Medicare

Medicare is a social insurance program that provides health insurance coverage to about 60 million Americans- 51.2 million ages 65 and older and 8.8 million persons with disabilities- and is one of the nation’s largest sources of health coverage. A program through which close to 20 percent of U.S. health expenditures flow, Medicare provides coverage for about one of every six people residing in the country. Click here to view the Medicare Overview infographic.

For more information on how Medicare is designed and operates, keep reading below or click here to download the Medicare Primer.  

The official Medicare website is www.Medicare.gov.

The History of Medicare

The Medicare program was signed into law in 1965 to provide health coverage and increased financial security for older Americans who were not well served in an insurance market characterized by employment-linked group coverage. Many of its architects thought Medicare for the elderly was the first step toward eventually achieving health care coverage for all. Although it wasn’t, the program has remained quite stable over time, with modest expansions in coverage and eligibility.

At the time of Medicare’s enactment, insurance for hospital stays was typically the primary insurance benefit provided by employers, since physician services and prescription drugs represented a less costly and more predictable component of spending. Therefore, hospital coverage (Medicare Part A) constituted Medicare’s principal benefit, automatically enrolling eligible beneficiaries, with coverage for physician services (Part B) offered as optional, supplementary insurance. Part B coverage of physician and other outpatient services, however, is a critical part of the program with almost universal enrollment among traditional Medicare enrollees.

As private health insurance evolved to a more managed-care approach with an integrated benefit design, including both hospital and physician services, the Medicare Plus Choice program was enacted in 1997 with the addition of Medicare Part C that allowed Medicare HMOs to participate. Under the 2003 Medicare prescription Drug, Improvement, and Modernization Act (MMA), the Medicare Plus Choice program was relabeled as Medicare Advantage (MA), and MA plans now enroll more than one-third of Medicare beneficiaries. Also in the MMA of 2003, reflecting the increased importance and costs of prescription drugs in treating both acute and chronic health care conditions, Congress enacted the Part D prescription drug benefit. Drug coverage is available through MA plans or through stand-alone prescription drug plans. Other incremental changes to Medicare’s plan design have been made, including adding benefits for wellness, prevention, and hospice care. To date, further attempts to update Medicare’s benefit design and cap OOP expenditures for Parts A and B have not been successful.

 

For more on the history of Medicare, see:

Eligibility and Enrollment

Individuals are eligible to enroll once they reach age 65. Persons under the age of 65 who have received Social Security Disability Insurance (SSDI) benefits for at least 24 months are automatically enrolled in Medicare and are entitled to premium-free Part A benefits. Individuals receiving Social Security retirement benefits are automatically enrolled in traditional Medicare (Part A and Part B) once they turn 65. Enrollment in Medicare is also automatic after the 24-month waiting period for people who receive SSDI benefits.

The waiting period is waived for individuals who have qualified for SSDI due to amyotrophic lateral sclerosis. Individuals diagnosed with end-stage renal disease (ESRD) are eligible for Medicare without first having to receive SSDI benefits. In addition, individuals who were diagnosed with a specific lung disease or type of cancer and lived in an area subject to a public health emergency declaration by the Environmental Protection Agency for a specified period before diagnosis are entitled to Part A benefits and eligible to enroll in Part B.

Traditional Medicare

The Medicare program organizes benefits into four separate components, each with its own cost-sharing and premium requirements. Parts A and B together are referred to as traditional fee-for-service (FFS) Medicare, in which the federal government directly pays for covered health services. In 2018, 59.6 million people were enrolled in Medicare Part A, which represented 99 percent of individuals eligible to enroll. Part B had enrollment of 54.6 million (91 percent of individuals eligible to enroll), the vast majority of whom were also enrolled in Part A.

 

Part A

Medicare Part A covers inpatient hospital services, including room and board, hospital facility use, inpatient drugs/biologics and supplies, and diagnostic and therapeutic items. Part A also covers limited periods of patient stays in post-hospital skilled nursing facilities and covers hospice care and home health care following a stay in a hospital/skilled nursing facility. Part A includes a deductible and coinsurance for hospital inpatient stays and daily coinsurance payments for skilled nursing facility care.

