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Wednesday, October 2, 2013

Medicare Financing

Patricia A. Davis
Specialist in Health Care Financing

Medicare is the nation’s health insurance program for individuals aged 65 and over and certain disabled persons. Medicare consists of four distinct parts: Part A, or Hospital Insurance (HI); Part B, or Supplementary Medical Insurance (SMI); Part C, or Medicare Advantage (MA); and Part D, the prescription drug benefit. The Part A program is financed primarily through payroll taxes levied on current workers and their employers; these are credited to the HI trust fund. The Part B program is financed through a combination of monthly premiums paid by current enrollees and general revenues. Income from these sources is credited to the SMI trust fund. Beneficiaries can choose to receive all their Medicare services, except hospice, through managed care plans under the MA program; payment is made on their behalf in appropriate parts from the HI and SMI trust funds. A separate account in the SMI trust fund accounts for the Part D drug benefit; Part D is financed through general revenues, beneficiary premiums, and state contributions. The HI and SMI trust funds are overseen by a board of trustees that makes annual reports to Congress.

The 2013 report of the Medicare Board of Trustees estimates that the HI trust fund will become insolvent in 2026, two years later than it had predicted in the 2012 report. Because of the way it is financed, the SMI fund cannot face insolvency; however, the trustees project that SMI expenditures will continue to grow rapidly, and thus place increasing demands on Medicare beneficiaries and all taxpayers. The trustees estimate that total Medicare costs will increase from 3.6% of GDP in 2012 to 6.5% in 2087.

Although the Medicare trustees report that the financial outlook for the Medicare program appears to have improved as a result of changes made by the Patient Protection and Affordable Care Act as amended (ACA, P.L. 111-148), they caution that the projections in the report are somewhat uncertain, due to the potential for future expenditure reductions not to materialize. In addition, the report projections assume that reductions in physician payment rates scheduled under current law will occur, although these reductions have usually been overridden by Congress. As such, as it has done each year subsequent to the enactment of ACA, the Centers for Medicare & Medicaid Services (CMS) Office of the Actuary issued a supplemental analysis that provides projections based on an illustrative alternative to current law.

Date of Report: September 19, 2013
Number of Pages: 37
Order Number: R41436
Price: $29.95

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