R EP O RT

A Primer on Medicare March 2015

KEY FACTS ABOUT THE MEDICARE PROGRAM AND

THE PEOPLE IT COVERS
This primer was prepared by Juliette Cubanski, Christina Swoope, Cristina Boccuti, Gretchen
Jacobson, Giselle Casillas, Shannon Griffin, and Tricia Neuman of the Kaiser Family
Foundation’s Program on Medicare Policy.
Medicare is a federal program established in 1965 that provides health insurance coverage to 55 million
people in 2015, including 46 million people ages 65 and older and 9 million younger people with permanent
disabilities. The program covers all those who are eligible regardless of their health status, medical
conditions, or incomes.

Most individuals become eligible for Medicare when they reach age 65. People under age 65 qualify for
Medicare after 24 months of receiving Social Security Disability Insurance (SSDI) payments, or if they
have end-stage renal disease (ESRD) or amyotrophic lateral sclerosis (ALS, also known as Lou Gehrig’s
disease).

Medicare covers a diverse population. Many people on Medicare live with health problems ranging from
multiple chronic conditions, cognitive impairments, and limitations in their activities of daily living. Most
people with Medicare live on modest incomes.

Medicare covers basic health services, including hospital stays, physician visits, and prescription drugs. At
the same time, gaps in Medicare's benefit package include long-term care services, vision services, dental
care, and hearing aids.

Medicare has varying premiums, deductibles, and coinsurance amounts that can change annually to reflect
changes in program costs. Taken altogether, Medicare has relatively high cost-sharing requirements for
covered benefits, but traditional Medicare provides no protection from catastrophic medical expenses.

Through the Part D program, Medicare helps cover the cost of prescription drugs offered by private drug
plans. Seven out of 10 Medicare beneficiaries are currently enrolled in a Part D drug plan, including stand-
alone prescription drug plans and Medicare Advantage drug plans. Roughly 12 million low-income
beneficiaries are receiving extra help with their Part D plan premiums and cost sharing.

Medicare Advantage plans are private health plans that receive payments from Medicare to provide
Medicare-covered benefits to enrollees. Three in 10 beneficiaries are enrolled in a Medicare Advantage
plan.

Most Medicare beneficiaries have some type of supplemental insurance to help pay Medicare’s cost-sharing
requirements and fill gaps in Medicare’s benefit package. Primary sources of supplemental coverage
include employer-sponsored plans, Medicaid, Medigap policies, and Medicare Advantage plans.
Medicare and Medicaid play important but different roles for people who are eligible for both programs.
These dual-eligible beneficiaries are poorer and have more medical needs than beneficiaries who are not
dually eligible.

The enactment of Medicare dramatically improved access to care for millions of elderly Americans.
Beneficiaries generally enjoy broad access to physicians, hospitals, and other providers, and report
relatively low rates of problems across a number of access measures.

Medicare relies on a number of different approaches when determining payments to each provider for
services they deliver to Medicare beneficiaries. While traditionally Medicare has paid providers on a fee-
for-service basis, Medicare is implementing new payment models that are designed to tie traditional
Medicare payments to provider performance on quality and spending.

Delivery system reforms are new payment approaches for health care designed to change the way
providers organize and deliver care. The Affordable Care Act included a number of delivery system
reforms that are being implemented in the Medicare program.

Medicare accounted for 14 percent of federal spending in 2014 and one-fifth of the $2.5 trillion in personal
health care expenditures in the U.S in 2013. In the short term, Medicare spending per person is expected to
grow more slowly than it has in the past, while over the longer term, Medicare spending is expected to
begin to rise more rapidly due to a number of factors.

Funding for Medicare comes primarily from general revenues (41 percent in 2013) and payroll taxes (38
percent), followed by premiums paid by beneficiaries (13 percent). Looking to the future, Medicare is
expected to face financing challenges due to the aging of the U.S. population and increasing health care
costs.
July 30, 2015 marks the 50th anniversary of the date in 1965 that President Lyndon Johnson signed the law
establishing the Medicare program. Medicare is a social insurance program that helps to provide health and
financial security for people ages 65 and older and younger people with permanent disabilities. Prior to 1965,
roughly half of all seniors lacked medical insurance; today, virtually all seniors have health insurance under
Medicare. Since Medicare's beginning, a number of changes have been made to expand benefits, revise the way
Medicare pays providers, modify beneficiary out-of-pocket costs for Medicare-covered services, improve access
and coverage for low-income individuals, expand the role of private plans in providing Medicare-covered
benefits, strengthen quality, and address the growth in program spending.

Today, Medicare provides health insurance coverage to more than 55 million people: 46.3 million people ages
65 and older and 9 million people with permanent disabilities under age 65. The program helps to pay for
many vital health care services, including hospitalizations, physician visits, and prescription drugs, along with
post-acute care, skilled nursing facility, home health care, hospice, and preventive services. People who are
working contribute payroll taxes to Medicare and most people become eligible for Medicare when they reach
age 65, regardless of income or health status.

Comprising 14 percent of the federal budget in 2014 and just over one-fifth of total personal health
expenditures in 2013, Medicare spending has slowed in recent years and is expected to grow at a slower rate
than private insurance on a per person basis over the next decade. At the same time, Medicare is often part of
discussions about how to moderate the growth of both federal spending and health care spending in the U.S.
With the challenges of providing increasingly expensive medical care to an aging population and sustaining the
program for the future, Medicare is likely to remain prominent on the federal policymaking agenda in the years
ahead. As policymakers consider potential changes to Medicare, the effects of such changes on total health care
expenditures, Medicare spending, and beneficiaries’ access to quality care and their out-of-pocket costs will be
important considerations.
The program was expanded in 1972 to include people under age 65 with permanent disabilities receiving Social
Security Disability Insurance (SSDI) payments and people with end-stage renal disease (ESRD). In 2001,
Medicare eligibility expanded further to cover people with amyotrophic lateral sclerosis (ALS, or Lou Gehrig’s
disease).

 Part A, also known as the Hospital Insurance (HI) program, covers inpatient hospital, skilled nursing
facility, some home health visits, and hospice care. Part A is funded by a tax of 2.9 percent of earnings paid
by employers and workers (1.45 percent each), along with an additional 0.9 percent paid by higher-income
taxpayers (wages above $200,000/individual and $250,000/couple). An estimated 55 million people are
enrolled in Part A in 2015.
 Part B, the Supplementary Medical Insurance (SMI) program, helps pay for physician, outpatient, some
home health, and preventive services. Part B is funded by general revenues and beneficiary premiums.
Beneficiaries who have higher annual incomes (more than $85,000/single person, $170,000/married
couple) pay a higher, income-related monthly Part B premium; the Affordable Care Act (ACA) froze the
income thresholds at 2010 levels from 2011 through 2019. An estimated 51 million people are enrolled in
Part B in 2015.
 Part C, also known as the Medicare Advantage program, allows beneficiaries to enroll in a private plan, such
as a health maintenance organization (HMO) or preferred provider organization (PPO), as an alternative to
traditional Medicare. These plans receive payments from Medicare to provide all Medicare-covered benefits,
including hospital and physician services, and in most cases, prescription drug benefits. In 2014, 15.7 million
beneficiaries were enrolled in Medicare Advantage plans.
 Part D, the outpatient prescription drug benefit, was established by the Medicare Modernization Act of
2003 (MMA) and launched in 2006. The voluntary benefit is delivered through private plans that contract
with Medicare: either stand-alone prescription drug plans (PDPs) or Medicare Advantage prescription drug
(MA-PD) plans. Part D plan enrollees generally pay a monthly premium and cost sharing for prescriptions
(varying by plan). In 2015, an estimated 42 million beneficiaries are enrolled in Part D.
The four different parts of Medicare have varying eligibility requirements, as described below. In general,
coverage under Medicare Part A and Part B is automatic when a Medicare-eligible individual applies for Social
Security or Railroad Retirement benefits. Individuals can decline enrollment in Medicare Part B if they have
other qualifying group coverage. If an individual qualifies for Medicare at age 65 but is not yet receiving Social
Security or Railroad Retirement benefits, an application for Medicare is required to initiate Medicare coverage.

 Age 65 and older: People age 65 and older qualify for Medicare if they are U.S. citizens or permanent legal
residents with at least five years of continuous residence. Individuals qualify without regard to their medical
history or preexisting conditions, and do not need to meet an income or asset test.
 Under age 65: Adults under age 65 with permanent disabilities are eligible for Medicare after receiving
Social Security Disability Income (SSDI) payments for 24 months.
 ESRD/ALS: People with end-stage renal disease (ESRD) or amyotrophic lateral sclerosis (ALS) are eligible
for Medicare benefits as soon as they begin receiving SSDI payments, without having to wait an additional 24
months.
Since most people make payroll tax contributions during their working years, most people who are eligible for
Part A do not need to pay premiums for covered services. However, people age 65 and older are required to
pay a monthly premium to receive Part A benefits if neither they nor their spouse made payroll contributions
for 40 or more quarters. Adults under age 65 who are eligible for Medicare do not need to pay premiums for
Part A benefits.

Medicare Part B is voluntary, but more than 90 percent of beneficiaries with Part A are also enrolled in Part B.
For most individuals who become entitled to Part A, enrollment in Part B is automatic unless the individual
declines enrollment. Individuals age 65 and older who are not entitled to premium-free Part A may enroll in
Part B. With the exception of Medicare-eligible individuals who are working (or those with working spouses),
who may delay enrollment in Part B if they receive employment-based coverage, those who do not sign up for
Part B when they are first eligible typically pay a penalty for late enrollment in addition to the regular monthly
premium for the duration of their enrollment in Part B.