 

Table A-1: Medicare Part A Deductibles and Coinsurance, 2020

Hospital inpatient Skilled nursing facility
Days 0-60 Deductible $1,408 Days 0-20 No charge N/A
Days 61-90 Daily coinsurance $352/day Days 21-100 Daily coinsurance $176/day
Days 91-150 (lifetime reserve days) Daily coinsurance $704/day Days 101 and over Beneficiary responsible for all costs Unlimited
Days 151 and over Beneficiary responsible for all costs Unlimited      

 

Part A is primarily financed by a 1.45% payroll tax on all wage and salary income for the worker and the employer. Self-employed persons pay the full 2.9% of earnings. A vast majority of enrollees are eligible for premium-free Part A benefits if they or their spouse are eligible for Social Security payments and have paid Medicare eligible payroll taxes for 40 quarters (10 years). Individuals ages 65 and older without 40 quarters of coverage may choose to enroll and pay the full Part A monthly premium; however, 99 percent of Medicare beneficiaries do not pay a Part A premium.

 

Part B

Medicare Part B is a voluntary program that helps pay for doctor bills and other outpatient health care. 

It covers physician services, outpatient hospital services, and inpatient prescription drugs/biologics, durable medical equipment, clinical laboratory and diagnostic tests, and other medical services, including preventive care, physical and occupational therapy, speech–language pathology therapy, and ambulance care. Part B covers home health care when such care does not follow a stay in a hospital or skilled nursing facility. However, Part A covers all home health care for Medicare beneficiaries who lack Part B coverage. Part B enrollees are subject to a deductible of $198 in 2020 and a standard coinsurance of 20 percent for most covered services, except for clinical laboratory tests, home health agency services, and preventive care services

The standard monthly premium for Part B coverage increased from $135.50 in 2019 to $144.60 in 2020, which reflects an estimated 25 percent of program costs. Since 2007, individuals with modified adjusted gross incomes that exceed a specific threshold are subject to a higher income-related premium that reflects a greater percentage of estimated program costs. Depending on income level, high-income beneficiaries’ premiums are set to cover 35 percent to 85 percent of the expected per capita Part B costs for the year. The highest income adjusted monthly premium is $491.60 in 2020.

Additionally, beneficiaries who enroll in Part B after their initial enrollment period pay a premium surcharge unless they are employed and receive employer-sponsored health insurance benefits. In 2018, 1.4 percent of Medicare Part B enrollees were subject to this penalty. The penalty is waived for beneficiaries eligible for a special enrollment period, such as when an individual has previously had employer coverage.

Part C: Medicare Advantage

Overview of Medicare Advantage Plans

Medicare beneficiaries may elect to receive Part A and Part B benefits through a private Part C Medicare Advantage (MA) plan, which offers coverage with an integrated benefit package similar to private insurance coverage. The share of beneficiaries enrolled in MA has grown over time, with 21.3 million (35.6 percent) of Medicare beneficiaries receiving benefits through an MA plan in 2018.

Unlike traditional Medicare, MA plans include networks that limit enrollees to a set of providers in a specific geographic area in order to offer enrollees lower premiums, and they can include managed care mechanisms. MA plans may offer benefits to Medicare enrollees beyond traditional Medicare coverage, such as dental or vision coverage, and/or lower cost-sharing requirements. Employers and unions may sponsor MA plans for current and retired employees or members. These plans can operate under somewhat different rules, such as being permitted to restrict eligibility to employees and members and to provide customized benefits. Additionally, MA offers Medicare special needs plans, which provide coordinated care plans for individuals with specific needs, including institutionalized individuals, individuals dually eligible for Medicare and Medicaid, and individuals with specific chronic conditions.

 

Medicare Advantage Payments

MA plans receive a per person monthly payment adjusted to reflect the demographics and health history of enrollees. The amount paid to MA plans is not adjusted by the volume of services that an enrollee uses, but MA may pay providers on an FFS basis. The monthly payment made to an MA plan is based on a comparison of that plan’s estimated costs of providing all Part A and Part B benefits (the plan’s bid) with the maximum amount that traditional FFS Medicare will pay for the benefits in the plan’s service area (the benchmark). If the plan bid is lower than the benchmark, plans receive a portion of that difference in a rebate that must be passed on to beneficiaries, either through additional benefits, lower cost-sharing requirements, or a lower monthly premium. If the plan bid is greater than the benchmark, enrollees in that plan must pay an additional premium amount equal to the difference between the bid and the benchmark. The MA benchmark is set between 95 percent and 115 percent of FFS Medicare costs, depending on whether the plan is located in a high-cost or low cost FFS area. Payments to MA plans are adjusted through star ratings (1–5, with 5 being the highest) to reflect a plan’s performance on quality measures. Plans receiving a star rating of 4.0 or above receive a quality bonus payment.

