those who are 65 and older must pay a monthly premium to remain enrolled in Medicare if they or their spouse have not paid Medicare taxes over the course of 10 years while working.

People with disabilities who receive SSDI are eligible for Medicare while they continue to receive SSDI payments; they lose eligibility for Medicare based on disability if they stop receiving SSDI. The 24 month exclusion means that people who become disabled must wait 2 years before receiving government medical insurance, unless they have one of the listed diseases or they are eligible for Medicaid.

Many beneficiaries are dual-eligible. This means they qualify for both Medicare and Medicaid. In some states for those making below a certain income, Medicaid will pay the beneficiaries' Part B premium for them (most beneficiaries have worked long enough and have no Part A premium), and also pay for any drugs that are not covered by Part D.

In 2008, Medicare provided health care coverage for 45 million Americans. Enrollment is expected to reach 78 million by 2030, when the baby-boom generation is fully enrolled.

Benefits

U.S. Medicare (2008)

Medicare has four parts: Part A is Hospital Insurance. Part B is Medical Insurance. Medicare Part D covers prescription drugs. Medicare Advantage plans, also known as Medicare Part C, are another way for beneficiaries to receive their Part A, B and D benefits. All Medicare benefits are subject to medical necessity.

The original program included Parts A and B. Part D was introduced in January 2006; before that, Parts A and B covered prescription drugs in a few special cases.

Part A: Hospital Insurance

Part A covers inpatient hospital stays (at least overnight), including semiprivate room, food, and tests.

Part A covers brief stays for convalescence in a skilled nursing facility if certain criteria are met:

1. A preceding hospital stay must be at least three days, three midnights, not counting the discharge date.
2. The nursing home stay must be for something diagnosed during the hospital stay or for the main cause of hospital stay.
3. If the patient is not receiving rehabilitation but has some other ailment that requires skilled nursing supervision then the nursing home stay would be covered.
4. The care being rendered by the nursing home must be skilled. Medicare part A does not pay for custodial, non-skilled, or long-term care activities, including activities of daily living (ADL) such as personal hygiene, cooking, cleaning, etc.

The maximum length of stay that Medicare Part A will cover in a skilled nursing facility per ailment is 100 days. The first 20 days would be paid for in full by Medicare with the remaining 80 days requiring a co-payment (as of 2012, $144.50 per day). Many insurance companies have a provision for skilled nursing care in the policies they sell.

If a beneficiary uses some portion of their Part A benefit and then goes at least 60 days without receiving facility-based skilled services, the 100-day clock is reset and the person qualifies for a new 100-day benefit period.

Part B: Medical Insurance

Part B medical insurance helps pay for some services and products not covered by Part A, generally on an outpatient basis. Part B is optional and may be deferred if the beneficiary or his/her spouse is still working. There is a lifetime penalty (10% per year) imposed for not enrolling in Part B unless actively working. Part B coverage begins once a patient meets his or her deductible, then typically Medicare covers 80% of approved services, while the remaining 20% is paid by the patient.

Part B coverage includes physician and nursing services, x-rays, laboratory and diagnostic tests, influenza and pneumonia vaccinations, blood transfusions, renal dialysis, outpatient hospital procedures, limited ambulance transportation, immunosuppressive drugs for organ transplant recipients, chemotherapy, hormonal treatments such as Lupron, and other outpatient medical treatments administered in a doctor's office. Medication administration is covered under Part B if it is administered by the physician during an office visit.

Part B also helps with durable medical equipment (DME), including canes, walkers, wheelchairs, and mobility scooters for those with mobility impairments. Prosthetic devices such as artificial limbs and breast prosthesis following mastectomy, as well as one pair of eyeglasses following cataract surgery, and oxygen for home use is also covered.

Complex rules are used to manage the benefit, and advisories are periodically issued which describe coverage criteria. On the national level these advisories are issued by CMS, and are known as National Coverage Determinations (NCD). Local Coverage Determinations (LCD) apply within the multi-state area managed by a specific regional Medicare Part B contractor, and Local Medical Review Policies (LMRP) were superseded by LCDs in 2003. Coverage information is also located in the CMS Internet-Only Manuals (IOM), the Code of Federal Regulations (CFR), the Social Security Act, and the Federal Register.

Part C: Medicare Advantage plans

Main article: Medicare Advantage

With the passage of the Balanced Budget Act of 1997, Medicare beneficiaries were given the option to receive their Medicare benefits through private health insurance plans, instead of through the original Medicare plan (Parts A and B). These programs were known as "Medicare+Choice" or "Part C" plans. Pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, "Medicare+Choice" plans were made more attractive to Medicare beneficiaries by the addition of prescription drug coverage and became known as "Medicare Advantage" (MA) plans. Medicare Advantage plans are offered through private companies known as Medicare Advantage Organizations (MAO). Each of them under the contract from CMS are required to provide an effective compliance program to prevent Fraud, Waste and Abuse issues in healthcare settings.