Outside of their initial enrollment period for Medicare, beneficiaries can elect to enroll in a Medicare
Advantage plan (or switch from one plan to another) on an annual basis between October 15 and December 7 of
each year during the annual election period. Changes made during this period take effect on January 1 of the
following year. Beneficiaries enrolled in a Medicare Advantage plan on January 1 who wish to disenroll and
return to traditional Medicare have 45 days to do so (between January 1 and February 14 each year); they are
not allowed to switch from one Medicare Advantage plan to another during this period.
To get Part D benefits, beneficiaries must enroll in a stand-alone prescription drug plan (PDP) or Medicare
Advantage prescription drug (MA-PD) plan. The annual election period for Part D runs from October 15 to
December 7 each year. People who delay enrollment in Part D beyond their initial enrollment period and who
do not have “creditable” drug coverage (at least comparable to the Part D standard benefit) during this time
pay a permanent premium penalty if they choose to enroll in a Part D plan at a later time.
While most beneficiaries (71%) are between the Figure 1

ages of 65 and 84, 16 percent are under age 65 Selected Demographic Characteristics of Medicare
and permanently disabled, while another 13 Beneficiaries, 2010
Other 5% 85+
percent are ages 85 and older (Figure 1). More Hispanic 9% 13%
than half of beneficiaries (55%) are female, but Male Black
10%
45% 75-84
women account for an even larger share of 27%
beneficiaries at older ages. More than three-
quarters (77%) of beneficiaries are white, while White
65-74
10 percent are black and 9 percent are Hispanic. Female
77%
44%
55%

In terms of health status, a majority of

<65
beneficiaries report being in good or better 16%
health, but one in four Medicare beneficiaries Gender Race/Ethnicity Age
SOURCE: Kaiser Family Foundation analysis of the Medicare Current Beneficiary Survey 2010 Cost and Use file.
report (26%) being in fair or poor health
(Figure 2). Close to half (45%) of beneficiaries Figure 2

live with four or more chronic conditions and Selected Measures of Health Status of the Medicare
three out of ten beneficiaries (31%) have a Population, 2010
Percent of all Medicare beneficiaries:
cognitive or mental impairment. One-third of
4+ Chronic
45%
beneficiaries (34%) have one or more limitations Conditions

in activities of daily living (ADLs), such as eating

Functional
or bathing, that limit their ability to function Impairment
(1+ ADL Limitations)
34%

independently.
Cognitive/Mental
Impairment 31%
Most Medicare beneficiaries live at home;
however, five percent live in a long-term care Fair/Poor Health 26%
setting, such as a nursing home or assisted living
facility. Women account for nearly two-thirds of NOTE: ADL is activity of daily living.
SOURCE: Kaiser Family Foundation analysis of the Medicare Current Beneficiary Survey 2010 Cost and Use file.
beneficiaries living in long-term care settings
along with a disproportionate share of beneficiaries ages 85 and older (67%) and beneficiaries who are dually
eligible for Medicare and Medicaid (60%).
Compared to beneficiaries over age 65, a larger share of beneficiaries under age 65 are men (53% versus 44%),
racial and ethnic minorities (36% versus 21%), and are dually eligible for Medicare and Medicaid (46% versus
14%). Because people under age 65 on Medicare qualified due to having a permanent disability, they typically
have relatively high rates of chronic conditions, functional limitations, and cognitive impairments. A much
larger share of beneficiaries under age 65 than those ages 65 and older report that they are in fair or poor
health status (56% versus 21%).

Among beneficiaries at the older end of the age spectrum, a larger share of beneficiaries ages 85 and older than
those between the ages of 65 and 74 are women (67% versus 54%), white (85% versus 78%), living in long term
care facilities (17% versus 2%), and dually eligible for Medicare and Medicaid (20% versus 11%). Not
surprisingly, there are also differences in health status between the two groups; compared to younger seniors, a
larger share of the oldest old (age 85 and older) have four or more chronic conditions (61% versus 36%),
cognitive impairments (44% versus 19%), and one or more functional limitations (60% versus 20%).

In 2013, half of all Medicare beneficiaries had Figure 3

incomes below $23,500 per person (Figure 3). Distribution of Medicare Beneficiaries By Income, 2013
This equates to roughly 200 percent of the
federal poverty level ($11,173 for a single person 5%: incomes above $93,900
and $14,095 for a married couple age 65 and
older in 2013). Income declines with age
among seniors and is lower among women than 50%: incomes below $23,500
men and among blacks and Hispanics compared
to whites, and higher among married
beneficiaries and those with higher education
levels. A larger share of beneficiaries under age 25%: incomes below $14,400
65 have relatively low incomes compared to
NOTE: Total household income for couples is split equally between husbands and wives to estimate income for married
those ages 65 and older. beneficiaries.
SOURCE: Urban Institute analysis of DYNASIM for the Kaiser Family Foundation.

Along with having relatively low incomes, many Medicare beneficiaries have relatively low levels of savings. In
2013, half of all beneficiaries reported savings less than $61,400 per person. As with income, savings levels are
lower among beneficiaries who are female, racial and ethnic minorities, and those under age 65.

Driven by the aging "Baby Boom" generation, the U.S. population ages 80 and over will nearly triple between
2010 and 2050, increasing from 11 million to 31 million people, and the number of people ages 90 and over will
quadruple (from 2 million to 8 million). As an increasing number of people become eligible for Medicare and
as more people live into their 80s and beyond, the demographics of the Medicare population can be expected to
change, not only in terms of the age distribution, but also beneficiaries' physical and mental capabilities,
financial resources, health status, and medical needs.
 Part A benefits include inpatient care Figure 4

provided in hospitals and short-term stays in Medicare Beneficiaries’ Utilization of Selected Medicare-
skilled nursing facilities, hospice care, post- Covered Services, 2010
Percent of Traditional
acute home health care, and pints of blood Medicare population with:
Prescription drug
received at a hospital or skilled nursing facility. use 89%

In 2010, 19 percent of beneficiaries in Physician office visit 78%

traditional Medicare had an inpatient hospital Inpatient hospital
19%
stay, while 9 percent used home health care stay

services, 5 percent had a skilled nursing facility Home health visit 9%

stay, and 3 percent used hospice care (Figure Skilled nursing 5%

facility stay
4).
Hospice days 3%
 Part B benefits include outpatient services
such as outpatient hospital care, physician
NOTE: Analysis excludes beneficiaries enrolled in Medicare Advantage.
SOURCES: Kaiser Family Foundation analysis of the Medicare Current Beneficiary Survey 2010 Cost and Use file.

visits, and preventive services (e.g.,

mammography and colorectal screening). Part B benefits also include ambulance services, clinical
laboratory services, durable medical equipment (such as wheelchairs and oxygen), kidney supplies and
services, outpatient mental health care, and diagnostic tests (such as x-rays and magnetic resonance
imaging). The ACA added a free annual comprehensive wellness visit and personalized prevention plan to
the list of Medicare-covered benefits. The law also gave the Secretary of Health and Human Services (HHS)
the authority to modify coverage of Medicare-covered preventive services to conform to the
recommendations of the U.S. Preventive Services Task Force (USPSTF). A larger share of beneficiaries use
Part B services compared to Part A services. For example, in 2010, more than three quarters (78%) of
traditional Medicare beneficiaries had a physician office visit.
 Part C (Medicare Advantage) private health plans cover all benefits under Medicare Part A, Part B, and, in
most cases, Part D. Medicare Advantage plans are required to provide all Medicare-covered benefits, but are
permitted to vary the benefit design as long as the core benefit package (excluding the value of supplemental
benefits) is actuarially equivalent to traditional Medicare. Some Medicare Advantage plans also include
extra benefits, such as dental services, eyeglasses, or hearing exams. (See "What is Medicare
Advantage?" for additional information.)
 Part D covers an outpatient prescription drug benefit through private plans. Plans are required to provide a
“standard” benefit or one that is actuarially equivalent, and may offer more generous benefits. In 2010, 89
percent of traditional Medicare beneficiaries used prescription drugs. (See "What is the Medicare Part
D prescription drug benefit?" for additional information.)
Medicare does not pay for some services and supplies that are often needed by older people and younger
beneficiaries with disabilities. For instance, Medicare does not pay for custodial long-term services and
supports, either at home or in an institution, such as a nursing home or assisted living facility. Medicare also
does not pay for routine dental care and dentures, routine vision care or eyeglasses, or hearing exams and
hearing aids.
Part A:
 Most beneficiaries do not pay a monthly premium for Part A services, but are required to pay a deductible
before Medicare coverage begins. In 2015, the Part A deductible for each “spell of illness” is $1,260 for an
inpatient hospital stay.
 Beneficiaries are generally subject to coinsurance for Part A benefits, including extended inpatient stays in a
hospital ($315 per day for days 61-90 and $630 per day for days 91-150 in 2015) or skilled nursing facility
($157.50 per day for days 21-100 in 2015). There is no coinsurance for days 1-60 of an inpatient hospital stay
or days 1-20 of a skilled nursing facility stay, and there is no cost sharing for home health visits.
Part B:
 Beneficiaries enrolled in Part B are generally required to pay a monthly premium ($104.90 in 2015).
 Beneficiaries with annual incomes greater than $85,000 for a single person or $170,000 for a married couple
in 2015 pay a higher, income-related monthly Part B premium, ranging from $146.90 to $335.70. The
income amounts that are used to determine who pays the income-related premium and how much they will
pay are fixed at their current levels through 2019. Approximately 5 percent of all Medicare beneficiaries paid
the income-related Part B premium in 2014.
 Part B benefits are subject to an annual deductible ($147 in 2015), and most Part B services are subject to
coinsurance of 20 percent. No coinsurance or deductible is charged for the annual wellness visit or for
preventive services that are rated 'A' or 'B' by the USPSTF.
Part C (Medicare Advantage):
 Medicare Advantage plan enrollees generally pay the monthly Part B premium and many also pay an
additional premium directly to their plan.
 Medicare Advantage plans are required to place a limit on beneficiaries’ out-of-pocket expenses for Medicare
Part A and Part B covered services ($6,700 in 2015). This limit is not applied to beneficiaries in traditional
Medicare, nor is it applied to out-of-pocket expenses for prescription drugs covered under Part D. (See
"What is Medicare Advantage?" for additional information.)
Part D:
 In general, Part D enrollees pay a monthly premium, along with cost-sharing amounts for each brand-name
and generic drug prescription; premiums and cost sharing vary by plan.
 Part D enrollees with higher incomes ($85,000 for a single person and $170,000 for a couple) pay an
income-related monthly adjustment amount in addition to the monthly premium charged by their Part D
plan. As with the Part B income-related premium, the income thresholds that determine who pays higher
premiums for Part D coverage are fixed at current levels through 2019. (See "What is the Medicare
Part D prescription drug benefit?" for additional information.)
Supplemental insurance coverage can help beneficiaries pay their out-of-pocket costs for Medicare-covered
services. Even with supplemental insurance, however, beneficiaries can face out-of-pocket expenses in the
form of copayments for services including physician visits and prescription drugs as well as costs for services
not covered by Medicare. Also, premiums for these policies can be costly: beneficiaries with Medigap
supplemental policies generally pay higher premiums than those with employer-sponsored retiree health
coverage. Moreover, while Medicaid, the Medicare Savings Programs (MSPs), and the Part D Low-Income
Subsidy (LIS) program help to shield low-income beneficiaries from Medicare premiums and other out-of-
pocket costs, not all low-income people on Medicare qualify for these programs. (See "What types of
supplemental insurance do beneficiaries have?" for additional information.)

The burden of out-of-pocket spending for health

Figure 5
care expenses is three times larger for Medicare Distribution of Average Household Spending by Medicare
households than non-Medicare households and Non-Medicare Households, 2012
(Figure 5). In 2010, Medicare beneficiaries Medicare Household Spending Non-Medicare Household Spending

spent $4,745 out of their own pockets for health

Transportation
care spending, on average, including premiums Transportation
$5,087* $9,660 Health
Housing 15.0% 18.2% $2,772 Care
for Medicare and other types of supplemental $11,673*
34.3% Health Care
Housing
$16,976
5.2%
$4,722* 32.0%
insurance and costs incurred for medical and 13.9%* Food
$7,890
14.9%
long-term care services (Figure 6). Premiums Food
$5,189* Other
for Medicare and supplemental insurance Other
$7,321*
15.3% $15,702
29.6%
21.5%*
accounted for 42 percent of average total out-of-
pocket spending among beneficiaries in Average Household Spending, 2012 = Average Household Spending, 2012 =
$33,993* $53,000
traditional Medicare in 2010. NOTE: *Estimate statistically significantly different from the non-Medicare household estimate at the 95 percent confidence level.
SOURCE: Kaiser Family Foundation analysis of the Bureau of Labor Statistics Consumer Expenditure Survey Interview and Expense
Files, 2012.

