Medicare Overview
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Updated July 8, 2024
Medicare Overview
Medicare is a federal program that pays for covered health care services of qualified beneficiaries. It was established in 1965 under Title XVIII of the Social Security Act to provide health insurance to individuals aged 65 and older, and it was expanded in 1972 to include permanently disabled individuals under the age of 65. The Centers for Medicare and Medicaid Services (CMS) administer the program, but individuals enroll in Medicare through the Social Security Administration. CMS also contracts with private entities to provide certain services, such as claims processing, auditing, and quality oversight.
Medicare serves approximately one in five Americans and virtually all of the population aged 65 and older. In 2022, the program covered an estimated 65 million people (57 million aged and 8 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. Parts A, B, and D each cover different services, while Part C provides a private plan alternative for Parts A and B. Together, Parts A and B of Medicare comprise “original” or “traditional” Medicare.
Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled nursing care, hospice care, and some home health services.
Part B (Supplementary Medical Insurance, or SMI) covers a range of medical services and supplies, including physician, laboratory, outpatient hospital and some home health services, physician-administered drugs, and durable medical equipment. Enrollment in Part B is optional, but most beneficiaries with Part A also enroll in Part B.
Part C (Medicare Advantage, or MA) is a private plan option that covers all services under Parts A and B, except hospice. MA plans may offer additional benefits or require lower co-payments or deductibles than original Medicare. Those who enroll in MA must also be enrolled in Parts A and B. About half of Medicare beneficiaries are enrolled in MA.
Part D is an optional outpatient prescription drug benefit. Part D is provided through private prescription drug plans (PDPs), which offer only drug coverage, or through Medicare Advantage prescription drug plans (MA-PDs), which offer drug coverage that is integrated with the health care coverage provided under Part C. About three-quarters of eligible Medicare beneficiaries are enrolled in Part D.
Medicare Spending
Medicare spending is driven by a variety of factors, such as level of enrollment, complexity of medical services, health care inflation, and life expectancy. The Congressional Budget Office (CBO) estimates that total Medicare spending in 2024 will be about $1.052 trillion; of this amount, about $1.041 trillion will be spent on benefits. (See Figure 1.)
Figure 1. Projected Medicare Benefit Spending by Category, FY2024
Source: CRS figure based on CBO, “June 2024 Medicare Baseline.” Notes: Totals may not add to 100% due to rounding.
CBO estimates that the federal portion of Medicare spending (after deduction of beneficiary premiums and other offsetting receipts) will be about $867 billion in 2024. This accounts for close to 13% of total federal spending and 3% of GDP. Over the next 10 years, Medicare spending is expected to more than double, driven mainly by increasing enrollment and health care costs.
Eligibility and Enrollment
Most persons aged 65 or older are automatically entitled to premium-free Part A because they or their spouses paid Medicare payroll taxes for at least 10 years. Persons under 65 who receive cash disability benefits from Social Security for at least 24 months and individuals of any age with end- stage renal disease (ESRD) are also entitled to Medicare Part A. Eligible individuals who are not entitled to premium-free Part A may obtain coverage by paying a monthly premium.
All persons entitled to Part A may enroll in Part B by paying a monthly premium of $174.70 in 2024. Some Part B enrollees may pay less due to a “hold-harmless” provision in the Social Security Act. Beneficiaries with high incomes pay higher premiums, and those with low
Medicare Overview
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incomes may qualify for premium assistance through their state Medicaid programs.
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 each fall during which Medicare beneficiaries may choose a different MA and/or Part D plan or may choose to leave or join the MA and/or Part D programs.
Beneficiaries generally pay monthly premiums for Part D, and there may be an additional premium for those who choose to enroll in MA (Part C). Premiums for Parts C and D vary by plan. Similar to Part B, some high-income enrollees pay higher premiums for Part D, and the Part D program provides assistance to low-income enrollees. Individuals who do not enroll in Part B or Part D when they first become eligible for Medicare may pay a permanent penalty of increased monthly premiums if they choose to enroll at a later date.
Beneficiary Costs
In addition to paying premiums for Medicare Parts B, C, and/or D, beneficiaries may pay other out-of-pocket costs, such as deductibles and coinsurance, for services provided under all parts of the Medicare program. For example, there is a $1,632 per episode deductible for inpatient services under Part A, and for Part B, there is an annual deductible of $240 in 2024 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.
There is generally no limit on beneficiary out-of-pocket spending for Medicare services, although MA does have an annual limit of $8,850 for in-network services. Medicare 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.
Provider and Plan Payments
Medicare pays health care providers and plans according to payment methodologies that vary by type of service. Most of these methodologies are established in statute, and Congress has changed these payment systems over time. Under traditional Medicare, Parts A and B, the government generally pays providers directly on a fee-for-service basis using different prospective (predetermined) payment systems or fee schedules. Under Parts C and D, Medicare pays private insurers a set monthly capitated amount per enrollee regardless of the amount of services used. The capitated payments are adjusted to reflect differences in the relative cost of sicker beneficiaries with different risk factors including age, disability, or ESRD.
Most plan and provider payments are to be reduced by 2% through November 2032 due to the sequestration of mandatory spending under the Budget Control Act of 2011
(P.L. 112-25) as amended. During the COVID-19 pandemic, Congress temporarily suspended the reductions between May 2020 and March 2022, and limited the reductions to 1% from April 2022 through June 2022.
Financing
The Medicare program has two separate trust funds—the Hospital Insurance (HI) trust fund, which finances Part A, and the Supplementary Medical Insurance (SMI) trust fund, which finances Parts B and D. Part C payments are made in appropriate parts from both the HI and SMI trust funds. Both funds are maintained by the Department of the Treasury and overseen by a Board of Trustees, which reports annually to Congress.
Similar to Social Security, the HI portion of Medicare was designed to be self-supporting and is financed through dedicated sources of income. The primary source is payroll taxes paid by employees and employers; each pays a tax of 1.45% on earnings. An additional tax of 0.9% is imposed on high-income workers. There is no upper limit on earnings subject to the tax. Payroll taxes paid by current workers and their employers fund Part A benefits for today’s Medicare beneficiaries. (See Figure 2.)
Unlike the HI portion of Medicare, SMI (Parts B and D) was not intended to be supported through dedicated sources of income. Instead, it relies primarily on general tax revenues and beneficiary premiums as revenue sources.
Figure 2. Sources of Medicare Revenue, 2023
Source: 2024 Report of the Medicare Trustees, Table II.B1.
Notes: Totals may not add to 100% due to rounding. HI = Hospital Insurance trust fund; SMI = Supplementary Medical Insurance trust fund.
From its inception, the HI trust fund has faced a projected shortfall and eventual insolvency. The insolvency date has been postponed numerous times, primarily due to legislative changes that have had the effect of restraining growth in program spending. The 2024 Medicare Trustees Report projects that the HI trust fund will become insolvent in 2036. Unlike the HI trust fund, the SMI trust fund cannot become insolvent due to its financing structure; however, the Medicare trustees continue to express concerns about the rapid growth in SMI costs.
Paulette C. Morgan, Specialist in Health Care Financing Phoenix Voorhies, Analyst in Health Care Financing
IF10885
Medicare Overview
https://crsreports.congress.gov | IF10885 · VERSION 10 · UPDATED
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