Part D: The Medicare Drug Benefit

Prescription Drug Plans

Beneficiaries in Part A and/or Part B or in an MA plan without drug coverage are eligible to enroll voluntarily in prescription drug plans (PDPs) under Part D. Part D enrollment was 45.8 million in 2018. Medicare heavily regulates the PDP formularies, specifying what drugs must be covered within therapeutic classes. All private drug plans, including Part D PDPs and MA–PDs, must follow a standard coverage benefit structure or offer an actuarially equivalent plan, although plan sponsors may also offer enhanced benefit plans in addition to a standard PDP. Of the PDP enrollees in 2018, almost none were in a standard plan, 60 percent of PDP enrollees were in an actuarially equivalent plan, and 40 percent were in an enhanced plan. In 2020, all PDPs are offering an alternative benefit design. The standard Part D plan cost-sharing is shown in Table A-2. Previously, beneficiaries were exposed to a coverage gap called the “doughnut hole,” but in 2020 that has ended and beneficiaries are responsible for a 25% coinsurance during the former coverage gap phase.

Table A-2: Medicare Part D Standard Benefit, 2020

Benefit phase Total drug costs Cost-sharing requirements Total beneficiary out-of-pocket spending
Deductible period $0-435 Enrollees: 100% $435
Initial coverage period $435-4,020 Enrollees: 25%
Plans: 75%
$435-1,005*
Former coverage gap $4,020.00-9,719.38 Brand name
Manufacturer discount: 70%
Enrollees: 25%
Plans: 5%
Generic
Enrollees: 25%

Plans 75%
$1,005-6,350
Catastrophic coverage $9,719.38+ Enrollees: 5%
Plans: 15%
Medicare: 80%
$6,350+

 

Medicare Part D pays private prescription drug plans through a competitive bidding process in which the standard enrollee premium is based on the national average bid, and actual plan premiums reflect differences between the bid and the national average. Medicare pays PDPs a risk-adjusted monthly per capita amount reflecting that plan’s bid during a given year. Part D plan sponsors negotiate payments with drug manufacturers, set their own formularies, and determine cost-sharing amounts. The standard enrollee monthly premium is estimated to be $42.05 in 2020, up from $33.19 in 2019. Similar to Part B, beneficiaries above a specific income threshold are subject to a higher income-related premium that reflects a greater percentage of estimated per capita program costs. This adjustment ranges from 35 percent to 85 percent of the national average cost of providing Part D benefits.

Gaps in Medicare and Supplemental Coverage

Traditional Medicare does not cover long-term care services and supports and dental, vision, and hearing services. However, Medicare beneficiaries are at risk of incurring significant OOP costs for covered services as well as for services that aren’t covered, such as dental, vision, and long-term care. Approximately 81 percent of traditional Medicare enrollees have some form of supplemental coverage. Approximately one in five beneficiaries is fully “dually eligible,” qualifying for Medicaid coverage in their state, which covers cost sharing, the premium for Part B, and provides benefits not covered under Medicare. Many people with low incomes who do not qualify for Medicaid in their states may still qualify for cost-sharing assistance that reduces or eliminates their OOP costs, thereby reducing potential cost-related barriers to accessing services.

Many beneficiaries have private supplemental coverage either through a former employer or private Medigap policies that may fully or partially cover Part A and Part B cost-sharing requirements. Employer-sponsored insurance (ESI) coverage provides supplemental coverage to approximately 30 percent of Medicare beneficiaries. In 2019, only 28 percent of all large firms (200 or more workers) that offered ESI coverage to current employees also offered retiree health benefits. The availability of retiree coverage differs by firms’ characteristics: Firms offering ESI benefits are more likely to offer retiree health benefits if they have at least some union workers, a larger share of high-income workers, or a larger share of older workers. Of these firms, 91 percent offered health benefits for early retirees (individuals retiring before the age of 65), and 61 percent offered health benefits to individuals ages 65 and older in 2019.