Traditional or "fee-for-service" Medicare has a standard benefit package that covers medically necessary care members can receive from nearly any hospital or doctor in the country. For people who choose to enroll in a Medicare Advantage health plan, Medicare pays the private health plan a fixed amount every month. Members typically also pay a monthly premium in addition to the Medicare Part B premium to cover items not covered by traditional Medicare (Parts A & B), such as prescription drugs, dental care, vision care and gym or health club memberships. In exchange for these extra benefits, enrollees may be limited in the providers they can receive services from without paying extra. Typically, the plans have a "network" of providers that patients can use. Going outside that network may require permission or extra fees.

List of Federal laws that each MAO or Part D sponsor must follow

• Conflict of interest
• HIPAA privacy laws
• False Claims Act
• Anti-Kickback Statute
• STARK Anti-referral law

Medicare Advantage plans are required to offer coverage that meets or exceeds the standards set by the original Medicare program, but they do not have to cover every benefit in the same way. If a plan chooses to pay less than Medicare for some benefits, like skilled nursing facility care, the savings may be passed along to consumers by offering lower co-payments for doctor visits. Medicare Advantage plans use a portion of the payments they receive from the government for each enrollee to offer supplemental benefits. Some plans limit their members’ annual out-of-pocket spending on medical care, providing insurance against catastrophic costs over $5,000, for example. Many plans offer dental coverage, vision coverage and other services not covered by Medicare Parts A or B, which makes them a good value for the health care dollar, if you want to use the provider included in the plan's network or "panel" of providers.

Because the 2003 payment formulas overpay plans by 12 percent or more compared to traditional Medicare, in 2006 enrollees in Medicare Advantage Private Fee-for-Service plans were offered a net extra benefit value (the value of the additional benefits minus any additional premium) of $55.92 a month more than the traditional Medicare benefit package; enrollees in other Medicare Advantage plans were offered a net extra benefit value of $71.22 a month more. However, Medicare Advantage members receive additional coverage and medical benefits not enjoyed by traditional Medicare members, and savings generated by Medicare Advantage plans may be passed on to beneficiaries to lower their overall health care costs. Other important distinctions between Medicare Advantage and traditional Medicare are that Medicare Advantage health plans encourage preventive care and wellness and closely coordinate patient care.

Medicare Advantage Plans that also include Part D prescription drug benefits are known as a Medicare Advantage Prescription Drug plan or a MA-PD.

Enrollment in Medicare Advantage plans grew from 5.4 million in 2005 to 8.2 million in 2007. Enrollment grew by an additional 800,000 during the first four months of 2008. This represents 19% of Medicare beneficiaries. A third of beneficiaries with Part D coverage are enrolled in a Medicare Advantage plan. Medicare Advantage enrollment is higher in urban areas; the enrollment rate in urban counties is twice that in rural counties (22% vs. 10%). Almost all Medicare beneficiaries have access to at least two Medicare Advantage plans; most have access to three or more. Because of the 2003 law's overpayments, the number of organizations offering Fee-for-Service plans has increased dramatically, from 11 in 2006 to almost 50 in 2008. Eight out of ten beneficiaries (82%) now have access to six or more Private Fee-for-Service plans.

Each year many individuals disenroll from MA plans. A recent study noted that about 20 percent of enrollees report that "their most important reason for leaving was due to problems getting care." There is some evidence that disabled beneficiaries "are more likely to experience multiple problems in managed care." Some studies have reported that the older, poorer, and sicker persons have been less satisfied with the care they have received in MA plans. On the other hand, an analysis of the Agency for Healthcare Research and Quality data published by America’s Health Insurance Plans found that Medicare Advantage enrollees spent fewer days in the hospital than Fee-for-Service enrollees, were less likely to have "potentially avoidable" admissions, and had fewer re-admissions. These comparisons adjusted for age, sex and health status using the risk score used in the Medicare Advantage risk adjustment mechanism.

In December 2009 the Kaiser Family Foundation published a report that rated Medicare Advantage organizations on a five star scale. The ratings were based on data from CMS, the Consumer Assessment of Healthcare Providers and Systems (CAHPS), Healthcare Effectiveness Data and Information Set (HEDIS) data, and the Health Outcomes Survey (HOS). New plans did not receive ratings, because data was not available. Almost six out of ten (59%) of MA plans did receive ratings, and these plans represented 85% of the enrollment for 2009. The average rating was 3.29 stars. Twenty-three percent of enrollees were in a plan with four or more stars; 20% were in a plan with fewer than three stars.

Twenty percent of Black-American and 32 percent of Hispanic-American Medicare Beneficiaries were enrolled in Medicare Advantage plans in 2006. Almost half (48%) of Medicare Advantage enrollees had incomes below $20,000, including 71% of minority enrollees. Others have reported that minority enrollment is not particularly above average. Another study has raised questions about the quality of care received by minorities in MA plans.

The Government Accountability Office reported that in 2006, the plans earned profits of 6.6 percent, had overhead (sales, etc.) of 10.1 percent, and provided 83.3 percent of the revenue dollar in medical benefits. These administrative costs are far higher than traditional fee-for-service Medicare.

