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Medicare 101: The Basics

Tricia Neuman, Sc.D. Director, Medicare Policy Project Vice President, Kaiser Family Foundation
For KaiserEDU June 2009
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Exhibit 2

Medicare Overview
1965: Signed into law by President Johnson to provide health and economic security to seniors 1972: expanded to cover younger adults with permanent disabilities 2009: covers 45 million people, including 7 million under-65 disabled Covers individuals without regard to income or medical history Helps pay for range of medical services, including inpatient hospital, physician, home health, diagnostic tests and prescription drugs

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Exhibit 3

Medicare Covers a Population with Diverse Needs and Circumstances

Percent of total Medicare population: Income <200% FPL ($20,800 in 2008) 3+ Chronic Conditions Cognitive/Mental Impairment Fair/Poor Health 2+ADL Limitations Under-65 Disabled Age 85+ Long-term Care Facility Resident
5% 12% 17% 16% 29% 28% 38% 46%

NOTE: ADL is activity of daily living. SOURCE: Income data for 2007 from U.S. Census Bureau, Current Population Survey, 2008 Annual Social and Economic Supplement. All other data from Kaiser Family Foundation analysis of the Centers for Medicare & Medicaid Services Medicare Current Beneficiary Survey, Access to Care file, 2006.

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Exhibit 4

Medicare Parts A and B Medicare Part A Hospital Insurance Program

Inpatient hospital, skilled nursing facility, home health, hospice $1,068 deductible for hospital inpatient in 2009 Individuals (and spouses) entitled to Part A after paying payroll taxes for 10+ years Mainly funded by payroll tax contributions (1.45 percent from employers/employees)

Medicare Part B Supplementary Medical Insurance

Physician visits, outpatient, preventive services, home health $96.40 monthly premium in 2009; higher for beneficiaries with higher incomes $135 deductible; 20% coinsurance for physician visits and outpatient hospital services
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Exhibit 5

Medicare Advantage (Part C)

Beneficiaries can enroll in regular feefor-service program OR in a Medicare Advantage (MA) plan MA include HMOs, PPOs and other private health plans Some plans offer extra benefits and have lower cost-sharing requirements than traditional Medicare
6.9 6.1 5.3 6.1

Medicare Advantage Enrollment (in millions) 10.8


Access to doctors and other health care providers is typically limited to those in the plans network
Plans are paid a fixed amount per enrollee On average, 14 percent more than it would pay under traditional Medicare This extra payment will increase overall costs to Medicare by about~$150 b over 10 years







25% of beneficiaries are enrolled in Medicare Advantage plans in 2009

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Exhibit 6

Medicare Prescription Drug Benefit (Part D)

Prescription Drug Coverage, 2009
No Drug Coverage 4.5 million 10% 6.2 million 14% 17.5 million 39%

Other Drug Coverage

Part D Stand-Alone Prescription Drug Plan

Administered exclusively through private plans; not under fee-forservice program

Stand-alone prescription drug plans (PDPs)

Medicare Advantage prescription drug plans (MA PDs)

7.9 million 18% 9.2 million 20%

Premiums and cost-sharing vary; most plans have a gap in coverage (doughnut hole) Additional premium and cost-sharing subsidies for low-income Funded by general revenues, enrollee premiums and payments from states

Retiree Drug Coverage

Part D Medicare Advantage Prescription Drug Plan

45.2 Million Medicare Beneficiaries

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Exhibit 7

Medicare Benefit Payments, by Type of Service, 2009

Low-Income Subsidy Payments Payments to Drug Plans Other Part B Benefits Hospital Outpatient Payments to Union/EmployerSponsored Plans 1% Hospital Inpatient

Part A

Part B
Part D Part A and B

6% 4% 28%


Physicians and Other Suppliers



Skilled Nursing Facilities Hospice 3%

Home Health


Medicare Advantage (Part C)

Total Benefit Payments = $484 billion

Notes: Total does not include $2.5 billion in administrative expenses such as spending for implementation of the Medicare drug benefit and the Medicare Advantage program. Total is net of $9.4 billion in recoveries for 2009. Source: Congressional Budget Office, Medicare Baseline, March 2009.
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Exhibit 8

