Evaluation of Selected Aspects of the National Medicare Education Program: Final Design Report. 1.1 Background on the Medicare Program


The Medicare program provides health insurance to more than 44 million beneficiaries nationally and provides more than $374 billion in health care benefits. Participation in the Medicare program depends on whether individuals are aged 65 or older, have selected disabilities, or have end-stage renal disease (ESRD). The majority (about 85%) of the Medicare population is aged, and approximately 14% of beneficiaries are disabled. The remaining Medicare population (less than 1%) is eligible for Medicare benefits because of ESRD. The Medicare program is the largest health insurer in the United States and is crucial in ensuring health care for older adults.

The Medicare program has its roots in the Social Security program. The original Social Security Act, enacted in 1935, provided minimal income security through social insurance and included no provision for coverage of health care expenses. Despite the goals of providing a basic social income safety net, policy makers became aware that health care costs, particularly for the aged and disabled populations with multiple health care needs, would quickly undermine the income protections provided under the Social Security program. Therefore, the Medicare program was signed into law in 1965 as a mechanism to add health insurance to the already existing national Social Security program.

Medicare is partially financed through a combination of payroll taxes, beneficiary premiums, and beneficiary cost sharing. For most of its history, the Medicare program (now commonly referred to as “Original Medicare”) consisted of hospital insurance (covered under Medicare Part A) and general medical insurance, including physician services (Medicare Part B). Coverage under the Original Medicare program is offered under a fee-for-service (FFS) system in which Medicare pays medical providers predetermined rates for specific health care services.

Medicare, however, has evolved over time to include new programs. During the late 1980s, the program began to experiment with providing services to beneficiaries through capitated health maintenance organization (HMO) programs. Managed care programs, such as HMOs, offered an alternative way for Medicare beneficiaries to receive their Medicare benefits. In exchange for enrolling in a Medicare managed care plan, beneficiaries often received additional, nonstatutory benefits, including preventive care. Popularity of Medicare managed care (known first as the TEFRA HMO program) grew steadily , and the program was significantly expanded through passage of the Balanced Budget Act (BBA) of 1997. Under the BBA, which created the Medicare+Choice (M+C) program, Medicare expanded the types of managed care organizations eligible to contract with Medicare. Through the M+C program, also known as Medicare Part C, managed care organizations added new benefit options, including preferred provider organizations (PPOs) and private fee-for-service (PFFS) plans to the original HMO options. Although all beneficiaries have access to managed care options, the Medicare managed care program (currently renamed Medicare Advantage) provides coverage to a minority of Medicare beneficiaries (about 18.5% in 2007).

Possibly the most significant change to the Medicare program came with the enactment of the Medicare Modernization Act (MMA) of 2003. The MMA added to the Medicare program a benefit long absent from original Medicare voluntary prescription drug coverage. The Medicare Part D program, which became effective in January 2006, provides basic and catastrophic prescription drug coverage to beneficiaries through private insurance plans. Under Part D in 2006, beneficiaries received basic coverage of prescription drugs up to (depending on their specific plan) about $2,400. Catastrophic coverage continued after beneficiaries have paid out-of-pocket costs of $3,850. The private plans that provide Part D coverage include a wide range of stand-alone prescription drug plans (PDPs) and Medicare Advantage prescription drug plans (MA-PDs). Medicare beneficiaries choose annually which type of mechanism (PDPs or MA-PDs) they want for their Part D coverage. Beneficiaries also have the option of continuing to receive “creditable” drug coverage (e.g., coverage that is as good as the Part D benefit) through another source, such as a former employer or the Veterans Administration.

The Medicare Part D program is credited with providing critical prescripti on drug coverage to almost 24 million Medicare beneficiaries, some of whom had no reliable coverage before the new program. However, Medicare Part D has faced some criticism for its complex, hard-to-understand benefit design; the large number of coverage plan options; and the coverage gap between basic and catastrophic coverage.

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