I C A R E
April 2003

W
HAT
I
S
M
EDICARE
?

Medicare is the federal health insurance program that covers
41 million Americans. Medicare serves all eligible
beneficiaries without regard to income or medical history.
Medicare has played a central role in the U.S. health system
since it was established in 1965.

Most individuals ages 65 and over are automatically entitled
to Medicare Part A (the Hospital Insurance Program) if they
or their spouse are eligible for Social Security payments.
People under 65 who receive Social Security cash payments
due to a disability generally become eligible for Medicare
after a 2-year waiting period. People with end-stage renal
disease (ESRD) are entitled to Part A regardless of their age.
Part B (the Supplementary Medical Insurance Program) is
voluntary, but covers 95% of all Part A beneficiaries.

H
OW
I
S
M
EDICARE
F
INANCED
?

Part A is financed mainly by a 1.45% payroll tax paid by both
employees and employers. Revenue from the payroll tax is
held in the Hospital Insurance Trust Fund and is used to pay
Part A benefits. Part B is financed by both beneficiary
premiums ($58.70/month, 2003) and general revenues.
Premiums cover about a quarter of total Part B spending.

Looking at the Medicare program as a whole, over half of
revenues in 2003 were from payroll taxes (55%). General
revenues accounted for 28% of the total and premiums
represented 9%, with the remainder coming from interest and
taxes paid on Social Security benefits.

Medicare has relatively low administrative costs, accounting
for less than 2% of total benefit spending.

100-149% of
Poverty
15%
150-199% of
Poverty
13%
200% of
Poverty
or more
60%
Less than
100% of
Poverty
12%
The Non-Institutionalized Medicare Population by
Poverty Level, 2000
Total = 37 million
40%
with Income below
200% of Poverty
Note: Reflects family income as defined by the Census. Under an alternative definition linked to eligibility levels, 49% of
beneficiaries would have incomes <200% of poverty. 2000 federal poverty thresholds for individuals age 65+ were
$8,259 /singles and $10,419 /couples; for individuals under age 65, they were $8,959 /singles and $11,590 /couples.
SOURCE: Urban Institute estimates based on 2001 Current Population Survey.
Figure 1




W
HO
I
S
C
OVERED
U
NDER
M
EDICARE
?


Medicare covers more than 35 million Americans ages 65+
and 6 million younger adults with permanent disabilities.

Four in ten (40%) have incomes at or below 200% of the
federal poverty level ($16,988 per senior and $21,430 per
senior couple in 2001) (Figure 1).
Forty percent of all beneficiaries have less than $12,000 in
countable assets (2002).
Three in ten (30%) say their health status is fair or poor.

W
HAT
B
ENEFITS
D
OES
M
EDICARE
C
OVER
?

Medicare provides broad coverage of basic benefits, but
does not cover outpatient prescription drugs or long-term
care. Part A, which financed 48% of benefits in 2003, covers
inpatient hospital services, skilled nursing facility (SNF)
benefits, home health visits following a hospital or SNF stay,
and hospice care (Figure 2). Inpatient hospital services are
subject to a deductible ($840/benefit period, 2003) and a
daily coinsurance beginning after the 60
th
day of a hospital
stay. SNF care is limited to 100 days, subject to a 3-day prior
hospitalization requirement, with coinsurance ($105/day,
2003) for days 21-100. No copayments apply to home health.

Skilled
Nursing Facilities
Hospital
Outpatient
Other Part B
Benefits
Hospital Inpatient
Hospice
Physicians
Home Health
Medicare+Choice
(Part C)
Total = $271 billion*
Includes administrative expenses. Pie may not sum to 100% due to rounding.
SOURCE: Congressional Budget Office, March 2003 Baseline: Medicare.
Part A
Part B
Parts A and B
5%
2%
13%
4%
18%
5%
13%
Estimated Medicare Benefit Payments,
by Type of Service, Fiscal Year 2003
41%
Figure 2

Part B, which accounted for one-third of Medicare benefit
spending last year, covers physician and outpatient hospital
services, annual mammography and other cancer
screenings, and services such as laboratory procedures and
medical equipment. After the $100 Part B deductible has
been met, a 20% coinsurance is required for most services.