Of the remaining 58 percent of average total out-

Figure 6
of-pocket spending on services, long-term facility
Distribution of Average Total Out-of-Pocket Spending on
costs are the largest component (accounting for Services and Premiums by Medicare Beneficiaries, 2010
18 percent of total out-of-pocket spending),
followed by medical providers/supplies (14%), Long-term care facility
18%
prescription drugs (11%), and dental care (6%).
Medical providers and
Premiums Services 14%
supplies
42% 58%
$2,000 $2,746
11% Prescription drugs

6% Dental
3% Inpatient hospital
3% Skilled nursing facility
2% Outpatient hospital
1% Home health

Average Total Out-of-Pocket Spending on Services and Premiums, 2010: $4,745

NOTE: Analysis excludes beneficiaries enrolled in Medicare Advantage plans. Premiums includes Medicare Parts A and B and other
types of health insurance beneficiaries may have (Medigap, employer-sponsored insurance, and other public and private sources).
Estimates do not sum to total due to rounding.
SOURCE: Kaiser Family Foundation analysis of the Medicare Current Beneficiary Survey 2010 Cost and Use file.
Spending on medical and long-term care rises Figure 7

with age among beneficiaries ages 65 and older Medicare Beneficiaries’ Average Total Out-of-Pocket
and is higher for women than men, especially Spending on Services and Premiums, by Self-Reported
Health Status and Age, 2010
among those ages 85 and older (Figure 7). $8,276
Services
Beneficiaries’ health status and chronic Premiums
conditions also are significant drivers of out-of- $5,767 $5,537
$5,247
pocket spending, with average out-of-pocket $4,094 $4,131
$4,742 $6,012
$4,054
spending on services rising as beneficiaries’ $2,649
$4,230
$4,246 $3,023 $2,845
$1,797 $1,858 $1,956
health status declines, and rising with the
$2,074
number of functional impairments and chronic $2,297 $2,274 $2,093 $2,098 $2,402 $2,264
$1,537 $1,291
conditions. Out-of-pocket spending is also
$948

Excellent Very good Good Fair Poor Under 65 65-74 75-84 85+
higher among beneficiaries who have multiple Health status Age

hospitalizations and post-acute care use and NOTE: Analysis excludes beneficiaries enrolled in Medicare Advantage plans. Premiums includes Medicare Parts A and B and other
types of health insurance beneficiaries may have (Medigap, employer-sponsored insurance, and other public and private sources).
SOURCE: Kaiser Family Foundation analysis of the Medicare Current Beneficiary Survey 2010 Cost and Use file.
those who live in long-term care facilities. These
differences are driven primarily by variation in average spending on medical and long-term care services,
rather than by variation in premium spending.

In 2010, one in four beneficiaries spent at least $5,276 out of pocket on medical and long-term care services
and premiums (the top quartile), and one in ten spent at least $8,292 (the top decile). Average total out-of-
pocket spending among the top quartile—$11,501 in 2010—was more than twice as much as the average among
all beneficiaries ($4,745), while among the top decile, it was four times as much ($19,103). Long-term care
facility costs are a major component of spending for beneficiaries in the top quartile of total out-of-pocket
spending. This group of 'high out-of-pocket spenders' includes a disproportionate share of older women,
beneficiaries living in long-term care facilities, those with Alzheimer’s disease and ESRD, and beneficiaries who
were hospitalized.
In 2015, 1,001 stand-alone prescription drug plans (PDPs) are available nationwide, fewer than in any year
since the program began in 2006. Medicare beneficiaries in each region have a choice of 30 stand-alone PDPs,
on average, in 2015.

The standard benefit in 2015 has a $320 Figure 8

deductible and 25 percent coinsurance up to an Standard Medicare Prescription Drug Benefit, 2015
CATASTROPHIC
initial coverage limit of $2,960 in total drug COVERAGE Enrollee
pays 5% Plan pays 15%; Medicare pays 80%
Catastrophic
Coverage Limit =
$7,062 in
costs, followed by a coverage gap (Figure 8). Brand-name drugs
Estimated
Total Drug Costs*
During the gap, enrollees are responsible for a
Enrollee pays 45%
Plan pays 5%
COVERAGE 50% manufacturer discount
larger share of their total drug costs than in the GAP Generic drugs
(“Doughnut Hole”) Enrollee pays 65%
initial coverage period. Enrollees in plans with Plan pays 35%

Initial Coverage
no additional gap coverage in 2015 pay 45 Limit = $2,960 in
Total Drug Costs
percent of the total cost of brands and 65 percent INITIAL Enrollee
COVERAGE pays Plan pays 75%
of the total cost of generics in the gap until they PERIOD 25%
reach the catastrophic coverage limit. Medicare Deductible = $320
DEDUCTIBLE Enrollee pays 100%
will phase in additional subsidies for brands and NOTE: *Amount corresponds to the estimated catastrophic coverage limit for non-low-income subsidy enrollees ($6,680 for LIS
enrollees), which corresponds to True Out-of-Pocket (TrOOP) spending of $4,700 (the amount used to determine when an enrollee

generic drugs, ultimately reducing the

reaches the catastrophic coverage threshold.
SOURCE: Kaiser Family Foundation illustration of standard Medicare drug benefit for 2015 (standard benefit parameter update
from Centers for Medicare & Medicaid Services, 2014). Amounts rounded to nearest dollar.

beneficiary coinsurance rate in the gap to 25

percent by 2020.

After total out-of-pocket spending reaches $4,700 in 2015 (excluding premiums)—an amount equivalent to
$7,062 in estimated total drug costs—enrollees pay 5 percent of the drug cost or a copayment ($2.65/generic
drugs or $6.60/brand-name drugs for each prescription) for the rest of the year. The standard benefit amounts
are set to change annually by the rate of change in per capita Part D spending.

In 2015, no PDPs offer the standard benefit. Most charge copayments (flat dollar amounts) instead of 25
percent coinsurance; 58 percent of plans charge a deductible (44 percent of plans charge the full $320
deductible amount, and 14 percent charge a partial deductible). The majority (74%) of PDPs offer no gap
coverage in 2015 beyond what the ACA requires plans to offer. With all Part D enrollees now getting coverage
for a share of their drug costs in the gap, the value of additional gap coverage offered by plans will become
lower each year until 2020, when the gap is fully closed.

Part D plans are required to maintain a medical loss ratio (MLR) of at least 85 percent; that is, 85 percent of
revenue must be used on patient care, rather than on administrative expenses or profit. Plans vary widely,
however, in terms of formularies (the list of covered drugs), the placement of drugs on formulary tiers, cost-
sharing requirements, and utilization management tools (such as prior authorization requirements).
In 2015, the average monthly Part D premium for PDP plans is $38.83 (weighted by 2014 enrollment). Actual
monthly PDP premiums vary across plans and regions, ranging from a low of $12.60 for a plan available in
New Mexico, to a high of $171.90 for a plan available in Florida. Average monthly PDP premiums, weighted by
2014 enrollment, vary widely in 2015 across regions, ranging from $27.91 per month for PDPs in the New
Mexico region (one of only five regions with an average under $35) to $44.56 per month for PDPs in New
Jersey and $43.84 in the Idaho/Utah region.

Beneficiaries with limited income (less than 150 percent of the federal poverty level, or $17,655 for a single
person; $23,895 for a married couple in 2015) and limited assets ($13,640/single person; $27,250/married
couple in 2015) are eligible for the Low-Income Subsidy (LIS) program, or “extra help,” which helps pay for
some or all of the Part D monthly premium and cost-sharing amounts. Around 12 million beneficiaries are
currently receiving full or partial benefits under the LIS program, depending on their income and asset levels.

Beneficiaries who are dually eligible, QMBs, SLMBs, QIs, and SSI-onlys automatically qualify for the additional
assistance, and Medicare automatically enrolls them into PDPs with premiums at or below the regional average
(the Low-Income Subsidy benchmark) if they do not choose a plan on their own. Other beneficiaries are
subject to both an income and asset test and need to apply for the Low-Income Subsidy through either the
Social Security Administration or Medicaid. People determined eligible for the Low-Income Subsidy are
assigned to a PDP if they do not enroll on their own.

Of the 38 million beneficiaries enrolled in Part D Figure 9

plans, about 61 percent (23.2 million) are in Distribution of Sources of Prescription Drug Coverage
PDPs; the others are enrolled in Medicare Among Medicare Beneficiaries, 2014
Advantage drug plans. These enrollment counts
from September 2014 include 6.6 million Part D All other
13.3 million
enrollees in employer-only plans. Another 2.6 25% Part D non-LIS
million Medicare beneficiaries are estimated to Employer subsidy
enrollees
26.6 million
5%
be receiving prescription drug coverage from an 2.6 million
Part D LIS
49%

employer or union plan in which the employer enrollees

11.5 million
21%
receives subsidies through the Medicare Retiree
Drug Subsidy (RDS) program (equal to 28 Total Medicare Enrollment, 2014 = 54.0 million
Total Part D Enrollment (excluding employer plans), 2014 = 38.1 million
percent of drug expenses between $310 and NOTE: LIS is low-income subsidy. Total Part D and Medicare enrollment based on 2014 intermediate estimates. Part D non-LIS

$6,350 per retiree in 2014) (Figure 9).

enrollment includes enrollees in employer/group waiver plans (6.8 million in 2014).
SOURCE: Kaiser Family Foundation analysis of data from the 2014 Annual Report of the Boards of Trustees of the Federal Hospital
Insurance and Federal Supplementary Medical Insurance Trust Funds.
In 2015, Part D beneficiaries pay 45 percent of their brand-name drug costs, and 65 percent of their generic
drug costs in the coverage gap. Medicare is gradually phasing in subsidies in the coverage gap for brand-name
drugs and generic drugs, reducing the beneficiary coinsurance rate from 100 percent in 2010 to 25 percent in
2020. In addition, between 2014 and 2019, the out-of-pocket amount that qualifies an enrollee for
catastrophic coverage will be reduced, further lowering out-of-pocket costs for those with relatively high
prescription drug expenses. In 2020, the catastrophic coverage level will revert to what it would have been
absent these reductions.

