Updated July 5, 2018
Medicare Overview
Medicare is a federal program that pays for covered health
Medicare Spending
care services of qualified beneficiaries. It was established in
Medicare spending is driven by a variety of factors, such as
1965 under Title XVIII of the Social Security Act to
the level of enrollment, the complexity of medical services
provide health insurance to individuals aged 65 and older,
provided, health care inflation, and life expectancy. The
and it was expanded in 1972 to include permanently
Congressional Budget Office (CBO) estimates that total
disabled individuals under the age of 65. The program is
Medicare spending in 2018 will be about $714 billion; of
administered by the Centers for Medicare & Medicaid
this amount, close to $693 billion will be spent on benefits.
Services (CMS), but individuals enroll in Medicare through
the Social Security Administration. CMS also contracts
Figure 1. Projected Medicare Benefit Spending by
with private entities to provide certain services, such as
Category, FY2018
claims processing, auditing, and quality oversight.
Medicare serves approximately one in six Americans and
virtually all of the population aged 65 and older. In 2018,
the program will cover an estimated 60 million persons (51
million aged and 9 million disabled). All beneficiaries are
entitled to the same coverage regardless of income or
medical history. Funding for Medicare benefits is
considered mandatory spending and is not subject to the
annual Congressional appropriations process.
Medicare Structure
Medicare consists of four distinct parts. Medicare Parts A,
B, and D each cover different services, and Part C provides
a private plan alternative for Parts A and B. Together, Parts

A and B of Medicare comprise “original” or “traditional”
Source: Figure by the Congressional Research Service (CRS) based
Medicare.
on data from the Congressional Budget Office, “April 2018 Medicare
Baseline,” April 9, 2018.
Part A (Hospital Insurance, or HI) covers inpatient hospital
services, skilled nursing care, hospice care, and some home
CBO estimates that the federal portion of Medicare
health services.
spending (after deduction of beneficiary premiums and
other offsetting receipts) will be close to $590 billion in
Part B (Supplementary Medical Insurance, or SMI) covers
2018, accounting for about 14% of total federal spending
a range of medical services and supplies, including
and 3% of GDP. Over the next 10 years, Medicare spending
physician, laboratory, outpatient hospital and some home
is expected to almost double due mainly to growing
health services, physician-administered drugs, and durable
enrollment and increasing health care costs.
medical equipment. Enrollment in Part B is optional, but
most beneficiaries with Part A also enroll in Part B.
Eligibility and Enrollment
Most persons aged 65 or older are automatically entitled to
Part C (Medicare Advantage, or MA) is a private plan
premium-free Part A because they or their spouse paid
option that covers all Parts A and B services, except
Medicare payroll taxes for at least 10 years. Persons under
hospice. MA plans may offer additional benefits or require
the age of 65 who receive cash disability benefits from
smaller co-payments or deductibles than original Medicare.
Social Security for at least 24 months and individuals of
Those who enroll in MA also must be enrolled in Parts A
any age with end-stage renal disease (ESRD) also are
and B. About one-third of Medicare beneficiaries are
entitled to Medicare Part A. Eligible individuals who are
enrolled in MA.
not entitled to premium-free Part A may obtain coverage by
paying a monthly premium.
Part D is an optional outpatient prescription drug benefit.
Part D is provided through private prescription drug plans
All persons entitled to Part A may enroll in Part B by
(PDPs), which offer only drug coverage, or through
paying a monthly premium ($134 in 2018). Some Part B
Medicare Advantage prescription drug plans (MA-PDs),
enrollees may pay less due to a “hold-harmless” provision
which offer drug coverage that is integrated with the health
in the Social Security Act. Beneficiaries with high incomes
care coverage they provide to beneficiaries under Part C.
pay higher premiums, whereas those with low incomes may
About 77% of eligible Medicare beneficiaries are enrolled
qualify for premium assistance through their state Medicaid
in Part D.
programs.
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Medicare Overview
When beneficiaries first become eligible for Medicare, they
Financing
may enroll in either original Medicare or a private MA
The Medicare program has two separate trust funds—the
plan. Beneficiaries also may choose to enroll in a Part D
Hospital Insurance (HI) Trust Fund, which finances Part A,
plan at this time. There is an annual open enrollment period
and the Supplementary Medical Insurance (SMI) Trust
each fall during which Medicare beneficiaries may choose a
Fund, which finances Parts B and D. (Part C payments are
different MA and/or Part D plan or may choose to leave or
made in appropriate parts from both the HI and SMI Trust
join the MA and/or Part D programs.
Funds.) Both funds are maintained by the Department of the
Treasury and overseen by a Board of Trustees, which
Beneficiaries generally pay monthly premiums for Part D,
reports annually to Congress.
and there may be an additional premium for those who
chose to enroll in MA (Part C). Premiums for Parts C and D
Similar to Social Security, the HI portion of Medicare was
vary by plan. Similar to Part B, some high-income enrollees
designed to be self-supporting and is financed through
pay higher premiums for Part D and the Part D program
dedicated sources of income. The primary source is payroll
provides assistance to low-income enrollees. Individuals
taxes paid by employees and employers; each pays a tax of
who do not enroll in Part B or Part D when they first
1.45% on earnings. An additional tax of 0.9% is imposed
become eligible for Medicare may pay a permanent penalty
on high-income workers. There is no upper limit on
of increased monthly premiums if they choose to enroll at a
earnings subject to the tax. Payroll taxes paid by current
later date.
workers and their employers are used to pay Part A benefits
for today’s Medicare beneficiaries.
Beneficiary Costs
In addition to paying premiums for Medicare Parts B, C,
Unlike the HI portion of Medicare, SMI (Parts B and D)
and/or D, beneficiaries may pay other out-of-pocket costs,
was not intended to be supported through dedicated sources
such as deductibles and coinsurance, for services provided
of income. Instead, it relies primarily on general tax
under all parts of the Medicare program. For example, there
revenues and beneficiary premiums as revenue sources.
is a $1,340 per episode deductible for inpatient services
under Part A, and for Part B, there is an annual deductible
Figure 2. Sources of Medicare Revenue, 2017
($183 in 2018) and a 20% coinsurance for most services.
Under Part D, although costs can vary by plan, enrollees
generally pay a deductible and cost sharing for prescriptions
and 5% of costs after reaching a catastrophic threshold.
There is generally no limit on beneficiary out-of-pocket
spending for Medicare services. (MA does have an annual
limit of $6,700.) Medicare also does not cover some items
and services, such as long-term care, hearing aids,
eyeglasses, and most dental care. Most beneficiaries
therefore have some form of supplemental coverage
through MA, private supplemental (Medigap) plans,

