Medicare

Medicare, the national health-insurance plan for the elderly and disabled, often gets lumped in with Social Security in terms of the people it serves, its popularity and its fragile future -- except that it's in much worse shape financially. The program serves 46 million Americans and costs more than $430 billion per year, nearly 13 percent of the federal budget. But current projections say Medicare will be unable to cover its bills by 2029 -- long before Social Security, which should be able to cover its costs until 2037.

Like Social Security, Medicare is up against an increasing demand for its services as the 78 million-strong Baby Boom gradually retires. Unlike Social Security, Medicare also has to cope with the skyrocketing cost of health care. Most budget experts, in fact, say this combination of rising health costs and demographics makes Medicare the biggest financial problem facing the federal government in the long term.

The health care reform law passed in 2010 has significantly improved the outlook for Medicare, according to the annual trustees report (previous to the health care legislation, Medicare's trust fund was projected to be empty by 2017). As part of efforts to overhaul the health care system in general, the law expands the Medicare payroll tax, cuts payments to doctors and hospitals, and implements changes designed to cut overall health care costs.

However, many of these changes require follow-up action by Congress, and if Congress balks at them, Medicare's financial state will get worse.

Saving The Elderly From Medical Costs

Since its inception in 1965, Medicare has transformed health care for the nation's retirees and the disabled. Nearly every elderly American is covered by the program.

Medicare has two parts. Part A, financed by a 2.9 percent payroll tax paid in equal parts by employees and their employers, is a hospital insurance program for retirees and their dependents covering most in-patient hospital costs. Recipients can elect to enroll in Part B, Medicare's supplementary insurance, which covers physician and outpatient services. This part is financed with premiums and deductibles paid by beneficiaries and from general revenues. Almost all Part A recipients enroll in Part B.

Medicare spending that isn't covered by payroll taxes and premiums comes directly from the federal government. By law, the government has set a 45 percent threshold for its contribution -- beyond that, premium increases or service cuts would be required.

When Medicare began, no one anticipated the development of new medical technologies and drugs that are keeping older Americans healthier, but at considerable expense. The cost of Medicare has risen more rapidly than any other government program. Membership has increased rapidly as well, with 46 million people getting Medicare benefits in 2009, compared with about 25 million in 1967.

In addition, many retirees are becoming more dependent on Medicare, because fewer are getting health benefits from their former employers, and many who do get benefits are getting less coverage.

In the 1990s, the federal government tried to slow Medicare costs by encouraging beneficiaries to enroll in health maintenance organizations, which along with other "managed care" insurers, have focused on controlling costs. By 2003, there were 4.6 million people on Medicare who were enrolled in HMOs. While that's nearly triple the number of Medicare participants in HMOs in 1992, the number has actually declined from its 1999 high point of 6.8 million. During the 1990s, HMOs were eager for Medicare patients, promising better benefits at better prices. Now, however, many HMOs are complaining that government reimbursements are too low and they are dropping out of the program. Beneficiaries turned away from an HMO still get Medicare coverage, but have to go through the trouble of finding another HMO or returning to Medicare's conventional plan.

One of the great benefits of these "Medicare Advantage" HMOs, however, is that they generally provide coverage beyond standard Medicare. Most Medicare participants supplement their coverage in some way. One-third still have employer or union-sponsored insurance as part of their retirement package, while about one-quarter have a so-called "Medigap" policy -- private insurance specifically tailored to cover things Medicare leaves out (such as prescriptions, eyeglasses or long-term care). Low-income seniors may be covered by Medicaid as well.

Paying For Prescriptions

The Medicare prescription drug benefit, introduced in 2003, has addressed one of the major weaknesses as far as the benefits offered by the program, which did not previously cover prescriptions outside a hospital.

Like Part B, the formal drug benefit (known as Part D) is voluntary; unlike Part B, it will be offered through private insurers. Coverage is available for a $250 deductable, covering 75 percent of drug costs up to $2,250. After that, beneficiaries pay the full cost. But if someone's drug costs exceed $5,100 per year, benefits kick in again, with such "catastrophic" beneficiaries able to get coverage for 95 percent of their drug costs.

Adding the drug benefit was supported by major groups advocating for the elderly, such as the AARP, arguing that it was a dramatic and needed expansion of coverage. But critics say the benefit may actually give some retired people fewer benefits than they got before. In addition to potentially steep out-of-pocket costs, some employers are expected to drop drug coverage for retirees because of the new plan. And elderly people will no longer be able to get drug coverage from Medicaid. Also, this has a major impact on the financial state of Medicare, adding additional costs (an estimated $395 billion) to a program that's already financially fragile.

The Question of Cost

With health care costs continuing to rise and the number of Medicare beneficiaries expected to double, a key issue is whether the government can control the costs of the program. Medicare and Medicaid, the health program for the poor, are the largest part of the federal government's long-term budget problems.
In many ways, the cost problem is simply a reflection of the wider health care system, where costs have been rising for years. (For more details, see our issue guide on health care).

In passing the 2010 health care law, the Obama administration argued that controlling overall health costs was the best way to deal with Medicare and Medicaid's impact on the federal budget. The law also imposes specific changes to Medicare itself, including limits on overall spending growth per capita. If costs exceed that level, an independent panel will recommend cuts that will be imposed unless Congress specifically blocks them. However, the panel can't make recommendations that change Medicare taxes, eligibility rules or "ration" medical care.

While the new health care law is projected to improve Medicare's financial state, that's based on assumptions that many of the changes, set to be phased in over the next decade, will go into effect on schedule and actually work in the field. The Medicare trustees themselves warn that if those things don't happen, the program will be in worse shape.

Choicework

For additional perspective on how society could address this issue, visit our Discussion Guide which sets out three alternative approaches.
The points of view are drawn both from what the experts say about an issue and from what the public thinks about it, based on surveys and focus groups. We call this section "Choicework." Each point of view comes with the arguments for and against, along with some potential costs and tradeoffs.

• From one perspective, we should accept the rising cost of this program and do whatever is necessary to keep existing benefits intact.

• From a second perspective, the most prudent course is to reduce the program's costs by revising benefits, raising the eligibility age, and requiring Medicare recipients to use HMOs, which have a track record of containing costs.

• From a third perspective, what's needed is fundamental reform, privatizing the system, and requiring individuals to set up medical savings accounts to cover the cost of health care in retirement.