The Health Law Resource

Overview of Medicare

Provided by the Health Care Financing Administration ("HCFA")

NOTE: These summaries are very brief, simple versions of complex subjects. They should be used only as general overviews and guides to the Medicare and Medicaid programs.

Brief Summaries of TITLE XVIII

of the Social Security Act

as of 6/24/95 (with 1994 data)

Table of Contents

Background Information

Since early in this century, health care issues have continued to escalate in importance for our Nation. Beginning in 1915, various efforts to establish government health insurance programs have been initiated every few years. From the 1930s on, there was broad agreement on the need for some form of health insurance to alleviate the unpredictable and uneven incidence of medical costs. The main health care issue at that time was whether health insurance should be privately or publicly financed.

Private health insurance coverage expanded rapidly during World War II, when fringe benefits were increased to compensate for the government limits on direct wage increases. This trend continued after the war. Private health insurance (mostly group insurance financed through the employment relationship) was especially needed and wanted by middle-income people. Yet not everyone could obtain or afford private health insurance. Government involvement was sought.

Various national health insurance plans, financed by payroll taxes, were proposed in Congress starting in the 1940s; but none was ever brought to a vote. In 1950, Congress acted to improve access to medical care for needy persons who were receiving public assistance. This permitted, for the first time, Federal participation in the financing of State vendor payments to the providers of medical care for costs incurred by public assistance recipients. In 1960, the Kerr-Mills bill provided medical assistance for aged persons who were not so poor, yet still needed assistance with medical expenses. But a more comprehensive improvement in the provision of medical care, especially for the elderly, became a major congressional priority.

After various considerations and approaches, and following lengthy national debate, Congress passed legislation in 1965 which established the Medicare and the Medicaid programs as Title XVIII and Title XIX of the Social Security Act. Medicare was established in response to the specific medical care needs of the elderly (and in 1972, the severely disabled and certain persons with kidney disease), and Medicaid was established in response to the widely perceived inadequacy of the "welfare medical care" under public assistance.

Subsequent to their enactment, both Medicare and Medicaid have been subject to numerous legislative and administrative changes which continually seek, within financial considerations, to make improve- ments in the provision of health care services to the aged and poor. Since 1965, growth in health care expenditures have consistently outpaced growth in general revenues for all levels of government.

Health and medical care is funded through a variety of private payers and public programs. For each year from 1975 through 1990, private funds (out-of-pocket expenditures, non-patient revenues including philanthropy, industrial in plant health services, and private health insurance) paid for 58 to 60 percent of all health care expenditures. By 1993, the proportion paid by private funds had dropped to 56.1 percent. (1994 national data are not yet available).

The public share of health care expenditures has steadily increased over the past five years from 40.2 percent in 1988 to 43.9 percent in 1993. Public spending represents expenditures by Federal, State, and local governments. Of the publicly funded health care expenditures for our Nation, each of the following account for a small percentage of the total: The Department of Defense health care programs for military personnel; The Department of Veterans' Affairs health programs; payments for health care under Workers' Compensation programs; health programs under the State-only general assistance programs; non-commercial medical research; and the construction of medical facilities. Other activities which are also publicly funded include: maternal and child health services; public health clinics; school health programs; Indian health care services; migrant health care services; vocational rehabilitation services; and drug, alcohol and mental health activities.

The largest shares of public health expenditures, however, are for the Medicare and Medicaid programs, which accounted for 30.8 percent of the total health care spending in the U.S. in 1993. (By comparison, 17.8 percent of all national health care spending comes from consumers in out-of-pocket expenditures and 33.5 percent is reimbursed by private health insurance.) Medicare and Medicaid expenditures represented 70.2 percent of all publicly-funded health care spending in the U. S. in 1993, with Medicare responsible for 40 percent and Medicaid responsible for 30 percent. Although percentages of total health expenditures for 1994 are still unknown, the data for Medicaid and Medicare are available. The FY 1994 Medicare and Medicaid programs' total expenditure for delivery of services and program administration was reported as $297.5 billion.

Medicare: A Brief Summary


Title XVIII of the Social Security Act, entitled "Health Insurance for the Aged and Disabled," is commonly known as "Medicare." As part of the Social Security Amendments of 1965, the Medicare legislation established a health insurance program for aged persons to complement the retirement, survivors and disability insurance benefits under other titles of the Social Security Act.

When first implemented in 1966, Medicare covered most persons age 65 and over. Since then, legislation has added other groups:

(1) persons who are entitled to disability benefits for 24 months or more (1972); (2) persons with end-stage renal disease (ESRD) requiring dialysis or kidney transplant (1972); and (3) certain otherwise non-covered persons who elect to buy into the Medicare program (1973).