Medicare provides plans with a subsidy of 74.5 percent of the cost of standard coverage for all beneficiaries,
which is based on annual bids submitted by plans for their expected benefit payments. Premium payments by
beneficiaries cover the remaining 25.5 percent. In 2015, private plans are projected to receive average annual
payments from Medicare of $548 per enrollee overall and $1,996 for Low-Income Subsidy enrollees; employers
are expected to receive, on average, $604 for retirees in employer-subsidy plans. Plans also receive additional
risk-adjusted payments for high-cost enrollees and reinsurance payments for a share of their enrollees’ costs
above the catastrophic threshold. Part D plans’ potential losses or profits are limited by risk-sharing
arrangements with the federal government (“risk corridors”).
Private plans, such as health maintenance organizations (HMOs), have been an option under Medicare since
the 1970s. Medicare now contracts with other types of private plans, including local preferred provider
organizations (PPOs), regional PPOs, private fee-for-service (PFFS) plans, and high deductible plans linked to
medical savings accounts (MSAs). In 2015, Medicare beneficiaries are able to choose from an average of 18
Medicare Advantage plans offered in their area.

Medicare Advantage plans receive payments from the federal government to provide all Medicare-covered
benefits to enrollees. Plan sponsors are generally required to offer at least one plan with basic drug coverage.
More than 8 in 10 Medicare Advantage plans (86 percent) offer drug coverage in 2015, and about four in ten
plans (44 percent) offer some coverage beyond the standard benefit design in the coverage gap, mainly for
generic drugs only. Plans are required to use any additional payments (known as rebates) to provide extra
benefits to enrollees in the form of lower premiums, lower cost sharing, or benefits and services not covered by
traditional Medicare. Examples of extra benefits include eyeglasses, hearing exams, preventive dental care,
podiatry, chiropractic services, and gym memberships.

Medicare Advantage enrollees generally pay the monthly Part B premium and many also pay an additional
premium directly to their plan. In 2015, the average premium for MA-PD plans (weighted by 2014 enrollment)
is $41 per month, but varies by plan type and is lower for HMOs ($32) than for local PPOs ($70). Medicare
Advantage plans are required to place a limit on beneficiaries’ out-of-pocket expenses for Medicare Part A and
B covered services of $6,700 in 2015. In 2015, 9 percent of all Medicare Advantage plans have a limit of
$3,400 or less, while almost half (48 percent)
have a limit of more than $5,000.
Figure 10

Medicare Private Plan Enrollment, 1999-2014

15.7
After a decline in the number of Medicare 14.4
13.1
Advantage enrollees between 1999 and 2003, the 11.9
11.1
10.5
program has seen a rapid increase in enrollment In millions: 9.7
8.4
in more recent years (Figure 10). The number 6.9 6.8
6.2
6.8
5.6 5.3 5.3 5.6
of Medicare enrollees in private plans has almost
tripled between 2003 and 2014, from 5.3 million
to 15.7 million. In 2014, 64 percent of Medicare
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Advantage enrollees were in HMOs, 23 percent % of Medicare
Beneficiaries
18% 17% 15% 14% 13% 13% 13% 16% 19% 22% 23% 24% 25% 27% 28% 30%

were in local PPOs, 2 percent were in PFFS NOTE: Includes MSAs, cost plans, demonstration plans, and Special Needs Plans as well as other Medicare Advantage plans.
SOURCE: MPR/Kaiser Family Foundation analysis of CMS Medicare Advantage enrollment files, 2008-2014, and MPR, “Tracking
Medicare Health and Prescription Drug Plans Monthly Report,” 1999-2007; enrollment numbers from March of the respective year,
plans, 8 percent were in regional PPOs, and the with the exception of 2006, which is from April.

remainder were in other plan types.

In 2015, less than 5 percent of beneficiaries in 2 Figure 11

states (Alaska and Wyoming) were enrolled in Share of Medicare Beneficiaries Enrolled in Medicare
Medicare Advantage plans, while more than 30 Advantage Plans by State, 2014
National Average, 2014 = 30%
percent of beneficiaries in 18 states (Arizona,
29% 7% 20%
California, Colorado, Florida, Hawaii, Idaho, 17% 14%
51%
6%
43% 35% 35% 20%
Michigan, Minnesota, Nevada, New Mexico, New 33%
3%
15% 30%
39%
36%
24%
14% 15%
38%
York, Ohio, Oregon, Pennsylvania, Rhode Island, 33%
34%
13%
16% 22%
24% 15%
7%
9%
DC 11%
38% 36% 13% 24%
26%
Tennessee, Utah, and Wisconsin) were in such 32%
28%

38% 16% 19% 22%

plans (Figure 11). 30%
28%
13% 24% 28%
0% 29%
46% 38%

< 10% 10% - 19% 20% - 29% 30% - 39% ≥40%

(6 states) (12 states + DC) (14 states) (15 states) (3 states)

NOTE: Includes MSAs, cost plans and demonstrations. Includes Special Needs Plans as well as other Medicare Advantage plans.
Since 2006, Medicare has paid private plans SOURCE: MPR/Kaiser Family Foundation analysis of CMS State/County Market Penetration Files, 2014.

under a bidding process: plans submit bids that estimate their costs per enrollee for services covered under
Medicare Parts A and B. If plans bid higher than the county-level benchmark, enrollees pay the difference in
the form of monthly premiums. If plans bid lower than the benchmark, the plan and Medicare split the
difference between the bid and the benchmark; the plan’s share is known as a “rebate,” which must be used to
provide supplemental benefits to enrollees. Medicare payments to plans are then adjusted based on enrollees’
risk profiles.

In the early-2000s, Medicare payment policy for plans changed from one that produced savings to one that
focused more on expanding access to private plans and providing extra benefits to enrollees. Between 2006
and 2010, many advocates, policymakers, and researchers voiced concerns about rising “overpayments” to
Medicare Advantage plans – estimated to be as much as 14 percent higher than what it would have cost to
cover similar people in traditional Medicare. In response, the ACA reduce federal payments to Medicare
Advantage plans over time, bringing them closer to the average costs of care under the traditional Medicare
program. Under this payment system, plans in counties with relatively high traditional Medicare costs will be
paid 95 percent of fee-for-service (FFS) costs per enrollee, while plans in counties with relatively low
traditional Medicare costs will be paid 115 percent of FFS costs per enrollee. The ACA also provided bonus
payments to Medicare Advantage plans based on the plan quality ratings, beginning in 2012. In addition, the
ACA required Medicare Advantage plans to maintain a medical loss ratio no lower than 85 percent, restricting
the share of premiums and other revenues that could be used for profits and administrative expenses.
While many studies have examined the quality and access to care in Medicare Advantage plans, shortcomings
in the available research make it hard to draw broad conclusions about the relative performance of the two
coverage options.20 A systematic review found that the data used in studies that compare traditional Medicare
and Medicare Advantage tend to be old and provide limited information about the experience since the ACA
was passed. Despite these limitations, at least through 2009, Medicare HMOs tend to perform better than
traditional Medicare in providing preventive services and using resources more conservatively. Yet,
beneficiaries rate traditional Medicare more favorably than Medicare Advantage plans in terms of quality and
access, particularly sicker beneficiaries. Performance also has been found to vary widely across Medicare
Advantage plans even within the same type.
Medicare provides protection against the costs of many health care services, but traditional Medicare has
relatively high deductibles and cost-sharing requirements and places no limit on beneficiaries’ out-of-pocket
spending. Moreover, traditional Medicare does not pay for some services vital to older people and those with
disabilities, including long-term services and supports, dental services, eyeglasses, and hearing aids.

In light of Medicare’s benefit gaps and cost- Figure 12

sharing requirements, most beneficiaries in Distribution of Sources of Supplemental Coverage Among

traditional Medicare have some form of Medicare Beneficiaries, 2010
Medigap only
supplemental coverage to help cover cost-sharing
No supplemental 15% Employer-sponsored +
expenses required for Medicare-covered services coverage Medigap
14% 4%
(Figure 12). Other beneficiaries—30 percent in
2014—are covered under Medicare Advantage Other coverage/
6%
combinations
plans. However, 14 percent of all Medicare 26%
Employer-sponsored
only
beneficiaries had no supplemental coverage in Medicaid only 13%
2010, including a disproportionate share of
4%
beneficiaries under age 65 with disabilities, the Medicare Advantage + 15%
3%
Medicare Advantage +
near poor (those with incomes between $10,000 Medicaid
Medicare Advantage only
Employer-sponsored

Total Medicare Beneficiaries, 2010 = 48.4 Million

and $20,000), and black beneficiaries. SOURCE: Kaiser Family Foundation analysis of the Medicare Current Beneficiary Survey 2010 Cost and Use file.

Employer-sponsored retiree coverage is a Figure 13

primary source of supplemental coverage for Percent of Large Firms (200+ Workers) Offering Retiree
Medicare beneficiaries, but access to retiree Health Benefits to Active Workers, 1988-2014
66%
health benefits is on the decline. In 2014, 25
percent of large firms (those with 200 or more
workers) offered retiree health benefits to active 46%
40% 40% 40%
workers, a sharp decline from the two-thirds 36%
34%
37%
35% 36% 35% 34%
32% 32%
offering health benefits for retirees in 1988 29% 28%
26% 26% 25%
28%
25%

(Figure 13). Employer plans often provide

additional benefits, such as additional
prescription drug coverage and limits on retirees’
out-of-pocket health expenses. For some 1988 1991 1993 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
NOTE: Tests found no statistical difference from estimate for the previous year shown (p<.05). No statistical tests are conducted

Medicare beneficiaries who are working (or have

for years prior to 1999.
SOURCE: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2014; KPMG Survey of Employer-Sponsored Health
Benefits, 1991, 1993, 1995, 1998; The Health Insurance Association of America (HIAA), 1988.

working spouses), employer plans are their

primary source of health insurance coverage, and Medicare is the secondary payer.
Enrollment in private Medicare Advantage health plans has increased in recent years, and 30 percent of
Medicare beneficiaries were enrolled in Medicare Advantage plans in 2014 (up from one-fourth in 2010).
Medicare beneficiaries who enroll in private Medicare Advantage plans often receive supplemental benefits
that are not covered under traditional Medicare, such as vision and dental benefits. Medicare Advantage plans
are required to have a limit on beneficiaries’ out-of-pocket expenses for Medicare Part A and Part B covered
services of $6,700 in 2014. (See "What is Medicare Advantage?" for additional information.)

Medigap policies assist beneficiaries with their coinsurance, copayments, and deductibles for Medicare-covered
services. Medigap policies help to shield beneficiaries from sudden, out-of-pocket costs resulting from an
unpredictable medical event, allow beneficiaries to more accurately budget their health care expenses, and
reduce the paperwork burden associated with medical claims. In 2010, about one in five Medicare
beneficiaries had an individually-purchased Medicare supplement insurance policy. Currently, there are 10
standard Medigap plans (labeled Plan A-N; Plans E, H, I, and J are no longer available for sale); all Medigap
policies of the same letter provide the same benefits (see Appendix 2: Standard Medigap Plan
Benefits). Premiums vary by plan type, insurer, age of the enrollee, and state of residence.

