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As the largest publicly funded health care program, Medicare plays an essential role in insuring the needs of America's elderly and disabled populations. It remains one of the most popular federal programs, although it has been under considerable scrutiny since the 1980s because of its large share of the federal budget and rapid rates of expenditure growth. Initially, the program covered about 19 million persons who were sixty-five years of age and older. In 2000, over 39 million persons, nearly one in every eight Americans, were enrolled, and that number is projected to rise to nearly 78 million by 2030.

As enacted in 1965, Medicare offered coverage to all persons aged sixty-five and older. After that, eligibility was limited to persons sixty-five years of age and older who were eligible for some type of Social Security benefit, usually as a worker or dependent. In 1972, the program's scope was expanded to include persons who receive Social Security Disability Insurance, after meeting a two-year waiting period. Persons with permanent kidney failure who face costly kidney dialysis treatments were also added to the program. Despite warnings about creating a "disease of the month" approach to Medicare eligibility, no other groups have been added since 1972.

Because of its size—nearly $213 billion in spending in 1999—Medicare plays an important role in the overall health care system. Changes in Medicare's payment systems are often adopted by other insurers, and decisions by Medicare about coverage of new technologies are also closely watched. Further, subsidies for medical education and for hospitals serving a disproportionate number of low income patients or located in rural areas are provided through the Medicare program, even though these reflect broader health care issues.

MEDICARE'S COVERAGE

Medicare's benefit package has changed little since 1965, although changes in the way care is delivered have affected the size of the various components of that benefit package. Part A of Medicare, also called Hospital Insurance, covers inpatient hospital services, up to one hundred days of care in a skilled nursing facility following a hospital stay, and some hospice services. Part B of Medicare, Supplementary Medical Insurance, covers physician services, outpatient hospital care, laboratory services, and other ambulatory services. Home health care services—skilled care such as rehabilitation provided to persons who are homebound—have been subject to a number of changes in recent years; as of 2000 they were divided between the two parts of the program.

When Medicare began, it was dominated by inpatient hospital care, which accounted for about two-thirds of all spending under the program. But as care has moved out of the inpatient setting, Part B has expanded and now represents over 40 percent of spending, about the same as spending on inpatient hospital care. In addition, post-acute care—skilled nursing-facility care services and home health—has also increased in importance. But these benefits have also come under increased criticism for moving Medicare into the domain of long-term care services.

Part B is voluntary and requires a premium from those who choose to enroll. Because that premium represents only 25 percent of the costs of the benefit, however, most who are eligible choose to enroll in Part B. In addition to the premium, Medicare beneficiaries are required to pay an array of cost-sharing charges. Both parts have a deductible, and most services are subject to some type of coinsurance. This cost sharing, and the exclusion of some benefits (such as prescription drugs) from coverage, results in a benefit package that is less comprehensive than that available to many younger families. Consequently, a market for supplemental insurance has arisen, either supported by employers as part of a retirement package or purchased specifically by beneficiaries. This latter supplemental insurance is referred to as "Medigap."

Gaps in coverage for low-income beneficiaries are made up through Medicaid, a joint federal/state program for which most Medicare beneficiaries can qualify if they have limited financial resources. In addition, legislation passed in 1988 established a Qualified Medicare Beneficiary program to use Medicaid to further fill in the gaps. Later programs include the Specified Low Income Medicare Beneficiary program and a program for Qualified Individuals. These programs help fill in Medicare's cost sharing or premium requirements for persons with low incomes but who do not qualify for full Medicaid benefits. But participation is relatively low and varies across the states. Thus, the comprehensiveness of coverage for older Americans and eligible disabled persons varies considerably via this complicated environment of patchwork supplemental benefits.

