The Basics of Medicare Updated With the 2009 Board of Trustees Report

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1 Emplyee Benefit Research Institute th St. NW #878 Washingtn, DC / The Basics f Medicare Updated With the 2009 Bard f Trustees Reprt July 2009 Histry In 1965, Title 18, Health Insurance fr the Aged, f the Scial Security Act created the Medicare prgram. Medicare cnsists f tw parts: Hspital Insurance (HI), Part A, cvers hspital services and sme hme health care and skilled nursing facility services, and Supplemental Medical Insurance (SMI), Part B, cvers physician care, utpatient hspital services, and independent labratry services; and Part D, cvers utpatient prescriptin drugs. In 1972, the Medicare prgram was expanded t include disabled persns wh qualified fr benefits under the Disability Insurance (DI) prgram and certain individuals with end-stage renal (kidney) disease. In 1986, all state and lcal gvernment emplyees hired after Mar. 31, 1986, and nt cvered under Scial Security, were required t be cvered by Medicare. In 1997, the Balanced Budget Act f 1997 expanded the delivery f health care under Medicare with the Medicare+Chice prgram. See belw fr mre details in the sectin Medicare Advantage. In 1997, under the Balanced Budget Act f 1997, hme health services nt assciated with a hspital r skilled nursing facility stay fr individuals enrlled in bth HI and SMI were transferred frm the HI prgram t the SMI prgram, effective January In 2000, Cngress enacted the Benefits Imprvement and Prtectin Act (BIPA) t increase payments t plans in an effrt t stp plans frm withdrawing frm the Medicare+Chice prgram. In 2003, Cngress enacted the Medicare Prescriptin Drug Imprvement and Mdernizatin Act, which created Part D, prescriptin drug cverage, means-tested Part B premiums and increased the Part B deductible. Cvered Beneficiaries Medicare serves elderly and disabled wrkers wh qualify fr DI benefits. Enrllment in HI (Part A) is autmatic, while enrllment in SMI (Parts B and D) is vluntary. In 2008, 37.5 millin elderly and 7.4 millin disabled individuals were enrlled in Part A, and 35.2 millin elderly and 6.6 millin disabled individuals were enrlled in Part B, and 32.3 millin individuals were enrlled in Part D. Financing Expressing Medicare expenditures as a percentage f grss dmestic prduct (GDP) gives a relative measure f the size f the Medicare prgram cmpared t the general ecnmy. The prjectin f this measure affrds the public an idea f the relative financial resurces that will be necessary t pay fr Medicare services. In 2008, expenditures in the Medicare prgram equaled 3.24 percent f GDP. By 2080, that percentage is estimated t be percent. Hwever, after 2007, the prjected Part B, SMI, and ttal Medicare expenditures are unrealistically lw because f the current-law physician payment reductins. Shuld these payment rates, by new legislatin, be prevented frm declining, the verall Medicare csts shwn in this sectin wuld be increased pssibly by 4 t 8 percent fr 2030 and later, depending n the specific changes enacted. Medicare csts are prjected t exceed thse f the Scial Security OASDI prgram in 2028 and wuld be nearly duble that f Scial Security by Federal Budgetary Prcesses Currently, the U.S. Department f the Treasury credits the Medicare and Scial Security trust funds with any annual excess f Medicare and Scial Security tax revenues ver the amunt spent fr current benefits. By law, these assets must be invested in special securities issued by the Treasury. The gvernment then spends these assets t ease fiscal pressures n ther prgrams. The trust fund surpluses are nt reserved fr future Medicare and Scial Security benefits but are bkkeeping entries shwing hw much the Medicare and Scial Security prgrams have lent t the Treasury (r