Medicaid helps to make Medicare affordable for low-income beneficiaries, given gaps in the Medicare benefit
package, premiums, deductibles, and other cost-sharing requirements (see Appendix 3: Common
Medicaid Eligibility Pathways and Benefits for Medicare Beneficiaries, 2014). In total, about one
in five Medicare beneficiaries also had Medicaid coverage in 2010. Most dual-eligible beneficiaries qualify for
full Medicaid benefits, including long-term care. These dual eligible beneficiaries also get help with Medicare’s
premiums and cost-sharing requirements, and receive subsidies that help pay for drug coverage under
Medicare Part D plans. (See "What is the role of Medicare for dual-eligible beneficiaries?" for
additional information.)

In addition, some low-income Medicare beneficiaries do not qualify for full Medicaid benefits, but receive help
with Medicare premiums and/or some cost-sharing requirements through the Medicare Savings Programs
(MSPs). Eligibility for this assistance is based on a beneficiary’s income and resources (the latter generally
must be less than $7,160 for a single person and $10,750 for a married couple in 2014).
For the 10 million low-income elderly and Figure 14

disabled people who are covered under both the Number of Beneficiaries Enrolled in Medicare, Medicaid,
Medicare and Medicaid programs (often referred and Both Programs, 2010
to as “dual-eligible" beneficiaries), Medicare is
their primary source of health insurance (Figure
14). Medicare covers most medical services, Dually
including inpatient and outpatient care, Medicare eligible
Medicaid
10 million
physician services, diagnostic and preventive 40 million 56 million
care and, since 2006, outpatient prescription
drugs under Part D plans. Medicare does not
cover routine outpatient dental care or non-
skilled long-term services and supports, such as Total Medicare beneficiaries, 2010: Total Medicaid beneficiaries, 2010:
50 million 66 million
in home care or extended home and personal SOURCE: Kaiser Family Foundation analysis of a 5 percent sample of Medicare claims from the Chronic Conditions Data
Warehouse, 2010, and Kaiser Commission on Medicaid and the Uninsured and Urban Institute estimates based on FY2010 MSIS.
care in the community. Medicaid, a need-based
program funded jointly by the federal and state Figure 15

governments, supplements Medicare by Dual-Eligible Beneficiaries as a Share of Medicare and

providing help with Medicare’s premiums and Medicaid Enrollment and Spending, 2010
Dual-eligible beneficiaries Non-dual eligible beneficiaries
cost-sharing requirements, and by helping to pay
Medicare Medicaid
for the services that are not covered by Medicare. 14%
20%
Together, these two programs help to shield very 34% 34%

low-income Medicare beneficiaries from

potentially unaffordable out-of-pocket medical 86%
80%
and long-term care costs. 66% 66%

Dual-eligible beneficiaries are disproportionately Total Medicare Total Medicare Total Medicaid Total Medicaid
counted among both Medicare and Medicaid’s enrollment, 2010:
48.9 million
spending, 2010:
$498.9 Billion
enrollment, 2010:
67.2 Million
spending, 2010:
$340.5 billion

high spenders. In 2010, dual-eligible SOURCE Medicare Payment Advisory Commission and Medicaid and CHIP Payment and Access Commission, Data Book:
Beneficiaries Dually Eligible for Medicare and Medicaid (January 2015).
beneficiaries comprised 20 percent of Medicare
beneficiaries but 34 percent of Medicare spending, and, similarly, 14 percent of the Medicaid population but 34
percent of Medicaid spending (Figure 15).

Dual-eligible Medicare beneficiaries are more likely than other Medicare beneficiaries to be frail, live with
multiple chronic conditions, and have functional and cognitive impairments. Four in 10 dual-eligible
beneficiaries (39%) are under age 65 and living with disabilities, compared to about one in 10 (11%) non-dual
eligible beneficiaries. Nearly half (48%) of all dual-eligible beneficiaries rate their health status as fair or poor,
more than double the share of non-dual eligible beneficiaries (22%). A larger share of dual-eligible
beneficiaries than non-dual eligible beneficiaries have three or more chronic conditions (70% versus 63%);
more than half (56%) of all dual-eligible beneficiaries have a cognitive or mental impairment, compared to one
quarter (25%) of non-dual eligible beneficiaries; Figure 16

and more than half (55%) live with one or more Comparison of Characteristics of Dual-Eligible Medicare
functional impairments in activities of daily Beneficiaries and All Other Medicare Beneficiaries
Percent of beneficiaries:
living (ADLs), compared to 29 percent of other
3+ Chronic 70%
Medicare beneficiaries. A substantially greater 3+ chronic conditions
Conditions 63%
share of dual-eligible beneficiaries than other 56%
Cognitive/mental
cm impair Dual-eligible
Medicare beneficiaries live in long-term care impairment 25% Medicare
beneficiaries
facility settings (17% versus 2%) (Figure 16). fp health
Fair or poor health
48%
22% All other
Medicare
39%
As a result of having greater medical needs, dual- Under
Underage age6565 beneficiaries
11%
eligible beneficiaries also use more Medicare
Long-term 17%
LTCcare facility
resident
services, particularly acute care services, than resident 2%
other Medicare beneficiaries. Among dual-
SOURCE: Kaiser Family Foundation analysis of the Medicare Current Beneficiary Survey 2010 Cost and Use file.
eligible beneficiaries in traditional Medicare,
one-quarter (25%) had at least one hospitalization in 2010 (versus 16% of other beneficiaries) and 11 percent
had two or more hospitalizations (versus 6% of other beneficiaries). Dual-eligible beneficiaries were also more
likely to use the emergency room in 2010: 44 percent had at least one emergency department visit versus 24
percent of other beneficiaries.

Some dual-eligible beneficiaries, often described Figure 17

as “high need” or “high cost,” have extensive Distribution of Dual-Eligible Medicare Beneficiaries, by
need for acute, post-acute, and long-term care Amount of Medicare Spending, 2010
services and supports. One quarter (25%) had 12%
Medicare spending of $20,000 or more in 2010, 26%
Less than $2,500
and another 17 percent had Medicare spending $2,500-$5,000 13%
between $10,000 and $20,000 (Figure 17). $5,000-$10,000
$10,000-$15,000
Other dual-eligible beneficiaries use relatively $15,000-$20,000 7%
few services and incur relatively low Medicare $20,000-$40,000 14%
spending, including more than one-quarter $40,000 or more 10%

(26%) with Medicare spending below $2,500. 18%

Three-quarters (75%) of all dual-eligible Average Spending, 2010 = $17,745
Median Spending, 2010 = $7,464
beneficiaries had no inpatient hospitalization SOURCE: Kaiser Family Foundation analysis of a 5 percent sample of Medicare claims from the Chronic Conditions Data
Warehouse, 2010.

and more than half (56%) had no emergency

department visit in 2010—two of the most expensive health care services on a per capita basis.

Dual-eligible beneficiaries who are under age 65 with disabilities have different needs and lower Medicare
costs, on average, than those dual-eligible beneficiaries who are age 65 and older. Specifically, a smaller share
of those under age 65 have 3 or more chronic conditions compared to those age 65 and older (61% versus 77%),
but a larger share have cognitive or mental impairments (65% versus 51%). However, a similar share of dual-
eligible beneficiaries in traditional Medicare who were under age 65 compared to those age 65 or older had an
inpatient stay (21% versus 28%) and a similar share had one or more emergency department visits (47% versus
42%) in 2010.
Policymakers at the federal and state levels are developing initiatives for dual-eligible beneficiaries to improve
the coordination of their care and to reduce spending for both Medicare and Medicaid. Currently, the Centers
for Medicare & Medicaid (CMS) has approved 13 federal-state demonstrations in 12 states (California,
Colorado, Illinois, Massachusetts, Michigan, Minnesota, New York, Ohio, South Carolina, Virginia, and
Washington) to improve care coordination and align financing for up to 1.5 million dual-eligible beneficiaries.
Most states are pursuing capitated managed care options; two states (Colorado and Washington) are testing
managed fee-for-service (FFS) models, and one state (Minnesota) will integrate administrative, but not
financial, alignment. As of October 2014, 166,580 beneficiaries were enrolled in demonstrations in California,
Illinois, Massachusetts, Ohio, and Virginia. CMS has also undertaken an initiative to prevent unnecessary
hospitalizations of nursing home residents, two-thirds (67%) of whom are dual-eligible beneficiaries, by
providing enhanced on-site services and supports.
Prior to the enactment of Medicare in 1965, less than half of all elderly people had insurance to help pay for
hospital and other medical services. Many were unable to obtain health insurance either because they could
not afford the premiums or because they were denied coverage based on their age or pre-existing health
conditions. Medicare significantly improved access to care for elderly Americans and is now a vital source of
financial and health security for nearly all Americans age 65 and older, as well as millions of people with
permanent disabilities.

 Usual source of care: The vast majority of Medicare beneficiaries (96%) report that they have a usual
source of care for when they are sick or seeking medical advice. This key indicator of access to care is
particularly important for Medicare beneficiaries because they tend to have more chronic conditions and
medical needs than others. In fact, Medicare beneficiaries are more likely than younger adults with private
insurance to report having a usual source of care.
 Access to care: A relatively small share of Figure 18

Medicare beneficiaries (6%) report that they Measures of Access to Care Among Medicare
had trouble accessing needed medical care Beneficiaries by Demographic Characteristics, 2012
During the past year, percent of beneficiaries reporting that they…
(Figure 18). A somewhat larger share (11%) …had trouble getting needed care …delayed getting health care due to cost
report delaying care due to cost burdens. Overall 6% 11%

Certain subgroups of Medicare beneficiaries <65 17% 28%

Age
report access problems more frequently than 65+ 4% 8%

others, particularly those who often need more <$20,000 10% 18%
health care services. For instance, Medicare Income $20,000-$39,999 5% 11%
>$40,000 3% 5%
beneficiaries under age 65 (most of whom
qualify for Medicare because of a long-term Health Exc./V. Good/Good 3% 7%
Status Fair/Poor 22%
disability) report experiencing trouble 13%
NOTE: Excludes respondents who did not have Medicare eligibility for the full calendar year, such as new enrollees and

accessing care at more than four times the rate decedents. Also excludes respondents who did not indicate incomes within specified ranges. All subgroup estimates are
statistically significantly different from ‘overall’ estimate.
SOURCE: Kaiser Family Foundation analysis of the Medicare Current Beneficiary Survey 2012 Access to Care file.

of their older counterparts (17% versus 4%).