Another way in which beneficiaries can obtain supplemental benefits is to opt out of traditional Medicare and enroll in a managed care plan. This option has been available for many years, but the Balanced Budget Act (BBA) of 1997 expanded its scope by creating a new Part C of Medicare—Medicare+Choice. In early 2000, about6.2 million beneficiaries—nearly 16 percent of all beneficiaries—participated in Medicare+Choice plans. Medicare+Choice moves Medicare away from its traditional role as the insurer and into a role as a purchaser of insurance. Beneficiaries who enroll in Medicare+Choice agree to get all of their care from a private plan. This plan, which is paid a fixed monthly amount on behalf of each enrollee, is usually a health maintenance organization (HMO) although other types of plans may also participate. These plans may offer benefits in addition to the basic Medicare benefit package, and they can afford to do so in part because of savings that arise from requiring beneficiaries to abide by a stricter set of rules, such as using only doctors, hospitals, and other health care providers who are on a prescribed list.

Most studies of Medicare's HMO program have suggested that plans have been overpaid, so that Medicare's contributions implicitly help subsidize additional benefits for those in private plans. As a result, some beneficiaries are better off, but Medicare then loses money on each enrollee. Changes made under the BBA were intended to reduce these overpayments, but the new restrictions have been controversial and may have contributed to a number of plans withdrawing from the Medicare+Choice system. Reforms of Medicare+Choice are likely to continue to be controversial.

Another consequence of the absence of a comprehensive Medicare benefit is the financial burden that beneficiaries face in paying for their own care. When the premiums that they pay for Part B and supplemental insurance are added to the direct expenses for care not covered by any insurance, older Americans pay about 20 percent of their incomes for health care (even excluding the costs of long-term care for persons in institutions). Enrollees in the Medicare+Choice program face smaller but not insignificant burdens. In 1965, when Medicare was instituted, the share of income that individuals paid for their care was about 19 percent. Medicare initially reduced that share, but it has gradually risen again over time as the costs of health care have gone up faster than the incomes of older Americans. Even with no changes in policy, the share of income spent on health will likely rise over time if health costs continue to outpace retirement incomes.

REFORM ISSUES

Because Medicare is projected to grow substantially as the baby boom generation reaches sixty-five years of age, it is likely to become an ever larger share of the federal budget and need additional revenues. Efforts to find ways to reduce spending on Medicare have been a high priority for politicians who do not wish to raise taxes. The urgency behind various reform efforts has diminished, however, as projections of spending growth moderated at the end of the 1990s.

Nonetheless, several competing approaches to reform remain under discussion. They usually focus on reducing per capita spending and range from incremental changes to major structural reforms that would shift Medicare more under the control of private plans. Incremental approaches usually seek to modernize the existing Medicare program, largely by changing payment policies for services and for private plans. Critics of this approach worry that it focuses more on prices charged for services and less on controlling the amount of care being used.

One of the principal Medicare restructuring plans is a variant of the 1999 plan of the co-chairs of the National Bipartisan Commission on the Future of Medicare. It has since been offered in an amended form by Senators John Breaux (D-Louisiana) and Bill Frist (R-Tennessee). Termed "premium support," this approach would require that beneficiaries choose among an array of private plans (with traditional Medicare being just one choice). If the plan chosen is more expensive than the national average, the beneficiary would have to pay a higher premium. This would presumably result in greater awareness by beneficiaries of the costs of health care and a greater incentive for private plans to hold the line on costs so as to be competitive. Traditional Medicare, which is now effectively the default plan for most persons, would become much more expensive and perhaps would be eliminated over time. This and other proposals to expand competition in Medicare are controversial because they are based more on theory than on practice, and because many supporters of Medicare are skeptical of the level of savings likely to be generated and fearful of what protections for beneficiaries might be lost if private plans take over.

Other proposed reforms that are sometimes combined with changes aimed at the efficient operation of Medicare include increases in the age of eligibility and income-testing the program, either through higher premiums or eliminating eligibility entirely for persons at high income levels. All of these proposals, and any new ones, will likely continue to be debated as baby boomers move inexorably toward eligibility for Medicare and as the projected costs of Medicare continue to grow.

MARILYN MOON

(SEE ALSO: Access to Health Services; Economics of Health; Health Care Financing; Landmark Public Health Laws and Court Decisions; Managed Care; Medicaid; National Health Insurance; Retirement; Uninsurance)