Approximately 29 percent of traditional Medicare beneficiaries in 2016 were enrolled in Medicare supplemental insurance plans to pay health costs not covered by Medicare, popularly known as Medigap. The benefits offered by these plans are standardized by the Centers for Medicare & Medicaid Services, but significant variation occurs in the operation of Medigap marketplaces across states. Beneficiaries are eligible to enroll in a Medigap plan during their open enrollment period (the first six months of their enrollment in Part B). During this open enrollment period, Medigap coverage must be offered on a guaranteed-issue basis, meaning Medigap insurers cannot deny a policy to any applicant based on age, gender, or health status. In addition, for Medigap coverage purchased during the open enrollment period, premiums cannot vary by health status. Most states allow Medigap insurers to practice medical underwriting outside of this open enrollment period and deny coverage or charge higher premiums to beneficiaries with preexisting conditions. Federal law does not require Medigap insurers to sell policies to beneficiaries who qualify for Medicare based on long-term disability or to any beneficiaries switching from a Medicare Advantage plan to traditional Medicare during the annual open enrollment period. States have the flexibility to go beyond these minimum standards for Medigap policies.

Medicare coordinates benefit coverage with other coverage sources. While in some circumstances, Medicare is the secondary payer, in most instances, Medicare is the primary payer, with any supplemental coverage providing secondary, wraparound coverage. The Medicare Secondary Payer provisions specify that Medicare is the primary payer for beneficiaries with supplemental coverage through a group health insurance plan under the following conditions: for individuals 65 years or older enrolled in a group health plan through an employer with fewer than 20 employees; for persons with a disability who are younger than 65 enrolled in a plan through an employer with fewer than 100 employees; and for people 65 years or older with retiree coverage through a former employer. Medicare is the secondary payer for beneficiaries with supplemental coverage from a group health insurance plan for individuals ages 65 and older if the employer has more than 20 employees and for people under the age of 65 with a disability if the employer has 100 employees or more. Medicare is the primary payer for beneficiaries dually covered by Medicare and Medicaid and for individuals with a private Medigap plan.

 

For a more detailed discussion, see:

Premium and Cost-Sharing Assistance

Several cost assistance programs currently exist within Medicare. Medicare beneficiaries with low incomes and limited resources may qualify for one of three Medicare Savings Programs to assist with premiums and OOP expenses. The Qualified Medicare Beneficiaries (QMB) program is available to beneficiaries with incomes at or below the federal poverty level (FPL). QMB individuals are entitled to receive assistance for all Medicare Part A and Part B cost-sharing charges (including the Part B premium, all deductibles, and all coinsurance), paid by Medicaid. The Specified Low-Income Medicare Beneficiaries (SLMB) program is available to individuals with income greater than 100 percent but less than 120 percent of FPL. Beneficiaries who qualify for the SLMB program have their Medicare Part B premium paid by Medicaid. The Qualifying Individuals (QI) program is for individuals with income between 120 percent and 135 percent of FPL. As shown in Table A-3, Medicaid pays the Medicare Part B premium for these individuals; however, 100 percent of the payment comes from federal government allocations to states. Funds for the QI program come from the Medicare Supplementary Medical Insurance (SMI) Trust Fund.

 

Table A-3: Medicare Savings Programs for Dual-Eligible Beneficiaries, 2019

Program Monthly income limit Asset resources limit Costs paid by Medicaid
Qualified Medicare Beneficiaries <100% of FPL
Single: $1,061
Couple: $1,430
Single: $7,730
Couple: $11,600
All Part A and Part B premiums, deductibles, and coinsurance
Specified Low-Income Medicare Beneficiaries 100% to <120% of FPL
Single: $1,061-$1,269
Couple: $1,430-$1,923
Single: $7,730
Couple: $11,600
Part B premium
Qualifying Individuals 120% to <135% of FPL
Single: $1,269-$1,426
Couple: $1,711-$1,923
Single: $7,730
Couple:11.600

Part B premium

 

Medicare Part D also has cost-sharing and premium assistance programs. Medicare Part D provides low-income subsidies (LIS) to certain beneficiaries with limited incomes and resources to help them pay Part D premiums, cost-sharing amounts, and other OOP expenses. Individuals who receive assistance through an MSP, receive full Medicaid benefits, and/or receive Social Security income cash assistance, are eligible for a full LIS. Eligible enrollees have their monthly premium paid up to a certain benchmark plan amount. Individuals with the full LIS also have no deductible, minimal cost sharing during the initial coverage period and during the coverage gap, and no cost sharing above the catastrophic threshold. Individuals with an income below 150 percent of FPL and limited assets may qualify for a partial low-income subsidy. Individuals may receive premium assistance equal to 25 percent to 75 percent of the cost of full LIS premium assistance, determined by an income based sliding scale (Congressional Research Service 2018).