The share of Medicare beneficiaries who report that they delayed care due to cost is three times as high for
people with incomes below $20,000 compared to those with income of $40,000 or more. Also, Medicare
beneficiaries who report that they are in fair or poor health are considerably more likely to encounter
problems getting needed care or delaying care due to cost, relative to those reporting comparatively better
health.
 Physician acceptance of new Medicare Figure 19

patients: The majority of office-based Percent of Office-Based Physicians Accepting New Patients
physicians (91%) report that they accept new with Medicare and Other Types of Insurance, 2012
Medicare patients into their practice (Figure Medicare 91%
19). This acceptance rate for new Medicare
patients is the same as the rate for new Private non-capitated 91%

patients with private non-capitated insurance, Private capitated 72%*

such as a preferred provider organization, and
is higher than for new patients with private Medicaid 71%*

capitated insurance (72%), Medicaid (71%), or Uninsured 47%*

no insurance (47%). Across the country, there
NOTE: Pediatricians were excluded from Medicare and private non-capitated insurance categories. Physicians who did not respond
is some variation in acceptance rates, but in to relevant survey questions were also excluded. The survey did not ask responding physicians to distinguish Medicare Advantage
plans from traditional Medicare or other private insurance. Acceptance rates for patients with insurance status of self-pay or
worker’s compensation are not shown. *Indicates difference from Medicare is statistically significant at the 95% confidence level.
each state, the majority of physicians accept SOURCE: Kaiser Family Foundation analysis of National Ambulatory Medical Care Survey, National Electronic Health Records
Survey, 2012.

new Medicare patients (Figure 20).

 Finding a new physician: Medicare Figure 20

seniors are as likely to report problems finding Percent of Physicians Accepting New Medicare Patients by State,
2012
a new physician as people aged 50 to 64 with
89% 80% 81%
private insurance. Nonetheless, for both 93% 97% 86%
79% 92% 92%
90%
groups of individuals, problems finding a new 88%
95%
95% 91%
94% 91%
79%
93% 90% 94%
doctor are more frequently reported when 90%
92%
94% 92%
90% 97%
84%
88% 84% 87% DC 83%
82%
looking for a primary care physician compared 89% 90% 94% 94%
93%
95%
84% 95%
with a specialist. Among the small share of 86%
81%
94%
93% 87% 93%
86%
Medicare seniors (7%) who said that they 80% 92%
98%
84%
looked for a new primary care physician in
2013, 28 percent reported a problem finding
≤80% 81% - 89% ≥90%
one—equating to about 2 percent of all seniors (4 states) (16 states, DC) (30 states)
NOTE: Pediatricians are excluded from this analysis. Physicians were not asked to distinguish between patients in traditional

in Medicare.
Medicare and Medicare Advantage plans.
SOURCE: Kaiser Family Foundation analysis of National Ambulatory Medical Care Survey, National Electronic Health Records
Survey, 2012.

 High physician participation rates

mean predictable expenses for most Medicare patients: The vast majority of physicians and other
health professionals (96%) who bill Medicare are “participating providers,” which means that they agree to
accept Medicare’s fee-schedule rates and will not “balance bill” their Medicare patients (charge higher fees
for Medicare-covered services). As a result, most beneficiaries encounter predictable expenses when seeing
their physician. A small share of physicians (less than 4%) who bill Medicare do not have these agreements
and may balance bill up to a specified maximum for Medicare covered services.
 A very small share of physicians “opt out” of Medicare: Less than 1 percent of physicians has
elected to “opt out” of Medicare and instead contract privately with all of their Medicare patients. These opt-
out providers may charge Medicare patients any fee they choose. Psychiatrists represent a
disproportionate share (42%) of these physicians, which raises concerns about access to psychiatrists for
beneficiaries who cannot afford high out-of-pocket costs.
Current payment systems in traditional Medicare have evolved over the last several decades, but have
maintained a fee-for-service payment structure for most types of providers. In many cases, private insurers
have modeled their payment systems on traditional Medicare, including those used for hospitals and
physicians. Building on Medicare payment reforms included in the Affordable Care Act and new approaches
being tested and launched by the CMS Innovation Center, the Secretary of Health and Human Services recently
announced a set of explicit targets to be met in the coming years that would tie an increasing share of
traditional Medicare payments to provider performance on quality and spending.

Out of $597 billion in total benefit spending in 2014, Medicare paid $376 billion (63%) for benefits delivered by
health care providers in traditional Medicare. These providers include hospitals (for both inpatient and
outpatient services), physicians, skilled nursing facilities, home health agencies, inpatient rehabilitation
facilities, hospice agencies, long-term care hospitals, outpatient dialysis facilities, ambulatory surgical centers,
inpatient psychiatric facilities, durable medical equipment suppliers, ambulance providers, and laboratories.
In general, Medicare pays each of these providers separately, using payment rates and systems that are specific
to each type of provider. The remaining share of Medicare benefit payments (37%) went to private plans under
Part C (the Medicare Advantage program; 26%) and Part D (the Medicare drug benefit; 11%). These private
plans are responsible for paying providers or pharmacies on behalf of their Medicare enrollees. (See "What
is Medicare Advantage?" and "What is the Medicare Part D prescription drug benefit?" for
additional information on how Medicare pays Medicare Advantage and Part D plans.) The
Budget Control Act of 2011 put in place a 2 percent across-the-board cut (known as “sequestration”) in
Medicare payment to plans and providers beginning in 2013.

Medicare uses prospective payment systems for most of its providers in traditional Medicare. In general, these
systems require that Medicare pre-determine a base payment rate for a given unit of service (e.g., a hospital
stay, an episode of care, a particular service). Then, based on certain variables, such as the provider’s
geographic location and the complexity of the patient receiving the service, Medicare adjusts its payment for
each unit of service provided (see Appendix 4: Medicare Payments to Providers). For most payment
systems, Medicare updates payment rates annually to account for inflation adjustments. The main features of
hospital, physician, outpatient, and skilled nursing facility payment systems (altogether accounting for almost
three-quarters of spending in traditional Medicare) are described below:
 Inpatient hospitals (acute care): Medicare pays hospitals per beneficiary discharge, using the
Inpatient Prospective Payment System. The base rate for each discharge corresponds to one of over 700
different categories of diagnoses—called Diagnosis Related Groups (DRGs)—that are further adjusted for
patient severity. DRGs that are likely to incur more intense levels of care and/or longer lengths of stay are
assigned higher payments. Medicare’s payments to hospitals also account for a portion of hospitals’ capital
 and operating expenses. Some hospitals receive added payments, such as teaching hospitals and hospitals
with higher shares of low-income beneficiaries. Recent Medicare policies also reduce payments to some
hospitals, including hospitals that have relatively higher Medicare readmission rates following previous
hospitalizations for certain conditions.
 Physicians and other health professionals: Medicare reimburses physicians and other health
professionals (e.g., nurse practitioners) based on a fee-schedule for over 7,000 services. Payment rates for
these services are determined based on the relative, average costs of providing each to a Medicare patient,
and then adjusted to account for other provider expenses, including malpractice insurance and office-based
practice costs. This system, known as the Resource-Based Relative Value Update Scale (RBRVS), has been in
place since 1992. Increases to Medicare’s payments include bonuses to those practicing in designated
shortage areas. In general, health professionals who are not physicians but bill Medicare independently (e.g.,
nurse practitioners) receive a 15 percent reduction in payment.
Under current law, Medicare’s physician fee-schedule payments are subject to a formula, called the
Sustainable Growth Rate (SGR) system, enacted in 1987 as a tool to control spending. For more than a
decade this formula has called for cuts in physician payments, reaching as high as 24 percent. To prevent
these cuts in physician payments from occurring, policymakers have overridden the SGR 17 times, as of
2014. Policymakers in both the House and the Senate agreed on a bipartisan proposal to repeal the SGR and
replace it with a long-term approach for setting physician fees (H.R. 4015/S.2000), but disagreement on how
the federal government would cover the cost of this proposal has so far prevented its enactment.
 Hospital outpatient departments: Medicare pays hospitals for ambulatory services provided in
outpatient departments, based on the classification of each service into more than 750 categories with
similar expected costs. Final determination of Medicare payments for outpatient department services is
complex and incorporates both individual service payments and payments “packaged” with other services,
partial hospitalization payments, as well as numerous exceptions. Hospitals may receive additional
payments for certain outpatient department services, such as specified drugs and devices; unusually costly
(outlier) services; and adjustments for some rural hospitals and cancer hospitals.
 Skilled Nursing Facilities (SNFs): SNFs are freestanding or hospital-based facilities that provide post-
acute inpatient nursing or rehabilitation services. Medicare pays SNFs one of 66 pre-determined daily rates
(categorized as Resource Utilization Groups (RUGs) for each patient, based on patients’ expected level of
nursing and therapy needs. SNF payments incorporate operating and capital costs for providing care to
Medicare patients, and an added daily payment from Medicare for care provided to beneficiaries with AIDS.
The overarching goals of delivery system reforms in Medicare are to lower per capita spending while
simultaneously fostering improved patient care. The Affordable Care Act directed CMS, primarily through a
new Innovation Center, to launch a number of Medicare-wide programs and pilot projects to test new payment
models across various types of providers. Evaluations of these programs are in their early stages and showing
mixed results. While the overarching goals for most of these models are similar—improving care quality and
lowering costs—the more specific aims within each model vary and represent a range of potential opportunities
and challenges.

For the most part, traditional Medicare currently reimburses individual providers separately for the services
they deliver to beneficiaries. This “siloed” payment approach carries inherent incentives for providers to
furnish more care (or more expensive care) than may be necessary while also lacking incentives to coordinate
patient care across health care settings. In contrast, new payment models that incorporate delivery system
reforms typically include financial incentives that are designed to encourage collaboration and care
coordination among different providers, reduce unnecessary service use, and reward providers for furnishing
higher quality patient care.

In addition to large-scale programs implemented within Medicare, many new models are being tested as pilots
and demonstration projects through the Innovation Center. Below are some examples of the types of delivery
system reforms currently underway.
 Accountable Care Organizations Figure 21

(ACOs): ACOs are groups of providers (such Accountable Care Organizations (ACOs) in Medicare, 2015
Pioneer ACO participants
as physician practices and hospitals) that Medicare Shared Savings Program participants

collectively accept responsibility for the overall

care of Medicare beneficiaries assigned to
them, and share in financial savings if they
meet aggregate spending and quality targets.
In general, the ACO concept is designed to
reward providers financially for working
together, sharing information, and
coordinating care, especially for high-risk and
high-cost chronically ill patients.
NOTE: Medicare Shared Savings Programs (MSSPs) include 35 Advanced Payment Model participants. Two MSSP participants in

Medicare has two main ACO programs: the Puerto Rico are not displayed on the map.
SOURCE: Kaiser Family Foundation analysis of data on ACOs, as of March 4, 2015 from Data.CMS.gov.