Part D: Prescription drug plans

Main articles: Medicare Part D and Medicare Part D coverage gap

Medicare Part D went into effect on January 1, 2006. Anyone with Part A or B is eligible for Part D. It was made possible by the passage of the Medicare Prescription Drug, Improvement, and Modernization Act. In order to receive this benefit, a person with Medicare must enroll in a stand-alone Prescription Drug Plan (PDP) or Medicare Advantage plan with prescription drug coverage (MA-PD). These plans are approved and regulated by the Medicare program, but are actually designed and administered by private health insurance companies. Unlike Original Medicare (Part A and B), Part D coverage is not standardized. Plans choose which drugs (or even classes of drugs) they wish to cover, at what level (or tier) they wish to cover it, and are free to choose not to cover some drugs at all. The exception to this is drugs that Medicare specifically excludes from coverage, including but not limited to benzodiazepines, cough suppressant and barbiturates. Plans that cover excluded drugs are not allowed to pass those costs on to Medicare, and plans are required to repay CMS if they are found to have billed Medicare in these cases.

It should be noted again for beneficiaries who are dual-eligible (Medicare and Medicaid eligible) Medicaid may pay for drugs not covered by part D of Medicare, such as benzodiazepines, and other restricted controlled substances.

Out-of-pocket costs

Neither Part A nor Part B pays for all of a covered person's medical costs. The program contains premiums, deductibles and coinsurance, which the covered individual must pay out-of-pocket. A study published by the Kaiser Family Foundation in 2008 found the Fee-for-Service Medicare benefit package was less generous than either the typical large employer PPO plan or the Federal Employees Health Benefits Program Standard Option. Some people may qualify to have other governmental programs (such as Medicaid) pay premiums and some or all of the costs associated with Medicare.

Premiums

Most Medicare enrollees do not pay a monthly Part A premium, because they (or a spouse) have had 40 or more 3-month quarters in which they paid Federal Insurance Contributions Act taxes. Medicare-eligible persons who do not have 40 or more quarters of Medicare-covered employment may purchase Part A for a monthly premium of:

• $248.00 per month (in 2011) for those with 30-39 quarters of Medicare-covered employment, or
• $450.00 per month (in 2011) for those with fewer than 30 quarters of Medicare-covered employment and who are not otherwise eligible for premium-free Part A coverage.

All Medicare Part B enrollees pay an insurance premium for this coverage; the standard Part B premium for 2012 is $99.90 per month. A new income-based premium schema has been in effect since 2007, wherein Part B premiums are higher for beneficiaries with incomes exceeding $85,000 for individuals or $170,000 for married couples. Depending on the extent to which beneficiary earnings exceed the base income, these higher Part B premiums are $139.90, $199.80, $259.70, or $319.70 for 2012, with the highest premium paid by individuals earning more than $214,000, or married couples earning more than $428,000. In September 2008, CMS announced that Part B premiums would be unchanged ($96.40 per month) in 2009 for 95 percent of Medicare beneficiaries. This was the sixth year without a premium increase since Medicare was established in 1965.

Medicare Part B premiums are commonly deducted automatically from beneficiaries' monthly Social Security checks. They can also be paid quarterly via bill sent directly to beneficiaries.

Part C and D plans may or may not charge premiums, at the programs' discretion. Part C plans may also choose to rebate a portion of the Part B premium to the member.

Deductible and coinsurance

Part A — For each benefit period, a beneficiary will pay:

• A Part A deductible of $1,156 (in 2012) for a hospital stay of 1–60 days.
• A $289 per day co-pay (in 2012) for days 61-90 of a hospital stay.
• A $578 per day co-pay (in 2012) for days 91-150 of a hospital stay, as part of their limited Lifetime Reserve Days.
• All costs for each day beyond 150 days
• Coinsurance for a Skilled Nursing Facility is $144.50 per day (in 2012) for days 21 through 100 for each benefit period.
• A blood deductible of the first 3 pints of blood needed in a calendar year, unless replaced. There is a 3 pint blood deductible for both Part A and Part B, and these separate deductibles do not overlap.

Part B — After a beneficiary meets the yearly deductible of $140.00 (in 2012), they will be required to pay a co-insurance of 20% of the Medicare-approved amount for all services covered by Part B with the exception of most lab services which are covered at 100%, and outpatient mental health which is currently (2010–2011) covered at 55% (45% copay). The copay for outpatient mental health which started at 50% is gradually being stepped down over several years until it matches the 20% required for other services. They are also required to pay an excess charge of 15% for services rendered by non-participating Medicare providers.

The deductibles and coinsurance charges for Part C and D plans vary from plan to plan.

Medicare supplement (Medigap) policies

Main article: Medigap

Some people elect to purchase a type of supplemental coverage, called a Medigap plan, to help fill in the holes in Original Medicare (Part A and B). These Medigap insurance policies are standardized by CMS, but are sold and administered by private companies. Some Medigap policies sold before 2006 may include coverage for prescription drugs. Medigap policies sold after the introduction of Medicare Part D on January 1, 2006 are prohibited from covering drugs. Medicare regulations prohibit a Medicare beneficiary from having both a Medicare Advantage Plan and a Medigap Policy. Medigap Policies may be purchased by beneficiaries who are receiving benefits from Original Medicare (Part A & Part B).