2 alternatively, what is wed t Medicare and Scial Security, including interest, by the Treasury). When the trust funds g int negative cash flw, the Treasury must start repaying the mney. Fr budgetary purpses, the date n which the trust funds g int negative cash flw (i.e., the benefit payments exceed the incme frm payrll taxes and the taxatin f benefits) is significant because it marks the pint at which the gvernment must prvide cash frm general revenues t the prgrams rather than receive surplus cash frm them t fund ther current spending. 4Part A: Hspital Insurance (HI) The Balanced Budget Act f 1997 cntained numerus prvisins affecting the Medicare prgram. These prvisins were designed in part t pstpne the imminent depletin f the HI trust fund, which, accrding t the 1997 Bard f Trustees reprt, had been prjected fr 2001 In 2008, the fund began using interest earnings t cver the excess f expenditures ver tax incme. Beginning in 2008, trust fund assets will begin t be used t cver the excess. The HI trust fund is expected t be exhausted by HI payrll taxes are based n a cmbined emplyer/emplyee rate f 2.9 percent. The Omnibus Budget Recnciliatin Act f 1993 cmpletely remved any wage base limit fr the HI payrll tax, effective Jan. 1, In 2008, ttal incme fr the HI trust fund was $230.8 billin: $198.7 billin came frm payrll taxes, $11.7 billin frm taxatin f Scial Security benefits, $15.6 billin frm interest, $2.9 billin frm premium payments, and $1.9 billin frm general revenue and ther surces. 1 In 2008, the average amunt reimbursed per enrllee in Part A was $5,179. In 2008, administrative csts fr Part A were $3.3 billin, r 1.4 percent f expenditures. The unfunded bligatin f the HI trust fund, frm prgram inceptin t 2083, is estimated t be $13.4 trillin, while the unfunded bligatin frm prgram inceptin thrugh the infinite hrizn is $36.4 trillin. 4Part B: Supplementary Medical Insurance (SMI) The SMI trust fund is financed n a year-by-year basis. The SMI prgram derives its revenues frm premium payments by beneficiaries and general revenues frm the federal budget. Under current law, n mre than 25 percent f SMI's revenues can cme frm premium payments. In 2008, ttal incme fr Part B f the SMI trust fund was $200.6 billin: $146.8 billin frm general revenues f the federal gvernment; $50.2 billin in premium payments, $0.0 billin in transfers frm states, and $3.5 billin in interest. The average amunt reimbursed per enrllee in Part B was $4,322, in In 2008, administrative csts fr Part B were $3.0 billin, r 1.6 percent f expenditures. The unfunded bligatin f Part B, frm prgram inceptin thrugh 2083, is estimated t be $23.2 trillin, while the unfunded bligatin frm prgram inceptin thrugh the infinite hrizn is $50.1 trillin. 4Part D: Medicare Prescriptin Drug Accunt Part D is financed by beneficiary premium payments, transfers frm the general fund f the Treasury and transfers frm state gvernments. Premiums are t accunt fr 25.5 percent f the ttal csts f Part D. In 2008, ttal incme fr Part D f the SMI trust fund was $49.4 billin: $37.5 billin frm general revenues f the federal gvernment; $5.0 billin in premium payments, and $7.1 billin in transfers frm states. The average amunt reimbursed per enrllee in Part D was $1,517, in The unfunded bligatin f Part D, frm prgram inceptin thrugh 2083, is estimated t be $9.4 trillin, while the unfunded bligatin frm the prgram inceptin thrugh the infinite hrizn is $20.3 trillin. Estimated peratins f the Part D accunt are summarized belw. Actual experience fr 2008 came in lwer than the intermediate cst estimates frm the 2008 Trustees Reprt. 2