Pioneer ACO program and the Medicare

Shared Savings Program (MSSP) (Figure 21). Pioneer ACOs are generally larger entities that serve more
beneficiaries and have experience with accepting financial risk for care, compared with ACOs in the MSSP.
In addition to sharing in any savings, Pioneer ACOs are also required to repay Medicare a portion of any
 shared losses, if spending exceeds their target. In contrast, most ACOs in the MSSP do not currently take on
this double-sided financial risk, but will be required to do so in future years.
 Bundled payments: Also known as episode-of-care payments, bundled payments reimburse for all
services provided to a patient for a defined course of treatment, rather than paying each provider and site
separately. For example, a single bundled payment for a patient undergoing knee replacement could
encompass: the surgeon’s fee, the anesthesiologist charges, the hospital’s charges and those of hospital based
physicians, post-surgical rehabilitation, such as physical therapy, and any medical complications that occur
within a specified period of time in the episode of care. Under the bundled payment approach, the
participating providers share in any savings that they generate or losses if total spending exceeds payment.
The CMS Innovation center is currently managing a large-scale demonstration called the Bundled Payment
for Care Improvement pilot, which is testing four bundled payment approaches for 48 different clinical
conditions that started with a hospitalization.
 Medical homes: The medical home, also called an “advanced primary care practice,” is a team-based
approach to care that focuses on providing and coordinating all of a patient’s ongoing care from within a
primary care medical practice. Medical home models commonly receive a monthly payment for each patient,
which is intended to offset the costs of activities that occur outside of face-to-face physician visits (e.g., phone
call or email follow-up with other specialists, electronic health record activities, after-hours access to clinical
staff). The CMS Innovation Center is currently testing medical home models within Medicare through
several programs, including the Comprehensive Primary Care Initiative, the Multi-Payer Advance Primary
Care Practice program, and a medical home model within over 400 Federally Qualified Health Centers.
 Hospital readmission reduction initiatives: Efforts to decrease the number of patient readmissions
to hospitals carries benefits to both Medicare patients as well as the Medicare program. Reducing
preventable readmissions could indicate that Medicare beneficiaries are receiving better care both during
and after the initial hospitalization, and may translate to lower spending in Medicare. Incentives to decrease
the number of preventable hospital
readmissions among Medicare patients is part Figure 22

Medicare Hospital Readmission Rates, 2005-2013

of many delivery system reforms in Medicare.
Diagnosis of initial
For example, the Hospital Readmission hospitalization
National Average Readmission Rate (%)

26
Heart Failure
25
Reduction Program financially penalizes 24 24.8
Heart Attack
24.5 24.7 24.7 Pneumonia
hospitals that have relatively higher rates of 23
22 23.0 22.7
Medicare readmissions following initial 21
19.9 19.9 19.8 19.7
20
hospitalizations for certain conditions (heart 19 18.3
17.8
attack, pneumonia, hip replacement). On the 18
18.2 18.3 18.4 18.5
17 17.6
whole, CMS has reported declines in national 16
17.3
15
readmission rates among Medicare July 2005- July 2006- July 2007- July 2008- July 2009- July 2010-
June 2008 June 2009 June 2010 June 2011 June 2012 June 2013
beneficiaries, starting in 2012 and continuing Performance (measurement) Time Period

into 2013 (Figure 22). NOTES: National readmission rates include Medicare fee-for-service unplanned hospitalizations for any cause within 30 days of
discharge from an initial hospitalization for either heart failure, heart attach, or pneumonia. Rates are risk-adjusted for certain
patient characteristics, such as age and other medical conditions.
SOURCE: Kaiser Family Foundation analysis of CMS Hospital Compare data files.
Federal spending for fiscal year 2014 totaled $3.5 Figure 23

trillion, with net spending on Medicare (that is, Distribution of Federal Outlays, 2014
Medicare spending minus income from
premiums and other offsetting receipts) Social Security
24%

comprising 14 percent of the total (Figure 23). Defense

17%
Of the three main entitlement programs—Social
Medicare1
Security, Medicare, and Medicaid—Medicare is 14%
Nondefense
second largest in terms of the share of federal Discretionary
Medicaid,
17%
spending on each program. Social Security is Exchange
subsidies,
Net CHIP
largest, at 24 percent of federal spending in 2014. Other2 Interest 9%
12% 7%
Spending on Medicaid (along with spending on
Total Federal Outlays, 2014 = $3.5 Trillion
the Children’s Health Insurance Program and Net Federal Medicare Outlays, 2014 = $505 Billion
Exchange subsidies) represented 9 percent of NOTE: All amounts are for federal fiscal year 2014. 1Consists of Medicare spending minus income from premiums and other
offsetting receipts. 2Other category includes spending on other mandatory outlays minus income from offsetting receipts).
SOURCE: Congressional Budget Office, Budget and Economic Outlook: 2015 to 2025 (January 2015).
federal spending in 2014.

Medicare benefit payments totaled $597 billion

in 2014; roughly one-fourth was for hospital Figure 24

Distribution of Medicare Benefit Payments, 2014

inpatient services, 12 percent for physician
Home
services, and 11 percent for the Part D drug Health
Other
3%
benefit (Figure 24). Just over one-fourth of Skilled
Nursing
Services*
14% Medicare
benefit spending (26%) was for Medicare Facilities
5%
Advantage
26%
Advantage private health plans covering all Part Hospital
Outpatient
A and B benefits; in 2014, 30 percent of Medicare Services Hospital
7% Inpatient
beneficiaries were enrolled in Medicare Outpatient
Services
Physician 23%
Advantage plans. Prescription
Drugs
Payments
11% 12%

Total Medicare Benefit Payments, 2014 = $597 billion

NOTE: *Other services includes ambulance services, ambulatory surgical centers, community mental health centers, durable
medical equipment, federally qualified health centers, hospice, hospital outpatient services not paid for using the outpatient
prospective payment system, outpatient dialysis, outpatient therapy services, lab services, rural health clinics, Part B drugs; also
includes amounts paid to providers and recovered.
SOURCE: Kaiser Family Foundation analysis of data from Congressional Budget Office, 2015 Medicare Baseline (March 2015).
A small share of Medicare beneficiaries accounts
Figure 25
for a majority of Medicare spending. Ten percent
Distribution of Traditional Medicare Beneficiaries and
of beneficiaries in traditional Medicare Medicare Spending, 2010
accounted for nearly 60 percent of Medicare Average per capita
10%
spending in 2010 (Figure 25). At the other end Traditional Medicare
spending: $10,584
of the spectrum, 30 percent of beneficiaries in 58%
traditional Medicare had total spending of less Average per capita
Traditional Medicare
spending among
than $1,000, accounting for just 1 percent of total 90% top 10%: $61,722

expenditures. Twelve percent of beneficiaries

Average per capita
incurred no Medicare expenditures at all. 42% Traditional Medicare
spending among
bottom 90%: $4,897

Total Number of Traditional Total Traditional

Medicare Beneficiaries, 2010: Medicare Spending, 2010:
36.3 million $385 billion
NOTE: Excludes Medicare Advantage enrollees.
SOURCE: Kaiser Family Foundation analysis of the Medicare Current Beneficiary Survey 2010 Cost and Use file.

Medicare’s share of national personal health care

expenditures varies by type of service, reflecting Figure 26

benefits covered and services used by the Percent of Personal Health Expenditures Accounted for by
Medicare, 2013
Medicare population. For example, in 2013, 43%
Medicare accounted for 43 percent of home
health care spending and 26 percent of all 28% 26%
22% 22% 22%
hospital spending, but less than 1 percent of
dental care spending (because traditional
Medicare does not cover dental services) <1%

(Figure 26). Medicare accounted for 28 Total

Services
Home
Health Care
Prescription
Drugs
Hospital
Services
Physician
Services
Nursing
Home Care
Dental
Services
percent of total national prescription drug Expenditures in Billions
Medicare $551 $34 $75 $243 $130 $35 $0.5
spending in 2013—a significant increase from 2 Total $2,469 $80 $271 $937 $587 $156 $111

percent in 2005, the year before the Part D drug NOTE: Total also includes durable medical equipment, other professional services, and other personal health care/products.
Medicare spending does not exclude income from premiums and other offsetting receipts. Medicare coverage of nursing home
care reflects spending on freestanding skilled nursing facilities only (not custodial long-term care services).
benefit went into effect. SOURCE: Kaiser Family Foundation analysis of data from Centers for Medicare & Medicaid Services, Office of the Actuary, National
Health Statistics Group, National Health Expenditures Tables (December 2014).

Figure 27

Medicare Spending and Percent of Federal Outlays and

GDP, 2010-2025
Looking ahead, net Medicare outlays (that is, Actual Net Outlays Projected Net Outlays $981

Medicare spending minus income from $833 $852

$866

premiums and other offsetting receipts) are

$738
$688
$642
$560 $562 $574
projected to increase nearly two-fold from $527 $480 $466 $492 $505
$527
$446
billion in 2015 to $981 billion in 2025—an
average annual growth rate of 6.4 percent in the
aggregate—due to growth in the Medicare
Share of: 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
population and increases in health care costs Federal
Outlays 12.9% 13.3% 13.2% 14.2% 14.4% 14.3% 14.3% 13.9% 13.6% 14.3% 14.5% 14.8% 15.8% 15.8% 15.2% 16.2%
(Figure 27). These estimates do not take into GDP 3.0% 3.1% 2.9% 3.0% 2.9% 2.9% 3.0% 2.9% 2.8% 3.0% 3.1% 3.2% 3.4% 3.4% 3.3% 3.6%

account additional spending that is likely to

NOTE: All amounts are for federal fiscal years; amounts are in billions and consist of Medicare spending minus income from
premiums and other offsetting receipts.
SOURCE: Kaiser Family Foundation based on data from Congressional Budget Office, Updated Budget Projections: 2015 to 2025

occur to avoid reductions in physician fees

(March 2015); The 2014 Long-Term Budget Outlook (July 2014).
scheduled under current law. The growth in health spending, which affects all payers, is influenced by
increasing volume and use of services, new technologies, and higher prices.

Despite annual growth in outlays, net Medicare spending is projected to be a modestly larger share of the
federal budget and the nation's economy in the coming decade. Medicare’s share of the federal budget is
projected to rise from 14.3 percent in 2015 to 16.2 percent in 2025, while Medicare spending as a share of GDP
is projected to be 2.9 percent in 2015 and 3.6 percent in 2025.

On a per capita basis, Medicare spending is Figure 28

projected to grow at a slower rate between 2014 Historical and Projected Average Annual Growth Rate in
and 2023 than it did between 2000 and 2013 Medicare Per Capita Spending and Other Measures
(3.7 percent vs. 5.5 percent) (Figure 28). Actual (2000-2013) Projected (2014-2023)

Medicare spending also is projected to grow 6.1%

more slowly than private health insurance 5.5%
4.7%
spending on a per capita basis in the coming 3.7% 3.5%
2.9%
years (4.7 percent), and roughly in line with 2.4% 2.2%

growth in GDP per capita (3.5 percent). The

Congressional Budget Office has attributed Medicare Private health GDP CPI Medicare Private health GDP CPI

Medicare's slow per person growth rate in the per capita

spending
insurance
per capita
per capita per capita
spending*
insurance
per capita
per capita

spending spending
short term to a larger share of younger NOTE: *Assumes 0.6-percent physician payment rate increase from 2016 through 2023, consistent with the average update over
the 10-year period ending with March 31, 2015; based on the spending data from the 2014 Medicare Trustees report.

beneficiaries as the baby boom generation ages SOURCE: Kaiser Family Foundation analysis of Medicare spending data from Boards of Trustees and Congressional Budget Office
(CBO); private health insurance spending data from the CMS National Health Expenditure data; GDP data from CBO and U.S.
Census Bureau, and CPI data from the Bureau of Labor Statistics (historical) and CBO (projected).
onto Medicare; constraints on Medicare payment
rates to plans, physicians, and other types of providers; and the overall slowdown in Medicare spending across
different types of services, beneficiaries, and geographic areas.