Medicare consists of two parts: hospital insurance (HI), also known as Part A; and supplementary medical insurance (SMI), also known as Part B. When Medicare began on July 1, 1966, there were 19.1 million persons enrolled in the program. By the end of 1966, 3.7 million persons had received at least some health care services covered by Medicare. In 1994, about 36.9 million persons were enrolled in one or both parts of the Medicare program. About 83 percent (84 percent of the aged) of all Medicare "enrollees" used some HI and/or SMI service in FY 1994, and thus are the 1994 Medicare "beneficiaries".

Medicare (HI and SMI) coverage

Hospital Insurance (Part A) is generally provided automatically for persons age 65 and over and to most persons who are disabled for 24 months or more who are entitled to Social Security or Railroad Retirement benefits. A major aspect of HI is the "benefit period," defined as the measurement of time-duration for inpatient care, starting when the beneficiary first enters a hospital, and ending when there has been a break of at least 60 consecutive days since inpatient hospital or skilled nursing care was provided. There is no limit to the number of benefit periods covered by HI during a bene-ficiary's lifetime; but co-payment requirements (detailed later) by the Part A beneficiary do apply for days 61 through 90 of a benefit period. If a beneficiary exhausts the 90 days of inpatient hospital care available in a benefit period, he or she can elect to use days of Medicare coverage from a nonrenewable "lifetime reserve" of up to 60 (total) additional days of inpatient hospital care.

The following describes the health services for which Part A of Medicare reimburses participating institutional providers: inpatient hospital, skilled nursing facility, home health, and hospice services that are rendered to beneficiaries enrolled in Part A.

Supplementary Medical Insurance (Part B) benefits are available to: almost all resident citizens age 65 and over; certain aliens age 65 or over -- even to those who are not entitled (based on eligibil-ity for Social Security or Railroad Retirement benefits) to Part A Medicare services; and disabled beneficiaries who are entitled to Medicare's Part A. Part B coverage is optional, and must be paid for through a monthly premium. Almost all persons entitled to Part A also choose to enroll in Part B.

Part B is often thought of primarily as coverage for physician services (in both hospital and non-hospital settings). However, SMI also covers certain other non-physician services, including: clinical laboratory tests, durable medical equipment, flu vaccinations, drugs which cannot be self-administered (except certain anticancer drugs), most supplies, diagnostic tests, ambulance services, some other therapy services, certain other health care services, and blood which is not supplied under Part A.

The expenditures for institutional services in hospital out-patient departments, ambulatory surgical centers and certain other centers are also covered. All services must be medically necessary to be covered. Certain medical services and related care are subject to special payment rules including: deductibles (for blood); maximum approved amounts (for independently practicing, Medicare-approved physical or occupational therapists); or higher cost sharing requirements (such as for outpatient mental illness treatments).

Non-covered services under Medicare include long-term nursing care or custodial care, and certain other health care needs such as dentures and dental care, prescription drugs (except certain self-administered anticancer drugs), eyeglasses, hearing aids, etc. These are not a part of either the Part A or the Part B program unless they are a part of a special "coordinated care plan".

Medicare coordinated care plans

Coordinated care (prepaid health care plans), such as competitive medical plans (CMPs) and health maintenance organizations (HMOs), is an option for Medicare beneficiaries. Coordinated care plans function on a basis different from regular fee-for-service plans. Under coordinated care plans, Medicare beneficiaries receive their medical services at a comprehensive health care setting within a service area. This public or private organization provides health care services at a predetermined per-person rate, regardless of frequency or extent of utilization by its enrollees. Coordination of all health care services is central to the HMO and CMP concept. To insure this coordination, all of the health care services, except for emergency services, are obtained by the beneficiary only from the professionals and facilities affiliated with the HMO or CMP which the beneficiary has selected.

In addition to those services which are usually provided under Medicare fee-for-service plans, the coordinated care plans often cover services such as preventive care, eyeglasses, dental care, or hearing aids. Electing to participate in a coordinated care plan may also serve as an alternative to purchasing "medigap insurance" (described later) which is often wanted if the beneficiary is in a traditional fee-for-service plan. And, although there are certain restrictions and limitations, the coordinated care plan's larger fixed monthly premiums and smaller coinsurance payments help to provide more predictability for out-of-pocket costs for the beneficiaries who do not have medigap insurance.

Program financing, Beneficiary liabilities, and Vendor payments

The Medicare program's expenses (for provided benefits and for administration) are paid for primarily from two separate trust funds. HI's funds accrue mainly from a tax on individuals' employment earnings. SMI's funds come from the payment of premiums by or on behalf of individuals, plus significant contributions from the general revenue of the Federal government. Most Medicare covered services also require some form of cost-sharing from beneficiaries.