employer-sponsored retiree plans, or Medicaid. It is
Source: 2018 Report of the Medicare Trustees, Table II.B1.
estimated that, on average, health expenses (including
Notes: Totals may not add to 100% due to rounding. HI is the
premiums) account for about 14% of Medicare household
Hospital Insurance Trust Fund, and SMI is the Supplementary Medical
spending.
Insurance Trust Fund.
Provider and Plan Payments
From its inception, the HI Trust Fund has faced a projected
Medicare pays health care providers and plans according to
shortfall and eventual insolvency. The insolvency date has
payment methodologies that vary by type of service. Most
been postponed a number of times, primarily due to
of these methodologies are established in statute, and
legislative changes that have had the effect of restraining
Congress has changed these payment systems over time.
growth in program spending. The 2018 Medicare Trustees
Under traditional Medicare, Parts A and B, the government
Report projects that the HI Trust Fund will become
generally pays providers directly for services on a fee-for-
insolvent in 2026. Because of the way it is financed, the
service basis using different prospective (predetermined)
SMI Trust Fund cannot become insolvent; however, the
payment systems or fee schedules. Under Parts C and D,
Medicare trustees continue to express concerns about the
Medicare pays private insurers a set monthly capitated
rapid growth in SMI costs.
amount per person to provide covered benefits to enrollees
regardless of the amount of services used. The capitated
For additional information, see CRS Report R40425,
payments are adjusted to reflect differences in the relative
Medicare Primer and CRS Report R43122, Medicare
cost of sicker beneficiaries with different risk factors
Financial Status: In Brief.
including age, disability, or ESRD.
Most plan and provider payments currently are being
Patricia A. Davis, Specialist in Health Care Financing
reduced by 2% due to sequestration of mandatory spending
Phoenix Voorhies, Analyst in Health Care Financing
under the Budget Control Act of 2011 (P.L. 112-25). These
IF10885
reductions are scheduled to continue through FY2027.
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Medicare Overview


Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

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