Medicare turned 50 this past week. On July 30, 1965, President Lyndon B. Johnson signed Medicare into law. Former president Harry Truman was present for the signing (pictured) and LBJ gave Truman the fist Medicare card.
It must have been a gratifying moment for Truman. As president, he had proposed legislation for national health for all ages in 1945. Conservatives and the American Medical Association fought vigorously and defeated the idea, calling it socialism.
President Johnson’s bill focused on healthcare only for the elderly (65 and older). The fight against Medicare was just as vicious, but LBJ’s masterful political skills for passing legislation carried the day.
Prior to Medicare, only about half of all seniors had some kind of health insurance. Due to their age, coverage was either unavailable or unaffordable. And poor seniors then had even less means – mostly just social security – to afford out-of-pocket health care. It was not uncommon for older citizens with few resources to put off needed but expensive medical care. When treatment couldn’t be put off, many elderly poor people never recovered from the economic effects of a single serious illness or hospital stay.
It’s much different now. Almost all older Americans are covered by Medicare. As of 2012, over 41,600,000 seniors were enrolled. Over time, Congress expanded Medicare eligibility to younger people with permanent disabilities and who receive Social Security Disability Insurance (SSDI) payments. Consequently more than 9,400,000 younger people with disabilities also receive benefits.
Medicare has undergone several other changes during its history. In 1972, benefits were broadened to include chiropractic care, and speech and physical therapy. Starting in 1982, hospice benefits were added; and in 2006, Medicare part D was added to cover most drug costs.
Medicare is an entitlement program. The past few weeks I have been writing about making gradual changes to entitlement programs (over 25-50 years), as part of the serious work of reducing our colossal and growing national debt. Along with tax reform and maintained control of discretionary spending, fixing entitlement spending are the key changes we need to make to begin reducing the debt as a percentage of GDP.
Almost all policymakers agree that we need to fix Medicare. But before we review possible solutions, it’s instructive to understand how Medicare works and is funded.
Medicare Part A covers hospitalization, and is funded primarily by a 2.9% payroll tax, half paid by workers and half by employers. There used to be an earnings cap – like Social Security has – on this tax, but it was removed in 1994 to help keep Medicare solvent. Beginning in 2013, this tax rose an additional .9% for individuals with income exceeding $200,000; and for married couples filing jointly that earned over $250,000. This additional tax on high income earners was mandated as part of the Affordable Care Act (ACA; aka Obamacare) to help pay for the ACA.
Medicare Part B helps pay for services and products not covered by Part A, such as doctor appointments and other outpatient services. Approximately 75 percent comes from general tax fund revenue, and about 25 percent from monthly premiums paid by Medicare recipients. Most beneficiaries pay a monthly premium of $104.90, and all have an annual deductible of $147.
In 2006, a surtax was added to Part B, requiring participants with higher incomes to pay larger premiums to help pay for new Medicare Part D coverage that was starting that year. Currently, seniors with higher incomes pay $146.90 to $335.70 for their monthly premiums depending on a sliding scale. In 2010, the number of enrollees subject to the 2006 surtax was doubled, also to help pay for the ACA.
Part D covers drugs, and is funded partially by monthly premiums paid by beneficiaries. However, these premiums only cover about 11 percent of the cost for this component of Medicare. The bulk of the funding for Part D is approximately 80 percent from general tax fund revenues, and the remainder from the states which pay for poor seniors who receive Medicaid in addition to Medicare.
Participants have many private Part D policies available to choose from, and premiums vary from plan to plan. In 2010, a surtax was added to Part D premiums to also help pay for the ACA. Like Part B, seniors with higher incomes pay more. All enrollees also pay a deductible of $320 per year ($360 in 2016), and co-pays depending on their plan.
Most Part D drug plans also have a coverage gap (aka donut hole) – meaning there’s a partial limit on what a drug plan will cover. Not every beneficiary will incur these fees, which begin after a person has spent a specified amount for drugs covered in their plan. In 2015, the gap begins once someone’s plan has spent $2960 on covered drugs. Once a participant reached the gap, they will pay 45-65 percent of the cost of the drugs. After a senior has paid $4700 out-of-pocket, they exit the coverage gap and will only have small co-pays for covered drugs the rest of the year.
Since Medicare only covers about 80 percent of all medical expenses, most enrollees need to protect themselves from potential catastrophic medical costs. The most common way is supplemental insurance, which recipients pay for in addition to their Medicare premiums. These supplemental policies protect seniors by limiting exposure to high out-of-pocket costs.
Beneficiaries near or below the poverty line, who cannot afford supplemental insurance, can enroll in Medicaid, which will also pay Medicare deductibles, premiums, and co-pays. Medicaid costs are split between the federal and state governments.
An alternative to traditional Medicare that participants can choose is Medicare Part C, which is a private-sector alternative to Parts A and B, and sometimes D. Participants can sign up for coverage with private health insurance companies and costs are paid by a combination of federal funds and enrollee premiums. Known as Medicare Advantage (MA), most Part C plans are traditional health maintenance organizations (HMOs).
Many seniors enrolling in MA do so because they like the options and choices of these plans. Recipients can purchase plans from a variety of companies and receive the same standard Medicare benefits, and other optional benefits they wish to buy. Beneficiaries pay extra for items not covered by Parts A and B, such as dental, vision, gym memberships, etc.
These private MA plans also provide protections against catastrophic out-of-pocket costs. Typically, enrollees are limited to a network of providers in the area where they live. Like all health insurance there are advantages and disadvantages between plans. In theory, these plans will not cost the federal government any more per participant than traditional Medicare, and may even save the program money, but the data is not yet conclusive.
Next week, I will write about the major concerns regarding Medicare, and include some possible solutions. This is a huge topic and a large part of the federal budget – 16 percent and growing. The largest and fastest growing part of the federal budget is mandatory entitlement spending. Medicare is the second largest component of entitlement spending behind Social Security (see last week’s blog). Because our country is aging rapidly, mandatory spending for these two programs will grow quickly.
Without changes to entitlement programs, mandatory spending is projected to exceed 100% of all government revenues sometime in the 2030s. It’s important that we come up with some solutions sooner than later or Medicare as we know it won’t be around another 50 years.
Links to related blogs:
Possible Solutions for Fixing Social Security: http://www.commonsensecentrist.com/possible-solutions-for-fixing-social-security/
A Fiscal Straightjacket: http://www.commonsensecentrist.com/a-fiscal-straightjacket/
Building a Strong Economy: http://www.commonsensecentrist.com/building-a-strong-economy/
Greece’s Troubles: http://www.commonsensecentrist.com/what-america-should-learn-from-greeces-troubles/
China’s emergence as largest economy: http://www.commonsensecentrist.com/a-coming-new-order-in-global-financial-systems/
China and U.S. national debt: http://www.commonsensecentrist.com/china-why-deficits-and-the-u-s-national-debt-matter/
Budget concerns: http://www.commonsensecentrist.com/the-federal-budget-were-getting-boxed-in/
Economic growth: http://www.commonsensecentrist.com/growing-the-economy-the-road-ahead/
Fiscal policy: http://www.commonsensecentrist.com/leadership-not-misleadership/
Deficit reduction: http://www.commonsensecentrist.com/passing-the-buck-really-big-bucks-2/