Program financing:

For Part A, financing is, primarily, through a mandatory payroll deduction ("FICA tax") of 1.45 percent of taxable earnings (paid by each employee and the employer for each), as well as 2.90 percent for self-employed persons who pay into the HI trust fund. This hospital insurance trust fund is separate from the SMI trust fund, and from Social Security's Old Age and Survivors' Insurance and Disability Insurance trust funds. The HI trust fund money is used only for the HI program.

For Part B, financing is through premium payments ($46.10 per month in 1995) which are usually deducted from monthly Social Security benefit checks of those who are voluntarily enrolled in the SMI plan, and through significant contributions (65 percent of the total in 1994) from general revenue of the Federal government.

Beneficiary payment liabilities:

For Parts A and B, beneficiaries are responsible for charges not covered by the Medicare program, and for various cost sharing aspects of both HI and SMI. These liabilities may be paid: (1) by the Medicare beneficiary, (2) by some other third party such as private "medigap" insurance purchased by the Medicare beneficiary, or (3) by Medicaid, if the person is eligible. The term "medigap" is used to mean private health insurance which, within limits, pays most of the health care service charges not covered by Parts A or B of Medicare. These policies, which must meet federally-imposed standards, are offered by Blue Cross (for Part A) and Blue Shield (for Part B), and by many commercial health insurance companies.

For Part A, the beneficiary's payment share includes a one-time deductible amount at the beginning of each benefit period ($716 in 1995). This covers the beneficiary's part of the first 60 days of each spell of inpatient hospital care. If continued inpatient care is needed, additional coinsurance payments ($179 per day in 1995) are required through the 90th day of a benefit period. Medicare pays nothing after day 90, unless the beneficiary elects to use "lifetime reserve" days, for which a co-payment ($358 per day in 1995) is required from the beneficiary.

For skilled nursing care under Part A, the first 20 days of SNF care are fully covered by Medicare; but for days 21 through 100, co- pay ($89.50 per day in 1995) is required from the beneficiary. After 100 days of SNF care per benefit period, Medicare pays nothing for SNF care. Home health care has no deductible or co-insurance. In any Part A service, the beneficiary is responsible for fees to cover the first three pints or units of non-replaced blood per calendar year. The beneficiary has the option of paying the fee or of having the blood replaced.

There are no premiums for the HI portion of Medicare for most people aged 65 and over. Eligibility for HI is generally earned through the work experience of the beneficiary, or that of a spouse. However, some persons who are otherwise unqualified for Medicare may purchase HI coverage if they also buy the SMI coverage. The cost is determined by a formula: If they have 30 or more quarters of coverage as defined by the Social Security Administration, the 1994 cost of HI is reduced to $183 per month; if not, the HI cost is $261 per month.

For Part B, the beneficiary's payment share includes: one annual deductible (currently $100); the monthly premiums; the co-insurance payments for Part B services (usually 20 percent of the allowable charges); a blood deductible; and payment for any services which are not covered by Medicare. These "cost-sharing" contributions are required of the beneficiaries for SMI services. For ESRD patients, Medicare Part B assists in paying for kidney dialysis and transplants. Regular Part B cost-sharing requirements also apply for ESRD services.

Vendor payments:

For Part A, prior to 1983, payment was made on a "reasonable cost" basis. Medicare payments for most inpatient hospital care are, since 1983, under a plan known as the Prospective Payment System (PPS). Under the PPS, a hospital is paid a predetermined amount, based upon the patient's diagnosis within a "diagnosis related group," (DRG) for providing whatever medical care is required during that person's inpatient hospital stay. In some cases the payment received is less than the hospital's actual costs; in other cases it is more. The hospital absorbs the loss or makes a profit. Certain payment adjustments exist for extraordinarily costly cases. Payments for home health, hospice and skilled nursing care coverage continue to be paid under the reasonable cost methodology, with each service having some restrictions and limitations. Vendor payments for Part A in FY 1994 were approximately $102.75 billion.

For Part B, physicians are paid on the basis of "reasonable charge". This was defined as the lowest of (1) thephysicians's actual charge, (2) the physicians's customary charge, or(3) the prevailing charge in the locality for similar services. Beginning January 1992, the reasonable charges are defined as the lesser of: the submitted charges, or a fee schedule based on a relative value scale (RVS). Durable medical equipment and clinical laboratory services are also based on a fee schedule. Outpatient services and HHAs are reimbursed on a reasonable cost basis. Vendor payments for Part B in FY 1994 were approximately $58.0 billion.

If a doctor or supplier agrees to accept the approved rate as payment in full ("takes assignment"), then payments provided must be considered as payments in full (after co-payments have been met) for that service. No added payments may be sought from the beneficiary or insurer. If the provider does not take assignment, the benefici-ary will be charged for the excess (which may be paid by medigap insurance). Limits now exist on the excess which providers can charge. However, since Medicare beneficiaries may select their doctors, they have the option to choose those who do take assignment.

