Reforming Medicare: Options, Tradeoffs, and Opportunities

2. A Medicare Primer

Since its enactment in 1965, Medicare has expanded from two to four components. The first offerings were Hospital Insurance (HI, or Part A) and Supplementary Medical Insurance covering physicians and other selected services (SMI, or Part B).1 In 1982 Congress added coverage of managed care plans (now named Medicare Advantage, or Part C). In 2003 it approved coverage of outpatient prescription drugs through privately administered insurance plans (Part D). The basic structure of Parts A and B has not changed since enactment. It remains a fee-for-service system that allows enrollees to select virtually any licensed provider and receive any covered service they and their providers deem appropriate. In contrast, most private insurance plans have adopted administrative practices to hold down costs, including care management , utilization reviews, and selective provider networks to leverage lower prices. The program has changed in several other important respects, however. In 1972 eligibility for Medicare benefits was extended to those receiving Social Security Disability Insurance pensions (after a two-year waiting period) and to victims of end-stage renal disease.2 In a pioneering move, it introduced prospective payment of most hospitals, physicians, and other providers in place of reimbursements based largely on costs or 12 A Medicare Primer 2 A Medicare Primer 13 customary charges. In addition, it offered new benefits, including hospice care (first covered in 1983) and various preventive services, such as screening for colon and breast cancer and flu shots. Who Is Covered In 2007 Medicare covered an average 44.1 million people a month—36.9 million elderly, 7.2 million people with disabilities, and approximately 223,000 with renal failure.3 Expenditures for that year totaled $432 billion.4 Before Medicare, only about half of the elderly had health insurance. Coverage was often narrow.5 People whose health had deteriorated could have their coverage canceled or premiums increased. Initially, Medicare covered everyone aged sixty-five or older. Part A now covers anyone aged sixty-five or older who has worked for ten years or more in employment subject to the Medicare payroll tax.6 It also covers their spouses or former spouses at age sixty-five. Most of the Medicare population is female, white, between the ages of sixty-five and eighty-four, in good or fair health, and living with a spouse. Part A eligibles may also enroll in Part B, which covers primarily outpatient and physician care. Anyone enrolled in Part A or Part B may buy subsidized prescription drug coverage under Part D. 7 Most Part B enrollees must pay a premium that covers just one-fourth of Part B costs. The basic premium was $96.40 a month in 2008.8 The 75 percent subsidy helps explain why 94 percent of those eligible to buy Part B coverage do so.9 Beginning in 2007, upper-income beneficiaries were required to pay premiums covering more than one-fourth of the cost of their insurance: the income threshold was $80,000 for single Part B participants and $160,000 for couples.10 At that point, only about 4 percent of Part B enrollees faced increased premiums.11 The increased premiums had little impact on participation in Part B, at least initially, because few people were affected and because Medicare enjoys other marketing advantages.12 Participation may decline, however, if either the number of seniors facing extra premiums grows rapidly or the premium itself begins to constitute a sizable share of their income. Roughly one Medicare beneficiary in five elects to enroll in a Medicare Advantage (MA) plan rather than receive care through the traditional feefor -service delivery system.13 To be eligible for an MA plan, a beneficiary must be enrolled in Medicare Parts A and B, must live in the service area of the MA plan, and cannot have end-stage renal disease at the time of 14 A Medicare Primer enrollment.14 Medicare pays these plans fixed monthly amounts per enrollee that vary according to the participant’s age, sex, health characteristics, and county of residence. Historically, enrollees in Medicare Advantage were healthier and younger than those who remained in traditional Medicare, although the differences are narrowing as more beneficiaries enroll in private plans. Not surprisingly, Medicare spends the most on the sick, old, and poor (see table 2-1). Overall, Medicare spending accounted for 45 percent of total spending on medical and long-term...