Medicare Financing

The primary source of funding for Part A is a payroll tax contribution of 1.45 percent on both employers and employees, with self-employed workers paying the full 2.9 percent. The tax revenues are added to the Hospital Insurance (HI) Trust Fund along with interest on federal securities held by the trust fund, federal income taxes paid on Social Security benefits, and premiums paid by enrollees not entitled to premium-free Part A. In 2018, total revenue accrued by the HI Trust Fund was $306.6 billion, total expenditures accounted for $308.2 billion, and the HI assets (compiled surpluses from previous years) were reduced by $1.6 billion. The assets were $200.4 billion at the beginning of 2019, which represents about 62 percent of expenditures. The HI assets are predicted to be depleted in 2026, at which point Medicare revenues will cover 89 percent of expenditures (in 2026), declining to 77 percent by 2046, and rising to 83 percent by 2093.

Part B benefits are financed through the Supplementary Medical Insurance (SMI) Trust Fund and are not at risk of insolvency because financing is derived through beneficiary premiums with general revenues filling the gap. Beneficiary premiums are set to finance 25 percent of expected program costs. Total revenue for the SMI Trust Fund in 2018 was $353.7 billion, and total expenditures were $337.2 billion, adding $16.5 billion to the SMI assets, which totaled $96.3 billion at the end of 2018. Payments and spending under MA (Part C) are set based on spending in traditional Medicare and are taken from the HI and SMI Trust Funds.

Medicare Part D is also financed through federal general revenues and beneficiary premiums. Beneficiary premiums are set to cover, on average, 25.5 percent of the cost of a standard Part D plan. Additional revenue comes from state “clawback” payments, which reflect a portion of the amounts that state Medicaid programs would otherwise have had to pay for dual-eligible enrollees’ drug coverage. Part D revenues are included in a separate account within the SMI Trust Fund. In 2018, total Part D expenditures were approximately $95.2 billion, and revenues were $95.4 billion.

 

For more information on Medicare’s financial future, see:

Why is Medicare Considered Social Insurance?

Social insurance (SI) programs protect individuals against certain forms of risk. The United States has a number of such programs, including Social Security, Unemployment Insurance, Workers’ Compensation, and Medicare, which protect people from risks such as old age, disability, job loss, work injuries, and the need for health care.

Medicare ensures that older Americans and people with disabilities have access to health care. It protects against illness-related financial insecurity. It is “insurance” because it pools risk. It is “social” because it protects members of society who would not otherwise be able to purchase insurance.

 

The following are seven characteristics that distinguish SI as it applies to Medicare:

1. Universality: To manage risk, SI programs are inclusive of the eligible population. In the case of Medicare, Part A is automatic for many workers and retirees. Participation in Part B is voluntary upon eligibility, but participation is incentivized to achieve near-universal enrollment.

2. Government Sponsorship: Governments create and oversee SI programs. The programs may be administered by a public agency (the Social Security model), by designated private (or quasi-private) institutions, or (as Medicare is) by a combination of public agencies and private contractors.

3. Contributory Finance: The resources to run SI programs are raised through contributions by employees and employers, dedicated taxes, or other earmarked revenues. Medicare Part A is funded mainly by flat-rate payroll tax contributions. Part B relies on general revenues and beneficiary premiums.

4. Eligibility Derived From Prior, Covered Work: Part A eligibility is dependent on an individual having worked for a minimum period in jobs where the employer and employee have made payroll tax contributions, although spouses of age-eligible beneficiaries may also enroll. Eligibility for Part B requires enrollment in Part A plus payment of monthly beneficiary premiums that equal 25 percent of the Part B program’s costs. Both parts of Medicare also have special provisions for individuals who do not qualify on the basis of past contributions to buy Medicare coverage at its full actuarial cost.

5. Defined Benefits Prescribed in Law: Eligibility criteria and schedules of benefits are developed, announced, and applied to all participants. The provisions of the law and related regulations determine who gets benefits and how much they get. Congressional appropriations are not required to authorize spending money on these benefits.

6. Benefits not Proportional to Contributions: Because an individual’s benefits are not determined by the amount of his or her contributions, Medicare redistributes resources from higher- to lower-income groups.

7. Separate Accounting and Explicit Long-range Financing Plan: SI contributions are earmarked to pay the SI benefits. Governments typically keep separate accounts that permit comparisons of program receipts and program benefits, and they project program revenues and expenditures into the future.

 

For more information on Medicare’s role in society, see: