What Is Medicare?

The U.S. Health Care System

Pharmacist, William Hewitt, (R) speaks with Aase Kjos-Hansen about her options under the new Medicare prescription drug benefit program
Joe Raedle/Getty Images News/Getty Images
Fall 2004
Access to health care and health insurance is always a key issue in the presidential campaigns. Two federal programs that provide health insurance to millions of Americans are Medicare and Medicaid. What are they? Who is eligible? How do they differ? What is their future?

In this article, we examine Medicare, perhaps the better known of the two programs. Part two will examine Medicaid, which is coordinated through the states.

Congressional Action
Congress established both Medicare and Medicaid in 1965 as part of President Lyndon Johnson's social services programs. Medicare is a federal program specifically designed for Americans over age 65 and for some people under 65 who have disabilities.

Because its primary clientele are retirees, Medicare was originally managed by the Social Security Administration (SSA). Medicaid was managed by Social and Rehabilitation Service. Both were part of the Health, Education and Welfare (HEW) Department. In 1980, President Reagan split HEW into the Department of Education and the Department of Health and Human Services (HHS). In 2001, President Bush renamed HCFA the Centers for Medicare & Medicaid Services (CMS).

Discussion about health and social services and the role of the government in health care is more than 100 years old. A national compulsory health insurance program was enacted in Germany in 1883 and the first Worker's Compensation law in the US was enacted in 1903 (and was later repealed).

Progressive Party Candidate Teddy Roosevelt ran for president in 1912 on a platform that included health insurance. And in 1918, the federal government provided its first grants to the states for health services.

In 1933, the first private hospital insurance was approved; it led to the establishment of Blue Cross.
But the original Social Security Act of 1935 excluded health insurance. National health bills of one form or another were then introduced regularly. Then in 1956, government health insurance was provided for Armed Forces dependents.

Health insurance was a key issue for President Kennedy, who addressed the nation on the issue of Medicare in 1962. But it would be another three years before Medicare was signed into law by President Johnson.

In the intervening period, there has been a major change in the US population. Average life expectancy in 1890 was 47.9 years for men, 50.7 for women; by 1960 that had grown to 66.8/73.2 and in 2001 it was 74.4/79.8. This is an increase of about 50%. Thus percentage of the population over age 65 has grown from less than 10% in 1950 to 12.6% in 2000; it is projected to be 20.0% by 2030.

In 1965, when Medicare was enacted, just 56 percent of Americans over sixty-five had hospital insurance. Today almost all elderly Americans have hospital insurance through Medicare. And in 1965, about 29 percent of elderly Americans lived in poverty; by 1998, that had fallen to less than 11 percent.

What It Does
In 2003, Medicare covered about 40 million Americans. Enrollment is projected at 77 million by 2031, when the Baby Boomers are fully enrolled.

Original Medicare has two parts: Part A (hospital insurance) and Part B (coverage for doctor services, outpatient hospital care, and some medical services not covered by Part A). A controversial prescription drug coverage, HR 1, Medicare Prescription Drug, Improvement, and Modernization Act, was added in 2003; it takes effect in 2006.

Congress has also created a Medicare Advantage Plan which provides more choices but which is offered by private companies. Then there is Medigap (supplemental insurance).

Medicare Part A helps cover inpatient care in hospitals, critical access hospitals, or skilled nursing facilities. It also covers some home health care and hospice care. Most people don't have to pay a premium for Part A because they paid Medicare taxes while working.

Medicare Part B focuses on outpatient care but also covers some rehabilitation (physical and occupational therapy). The monthly premium for Medicare Part B was $66.60 in 2004.

Both Parts A and B have deductibles. In 1999, Medicare spent $128.8 billion on Part A benefits and $80.7 billion on Part B benefits.

How It Works
Doctors and supplies who agree to accept an "assignment" from Medicare must accept the proper Medicare deductible and coinsurance amounts. The doctor provides the service and agrees to request payment from Medicare.

Should a doctor or supplier not accept the Medicare "assignment," they may charge up to 15% more than Medicare's approved amount. However, they may ask the patient to pay the entire charge and let Medicare reimburse the patient instead of the doctor.

If a patient believes that Medicare should have paid for something that it failed to pay, he has 120 days to file an appeal.

Like most insurance programs, a small number of people account for most expenditures; about 75 percent of Medicare’s outlays serve only 10 percent of those covered. As America's population ages, the federal budget will be under increasing pressure due to the cost of social programs like Medicare and Social Security.

Medicare Part A Hospital Insurance Trust Fund has been "broke" since 1992 -- that is, the annual operating costs have exceeded income. Part B faces the same fiscal challenge. But bankruptcy is not an option; gaps are met with general budget funding : in effect, a surcharge paid by all taxpayers.

Since 1970 real per-beneficiary Medicare spending has grown at the rate of about 5 percent per year. However, the Trustees made projections in 1999 based on this rate slowing to 1 percent; some believe this is extremely unrealistic.

In 1984, Medicare and Medicaid spending accounted for 9 percent of the federal budget; it was 20 percent of the 2004 budget.

In 1972, health expenditures accounted for less than 8 percent of Gross Domestic Product. In 2002 it jumped to 15 percent and should be about 18 percent by 2012 - long before the full impact of the Baby Boomers is felt.

Politicians on both sides of the aisle realize that the current social programs -- Medicare, Medicaid and Social Security -- are not sustainable. But the political will to do something about the problem is missing. There are basically three choices: reduce payments to providers, shift costs to retirees, or increase taxpayer fees.

Some questions leaders should be asking - and media should be reporting:
  • How can Medicare and the health care system each be reformed to make them solvent and sustainable?
  • Should programs like Medicare be reformed to make encourage citizens to work longer? If so, what kind of jobs will provide health insurance coverage?
  • What are the consequences of employers that cease providing health care benefits to their retirees?