Some have suggested that by reducing the cost-sharing requirements in the Medicare program, Medigap policies increase the use of health care by Medicare beneficiaries and thus increase Medicare spending. One recent study suggests that this concern may have been overstated due to methodological problems in prior research.

Payment for services

Medicare contracts with regional insurance companies who process over one billion fee-for-service claims per year. In 2008, Medicare accounted for 13% ($386 billion) of the federal budget. In 2010 it is projected to account for 12.5% ($452 billion) of the total expenditures. For the decade 2010-2019 medicare is projected to cost 6.4 trillion dollars or 14.8% of the federal budget for the period.

Reimbursement for Part A services

For institutional care, such as hospital and nursing home care, Medicare uses prospective payment systems. A prospective payment system is one in which the health care institution receives a set amount of money for each episode of care provided to a patient, regardless of the actual amount of care used. The actual allotment of funds is based on a list of diagnosis-related groups (DRG). The actual amount depends on the primary diagnosis that is actually made at the hospital. There are some issues surrounding Medicare's use of DRGs because if the patient uses less care, the hospital gets to keep the remainder. This, in theory, should balance the costs for the hospital. However, if the patient uses more care, then the hospital has to cover its own losses. This results in the issue of "upcoding," when a physician makes a more severe diagnosis to hedge against accidental costs.^{[citation needed]}

Reimbursement for Part B services

Payment for physician services under Medicare has evolved since the program was created in 1965. Initially, Medicare compensated physicians based on the physician's charges, and allowed physicians to bill Medicare beneficiaries the amount in excess of Medicare's reimbursement. In 1975, annual increases in physician fees were limited by the Medicare Economic Index (MEI). The MEI was designed to measure changes in costs of physician's time and operating expenses, adjusted for changes in physician productivity. From 1984 to 1991, the yearly change in fees was determined by legislation. This was done because physician fees were rising faster than projected.

The Omnibus Budget Reconciliation Act of 1989 made several changes to physician payments under Medicare. Firstly, it introduced the Medicare Fee Schedule, which took effect in 1992. Secondly, it limited the amount Medicare non-providers could balance bill Medicare beneficiaries. Thirdly, it introduced the Medicare Volume Performance Standards (MVPS) as a way to control costs.

On January 1, 1992, Medicare introduced the Medicare Fee Schedule (MFS), a list of about 7,000 services that can be billed for. Each service is priced within the Resource-Based Relative Value Scale (RBRVS) with three Relative Value Units (RVUs) values largely determining the price. The three RVUs for a procedure are each geographically weighted and the weighted RVU value is multiplied by a global Conversion Factor (CF), yielding a price in dollars. The RVUs themselves are largely decided by a private group of 29 (mostly specialist) physicians—the American Medical Association's Specialty Society Relative Value Scale Update Committee (RUC).

From 1992 to 1997, adjustments to physician payments were adjusted using the MEI and the MVPS, which essentially tried to compensate for the increasing volume of services provided by physicians by decreasing their reimbursement per service.

In 1998, Congress replaced the VPS with the Sustainable Growth Rate (SGR). This was done because of highly variable payment rates under the MVPS. The SGR attempts to control spending by setting yearly and cumulative spending targets. If actual spending for a given year exceeds the spending target for that year, reimbursement rates are adjusted downward by decreasing the Conversion Factor (CF) for RBRVS RVUs.

Since 2002, actual Medicare Part B expenditures have exceeded projections.

In 2002, payment rates were cut by 4.8%. In 2003, payment rates were scheduled to be reduced by 4.4%. However, Congress boosted the cumulative SGR target in the Consolidated Appropriation Resolution of 2003 (P.L. 108-7), allowing payments for physician services to rise 1.6%. In 2004 and 2005, payment rates were again scheduled to be reduced. The Medicare Modernization Act (P.L. 108-173) increased payments 1.5% for those two years.

In 2006, the SGR mechanism was scheduled to decrease physician payments by 4.4%. (This number results from a 7% decrease in physician payments times a 2.8% inflation adjustment increase.) Congress overrode this decrease in the Deficit Reduction Act (P.L. 109-362), and held physician payments in 2006 at their 2005 levels. Similarly, another congressional act held 2007 payments at their 2006 levels, and HR 6331 held 2008 physician payments to their 2007 levels, and provided for a 1.1% increase in physician payments in 2009. Without further continuing congressional intervention, the SGR is expected to decrease physician payments from 25% to 35% over the next several years.

MFS has been criticized for not paying doctors enough because of the low conversion factor. By adjustments to the MFS conversion factor, it is possible to make global adjustments in payments to all doctors.

