May 1997 Fact Sheet
The Basics of Medicare
In 1965, Title 18, "Health Insurance for the Aged," of the Social Security
Act created what is known as the Medicare program. Medicare consists of two parts: Part A,
Hospital Insurance (HI) covers hospital services and some home health care and skilled
nursing facility services, and Part B, Supplemental Medical Insurance (SMI), covers
physician care, outpatient hospital services, and independent laboratory services. In
1972, the Medicare program was expanded to include disabled persons who qualified for
benefits under the Disability Insurance (DI) program and certain individuals with
end-stage renal (kidney) disease. In 1985, all state and local government employees hired
after December 31, 1985, were included in the program.
Currently, the U.S. Department of the Treasury credits the Medicare and Social Security
trust funds with any annual excess of Social Security and Medicare tax revenues over the
amount spent for current benefits. By law, these assets must be invested in special
securities issued by the Treasury. The government then spends these "assets" to
ease fiscal pressures on other programs. The trust fund surpluses are not reserved for
future Social Security and Medicare benefits but are bookkeeping entries showing how much
the Social Security and Medicare programs have lent to the Treasury (or alternatively,
what is owed to Social Security and Medicare, including interest, by the Treasury). When
the trust funds go into negative cash flow, the Treasury must start repaying the money.
For budgetary purposes the date on which the trust funds go into negative cash flow
(i.e., the benefit payments exceed the income from payroll taxes and the taxation of
benefits) is more important than the insolvency date (i.e., the date on which the trust
fund is projected to exhaust its funds and be unable to pay benefits on time and in full).
This date is more important because it marks the point at which the government must
provide cash from general revenues to the programs rather than receive surplus cash from
them to fund other current spending.
The HI trust fund is currently experiencing negative cash flow. Under current law,
projected HI tax income will meet a declining share of expenditures, projected to equal 84
percent of expenditures in 1997 and 74 percent in 2001 (when the trust fund is estimated
to be exhausted).
The SMI trust fund is financed on a year-by-year basis. The SMI program derives its
revenues from premium payments by beneficiaries and general revenues from the federal
budget. Under current law, no more than 25 percent of SMI's revenues can come from premium
HI payroll taxes for 1997 were based on a combined employer/employee rate of 2.9
percent. The Omnibus Budget Reconciliation Act of 1993 completely removed any wage base
limit for the HI payroll tax, effective January 1, 1994. For years 1997 and afterward the
payroll tax is scheduled to be 2.9 percent. In 1996, $124.6 billion was collected for the
HI trust fund.
Medicare serves the elderly and disabled workers who qualify for DI benefits.
Enrollment in Part A (HI) is mandatory, while enrollment in Part B (SMI) is voluntary. In
1996, 33 million elderly and 5 million disabled individuals were enrolled in Part A, and
32 million elderly and 4 million disabled individuals were enrolled in Part B.
In 1996, the average amount reimbursed per enrollee in Part A was $3,400. The average
amount reimbursed per enrollee in Part B was $1,902.
Administrative costs for the Medicare program are low. In 1996, administrative costs
for Part A were 1 percent of expenditures, and for Part B they were 3 percent of
Treasury Secretary Robert E. Rubin acts as the Managing Trustee and Bruce C. Vladeck,
Administrator of the Health Care Financing Administration, acts as the Secretary of the
Medicare trust funds. The other trustees include: Cynthia A. Metzler, Acting Secretary of
Labor; Donna E. Shalala, Secretary of Health and Human Services; John J. Callahan, Acting
Commissioner of Social Security; Stephen G. Kellison; and Marilyn Moon.
For more information, contact Ken McDonnell (202) 775-6342, e-mail: firstname.lastname@example.org,
Paul Fronstin (202) 775-6352, e-mail: email@example.com.
Source: EBRI Databook on Employee Benefits, fourth edition, forthcoming.