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Updated May 21, 2020
Medicare is a federal program that pays for covered health
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
level of enrollment, 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 Centers for
Medicare spending in 2020 will be about $836 billion; of
Medicare and Medicaid Services (CMS) administer the
this amount, about $814 billion will be spent on benefits.
program, but individuals enroll in Medicare through the
(See Figure 1.)
Social Security Administration. CMS also contracts with
private entities to provide certain services, such as claims
Figure 1. Projected Medicare Benefit Spending by
processing, auditing, and quality oversight.
Medicare serves approximately one in six Americans and
virtually all of the population aged 65 and older. In 2020,
the program will cover an estimated 63 million persons (54
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 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”
CRS figure based on CBO, “March 2020 Medicare Baseline.”
(Hospital Insurance, or HI) covers inpatient hospital
Totals may not add to 100% due to rounding.
services, skilled nursing care, hospice care, and some home
CBO estimates that the federal portion of Medicare
spending (after deduction of beneficiary premiums and
(Supplementary Medical Insurance, or SMI) covers
other offsetting receipts) will be about $696 billion in 2020,
a range of medical services and supplies, including
accounting for close to 15% of total federal spending and
physician, laboratory, outpatient hospital and some home
3.1% of GDP. Over the next 10 years, Medicare spending is
health services, physician-administered drugs, and durable
expected to almost double due mainly to growing
medical equipment. Enrollment in Part B is optional, but
enrollment and increasing health care costs.
most beneficiaries with Part A also enroll in Part B.
Eligibility and Enrollment
(Medicare Advantage, or MA) is a private plan
option that covers all Parts A and B services, except
Most persons aged 65 or older are automatically entitled to
hospice. MA plans may offer additional benefits or require
premium-free Part A because they or their spouses paid
smaller co-payments or deductibles than original Medicare.
Medicare payroll taxes for at least 10 years. Persons under
Those who enroll in MA must also be enrolled in Parts A
the age of 65 who receive cash disability benefits from
and B. About one-third of Medicare beneficiaries are
Social Security for at least 24 months and individuals of
enrolled in MA.
any age with end-stage renal disease (ESRD) are also
entitled to Medicare Part A. Eligible individuals who are
is an optional outpatient prescription drug benefit.
not entitled to premium-free Part A may obtain coverage by
Part D is provided through private prescription drug plans
paying a monthly premium.
(PDPs), which offer only drug coverage or, through
Medicare Advantage, prescription drug plans (MA-PDs),
All persons entitled to Part A may enroll in Part B by
which offer drug coverage that is integrated with the health
paying a monthly premium ($144.60 in 2020). Some Part B
enrollees may pay less due to a “hold
care coverage they provide to beneficiaries under Part C.
About three-quarters of eligible Medicare beneficiaries are
in the Social Security Act. Beneficiaries with high incomes
enrolled in Part D.
pay higher premiums, and those with low incomes may
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qualify for premium assistance through their state Medicaid
spending under the Budget Control Act of 2011 (P.L. 112-
25) as amended; however, the CARES Act (P.L. 116-136)
suspended these reductions from May through December
When beneficiaries first become eligible for Medicare, they
may enroll in either original Medicare or a private MA
plan. Beneficiaries may also choose to enroll in a Part D
plan at this time. There is an annual open enrollment period
The Medicare program has two separate trust funds—the
each fall during which Medicare beneficiaries may choose a
Hospital Insurance (HI) Trust Fund, which finances Part A,
different MA and/or Part D plan or may choose to leave or
and the Supplementary Medical Insurance (SMI) Trust
join the MA and/or Part D programs.
Fund, which finances Parts B and D. (Part C payments are
made in appropriate parts from both the HI and SMI Trust
Beneficiaries generally pay monthly premiums for Part D,
Funds.) Both funds are maintained by the Department of the
and there may be an additional premium for those who
Treasury and overseen by a Board of Trustees, which
choose to enroll in MA (Part C). Premiums for Parts C and
reports annually to Congress.
D vary by plan. Similar to Part B, some high-income
enrollees pay higher premiums for Part D and the Part D
Similar to Social Security, the HI portion of Medicare was
program provides assistance to low-income enrollees.
designed to be self-supporting and is financed through
Individuals who do not enroll in Part B or Part D when they
dedicated sources of income. The primary source is payroll
first become eligible for Medicare may pay a permanent
paid by employees and employers; each pays a tax of
penalty of increased monthly premiums if they choose to
1.45% on earnings. An additional tax of 0.9% is imposed
enroll at a later date.
on high-income workers. There is no upper limit on
earnings subject to the tax. Payroll taxes paid by current
workers and their employers are used to pay Part A benefits
In addition to paying premiums for Medicare Parts B, C,
for today’s Medicare beneficiaries. (See Figure 2.)
and/or D, beneficiaries may pay other out-of-pocket costs,
such as deductibles and coinsurance, for services provided
Unlike the HI portion of Medicare, SMI (Parts B and D)
under all parts of the Medicare program. For example, there
was not intended to be supported through dedicated sources
is a $1,408 per episode deductible for inpatient services
of income. Instead, it relies primarily on general tax
under Part A, and for Part B, there is an annual deductible
revenues and beneficiary premiums as revenue sources.
($198 in 2020) and a 20% coinsurance for most services.
Under Part D, although costs can vary by plan, enrollees
Figure 2. Sources of Medicare Revenue, 2019
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 for in-network services.) 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
estimated that health expenses (including premiums)
account for about 14% of Medicare household spending.
2020 Report of the Medicare Trustees, Table II.B1.
Provider and Plan Payments
Totals may not add to 100% due to rounding. HI = Hospital Insurance
Medicare pays health care providers and plans according to
Trust Fund; SMI = Supplementary Medical Insurance Trust Fund.
payment methodologies that vary by type of service. Most
of these methodologies are established in statute, and
From its inception, the HI Trust Fund has faced a projected
Congress has changed these payment systems over time.
shortfall and eventual insolvency. The insolvency date has
Under traditional Medicare, Parts A and B, the government
been postponed numerous times, primarily due to
generally pays providers directly for services on a fee-for-
legislative changes that have had the effect of restraining
basis using different prospective (predetermined)
growth in program spending. The 2020 Medicare Trustees
payment systems or fee schedules. Under Parts C and D,
Report projects that the HI Trust Fund will become
Medicare pays private insurers a set monthly capitated
insolvent in 2026. Because of the way it is financed, the
amount per person to provide covered benefits to enrollees
SMI Trust Fund cannot become insolvent; however, the
regardless of the amount of services used. The capitated
Medicare trustees continue to express concerns about the
payments are adjusted to reflect differences in the relative
rapid growth in SMI costs.
cost of sicker beneficiaries with different risk factors
For more information, see CRS Report R40425, Medicare
including age, disability, or ESRD.
and CRS Report R43122, Medicare Financial
Status: In Brief
Most plan and provider payments are to be reduced by 2%
through FY2030 due to the sequestration of mandatory
Patricia A. Davis
, Specialist in Health Care Financing
, Analyst in Health Care Financing
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
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