Medicare

Medicare, the national health-insurance plan for the elderly and disabled, is much like Social Security in terms of the people it serves, its popularity and its fragile future -- except that it's in much worse shape financially. The program serves 42 million Americans and costs more than $325 billion per year, nearly 13 percent of the federal budget. But current projections say Medicare will be unable to cover its bills by 2019 -- long before Social Security, which should be able to cover its costs until 2041.

Like Social Security, Medicare will face increasing demand for its services as the 78 million baby boomers retire. Unlike Social Security, Medicare also has to cope with the skyrocketing cost of health care. Most budget experts, in fact, say this combination of rising health costs and demographics makes Medicare the biggest problem facing the federal budget in the long term.

In 2003, the federal government added prescription drug coverage to Medicare, the biggest change to the program since it was created in 1965. Supporters say with elderly Americans more and more dependent on prescription drugs (which are becoming more and more expensive), the benefit covers a vital need. Critics say the program is expensive and offers little actual coverage. Others argue that it's irresponsible to add more costs -- an estimated $395 billion -- to a system that's already in danger of going broke.

Generally, polls show the public is strongly supportive of Medicare, but doubtful about the most common reform plans. The public is also skeptical that future retirees will have the same benefits as current ones -- or that the federal government has the will to save the program.

Saving the Elderly from Medical Costs

Since its inception in 1965, Medicare has transformed health care for the nation's retirees and the disabled. Nearly every elderly American is covered by the program.

Medicare has two parts. Part A, financed by a 2.9 percent payroll tax paid in equal parts by employees and their employers, is a hospital insurance program for retirees and their dependents that covers most in-patient hospital costs. Recipients can elect to enroll in Part B, Medicare's supplementary insurance, which covers physician and outpatient services. This part is financed with premiums and deductibles paid by beneficiaries and from general revenues. Almost all Part A recipients enroll in Part B.

Medicare spending that isn't covered by payroll taxes and premiums comes directly from the federal government. As part of the new Medicare law, the government has set a 45 percent threshold for its contribution -- beyond that, premium increases or service cuts would be required.

When Medicare began, no one anticipated the development of new medical technologies and drugs that are keeping older Americans healthier, but at considerable expense.The cost of Medicare has risen more rapidly than any other government program. Membership has increased rapidly as well, with 43 million people getting Medicare benefits in 2006, compared with about 25 million in 1967.

In addition, many retirees are becoming more dependent on Medicare, because fewer are getting health benefits from their former employers, and many who do get benefits are getting less coverage.

In the 1990s, the federal government tried to slow Medicare costs by encouraging beneficiaries to enroll in health maintenance organizations. HMOs and other "managed care" insurers have been credited with controlling costs in other areas of health care. In 2003, there were 4.6 million people on Medicare enrolled in HMOs. While that's nearly triple the number in Medicare HMOs in 1992, the number has actually declined from its 1999 high point of 6.8 million. During the 1990s, HMOs were eager for Medicare patients, promising better benefits at better prices. Now, however, many HMOs are complaining that government reimbursements are too low and they are dropping out of the program. Beneficiaries turned away from an HMO still get Medicare coverage, but have to go through the trouble of finding another HMO or returning to Medicare's conventional plan.

One of the great benefits of these "Medicare Advantage" HMOs, however, is that they generally offer coverage beyond standard Medicare. Most Medicare participants supplement their coverage in some way. One-third still have employer or union-sponsored insurance as part of their retirement package, while about one-quarter have a so-called "Medigap" policy -- private insurance specifically tailored to cover things Medicare leaves out (such as prescriptions, eyeglasses or long-term care). Low-income seniors may be covered by Medicaid as well.

Paying for Prescriptions

The Medicare prescription drug benefit has addressed one of the major weaknesses as far as the benefits offered by the program, which did not previously cover prescriptions outside a hospital.

Like Part B, the formal drug benefit (known as Part D) is voluntary; unlike Part B, it will be offered through private insurers. Coverage is available for a $250 deductable, covering 75 percent of drug costs up to $2,250. After that, beneficiaries pay the full cost. But if someone's drug costs exceed $5,100 per year benefits kick in again, with such "catastrophic" beneficiaries able to get 95 percent of drug costs covered.

Adding the drug benefit was supported by major groups advocating for the elderly, such as the AARP, who say it was a dramatic and needed expansion of coverage. But critics say the benefit may actually give some retired people fewer benefits than they got before. In addition to potentially steep out-of-pocket costs, some employers are expected to drop drug coverage for retirees because of the new plan. And elderly people will no longer be able to get drug coverage from Medicaid. Also, this has a major impact on the financial state of Medicare, adding additional costs to a program that's already financially fragile.

The Question of Cost

With health care costs continuing to rise and the number of Medicare beneficiaries expected to double, a key issue is whether the government can control the costs of the program. Supporters of the new Medicare law say it will do that by harnessing competition among the various private companies expected to offer the prescription drug benefit. Upper-income retirees will see their Part B premiums increased. In addition, the 45 percent threshold for the overall federal government share is expected to limit government spending.

In many ways the cost problem is simply a reflection of the wider health care system, where costs have been rising for years. (For more details, see our issue guide on health care). But since Medicare is under direct government control, critics say the government can and should do more to cut costs. One suggestion is for the government to use its buying power to purchase prescription drugs for Medicare in bulk (and thus getting cheaper rates). The government already does this for Medicaid and veterans' hospitals. Others argue that the government should allow seniors to buy prescription drugs overseas, where drugs are often cheaper than in the U.S. or limit benefits for high-income seniors. Still others argue that the real solution is to change the overall health care system to control costs.

Serious Problems, Few Solutions

Most Americans tell public opinion researchers that they have serious concerns about Medicare, and they are convinced that fixing it should be a top priority. Majorities say the program needs major changes or a complete overhaul, while more than half also say the country is losing ground when it comes to the financial state of Medicare. Most experts would say that the public has unrealistic views about what the problems are and how they can be fixed. For one thing, Americans are more likely to blame Medicare's problems on drug and insurance companies than on the cost of new drugs and treatments or the aging of the population. Three-quarters consider fraudulent claims as a major factor in Medicare's rising cost. There is some support for this view, since one General Accounting Office study found roughly 10 percent of the Medicare budget is spent on bogus claims.

Americans generally support increased spending on Medicare, though they are divided on how to pay for it or whose responsibility it is to provide it. Few proposals have any broad support, especially requiring seniors to pay more in out-of-pocket costs, as well as serving only low-income seniors, cutting back on the prescription drug benefit, or increasing the eligibility age. Only when forced to choose is the public willing to place more of the financial burden on workers and employers.

Choicework

For additional perspective on how society could address this issue, visit our Discussion Guide which sets out three alternative approaches.
The points of view are drawn both from what the experts say about an issue and from what the public thinks about it, based on surveys and focus groups. We call this section "Choicework." Each point of view comes with the arguments for and against, along with some potential costs and tradeoffs.

• From one perspective, we should accept the rising cost of this program and do whatever is necessary to keep existing benefits intact.

• From a second perspective, the most prudent course is to reduce the program's costs by revising benefits, raising the eligibility age, and requiring Medicare recipients to use HMOs, which have a track record of containing costs.
• From a third perspective, what's needed is fundamental reform, privatizing the system, and requiring individuals to set up medical savings accounts to cover the cost of health care in retirement.