Office medication reimbursement

Chemotherapy and other medications dispensed in a physician's office are reimbursed according to the Average Sales Price, a number computed by taking the total dollar sales of a drug as the numerator and the number of units sold nationwide as the denominator. The current reimbursement formula is known as "ASP+6" since it reimburses physicians at 106% of the ASP of drugs. Pharmaceutical company discounts and rebates are included in the calculation of ASP, and tend to reduce it. In addition, Medicare pays 80% of ASP+6 which is the equivalent of 84.8% of the actual average cost of the drug. Some patients have supplemental insurance or can afford the co-pay. Large numbers do not. This leaves the payment to physicians for most of the drugs in an "underwater" state. ASP+6 superseded Average Wholesale Price in 2005, after a 2003 front-page New York Times article drew attention to the inaccuracies of Average Wholesale Price calculations.

Medicare 10% incentive payments

"Physicians in geographic Health Professional Shortage Areas (HPSAs) and Physician Scarcity Areas (PSAs) can receive incentive payments from Medicare. Payments are made on a quarterly basis, rather than claim-by-claim, and are handled by each area's Medicare carrier."

Costs and funding challenges

Medicare and Medicaid Spending as % GDP

Over the long-term, Medicare faces significant financial challenges because of rising overall health care costs, increasing enrollment as the population ages, and a decreasing ratio of workers to enrollees. Total Medicare spending is projected to increase from $523 billion in 2010 to $932 billion by 2020. From 2010 to 2030, Medicare enrollment is projected to increase from 47 million to 79 million, and the ratio of workers to enrollees is expected to decrease from 3.7 to 2.4. However, the ratio of workers to retirees has declined steadily for decades, and social insurance systems have remained sustainable due to rising worker productivity. There is some evidence that productivity gains will continue to offset demographic trends in the near future.

The Congressional Budget Office (CBO) has written that "future growth in spending per beneficiary for Medicare and Medicaid—the federal government’s major health care programs—will be the most important determinant of long-term trends in federal spending. Changing those programs in ways that reduce the growth of costs—which will be difficult, in part because of the complexity of health policy choices—is ultimately the nation’s central long-term challenge in setting federal fiscal policy."

Overall health care costs are expected to increase by 5.8 percent annually from 2010 to 2020, in part because of increased utilization of medical services, higher prices for services, and new technologies. Health care costs are rising across the board, but the cost of insurance has risen dramatically for families and employers as well as the federal government. In fact, since 1970 the per-capita cost of private coverage has grown roughly one percentage point faster each year that the per-capita cost of Medicare. Since the late 1990s, Medicare has performed especially well relative to private insurers. Over the next decade, Medicare’s per capita spending is projected to grow at a rate of 2.5 percent each year, compared to private insurance’s 4.8 percent. Nonetheless, most experts and policymakers agree containing health care costs is essential to the nation’s fiscal outlook. Much of the debate over the future of Medicare revolves around whether per capita costs should be reduced by limiting payments to providers or by shifting more costs to Medicare enrollees.

Indicators

Several measures serve as indicators of the long-term financial status of Medicare. These include total Medicare spending as a share of gross domestic product (GDP), the solvency of the Medicare HI trust fund, Medicare per-capita spending growth relative to inflation and per-capita GDP growth; and general fund revenue as a share of total Medicare spending.

Total Medicare spending as a share of GDP

This measure, which examines Medicare spending in the context of the U.S. economy as a whole, is expected to increase from 3.6 percent in 2010 to 5.6 percent in 2035 and to 6.2 percent by 2080.

The solvency of the Medicare HI trust fund

This measure involves only Part A. The trust fund is considered insolvent when available revenue plus any existing balances will not cover 100 percent of annual projected costs. According to the latest estimate by the Medicare trustees (2011), the trust fund is expected to become insolvent in 13 years (2024), at which time available revenue will cover 90 percent of annual projected costs. Since Medicare began, this solvency projection has ranged from two to 28 years, with an average of 11.3 years.

Medicare per-capita spending growth relative to inflation and per-capita GDP growth

The Independent Payment Advisory Board (IPAB), which the Affordable Care Act or "ACA" created, will use this measure to determine whether it must recommend to Congress proposals to reduce Medicare costs. Under the ACA, Congress established maximum targets, or thresholds, for per-capita Medicare spending growth. For the five-year periods ending in 2015 through 2019, these targets are based on the average of CPI-U and CPI-M. For the five-year periods ending in 2020 and subsequent years, these targets are based on per-capita GDP growth plus one percentage point. Each year, the CMS Office of the Actuary must compare those two values, and if the spending measure is larger than the economic measure, IPAB must propose cost-savings recommendations for consideration in Congress on an expedited basis. The Congressional Budget Office projects that Medicare per-capita spending growth will not exceed the economic target at any time between 2015 and 2021.

General fund revenue as a share of total Medicare spending

This measure, established under the Medicare Modernization Act (MMA), examines Medicare spending in the context of the federal budget. Each year, MMA requires the Medicare trustees to make a determination about whether general fund revenue is projected to exceed 45 percent of total program spending within a seven-year period. If the Medicare trustees make this determination in two consecutive years, a “funding warning” is issued. In response, the president must submit cost-saving legislation to Congress, which must consider this legislation on an expedited basis. In 2009, for the fourth consecutive year, the Medicare trustees determined that general fund revenue would exceed the threshold. However, in January 2009, the House passed a resolution to suspend congressional consideration of any legislation related to a Medicare funding warning.

