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, has become 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. This program was later relabeled Medicare Advantage (MA), and MA plans now enroll almost half of all Medicare beneficiaries.

Congress added a prescription drug benefit (Part D) to Medicare with the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), reflecting the increased importance and costs of prescription drugs in treating both acute and chronic health care conditions. Drug coverage is available through MA plans or through stand-alone prescription drug plans.

While the MMA prohibited Medicare from ‘interfering’ with drug price negotiations between manufacturers, pharmacies, and drug plan sponsors, Congress recently enacted legislation—the Inflation Reduction Act (IRA) of 2022—which amended this provision and requires Medicare to negotiate prices with drug companies for a limited number of brand-name drugs. The legislation also penalizes drug companies if the prices of their drugs sold to Medicare rise faster than inflation. Both changes are intended to save Medicare money and to pass on those savings to beneficiaries. Perhaps most significantly for beneficiaries, the IRA sets a hard cap on out-of-pocket (OOP) spending for Part D. This change will bring great relief to elderly individuals and people with disabilities who rely on prescription drugs.

Other incremental changes to Medicare’s plan design have been made since 2003, including adding benefits for wellness, prevention, and hospice care. Recently, Medicare also slightly expanded the definition of covered ‘medically necessary’ dental services to include additional health conditions that require dental services before medical treatment, such as certain surgeries, but this change does not provide regular dental coverage. To date, further attempts to modernize Medicare’s benefit design, including coverage for dental, vision, and hearing care, and to cap out-of-pocket expenditures for Parts A and B, have not been successful.

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