3 Part D Estimated Operatins Premiums Frm Other Ttal Ttal Calendar Year Enrllees Incme 1 Revenue Expenditures ($ in billins) Actual Experience 2008 $ 5.0 $ 44.4 $ 49.4 $ 49.3 Estimated 2008 Operatins frm 2008 Trustees Reprt Intermediate Assumptins Lw Cst Assumptins High Cst Assumptins Cntains federal and state gvernment payments plus interest incme. 2 Intermediate assumptins. Cst-Sharing Prvisins 4Hspital Insurance (HI): Part A Part A requires an enrlled individual t pay varius deductibles and c-pays, depending n the facility where the service is prvided and the length f stay Cst--Sharing Prvisins In-patient Hspital Deductible Fr a hspital stay f 1 60 days, a patient is liable fr a $1,068 deductible. Fr a hspital stay f days, the patient is liable fr a $267 c-pay per day. Fr a hspital stay f mre than 90 days, a patient is liable fr a $534 c-pay per day. Skilled Nursing Facility There is n deductible r c-pay fr the first 20 days f a skilled nursing facility stay. If the stay lasts fr 21 days r lnger, the patient is liable fr a $ cpay per day. Part A Premium Fr an individual wh is age 65 r lder and nt therwise cvered by the Medicare prgram, the mnthly premium t be cvered by Part A is $443. Fr enrllees wh have at least 30 quarters f credit may apply fr a reduced premium. That reduced premium amunt is $ Cst-Sharing Prvisins Estimates (based n intermediate assumptins) In-patient Hspital Deductible Fr a hspital stay f 1 60 days, a patient is estimated t be liable fr an $1,584 deductible. Fr a hspital stay f days, the patient is estimated t be liable fr a $396 c-pay per day. Fr a hspital stay f mre than 90 days, a patient is estimated t be liable fr a $792 c-pay per day. Skilled Nursing Facility There is n deductible r c-pay fr the first 20 days f a skilled nursing facility stay. If the stay lasts fr 21 days r lnger, the patient is estimated t be liable fr a $198. Part A Premium Fr an individual wh is age 65 r lder and nt therwise cvered by the Medicare prgram, the mnthly premium t be cvered by Part A is estimated t be $622. Fr enrllees wh have at least 30 quarters f credit may apply fr a reduced premium. In 2018, that reduced premium amunt is estimated t be $342. The use f Medicare benefits is calculated based n benefit perids and reserve days. The benefit perid is the blck f time used t determine hw much f a deductible and/r c-pay the beneficiary wes. A benefit perid begins and ends when he r she has been ut f the hspital fr 60 cnsecutive days. Fr example, if a beneficiary enters the hspital n Nvember 10, 2009, and is released n Nvember 24, 2009, he r she is liable fr $1,068. If the beneficiary is re-admitted t the hspital n December 20, 2009, and released n December 26, 2009, he r she des nt have t pay anther $1,068. The beneficiary is liable t pay the deductible per benefit perid, nt per admissin. The benefit perid n this example runs until January 24, There is n limit n the number f benefit perids a beneficiary may use in a lifetime, except fr hspice care, which entitles a beneficiary t tw 90-day perids and ne 30-day perid. 3

4 Reserve days are used fr hspital stays beynd 90 days. A beneficiary is entitled t nly 60 reserve days. 4Supplementary Medical Insurance (SMI): Part B Since Part B f Medicare is vluntary, participants are required t make a mnthly cntributin t the premium. Part B premiums are autmatically deducted frm the enrllee s Scial Security benefit, prvided the enrllee receives Scial Security benefits. Under current law, n mre than 25 percent f Part B s revenues can cme frm premium payments. The Medicare Prescriptin Drug Imprvement and Mdernizatin Act f 2003 require the Medicare Part B premium t be related t incme starting in By 2011, premiums will increase with incme. Medicare beneficiaries with incme under $80,000 ($160,000 fr a married cuple) will cntinue t be required t pay 25 percent f the cst f Part B. Hwever, beneficiaries with incme between $80,000 and $100,000 will be required t pay 35 percent f the premium, and beneficiaries with incme f at least $200,000 will be respnsible fr 80 percent f the premium t enrll in Part B. These incme levels will als be indexed t general inflatin. Premiums in 2009, the mnthly premium are $ By 2018, the mnthly premium is estimated, under intermediate assumptins, t be $ Annual Deductible this is applied t all Part B services except hme health care services. In 2009, the annual deductible is $135. By 2018, the annual deductible is estimated, under intermediate assumptins, t be $184. Cinsurance Cinsurance payment in 2009 is 20 percent. 