Unfunded obligation

Medicare’s unfunded obligation is the total amount of money that would have to be set aside today such that the principal and interest would cover the gap between projected Part A revenues and spending over a given timeframe. As of 2009, Medicare’s unfunded obligation over an infinite timeframe was $36 trillion. Due to the passage of health reform, Medicare’s unfunded obligation over the next 75 years declined from $13.4 trillion to $3 trillion.

Fraud and waste

Main article: Medicare fraud

The Government Accountability Office lists Medicare as a "high-risk" government program in need of reform, in part because of its vulnerability to fraud and partly because of its long-term financial problems. Fewer than 5% of Medicare claims are audited.

Estimated net Medicare benefits for different worker categories

See also: Social Security: Estimated net Social Security benefits under differing circumstances

In 2004, Urban Institute economists C. Eugene Steuerle and Adam Carasso created a Web-based Medicare benefits calculator. Using this calculator it is possible to estimate net Medicare benefits (i.e., estimated lifetime Medicare benefits received minus estimated lifetime Medicare taxes paid, expressed in today's dollars) for different types of recipients. In the book, Democrats and Republicans - Rhetoric and Reality, Joseph Fried used the calculator to create graphical depictions of the estimated net benefits of men and women who were at different wage levels, single and married (with stay-at-home spouses), and retiring in different years. Three of these graphs are shown below, and they clearly show why Medicare (as currently formulated) is on the path to fiscal insolvency: No matter what the wage level, marital status, or retirement date, a man or woman can expect to receive benefits that will cost the system far more than the taxes he or she paid into the system.

In the first graph (Figure 169) we see that estimated net benefits range from $108,000 to $240,000 for single men and from $142,000 to $277,000 for single women. Generally, the benefits are progressive. Note that women usually get higher benefits due to their greater longevity.

In the next graph (Figure 170) we see a comparison of net Medicare benefits for a single woman versus a married woman (or man) with a stay-at-home spouse. The single woman can expect substantial net benefits, ranging from $142,000 to $277,000, However, these benefits are dwarfed by the estimated net benefits of her married counterpart. Due to a "spousal benefit" built into the Medicare formula, the married person will get net benefits ranging from $393,000 to $525,000. The impact of the spousal benefit can disrupt the intended progressiveness of Medicare benefits. For example, we see in Figure 170 that the married worker earning $95,000 is estimated to get net benefits of $393,000, while the single worker earning $5,000 is estimated to get $277,000. In either case, the benefits paid to the worker greatly exceed the taxes paid by the worker (and pose a financial burden on the system); however, the high-earning married worker gets a better "return," so to speak, on each tax dollar paid into the system.

The last graph shown (Figure 171) compares the net benefits of a single man retiring in 2005 with the net benefits of a man retiring in 2045. It is clear that the future retiree is likely to get a far greater net benefit than the current retiree (and is likely to be a greater burden to the system). Interestingly, in the Social Security system we see the opposite pattern. In that case, the future retiree can expect a much smaller net retirement benefit than the current retiree can expect.

About 27.4 percent of Medicare expenditures for the elderly are spent in the last year of a person's life.

Criticism

Unearned entitlement or contribution based insurance paid over a lifetime?

Yaron Brook of the Ayn Rand Institute has argued that the birth of Medicare represented a shift away from personal responsibility and towards a view that health care is an unearned "entitlement" to be provided at others' expense. However, others argue that Medicare "entitlements" are not unearned.

Robert M. Ball, a former commissioner of Social Security under President Kennedy in 1961 (and later under Johnson, and Nixon) defined the major obstacle to financing health insurance for the elderly: the high cost of care for the aged combined with the generally low incomes of retired people. Because retired older people use much more medical care than younger employed people, an insurance premium related to the risk for older people needed to be high, but if the high premium had to be paid after retirement, when incomes are low, it was an almost impossible burden for the average person. The only feasible approach, he said, was to finance health insurance in the same way as cash benefits for retirement, by contributions paid while at work, when the payments are least burdensome, with the protection furnished in retirement without further payment. In the early 1960s relatively few of the elderly had health insurance, and what they had was usually inadequate. Insurers such as Blue Cross, which had originally applied the principle of community rating, faced competition from other commercial insurers that did not community rate, and so were forced to raise their rates for the elderly.

Also, Medicare is not generally an unearned entitlement. Entitlement is most commonly based on a record of contributions to the Medicare fund. As such it is a form of social insurance making it feasible for people to pay for insurance for sickness in old age when they are young and able to work and be assured of getting back benefits when they are older and no longer working. Some people will pay in more than they receive back and others will get back more than they paid in, but this is the practice with any form of insurance, public or private.^{[citation needed]}

Claims of socialism

Some conservatives opposed the enactment of Medicare, warning that a government-run program would lead to socialism in America:

• Ronald Reagan, as part of Operation Coffee Cup in 1961, stated that: “[I]f you don’t [stop Medicare] and I don’t do it, one of these days you and I are going to spend our sunset years telling our children and our children’s children what it once was like in America when men were free.”
• George H. W. Bush, while a candidate for the US Senate in 1964, described Medicare as “socialized medicine.”
• Barry Goldwater in 1964: “Having given our pensioners their medical care in kind, why not food baskets, why not public housing accommodations, why not vacation resorts, why not a ration of cigarettes for those who smoke and of beer for those who drink?”
• In 1995 Bob Dole stated that he was one of 12 House members who voted against creating Medicare in 1965. “I was there, fighting the fight, voting against Medicare ... because we knew it wouldn’t work in 1965.”