Medicare's long-term spending trends are driven by the aging of the population, an increase in service use
associated with greater severity of illness, and faster growth in health care costs than growth in the economy on
a per capita basis. According to CBO's most recent long-term projections, net Medicare spending will grow
from 3.0 percent of GDP in 2014 to 3.8 percent of GDP in 2030, 4.7 percent in 2040, and 5.5 percent in 2050.
Through 2039, CBO projects that the aging of the population will account for a larger share of spending growth
on the nation's major health care programs (Medicare, Medicaid, and subsidies for ACA Marketplace coverage)
than either "excess" health care spending growth or expansion of Medicaid and Marketplace subsidies.
Medicare is funded as follows (Figure 29):
 Part A, the Hospital Insurance (HI) trust Figure 29

fund, is financed primarily through a dedicated Sources of Medicare Revenue, 2013

payroll tax of 2.9 percent of earnings paid by General revenue
employers and their employees (1.45 percent
41%
each). In 2013 (the most recent year for which Payroll taxes

actual data are available), these taxes 73% 73%

Beneficiary
88%
accounted for 88 percent of the $251 billion in premiums

State payments
revenue to the Part A Trust Fund. In 2013, the 38%

Medicare HI payroll tax increased by 0.9 Taxation of Social

14% Security benefits
percentage points (from 1.45 percent to 2.35 13% 1%
25%
2% 6% 13% Interest and other
percent) for higher-income taxpayers (more 2%
3% 5% 2%
TOTAL Part A Part B Part D
than $200,000/single person and $575.8 billion $251.1 billion $255.0 billion $69.7 billion

$250,000/married couple), with additional SOURCE: Kaiser Family Foundation based on data from 2014 Annual Report of the Boards of Trustees of the Federal Hospital
Insurance and Federal Supplementary Medical Insurance Trust Funds.

revenues deposited into the HI trust fund.

 Part B, the Supplementary Medical Insurance (SMI) trust fund, is financed through a combination of
general revenues, premiums paid by beneficiaries, and interest and other sources. Premiums are
automatically set to cover 25 percent of spending in the aggregate, while general revenues subsidize 73
percent. Higher-income beneficiaries pay a larger share of spending, ranging from 35 percent to 80 percent
of Part B costs. Part B revenues totaled $255 billion in 2013.
 Part D is financed through general revenues, beneficiary premiums, and state payments for dual-eligible
beneficiaries (who received drug coverage under Medicaid prior to 2006). The monthly premium paid by
enrollees is set to cover 25.5 percent of the cost of standard drug coverage, and Medicare subsidizes the
remaining 74.5 percent. Similar to Part B, higher-income beneficiaries pay a larger share of the cost of
standard drug coverage. In 2013, Part D revenue totaled $70 billion, 73 percent of which was from general
revenues, 14 percent from premiums, and 13 percent from state payments.
 The Medicare Advantage program (Part C) is not separately financed. Medicare Advantage plans such
as HMOs and PPOs cover all Part A, Part B, and (typically) Part D benefits. Beneficiaries enrolled in
Medicare Advantage plans typically pay monthly premiums for additional benefits covered by their plan in
addition to the Part B premium.
Medicare solvency is measured by the level of assets in the Part A trust fund. In years when annual income to
the trust fund exceeds benefits spending, the asset level increases, and when annual spending exceeds income,
the asset level decreases. When spending exceeds income and the assets are fully depleted, Medicare will not
have sufficient funds to pay all Part A benefits.

Each year, the Medicare Trustees provide an Figure 30

estimate of the year when the asset level is Solvency of the Medicare Part A Hospital Insurance Trust
projected to be fully depleted. Because of slower Fund
2030
growth in Medicare spending in recent years, the 2029

solvency of the trust fund has been extended. In

2026
2014, the Trustees projected that the Part A trust
2024 2024
fund will be depleted in 2030, four years later
than was projected in the 2013 report and six 2020
years later than was projected in the 2012 report 2018
2019 2019

(Figure 30). 2017

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Part A Trust Fund solvency is affected by growth
Year of Medicare Trustees Report
in the economy, which affects revenue from SOURCE: Intermediate projections from 2005-2014 Annual Reports of the Boards of Trustees of the Federal Hospital Insurance and
Federal Supplementary Medical Insurance Trust Funds.
payroll tax contributions, health care spending
trends, and demographic trends: an increasing number of beneficiaries, especially between 2010 and 2030
when the baby boom generation reaches Medicare eligibility age, and a declining ratio of workers per
beneficiary making payroll tax contributions.

Part B and Part D do not have financing challenges similar to Part A, because both are funded by beneficiary
premiums and general revenues that are set annually to match expected outlays. However, future increases in
spending under Part B and Part D will require increases in general revenue funding and higher premiums paid
by beneficiaries.

For example, the Independent Payment Advisory Board (IPAB), a 15-member board which was authorized by
the ACA, is required to recommend Medicare spending reductions to Congress if projected spending growth
exceeds specified target levels. IPAB is required to propose spending reductions if the 5-year average growth
rate in Medicare per capita spending is projected to exceed the per capita target growth rate, based on inflation
(2015-2019) or growth in the economy (2020 and beyond). The ACA required the IPAB process to begin in
2013, but CBO has estimated that spending reductions will not be triggered for several years because Medicare
spending growth is expected to be below the target growth rate during the next decade. As yet, no members of
the board have been nominated or appointed.
While Medicare spending is on a slower upward
Figure 31
trajectory now than in the past, Medicare is likely Number of Medicare Beneficiaries and Number of Workers
to be a focus of future policy discussions about Per Beneficiary, 2000-2050
reducing the federal budget debt, given the In millions Number of beneficiaries (in millions)

health care financing challenges posed by the 100 Number of workers per beneficiary
89.2
92.8 4.5
90 4
81.8
aging of the population. From 2014 to 2050, the 80 4.0
3.5
number of people on Medicare is projected to 70 3.4 64.4 3
60
rise from 54 million to 93 million, while the ratio 50 47.7 2.8 2.5
39.7 2
of workers per beneficiary is expected to decline 40
2.3 2.2 2.3
1.5
from 3.2 to 2.3 (Figure 31). 30
1
20
10 0.5
0 0
2000 2010 2020 2030 2040 2050

SOURCE: Kaiser Family Foundation based on the 2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance
and Federal Supplementary Medical Insurance Trust Funds.
 Days 1-60 No coinsurance
Days 61-90 $315 per day
Days 91-150 $630 per day (for up to 60 lifetime reserve days)
After 150 Days Not covered

Days 1-20 No coinsurance

Days 21-100 $157.50 per day
After 100 Days Not covered

MD accepts assignment 20% coinsurance

MD does not accept assignment 20% coinsurance, plus up to 15% above the Medicare-approved fee

(unweighted PDP and MA-

PD plan average)

(up to $2,960 in total drug costs)

(between $2,960 and $7,062 in total drug
costs)
(above $4,700 in out-of-pocket
costs)
              

           

(first 3 pints)            
       

         

         

  

   

   
(up to plan limits)
(varies by state)
 Department of Health and Human Services, “Fiscal Year 2016 Budget in Brief: Strengthening Health and Opportunity for All
Americans,” 2015. Available at http://www.hhs.gov/budget/fy2016/fy-2016-budget-in-brief.pdf.
Congressional Budget Office (CBO), Medicare Baseline, March 2015. Available at
http://www.cbo.gov/sites/default/files/cbofiles/attachments/44205-2015-03-Medicare.pdf.
Congressional Budget Office (CBO), Medicare Baseline, March 2015. Available at
http://www.cbo.gov/sites/default/files/cbofiles/attachments/44205-2015-03-Medicare.pdf.
Kaiser Family Foundation, Medicare Advantage Fact Sheet, May 2014. Available at: http://kff.org/medicare/fact-sheet/medicare-
advantage-fact-sheet/.
Congressional Budget Office (CBO), Medicare Baseline, March 2015. Available at
http://www.cbo.gov/sites/default/files/cbofiles/attachments/44205-2015-03-Medicare.pdf.
Department of Health and Human Services, Fiscal Year 2016 Budget in Brief: Strengthening Health and Opportunity for All
Americans, 2015. Available at http://www.hhs.gov/budget/fy2016/fy-2016-budget-in-brief.pdf.
Congressional Budget Office (CBO), Medicare Baseline, March 2015. Available at
http://www.cbo.gov/sites/default/files/cbofiles/attachments/44205-2015-03-Medicare.pdf.
Kaiser Family Foundation analysis of the Medicare Current Beneficiary Survey 2010 Cost and Use file.
Jacobson G, Huang J, Neuman T, Smith K, Income and Assets of Medicare Beneficiaries, 2013–2030, Kaiser Family Foundation,
January 2014. Available at http://kff.org/medicare/issue-brief/income-and-assets-of-medicare-beneficiaries-2013-2030/.
U.S. Census Bureau poverty thresholds for 2013 by size of family and number of children under age 18.
Cubanski J, Swoope C, Damico A, Neuman T, How Much Is Enough? Out-of-Pocket Spending Among Medicare Beneficiaries: A
Chartbook, Kaiser Family Foundation, Kaiser Family Foundation, July 2014. Available at http://kff.org/health-costs/report/how-
much-is-enough-out-of-pocket-spending-among-medicare-beneficiaries-a-chartbook/.
Cubanski J, Swoope C, Damico A, Neuman T, How Much Is Enough? Out-of-Pocket Spending Among Medicare Beneficiaries: A
Chartbook, Kaiser Family Foundation, Kaiser Family Foundation, July 2014. Available at http://kff.org/health-costs/report/how-
much-is-enough-out-of-pocket-spending-among-medicare-beneficiaries-a-chartbook/
Hoadley J, Cubanski J, Hargrave E, and Summer L, Medicare Part D: A First Look at Part D Plan Offerings in 2015, Kaiser Family
Foundation, October 2014. Available at http://kff.org/medicare/issue-brief/medicare-part-d-a-first-look-at-plan-offerings-in-2015/.
The ACA eliminated the tax deductibility of the 28 percent federal subsidy payment that employers who accept the retiree drug
subsidy (RDS) had been able to claim prior to 2013. RDS claims are also not eligible for the 50 percent brand-name drug discount.
2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
Funds.
Jacobson G, Damico A, Neuman T, and Gold M, Medicare Advantage 2015 Data Spotlight: Overview of Plan Changes, Kaiser Family
Foundation, December 2014. Available at http://kff.org/medicare/issue-brief/medicare-advantage-2015-data-spotlight-overview-of-
plan-changes/.
Jacobson G, Damico A, Neuman T, and Gold M, Medicare Advantage 2015 Data Spotlight: Overview of Plan Changes, Kaiser Family
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