4 Supplementary Medical Insurance (SMI): Part D The Medicare Prescriptin Drug Imprvement and Mdernizatin Act f 2003 created Part D a prescriptin drug benefit. Under current law, n mre than 25.5 percent f Part D s revenues can cme frm premium payments Cst-Sharing Prvisins Premiums the base beneficiary premium is $ Annual Deductible the annual deductible is $295. Initial Benefit Limit the initial benefit limit is $2,700. The catastrphic threshld limit is $4, Cst-Sharing Prvisins estimates (based n intermediate assumptins) Premiums the base beneficiary premium is $ Annual Deductible the annual deductible is $490. Initial Benefit Limit the initial benefit limit is $4,510. The catastrphic threshld limit is $7, Supplementary Medical Insurance Csts Cmpared with Scial Security Benefits The average Part B plus Part D premium in 2010 is estimated t equal 11 percent f the average Scial Security benefit but wuld increase t an estimated 29 percent in Similarly, an average cst-sharing amunt in 2010 wuld be equivalent t 14 percent f the Scial Security benefit, increasing t 37 percent in Medigap Althugh Medicare eases many financial wrries fr the elderly, it des nt cver 100 percent f all medical services. Medicare s deductibles and c-payments can be high, particularly fr lng hspital stays. Medicare des nt cver all medical services. Mst ntable are eye exams and glasses, hearing aids, and dental services. T help meet these additinal expenses, Medicare beneficiaries frequently purchase what is knwn as Medigap plicies. A Medigap plicy is purchased in the individual market. In the 1970s and 1980s, Medicare enrllees encuntered prblems with purchasing health insurance t supplement Medicare. In the Omnibus Budget Recnciliatin Act f 1990 (OBRA 90), Cngress charged the Natinal Assciatin f Insurance Cmmissiners (NAIC) with develping a variety f Medigap plicies. NAIC develped 10 plicies ranging frm a basic cverage plan, Plan A, t cmprehensive cverage, Plan J. Insurance carriers are nt required t ffer all 10 plicies, but if a carrier ffers Medigap plicies, they must be frm the 10 plicies designed by NAIC. Exceptins t this rule are fr carriers in Massachusetts, Minnesta, and Wiscnsin, states that had Medigap laws in place befre OBRA 90. As f January 1, 2006, Medigap plicies prviding cverage fr prescriptin drugs (Plans H, I, and J) cannt be sld r issued, thugh they can be renewed if an individual des nt enrll in Medicare Part D. 4

5 The Centers fr Medicare & Medicaid Services maintains an interactive Web page designed t assist an enrllee in btaining Medigap cverage, nline at Cvered Services 4 Hspital Insurance (HI): Part A Hspitalizatin Cvered services include semiprivate rm and bard, general nursing, miscellaneus hspital services and supplies, inpatient psychiatric hspital care. Pst-hspital Skilled Nursing Facility Care T receive this service, the individual must have been in the hspital fr at least three days and enter facility within 30 days after hspital discharge. Hme Health Care Cvered services include part-time skilled nursing care, physical therapy, ccupatinal therapy, speech-language therapy, hme health aide services, medical scial services, durable medical equipment (such as wheelchairs) and medical supplies. Hspice Care Cvered services include medical and supprt services frm a Medicare-apprved hspice fr peple with a terminal illness, drugs fr symptm cntrl and pain relief, and ther services nt therwise cvered by Medicare. Hspice care is usually given in the hme. Hwever, shrt-term hspital and inpatient respite care (care given t a hspice patient by anther caregiver s that the usual caregiver can rest) are cvered