Financial challenges

Medicare faces continuing financial challenges. In its 2008 annual report to Congress, the Medicare Board of Trustees reported that the program's hospital insurance trust fund could run out of money by 2017. The trustees have made dozens of such projections in the past, but this one was bleaker than the outlook reported in 2007.

As an example of the problem, according to the Associated Press, the average wage couple jointly earned $89,000 annually in 2010. Upon attaining eligibility for Medicare and retirement in 2011, they would have paid in $114,000 in Medicare payroll taxes total. But their expected average medical services, including prescriptions are expected to cost $355,000, about three times what they paid in. When the last of the Baby Boomers retire in about 2030, 80 million people will be expecting coverage; the ratio of tax payers supporting the system is expected to drop from today's 3.5 for each person, to 2.3.

Popular opinion surveys show that the public views Medicare’s problems as serious, but not as urgent as other concerns. In January 2006, the Pew Research Center found 62 percent of the public said addressing Medicare’s financial problems should be a high priority for the government, but that still put it behind other priorities. Surveys suggest that there’s no public consensus behind any specific strategy to keep the program solvent.

Medicare spending as part of total U.S. healthcare spending (public and private). Percent of gross domestic product (GDP). Congressional Budget Office chart.

Quality of beneficiary services

A 2001 study by the Government Accountability Office evaluated the quality of responses given by Medicare contractor customer service representatives to provider (physician) questions. The evaluators assembled a list of questions, which they asked during a random sampling of calls to Medicare contractors. The rate of complete, accurate information provided by Medicare customer service representatives was 15%. Since then, steps have been taken to improve the quality of customer service given by Medicare contractors, specifically the 1-800-MEDICARE contractor. As a result, 1-800-MEDICARE customer service representatives (CSR) have seen an increase in training, quality assurance monitoring has significantly increased, and a customer satisfaction survey is offered to random callers.

Hospital accreditation

An attempt by TÜV Healthcare Specialists to provide a hospital accreditation option was denied in 2006. Shortly thereafter, DNV International purchased TUV and renamed the company DNV Health Care. CMS deemed DNV Healthcare in 2008 to accredit hospitals. Beyond hospitals and hospital accreditation, there are now a number of alternative American organizations possessing healthcare-related deeming power for Medicare. These include the Community Health Accreditation Program, the Accreditation Commission for Health Care, the Compliance Team and the Healthcare Quality Association on Accreditation.

Accreditation is voluntary and an organization may choose to be evaluated by their State Survey Agency or by CMS directly.

Graduate Medical Education

Medicare funds the vast majority of residency training in the US. This tax-based financing covers resident salaries and benefits through payments called Direct Medical Education payments. Medicare also uses taxes for Indirect Medical Education, a subsidy paid to teaching hospitals in exchange for training resident physicians. For the 2008 fiscal year these payments were $2.7 and $5.7 billion respectively. This in turn has funded the provision of physician level health care that would have otherwise cost the systems orders of magnitude more to finance. Overall funding levels have remained at the same level over the last ten years, so that the same number or fewer residents have been trained under this program. Meanwhile, the US population continues to grow older, which has led to greater demand for physicians. At the same time the cost of medical services continue rising rapidly and many geographic areas face physician shortages, both trends suggesting the supply of physicians remains too low.

Medicare finds itself in the odd position of having assumed control of graduate medical education, currently facing major budget constraints, and as a result, freezing funding for graduate medical education, as well as for physician reimbursement rates. This halt in funding in turn exacerbates the exact problem Medicare sought to solve in the first place: improving the availability of medical care. In response, teaching hospitals have resorted to alternative approaches to funding resident training, leading to the modest 4% total growth in residency slots from 1998–2004, despite Medicare funding having been frozen since 1996.

Legislation and reform

• 1960 — PL 86-778 Social Security Amendments of 1960 (Kerr-Mills aid)
• 1965 — PL 89-97 Social Security Act of 1965, Establishing Medicare Benefits
• 1980 — Medicare Secondary Payer Act of 1980, prescription drugs coverage added
• 1988 — PL 100-360 Medicare Catastrophic Coverage Act of 1988
• 1989 — Medicare Catastrophic Coverage Repeal Act of 1989
• 1997 — PL 105-33 Balanced Budget Act of 1997
• 2003 — PL 108-173 Medicare Prescription Drug, Improvement, and Modernization Act
• 2010 — Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010

In 1977, the Health Care Financing Administration (HCFA) was established as a federal agency responsible for the administration of Medicare and Medicaid. This would be renamed to Centers for Medicare and Medicaid Services (CMS) in 2001.

