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Medicare: An Analysis of Spending and Future Budget

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Medicare, the federal health insurance program for 47 million elderly and disabled Americans, helps to pay for hospital and physician visits, prescription drugs, and other acute and postacute services. And all of that spending can add up quickly. In 2010, spending on Medicare accounts for 12 percent of the federal budget.

Medicare accounts for 23 percent of total national health care spending. Medicare represents nearly one-third (30 percent) of total national spending on hospital care and 20 percent of total spending on physician services.

Health reform and Medicare spending

Medicare spending is projected to increase from $523 billion in 2010 to $845 billion in 2019, taking into account changes to Medicare incorporated in the Patient Protection and Affordable Care Act of 2010. The law is projected to reduce annual growth in Medicare spending over the next decade and beyond, by reducing the growth in Medicare payments to health care providers and Medicare Advantage plans, establishing several new policies and programs designed to reduce costs and improve quality of patient care, and establishing a new Independent Payment Advisory Board to recommend Medicare spending reductions if projected spending exceeds target growth rates. The law also increases the Medicare Part A payroll tax rate for higher-income people, and increases Part B and Part D premiums for higher-income beneficiaries.

Altogether, the Medicare provisions of the health care reform law are estimated to result in a net Medicare spending reduction of $428 billion between 2010 and 2019, including $533 billion in savings and $105 billion in new Medicare spending, according to analysis of CBO estimates, reducing the projected average annual growth rate in Medicare spending between 2010 and 2019 from 6.8 percent to 5.5 percent. These projections do not take into account additional spending that would be needed to offset the physician payment reductions that are required under current law according to the Sustainable Growth Rate formula.

Medicare as a portion of total medical spending

In 2006, Medicare paid just under half (48 percent, or $8,344) of the $17,231 in average total medical and long term care expenses per beneficiary in fee-for-service (FFS) Medicare. Beneficiaries paid 25 percent of this total out-of-pocket, including premiums. Medicare spending per beneficiary is highly skewed, with the top 10 percent of beneficiaries in FFS Medicare accounting for 58 percent of total Medicare spending in 2006 – on a per capita basis, nearly six times greater than the average across all FFS beneficiaries ($48,210 versus $8,344).

How is Medicare funded?

Medicare is financed primarily from three sources: general revenues (43 percent), payroll tax contributions (37 percent), and beneficiary premiums (13 percent). Medicare Parts A, B, and D are financed separately.

  • Part A is financed largely through a 2.9 percent tax on earnings paid by employers and employees (1.45 percent each). This accounts for 85 percent of Part A revenue. The health reform law increases the Medicare payroll tax for higher-income taxpayers (more than $200,000/individual and $250,000/couple) by 0.9 percentage points (from 1.45 percent to 2.35 percent), beginning in 2013.
  • Part B is financed through general revenues (74 percent) and beneficiary premiums (25 percent). Beneficiaries who have higher annual incomes (more than $85,000/individual, $170,000/couple) pay a higher, income-related monthly Part B premium reflecting a//edit. larger share of total spending, ranging from 35 percent to 80 percent; beginning in 2011, the health reform law freezes the income thresholds at 2010 levels through 2019.
  • Part D is financed through general revenues (82 percent), beneficiary premiums (10 percent), and state payments for dual eligibles (7 percent). The health reform law establishes a new income-related Part D premium similar to the Part B premium, beginning in 2011, where higher-income beneficiaries will pay a larger share of the cost of standard drug coverage and receive a smaller premium subsidy.

What is Medicare’s financial condition?

According to the 2010 Medicare Trustees report, the Part A trust fund will be depleted in 2029, at which point Medicare will not have sufficient funds to pay full benefits, unless Congress acts as it has in the past to make changes to improve the fiscal outlook of Part A. Medicare is projected to grow from 3.6 percent of GDP in 2010 to 3.9 percent in 2020 and 5.1 percent in 2030. These estimates are lower than previous years’ projections due to spending reductions enacted in the 2010 health reform law. SMI trust fund assets are projected to be adequate because beneficiary premiums and general revenue contributions are set to match expected outlays for Part B and Part D each year.

Future challenges

Sustained increases in health care costs are placing upward pressure on Medicare spending. Annual growth in Medicare spending is influenced by the same factors that affect health spending in general: increasing prices of health care services, increasing volume and use of services, and new technologies. Moving forward, systemwide efforts to curtail overall health care costs, such as those enacted as part of the 2010 health reform law, could help to improve Medicare’s financial outlook. Over the long term, an aging population, a decline in the number of workers per beneficiary, and increasing life expectancy will present fiscal challenges for Medicare. From 2010 to 2030, the number of beneficiaries is projected to rise from 47 million to 80 million, while the ratio of workers per beneficiary is expected to decline from 3.5 to 2.3.

Medicare provides essential coverage for its beneficiaries and enjoys broad public support. Yet many people on Medicare face significant out-of-pocket costs for both premiums and non-premium expenses to meet their medical and long term care needs. With health costs rising faster than beneficiaries’ incomes, median out-of-pocket health spending as a share of income increased from 11.9 percent in 1997 to 16.2 percent in 2006. How to ensure Medicare’s financial stability over the long term without shifting excessive costs onto beneficiaries, while meeting the health care needs of an aging population, is a pressing challenge for the nation.

Source: Kaiser Family Foundation