Medicare 101

1. Medicare 101 Presented byTricia Neuman, Sc.D. Vice President and Director,Medicare Policy Project The Henry J. Kaiser Family Foundation KaiserEDU.org Tutorial January 2005

2. Overview

3. Exhibit 1 Medicare Today • Enacted in 1965 to provide health and economic security to seniors • Expanded in 1972 to cover younger beneficiaries with permanent disabilities • Covers 41 million people • 35 million elderly, 6 million under-65 disabled • Individuals age 65+ are entitled to Medicare (Part A) if they are eligible to receive Social Security • Contribute portion of payroll tax throughout working lives to get Medicare • Pay monthly premium for Medicare Part B • Individuals eligible without regard to income or medical history • Program now has parts A,B,C; by 2006, a new part D • Part A – Hospital and skilled nursing care • Part B – Physician and outpatient hospital care • Part C – HMOs/Medicare Advantage • Part D – Outpatient prescription drug coverage begins January 2006 • Medicare is a popular program; enjoys broad public support and high satisfaction levels among seniors

4. The Medicare Population

5. Exhibit 2 Medicare Covers a Population with Diverse Needs and Significant Vulnerabilities Percent of total Medicare population: Low Income (<150% FPL or less than $13,965, 2004) 1+ Functional Limitation Fair/Poor Health Rural Cognitive Impairment Under-65 Disabled Nursing Home/ Assisted Living Resident SOURCE: Medicare Current Beneficiary Survey, 1997-2002; Low-income estimate from Urban Institute based on March 2003 Current Population Survey.

6. Exhibit 3 A Small Share of Beneficiaries Account for Majority of Medicare Expenditures (1999) Percent of Beneficiaries Percent of Expenditures 15% 75% Note: Totals exclude Medicare beneficiaries with no expenditures in 1999 and beneficiaries enrolled in Medicare+Choice plans and payments made on their behalf. SOURCE: CMS, Medicare and Medicaid Statistical Supplement, 2001.

7. Medicare Benefits, Spending, and Financing

8. Exhibit 4 Medicare Benefit Payments, by Type of Service, FY 2004 5% 5% 39% Part A Part B Parts A and B 26% 5% 4% 14% 2% Total = $295 billion Note: Does not include administrative expenses. Excludes Part D low-income subsidy payments. SOURCE: CBO, Medicare Baseline, March 2004.

9. Exhibit 5 Sources of Medicare Revenue, Parts A and B, 2003 Part A and B: $291.6 billion Combined Revenues Part A: $175.8 billion* Hospital Insurance Trust Fund Part B: $115.8 billion Supplementary Medical Insurance Trust Fund * Additional 2% of Part A income attributed to premiums, general revenue, and other. Note: Numbers may not total 100% due to rounding. SOURCE: 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

10. Exhibit 6 Medicare Represents 13 Percent of the Federal Budget Total Federal Budget = $2.3 Trillion, FY 2004 *Includes net interest on the federal government’s debt minus fees and other charges that are collected without annual appropriations action. SOURCE: Congressional Budget Office, September 2004 Baseline Budget Projections.

11. Gaps in Coverage, Benefits, and Out-of-Pocket Spending

12. Exhibit 7 Gaps in Medicare Coverage • Benefit Gaps • No outpatient drug benefit (until 2006) • Limited long-term care • No hearing aids, eyeglasses, or dental care • High cost-sharing requirements • Part A deductible ($912/benefit period in 2005) • Part B monthly premium ($78.20/month in 2005) • Income-relating the Part B premium (beginning in 2007) • Medicare pays for about half of all beneficiary health care spending • Nearly 9 in 10 rely on supplemental insurance to fill gaps

13. Exhibit 8 Most Medicare Beneficiaries Have Some Form of Supplemental Coverage Medicare HMO 13% Total = 39.6 million non-institutionalized Medicare beneficiaries in 2002 Note: Estimates are based on aged and disabled Medicare beneficiaries living in a community setting. Individuals with both employer-sponsored coverage and individually-purchased Medigap policy are classified as having employer-sponsored coverage. SOURCE: Medicare Beneficiary Survey, Cost and Use File, 2002.