Sources of Medicare Revenue in 2010

Payroll Taxes


General Revenue 73% 85%


Beneficiary Premiums Payments from States Taxation of Social Security Benefits Interest and Other


12% 3% 4%


7% 7%
PART A $237 Billion

2% PART B $196 Billion

11% 13%
PART D $66 Billion

TOTAL $499 Billion

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Source: 2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

Exhibit 9

Medicare offers important coverage, but with high cost-sharing and benefit gaps
Does not cover all medical benefits Very limited long-term care coverage No dental, hearing aids or eyeglasses Has relatively high cost-sharing requirements Deductibles for Part A, Part B, and Part D Coinsurance/copayments Part D coverage gap (doughnut hole) No limit on out-of-pocket spending Unlike typical plans offered by large employer Pays about half of beneficiaries total health and long-term care spending
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Exhibit 10

Supplemental Coverage Among Medicare Beneficiaries, by Income, 2006

8% 20% 42% 52%





Self-Purchased Only
3% 20% 21% 9% 1% 14% 16% 11% 7% 1% <1% <1% 5% <1% 21%

1% 20%

Other Public/Private

No Supplemental Coverage

$10,000 or less




$40,001 or more

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SOURCE: Kaiser Family Foundation analysis of the CMS Medicare Current Beneficiary Survey Access to Care File, 2006.

Exhibit 11

Median out-of-pocket health spending as a percent of income for Medicare beneficiaries is on the rise especially for those with modest incomes
21.9% 17.6% 16.1% 11.9% 10.6% 7.8% 5.4% 16.0% 14.9% 22.4%



<100% Poverty

100-199% Poverty

200-399% Poverty

400%+ Poverty
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NOTES: In 2005, federal poverty level: $9,570/individual and $12,830/couple. SOURCE: Kaiser Family Foundation. Skin-in-the-Game, November 2008.

Exhibit 12

Medicare Premiums and Cost Sharing Projected to Increase

Annual Costs:
Part A: Hospital Insurance Deductible $1,068 $1,584

2018 (projected)

Percent Increase 2009-2018


Part B: Supplementary Medical Insurance Premiums Deductible $1,157 $135 $1,577 $184

36% 36%

Part D: Prescription Drug Benefit

Deductible Coverage gap

$295 $3,454

$490 $5,755

83% 66%

Return to Tutorials Source: 2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

Medicare Spending and Financing

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Exhibit 14

Medicare accounts for 13% of federal spending and 22% of national health spending

Social Security Defense Discretionary



13% 16%
Nondefense Discretionary


7% 13%
Medicaid/ CHIP

Net Interest Other

Total Federal Spending, 2009 = $3.1 trillion

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Exhibit 15

A small share of beneficiaries account for most of Medicare spending

Average per capita* = $44,220



Average per capita* = $2,934


Total FFS Beneficiaries, 2005: 37.5 million

Total Medicare FFS Spending, 2005: $265 billion

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NOTE: Excludes Medicare Advantage enrollees *Average Medicare FFS Spending only SOURCE: Kaiser Family Foundation analysis of the CMS Medicare Current Beneficiary Survey Cost & Use file, 2005.

Exhibit 16

Medicare Financial Challenges

Part A Trust Fund - The hospital insurance trust fund is projected to be insolvent by 2017 with insufficient funds to pay for all promised benefits
Worker to retiree ratio The number of workers per beneficiary is projected to decline as the Medicare population grows in the future

GDP Medicare spending is projected to double from 3.5% of GDP in 2010 to 6.4% of GDP by 2030.
The Congressional Budget Office indicates most of the growth is due to rising health costs, rather than the aging of the Baby Boom generation.

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Exhibit 17

Looking to the Future

Medicare remains critical source of health coverage and economic security for many Addressing fiscal pressures without shifting more costs to beneficiaries Setting fair payment rates to providers and plans Monitoring and improving Part D drug benefit Assessing role of Medicare Advantage plans Improving care to meet needs of those with coverage and chronic illnesses and disabilities Ensuring affordability for lower-income beneficiaries Strengthening coverage for long-term care services
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Exhibit 18

Additional Resources

Kaiser Family Foundations Medicare Policy Project Official Medicare site Centers for Medicare & Medicaid Services (CMS) Congressional Budget Office (CBO) Medicare Payment Advisory Commission (MedPAC)
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