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Medicare is the federal health insurance program that provides coverage to more than 47 million people, including individuals 65 and older and younger people receiving Social Security disability benefits or suffering from end-stage renal disease. As of 2010, 39.7 million people 65 and older were covered by Medicare, as were 8 million people with disabilities.

For more than 45 years, Medicare has delivered stable, reliable health care to seniors and people with disabilities. As the country’s largest purchaser of health care, Medicare has a key role in our health care system. Medicare also has done better than private insurance companies in controlling the growth of health care costs. Over four decades, the average annual growth in Medicare spending per enrollee was 1 percent less than the growth of private health insurance premiums. It has been a leader in adopting payment reforms that increase efficiency, improve quality and lower costs, and many of these reforms have been followed by private insurers. 

Because protecting and improving Medicare is critical to health care cost containment, Republican proposals to pare back Medicare actually would increase overall health care costs. For example, the Republican budget proposal for FY 2012 would replace Medicare with vouchers to purchase private health coverage. According to the Congressional Budget Office, this proposal would result in total health care spending for an average 65-year-old that is nearly 40 percent higher than under the current Medicare program. Out-of-pocket costs for a typical senior would almost double. The result of this proposal would be to simply shift costs onto seniors, not to control costs.

Similarly, the proposal to increase the Medicare eligibility age from 65 to 67 would increase health care costs rather than reduce them. According to a recent study, the additional costs for 65- and 66-year-olds, employers and states would be $11.4 billion if the proposal were effective in 2014, twice as much as the federal government would save. For seniors who no longer qualify for Medicare, the proposal would mean an increase of $3.7 billion in out-of-pocket costs. This proposal, like the voucher proposal, would simply shift costs to seniors and other payers and would do nothing to control costs.

Medicare Basics

Traditional Medicare has two parts:

Part A—Hospital Insurance covers expenses for inpatient hospital stays, skilled nursing facilities, home health care and hospice care. The Part A deductible for 2013 is $1,184 for each spell of illness, and beneficiaries will also pay coinsurance for hospital stays over 60 days and skilled nursing facility stays over 20 days. For 2013, the coinsurance payments are:

Hospital Stays: $296 per day for days 61-90
  $592 per day for days 91-150
Skilled Nursing Facility: $148 per day for days 21-100

Part A is paid for through payroll taxes of 2.9 percent of earnings with workers and employers each paying 1.45 percent.  Beginning in 2013, the Affordable Care Act increases the payroll tax percent for higher-income workers (individuals making more than $200,000 a year and couples making more than $250,000) to 2.35 percent.

Part B—Supplementary Medical Insurance covers physician visits, outpatient hospital care, home health and preventive services as well as diagnostic tests and laboratory services and durable medical equipment. Part B benefits are subject to an annual deductible and beneficiaries will also pay coinsurance of 20 percent for most Part B services. The Part B deductible for 2013 is $147.

Part B is voluntary and is funded by monthly premiums paid by enrolled beneficiaries and general revenues from the federal government. The basic monthly Part B premium for 2013 is $104.90. However, single beneficiaries with incomes higher than $85,000 and married beneficiaries with incomes higher than $170,000 pay an additional income-related Part B premium. The additional monthly amount for 2013 ranges from $42 to $230.80, depending on the beneficiary’s income and tax filing status.

The Affordable Care Act enhanced benefits for preventive services under Part B by including free annual check-ups and providing certain preventive care screenings and services, including an annual flu shot, without any deductible or copayment.

There are two additional parts of Medicare:

Part C—the Medicare Advantage program allows beneficiaries to enroll in private plans available where they live, including health maintenance organizations, preferred provider organizations or private fee-for-service plans. Beneficiaries who choose a Medicare Advantage plan receive their benefits from the plan rather than through traditional Medicare. The private plans, in turn, are paid by Medicare to provide benefits to beneficiaries who select these alternatives. Part C is not separately financed.  In 2010, about 11 million Medicare beneficiaries were enrolled in Medicare Advantage plans.

The Affordable Care Act makes several changes to the Medicare Advantage program, including phasing out overpayments that these plans previously received. As a result of this change, the payments to Medicare Advantage plans will be closer to the average cost of Medicare beneficiaries covered by traditional Medicare. Medicare Advantage plans are also now prohibited from having higher cost-sharing requirements for certain services, including chemotherapy and skilled nursing care.

Part D—the Prescription Drug Benefit became effective in January 2006. The benefit is provided only through private plans, either stand-alone prescription drug plans or through a Medicare Advantage plan. Part D is funded by beneficiary-paid monthly premiums, federal government general revenues and state payments. Beneficiary premiums cover about 25 percent of the cost of the Part D benefit. 

Beginning in 2011, single beneficiaries with incomes higher than $85,000 and married beneficiaries with incomes higher than $170,000 pay an additional income-related Part D premium. In 2013 the monthly additional cost will range from $11.60 to $66.60, depending upon the beneficiary’s income and tax filing status.

Under the Affordable Care Act, the Part D benefit coverage gap—the “donut hole,” when Medicare beneficiaries must pay 100 percent of their drug costs—will gradually be closed. Beginning in 2011, beneficiaries who fall into the doughnut hole receive a 50 percent discount for brand name drugs. Beginning in 2013, subsidies for brand name drugs purchased in the coverage gap will be provided. The subsidies begin at 2.5 percent and grow to 25 percent by 2020. For generic drugs purchased while a beneficiary is in the donut hole, subsidies in 2011 cover 7 percent of generic drug costs and the subsidy amount increases each year by 7 percent until it reaches 75 percent in 2020.

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