By 1983, the diagnosis-related group (DRG) replaced pay for service reimbursements to hospitals for Medicare patients.

President Bill Clinton attempted an overhaul of Medicare through his health care reform plan in 1993-1994 but was unable to get the legislation passed by Congress.

In 2003 Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act, which President George W. Bush signed into law on December 8, 2003. Part of this legislation included filling gaps in prescription-drug coverage left by the Medicare Secondary Payer Act that was enacted in 1980. The 2003 bill strengthened the Workers' Compensation Medicare Set-Aside Program (WCMSA) that is monitored and administered by CMS.

On August 1, 2007, the U.S. House United States Congress voted to reduce payments to Medicare Advantage providers in order to pay for expanded coverage of children's health under the SCHIP program. As of 2008, Medicare Advantage plans cost, on average, 13 percent more per person insured than direct payment plans. Many health economists have concluded that payments to Medicare Advantage providers have been excessive. The Senate, after heavy lobbying from the insurance industry, declined to agree to the cuts in Medicare Advantage proposed by the House. President Bush subsequently vetoed the SCHIP extension.

In discussing changes and reforms to Medicare, both political parties in the United States have issued Medicare warnings intended to scare seniors as a way to benefit their own political ambitions.

Legislative oversight

The following congressional committees provide oversight for Medicare programs:

Senate

• Senate Committee on Appropriations
  • Subcommittee on Labor, Health and Human Services, Education, and Related Agencies
• Senate Budget Committee
• Senate Committee on Finance
• Senate Committee on Homeland Security and Governmental Affairs
  • Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia
• Senate Committee on Health, Education, Labor and Pensions
  • Subcommittee on Federal Financial Management, Government Information, and International Security
  • Subcommittee on Primary Health and Aging
• Senate Special Committee on Aging

House

• House Committee on Appropriations
  • Subcommittee on Labor, Health and Human Services, Education, and Related Agencies
• House Budget Committee
• House Committee on Energy and Commerce
  • Subcommittee on Health
  • Subcommittee on Oversight and Investigations
• House Small Business Committee
• House Committee on Ways and Means
  • Subcommittee on Health

Joint

• Joint Economic Committee

See also

• Administration on Aging
• Federal Insurance Contributions Act
• Health care in the United States
• Health care politics
• Health care reform in the United States
• Health insurance in the United States
• Maurice Mazel
• Medicare (Australia)

• Medicare (Canada)
• Medicare Rights Center
• National Health Service (United Kingdom)
• Patient Protection and Affordable Care Act (also known as Obamacare)
• Philosophy of healthcare
• Quality improvement organizations
• Single-payer health care
• Stark Law
• United States National Health Care Act (Expanded and Improved Medicare for All Act)

External links

Governmental links - current

• CMS official web site at cms.gov
  • Medicare at cms.gov
• Medicare.gov — the official website for people with Medicare
  • Official Medicare publications at Medicare.gov — includes official publications about current Medicare benefits
    • Medicare & You handbook for 2011 at Medicare.gov — includes information about current Medicare benefits
  • Information about the 1-800-MEDICARE helpline from Medicare.gov — a 24X7 toll-free number to call with questions about Medicare
  • Medicare Modernization Act at Medicare.gov
  • Medicare Plan Choices at Medicare.gov — basic information about plan choices for Medicare beneficiaries, including MA Plans
  • Prescription Drug Coverage homepage at Medicare.gov — a central location for Medicare's web-based information about the Part D benefit
    • Landscape of plans — state-by-state breakdown of all plans available in an area, both stand-alone PDPs, as well as MA-PD plans
• MyMedicare.gov — Medicare's secure online service where beneficiaries can access their own personal Medicare information

Governmental links - historical

• Medicare Is Signed Into Law page from ssa.gov — material about the bill-signing ceremony
• Historical Background and Development of Social Security from ssa.gov — includes information about Medicare
• Detailed Chronology of SSA from ssa.gov — includes information about Medicare
• Early Medicare poster from ssa.gov

Non-governmental links

• Congressional Research Service (CRS) Reports related to Medicare from the University of Texas Libraries
• Center for Medicare Advocacy — National education & advocacy organization.
• Medicare Rights Center — Education and advocacy organization.
• Medicare Interactive — Online Medicare reference guide created by the Medicare Rights Center.
• Medicare Made Clear -- Medicare education and planning tools.
• Medicare & Medicaid Resources — Medicare information site
• Kaiser Family Foundation — Wide range of free information, including a drug benefit calculator, about the Medicare program and other U.S. health issues.
  • Kaiser's Medicare Quiz
  • State Health Facts — Data on health care spending and utilization, including Medicare; provided by the Kaiser Family Foundation.
• Medicare - Alliance for Health Reform The nonpartisan, nonprofit Alliance for Health Reform offers information about health reform, in a number of formats, to elected officials and their staffs, journalists, policy analysts and advocates.
• Social Security and Disability News Resource Center
• Issue Guide on Medicare — Policy alternatives and public opinion analysis on Medicare from Public Agenda Online
• How Stuff Works - Medicare