14. Exhibit 9 Medicare HMO Enrollment Has Waxed and Waned, with Some Uncertainty About the FutureNumber of Medicare Advantage Plans, 1992-2013 32% 13% Projected Actual Note: All actual data are from December of the given year, except 2004 from March. SOURCE: Actual: CMS, Medicare Managed Care Contract (MMCC) Plans Monthly Summary Report. Projections: CBO testimony before the Committee on Ways and Means, US House of Representatives, March 24, 2004.

15. Prescription Drugs and the MMA

16. Exhibit 10 Context for New Medicare Drug Law • Seniors rely heavily on prescription drugs • 98% of seniors nationwide take prescription drugs • Nearly half of seniors (46%) take 5 or more prescriptions per month • Many lack prescription drug coverage • 43% lack drug coverage for the full year or part year • Drug coverage matters • Among seniors with heart failure, diabetes, or hypertension, those without drug coverage skip doses of medicine at twice the rate of those with drug coverage • Annual Medicare beneficiary out-of-pocket drug spending has been rising • $600 in 2000, $999 in 2003, and an estimated $1,457 in 2006 SOURCES: Stuart and Briesacher, estimates based on 2000 MCBS; Kaiser/Commonwealth/Tufts-New England Medical Center 2003 National Survey of Seniors and Prescription Drugs; Out-of-pocket spending data for 2006 from Congressional Budget Office, July 2004.

17. Exhibit 11 Overview of Medicare Prescription DrugImprovement, and Modernization Act of 2003 (MMA) Phase 1 – 2004 and 2005 • Medicare-approved discount drug cards • $600 annual drug subsidy for low-income seniors (<135% poverty or $12,569/year) Phase 2 – Begins in 2006 • Drug benefit to be offered by private plans • Beneficiaries expected to have choice of 2+ plans; • May sign up beginning November 15, 2005 • Plans provide standard benefit or actuarial equivalent. In 2006: $250 deductible, 25% coinsurance up to $2,250 in total Rx costs; 100% coinsurance up to $5,100 in total Rx costs, then 5% coinsurance • Premium estimated to be $35/month in 2006 • Formularies, cost-sharing structure, premiums expected to vary • Generous subsidies for low income

18. Exhibit 12 Key Questions About New Drug Law • Who will sponsor new private drug-only plans, where, and for how long? • What will Medicare prescription drug benefit packages look like, which drugs will be covered, and how much will monthly premiums be? • Will beneficiaries sign up for Part D? Will seniors with low-income apply for (and receive) subsidies? • Can the new benefit be implemented -- without major glitches – given the magnitude of changes that need to occur between now and January 1, 2006?

19. Future Challenges

20. Exhibit 13 The Medicare Population Will Nearly Double in Next Quarter of Century Millions of Beneficiaries: SOURCE: CMS, Office of the Actuary, January 2003.

21. Exhibit 14 Prescription Drugs Represent a Relatively Small Share of Beneficiaries’ Out-of-Pocket Spending Private Health Insurance Premium 21% Dental 10% Long-Term Care 41% Home Health* 1% Prescription Drugs 21% Inpatient Hospital/SNF 4% Medicare Part B Premium 15% Physician/ Supplier 18% Outpatient Services 5% Total Out of Pocket Spending, 1999 = $115 billion *For home health services not covered by Medicare. Data are for both fee-for-service and Medicare+Choice enrollees. Total per capita out-of-pocket spending (excluding Part B premiums and private health insurance premiums) is $1,825. SOURCE: Medicare Beneficiary Survey, Cost and Use File, 1999

22. Exhibit 15 Major Policy Challenges Facing Medicare • Implementing the new Medicare prescription drug benefit by 2006 • Strengthening protections for low-income, chronically ill, and otherwise vulnerable beneficiaries • Setting fair payments while serving as a fair and reliable business partner for health plans and providers • Securing Medicare financing for future generations • While keeping health care affordable for seniors and beneficiaries with disabilities who rely on the program