The Basics of Medicare
Updated With the 2000 Board of Trustees Report
- In 1965, Title 18, Health
Insurance for the Aged, of the Social Security Act
created 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. All state and
local government employees hired after Dec. 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, or as is currently the case,
paying off government debt. 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 significant 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 Balanced Budget Act of 1997
contained numerous provisions affecting the Medicare
program. These provisions were designed in part to
postpone the imminent depletion of the HI trust fund,
which had been projected for 2001. Under this
legislation, fund exhaustion is postponed until 2025,
based on the intermediate assumptions used in the Board
of Trustees' report.
- 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
- HI payroll taxes for 2000 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 Jan. 1, 1994. For years 2001 and
afterward, the payroll tax is scheduled to be 2.9
percent. In 1999, total income for the HI trust fund was
$151.6 billion: $132.3 billion was from payroll taxes,
$6.6 billion was from taxation of Social Security
benefits, $9.8 billion was from interest income, and $2.9
billion was from miscellaneous revenue.
- 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 1999, 34 million elderly and 5
million disabled individuals were enrolled in Part A, and
32 million elderly and 5 million disabled individuals
were enrolled in Part B.
- In 1999, the average amount
reimbursed per enrollee in Part A was $3,310. The average
amount reimbursed per enrollee in Part B was $2,178.
- Administrative costs for the
Medicare program are low. In 1999, administrative costs
for Part A were $1.9 billion or 1 percent of
expenditures, and for Part B they were $1.6 billion or 2
percent of expenditures.
- The Medicare+Choice Program was
created by Congress in the Balanced Budget Act of 1997 to
allow more types of health insurance plans, including
managed care plans, to serve Medicare beneficiaries. In
1998, 6.2 million Medicare beneficiaries (16 percent of
Medicare beneficiaries) were enrolled in a Medicare HMO.
Since 1998, most HMO contracts with the federal Health
Care Financing Administration have operated under the
- In 1999, 41 Medicare+Choice
organizations chose not to renew their Medicare+Choice
contracts, and 58 reduced their service areas for year
2000. As a result of those business decisions, more than
327,000 Medicare beneficiaries were affected and about
79,000 were left with no Medicare managed care option.
- In 2000, 65 Medicare+Choice
organizations chose not to renew their Medicare+Choice
contracts, and 53 reduced their service areas for year
2001. As a result of those business decisions, more than
934,000 Medicare beneficiaries were affected and about
159,000 were left with no Medicare managed care option.
- Using 2000 enrollment (to account
for generally larger enrollment in higher payment areas),
the monthly enrollment-weighted average payment per
member in 2001 is estimated to be about $573. The
weighted average payment rate in 2001 for counties
affected by nonrenewals is estimated to be about $541, or
about 95 percent of the national weighted average payment
- Although enrollees in lower
payment-rate areas are more likely to be affected by
nonrenewals, beneficiaries in higher payment areas are
also affected. About one-third of enrollees in counties
with the floor payment rate of $415 in 2001 are affected
by nonrenewals. About 18 percent of enrollees living in
counties with a payment rate of less than the national
enrollment weighted average are affected by withdrawals,
compared with about 11 percent of beneficiaries in
counties with a higher than average payment rate.
- Treasury Secretary Lawrence H.
Summers acts as the Managing Trustee and Nancy-Ann Min
DeParle, Administrator of the Health Care Financing
Administration, acts as the Secretary of the Medicare
trust funds. The other trustees include: Alexis M.
Herman, Secretary of Labor; Donna E. Shalala, Secretary
of Health and Human Services; Kenneth S. Apfel,
Commissioner of Social Security; Stephen G. Kellison,
Chief Actuary of The Variable Annuity Life Insurance
Company; and Marilyn Moon, an Economist at the Urban
For more information, contact Ken McDonnell (202) 775-6342,
Source: Employee Benefit Research Institute, EBRI Databook
on Employee Benefits, fourth edition; and U.S. Social
Security Administration, 2000 Annual Report of the Board of
Trustees of the Federal Hospital Insurance Trust Fund and, 2000
Annual Report of the Board of Trustees of the Federal
Supplementary Medical Insurance Trust Fund (Washington, DC:
U.S. Government Printing Office, 2000).