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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: