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October 2001

The Basics of Medicare
Updated With the 2001 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, according to the 1997 Board of Trustees' Report, had been projected for 2001. Under this legislation, fund exhaustion is postponed until 2029, based on the intermediate assumptions used in the 2001 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 premium payments.

  • HI payroll taxes for 2001 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 2002 and afterward, the payroll tax is scheduled to be 2.9 percent. In 2000, total income for the HI trust fund was $167.2 billion: $144.4 billion was from payroll taxes, $8.8 billion was from taxation of Social Security benefits, $11.7 billion was from interest and other income1, and $2.3 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 2000, 34 million elderly and 5 million disabled individuals were enrolled in Part A, and 33 million elderly and 5 million disabled individuals were enrolled in Part B.

  • In 2000, the average amount reimbursed per enrollee in Part A was $3,272. The average amount reimbursed per enrollee in Part B was $2,384.

  • Administrative costs for the Medicare program are low. In 2000, administrative costs for Part A were $2.6 billion or 2 percent of expenditures, and for Part B they were $1.8 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 2000, 6.9 million Medicare beneficiaries (approximately 18 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 Medicare+Choice Program.

  • 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 rate.

  • 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 Paul H. O'Neill acts as the Managing Trustee and Michael McMullan, Acting Deputy Administrator of the Health Care Financing Administration, acts as the Secretary of the Medicare trust funds. The other trustees include: Elaine Chao, Secretary of Labor; Tommy G. Thompson, Secretary of Health and Human Services; William A. Halter, Acting Commissioner of Social Security; John L. Palmer; and Thomas R. Saving.

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).

1Other income includes recoveries of amounts reimbursed from the trust fund that are not obligations of the trust fund, receipts from the fraud and abuse control program, and a small amount of miscellaneous income.

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