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Along with Medicaid, Medicare is one of the nation's primary health insurance programs and, in many ways, it has been one of the federal government's most significant success stories. It provides coverage to nearly 39 million people, or about 14 percent of Americans and nearly every senior aged 65 or older. By comparison, before Medicare was enacted in 1965 just 56 percent of seniors had hospital insurance.

In recent years, however, Medicare's long term finances have come into question. While several proposals have been made to significantly alter its finances and structure, only relatively modest changes have been enacted into law. This may change in the coming year, however. The Bush administration is expected to push for major reforms in the coming session of Congress.

Medicare Basics

Medicare is managed by the Health Care Financing Administration (HCFA), a division of the U.S. Department of Health and Human Services which also administers Medicaid. Medicare is divided into two parts, Parts A and B. Part A, also known as Hospital Insurance (HI), covers health care provided in hospitals, nursing facilities, and hospices, and some care provided by home health services. It is financed by a payroll tax of 2.9 percent, which is divided equally between employers and employees. In fiscal year (FY) 1999, Part A provided coverage to 33.6 million seniors and 5.3 million people with disabilities. About 22 percent of those covered actually received medical services through Part A in 1999.

Part B, also known as Supplementary Medical Insurance (SMI), provides optional additional coverage for doctor's visits and other out-patient services such as those provided by physician assistants, nurse practitioners, and clinical laboratories. Part B is financed through a combination of monthly premiums ($45.50 in 2000) and general tax revenues. In FY 1999, 32.3 million seniors and 4.6 million people with disabilities were enrolled in part B.

The coverage provided by Medicare is not comprehensive. Neither Part A nor Part B covers prescription drugs, long-term nursing care, or basic vision, dental, hearing-related care. Medicare recipients desiring such coverage usually purchase supplemental policies from insurance companies.

Medicare's Finances - Short and Long Term

While Medicare's long term financial prospects have been questioned, its short term financial prospects are solid. In FY 1999, the Hospital Insurance Trust Fund (Part A) collected $153.0 billion in revenues, most of which ($134.4 billion) was from payroll taxes paid by approximately 155 million covered workers. The rest was from interest accrued by assets in the Hospital Insurance trust fund ($9.5 billion), taxation of Social Security benefits ($6.5 billion), and other miscellaneous revenue. In FY 1999 the program spent $131.4 billion ($129.4 billion on medical services), for a surplus of $21.6 billion. The year's surplus brought total Part A trust fund reserves to $138.7 billion at the end of the fiscal year.

The short term finances for Supplementary Medical Insurance (Part B) are similarly good. In FY 1999, the program took in $85.3 billion in revenues, most of which represented transfers from the U.S. Treasury ($62.2billion). Other revenues came from monthly premiums paid but enrollees ($20.2 billion) and trust fund interest and other income ($2.9 billion). That year the program spent $80.5 billion, most of which ($79.0 billion) was for medical services. The year's surplus was $4.8 billion, which brought total Part B trust fund reserves to $45.6 billion at the end of the fiscal year.

Altogether, $212.0 billion was spent on Medicare in FY 1999, making it one of the federal government's largest programs.

Medicare's long term prospects are less rosy. According to the Medicare trustees, the Hospital Insurance trust fund will continue to run a surplus until 2017, when it will begin to run a deficit and start drawing down trust fund reserves. Absent any policy changes, the trustees estimate that the trust fund will be depleted in 2025. Over the next 75 years (2000-2074), the trustees estimate a programmatic financial shortfall equal to 1.21 percent of taxable payroll. In other words, immediately raising the combined payroll tax on employers and employees from 2.9 percent to 4.11 percent would be sufficient to cover long term shortfalls.

Recent Reform Proposals

The most significant legislation affecting Medicare that has been enacted in recent years was the 1997 Balanced Budget Act, which President Clinton signed into law on August 5 of that year. The legislation's primary goal was to balance the federal budget by 2002, which at the time was still operating in a deficit. It included language trimming growth in Medicare spending by $116.4 billion over five years, most of which was due to reductions in payments to health care providers (hospitals and doctors). The legislation also increased Medicare Part B premiums, established new Medicare+Choice managed care plans, and created a bipartisan commission to study Medicare's long-term finances and report back to Congress.

The commission, also known as the National Bipartisan Commission on the Future of Medicare, was chaired by Sen. John Breaux (D-LA) and Representative William Thomas (R-CA), now chairman of the House Ways and Means Committee. In March of 1999 the commission disbanded, unable to achieve sufficient unity to forward an official recommendation to Congress. The commission did not go out without controversy, however. A plan backed by Sen. Breaux fell one vote short of the required majority needed to endorse an official set of recommendations. Among other provisions, the Breaux plan would have transformed Medicare into a premium support system, where instead of Medicare directly covering beneficiaries or underwriting their participation in HMOs, beneficiaries would be given a fixed amount of money to purchase private health insurance. Breaux's plan would also have raised the age of eligibility from 65 to 67, as has already been done with Social Security, and provided prescription drug coverage for low-income individuals with incomes of up to $10,568 and couples with incomes of up to $13,334. Partly because the plan ignored his call to transfer Medicare some of the budget surplus expected over the next ten years, however, Clinton refused to urge his own nominees on the commission to support the Breaux plan.

Instead, Clinton released his own set of recommendation on June 29, 1999. The central feature in Clinton's plan was a transfer of $794 billion in surplus general tax revenues to the Medicare program from 2000 through 2014, extending the program's insolvency date. Clinton's plan would have also created a new prescription drug benefit and eliminated copayments and deductibles for preventive care.

Following this impasse, and facing increased political pressure from health care providers, Congress began to reverse some of the spending cuts in the 1997 Balanced Budget Act. In late 1999, Congress enacted legislation restoring $35 billion in Medicare and Medicaid funding to hospitals, nursing homes and health plans over five years. In 2000 Congress restored another $16 billion in Medicare funding to various providers. Significant structural reforms, however, were put off until the coming session of Congress.

In his campaign for the presidency, George W. Bush criticized the Clinton-Gore administration for failing to lead on Medicare and other issues. Bush is expected to appoint a new bi-partisan commission to review Medicare's long term finances and other possible changes, such as the inclusion of a new prescription drug benefit. After the commission issues its recommendations, Bush may submit a proposal to Congress in late 2001 or early 2002.



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