Medicare claims processing

Medicare contractors (intermediaries and carriers) may be public or private organizations or agencies (currently, all are private insurance agencies) that contract to serve as the fiscal agent between providers and the Federal government to locally administer Medicare's Part A and Part B.

Medicare "intermediaries" process Part A claims for institutional services, including inpatient hospital claims, skilled nursing facilities, home health agencies, and hospiceservices. They also process outpatient claims for SMI. Examples ofintermediaries are the Blue Cross and Blue Shield Association (which utilize Blue Cross plans in various States), and commercial insurance companies.

Medicare "carriers" handle Part B claims for services by physicians and medical suppliers. Examples of carriers are the Blue Shield plan in a State, and commercial insurance companies.

"Peer Review Organizations" (PROs) are groups of practicing health care professionals who are paid by the Federal government to review the care provided to Medicare beneficiaries in each State. PROs act to promote effective, efficient and economical delivery of health care services to the Medicare population they serve.

Administration of Medicare

The overall responsibility for administration of the Medicare program lies with the Department of Health and Human Services (DHHS) and the various components: the Health Care Financing Administration (HCFA), the Public Health Service (PHS), and the Social Security Administration (SSA). The HCFA has primary responsibility for Medicare, including: formulation of policy and guidelines; contract oversight and operation; maintenance and review of utilization records; and general financing of Medicare. The SSA is responsible for the initial determination of an individual's entitlement and has overall responsibility for maintaining the Medicare master benefici-ary record. And the PHS is responsible for administering the professional health aspects of Medicare.

The Department of Treasury manages both the Medicare Part A and Part B trust funds, and the transfer of funds to pay the bills. A Board of Trustees, which is composed of two appointed members and three ex-officio members, holds the trust funds for both Part A and for Part B. The Board of Trustees reports the status and operation of the Medicare trust funds to Congress on April first of each year.

State agencies (usually State Health Departments under agree-ments with HCFA) assist by helping DHHS to identify, survey, and inspect provider and supplier facilities or institutions wishing to participate in the Medicare program. In consultation with HCFA, they then certify those that are qualified. The State agency also coordinates the various State programs to assure effective and economical endeavors, and assists providers as a consultant.

Medicare Trends and Summary

The Medicare program covers 95 percent of our nation's aged population, plus many of the disabled persons who are on Social Security. In calendar year (CY) 1994, Medicare Part A covered 36 million enrollees at a cost of $104.5 billion (expected to be $113.9 billion in 1995), and Part B covered 35.1 million enrollees in 1994 at a cost of $60.3 billion (expected to total $69.0 billion for 1995). Administrative costs were 1.2 percent of HI and 2.8 percent of SMI disbursements for 1994. Combining the HI and SMI benefit payments for all Medicare services in CY 1994, the average disburse- ment per enrollee was $4,449. Of those persons who were entitled to Medicare in 1994, over 80 percent use Supplementary Medical Insurance services, while only 20 percent use the Hospital Insurance services.

The rising cost of health care is a major consideration for HCFA, for the President, and for Congress. The present schedule for financing the Part A program is sufficient to ensure the payment of benefits only for the next seven years. And although the Part B program is currently actuarially sound, the past and projected growth in the cost of the program is of grave concern. For the long range: the SMI program costs are projected to increase from 0.93 percent of the Nation's GDP in CY 1994 to 4.29 percent of GDP in CY 2069; and the HI program costs are projected to increase from 1.56 percent of GDP in CY 1994 to 4.46 percent in CY 2069.

Projections for the more immediate future indicate that, if expenditures continue at the current rate with normal growth rate for the population and if there are no significant changes to the health care programs, disbursements for the Medicare program are estimated to rise from $183 billion in 1995 to almost $222 billion for 1997.


Our Nation's expenditures for health care services in 1994 approached $1 trillion, and may have been as much as 14 percent of the Nation's gross domestic product (GDP). These health expendi- tures are a major concern of the Administration and Congress. The dynamic interrelationship of various factors, needs and financial limitations will have a major influence on future national health care programs and their costs. The ability of the Nation to provide good health care, yet contain health care costs, faces uncertainty.

Acknowledgements: The written portions, including the summaries of the Medicaid and Medicare programs, were prepared by Mary Onnis Waid in the Office of the Actuary, Health Care Financing Administration, N3-01-23, 7500 Security Blvd. Baltimore, MD 21244-1851. Phone (410)-786-6921. The national health expenditures data and estimates were prepared by the Office of National Health Statistics, also in the Office of the Actuary, HCFA. Historical information was extracted from the Vol. 56, No. 4, Winter, 1993 edition of the Social Security Bulletin.

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