when needed. Bld Cvered services include pints f bld received at a hspital r skilled nursing facility during a cvered stay. 4Supplementary Medical Insurance (SMI): Part B Medical and Other Services Cvered services include dctrs services (nt rutine medical exams), utpatient medical and surgical services and supplies, diagnstic tests, ambulatry surgery center facility fees fr apprved prcedures, and durable medical equipment (such as wheelchairs). Part B cvers secnd surgical pinins, utpatient mental health care, utpatient physical and ccupatinal therapy, including speech-language therapy. Clinical Labratry Services Services include bld tests, urinalysis, and mre. Hme Health Care Services include part-time skilled nursing care, physical therapy, ccupatinal therapy, speech-language therapy, hme health aide services, medical scial services, durable medical equipment (such as wheelchairs) and medical supplies, and ther services. Outpatient Hspital Services Services include hspital services and supplies received as an utpatient as part f a dctr s care. Bld Cvered services include pints f bld received as an utpatient r as part f a Part B cvered service. 4Supplementary Medical Insurance (SMI): Part D Prvides subsidized access t drug insurance cverage n a vluntary basis fr all beneficiaries and premium and cst-sharing subsidies fr lw-incme beneficiaries. Medicare Advantage The Medicare Prescriptin Drug Imprvement and Mdernizatin Act f 2003 changed the name f the Medicare+Chice prgram t Medicare Advantage. The Medicare Advantage prgram was created by Cngress in the Balanced Budget Act f 1997 t allw mre types f health insurance plans, including managed care plans, t serve Medicare beneficiaries. As f April 2009, 10.2 millin Medicare beneficiaries (22.0 percent f Medicare beneficiaries) were enrlled in a Medicare Managed Care accrding t a study frm the Kaiser Family Fundatin. Since 1998, mst managed care cntracts with the Centers fr Medicare & Medicaid Services have perated under the Medicare Advantage prgram. Trustees in 2009 Treasury Secretary Timthy F. Geithner acts as the managing trustee f the OASDI trust funds. The ther trustees include: Hilda Slis, secretary f Labr; Kathleen Sebelius, secretary f Health and Human Services; Michael J. Astrue, cmmissiner f Scial Security; Charlene M. Frizzera, administratr f the Centers fr Medicare & Medicaid Statistics and secretary, Bard f Trustees; the tw public trustee psitins are currently vacant. A cpy f the 2009 trustees reprt is nline at 5

6 Recent EBRI Research n Medicare and Retiree Health Savings Needed t Fund Health Insurance and Health Care Expenses in Retirement: Findings frm a Simulatin Mdel, EBRI Issue Brief n. 317 (May 2008): Savings Needed t Cver Health Insurance and Health Care Expenses in Retirement, EBRI Issue Brief n. 295 (July 2006): The Impact f the Ersin f Retiree Health Benefits n Wrkers and Retirees, EBRI Issue Brief n. 279 (March 2005): Cntrlling Health Csts and Imprving Health Care Quality fr Retirees, EBRI Issue Brief n. 278 (February 2005): Health Care Expenses in Retirement and the Use f Health Savings Accunts, EBRI Issue Brief n. 271 (July 2004): Medicare Prgram Takes n Mre Incme-Related Features, EBRI Ntes, n. 5 (May 2004): Fr additinal detailed infrmatin n the Medicare prgram, g t which is maintained by the Centers fr Medicare & Medicaid Services, part f the U.S. Department f Health and Human Services. Surce: U.S. Department f Health and Human Services, Centers fr Medicare & Medicaid Services, 2009 Annual Reprt f the Bard f Trustees f the Federal Hspital Insurance and Federal Supplementary Medical Insurance Trust Fund (Washingtn, DC: U.S. Gvernment Printing Office, 2009). 1 Other incme includes recveries f amunts reimbursed frm the trust fund that are nt bligatins f the trust fund, receipts frm the fraud and abuse cntrl prgram, and a small amunt f miscellaneus incme. FS 208 6