Medicare+Choice (M+C) plans contract with Medicare to
provide both Part A and B services to enrolled beneficiaries.
M+C plans accounted for an estimated 13% of Medicare
benefit payments in 2002. Home health, also funded under
Parts A and B, accounted for 4% of Medicare spending.
M E D I C A R E
F A C T S H E E T
The Henry J. Kaiser Family Foundation:
2400 Sand Hill Road, Menlo Park, CA 94025 (650) 854-9400 Facsimile: (650) 854-4800
Washington, D.C. Office:
1330 G Street, N.W., Washington, DC 20005 (202) 347-5270 Facsimile: (202) 347-5274
Publications:
(800) 656-4533
Website:
www.kff.org
The Henry J. Kaiser Family Foundation is an independent national health philanthropy and is not associated with Kaiser Permanente or Kaiser Industries.
MEDICARE AT A GLANCE Medicare benefit payments account for 19% of total national
spending for personal health services.
In 2001, Medicare
financed 30% of the nations hospital services and 21% of
physician and clinical services, but only 2% of outpatient
prescription drugs (Figure 3).

Medicares Share of National Personal Health
Expenditures, by Type of Service, 2001
30%
12%
21%
30%
19%
2%
0%
25%
50%
Total
Services*
Hospital
Services
Physician
and Clinical
Services
Prescription
Drugs
Nursing
Home Care
Home Health
Care
Medicare
Total
$223.5
$1,236.4
$135.0
$451.2
$63.9
$313.6
$2.4
$140.6
$11.6
$98.9
$9.9
$33.2
(Expenditures in Billions)
*Total services also includes dental care, other professional services, durable and non-durable medical equipment, and other
personal health care services.
SOURCE: Levit, et al., Health Affairs, Jan/Feb 2003.
Figure 3

F
ILLING
M
EDICARE S
G
APS


Medicare has high cost-sharing requirements and does not
generally cover outpatient prescription drugs. As a result, the
elderly spent an estimated 22% of their income, on average,
for health-care services and premiums in 2002 (Maxwell, et
al., 2002). To help with Medicares gaps, most have some
form of supplemental insurance. In the Fall of 1999:
A third (33%) of all Medicare beneficiaries had employer-
sponsored benefits.
Nearly a quarter (24%) owned a Medigap policy.
Eleven percent had Medicaid, the major public financing
program for low-income Americans.
Another 17% were enrolled in an M+C plan, the majority of
which are Medicare HMOs (Figure 4).

Sources of Health Insurance Coverage, Fall 1999
Employer-Sponsored
33%
M edicaid
11%
None
13%
M edicare+Choice
17%
Other Public
2%
M edigap
24%
Note: Analysis of non-institutionalized beneficiaries enrolled in Medicare for a full year.
SOURCE: Laschober, et al., Health Affairs, February 2002.
Total = 34.6 million non-institutionalized
Medicare beneficiaries
Figure 4


M
EDICARE
+C
HOICE


Medicare HMOs have been an option since the mid-1980s.
Beginning in the early-1990s, the number of M+C plans grew
rapidly, as did the number of enrollees. More recently, M+C
enrollment declined, along with a drop in plan participation
due to concerns about administrative requirements, Medicare
payments to plans, and other factors (Figure 5). Today, 4.6
million Medicare beneficiaries (11%) are enrolled in Medicare
HMOs, up from 1.3 million in 1990, but down from a peak of
6.3 million in 2000. By 2010, CBO projects enrollment to
shrink to 8% of the total Medicare populationa substantially
smaller share than was previously projected.


Exhibit 5
Medicare HMOs and Other Private Health Plans
Participating in Medicare, 1988-2003
Note: All data are from December of the given year except for 2003 data which is from March.
SOURCE: CMS, Medicare Managed Care Contract (MMCC) Plans Monthly Summary Report.
148
155
177
266
309
346
307
241
183
154
110
96
93
96
131
155
0
100
200
300
400
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Number of Plans

M
EDICARE AND
P
RESCRIPTION
D
RUGS


While most people on Medicare have supplemental
insurance, almost 4 in 10 beneficiaries (38%) lacked drug
coverage in the Fall of 1999, with higher rates reported by
those in rural areas (Laschober, 2002). Lack of drug
coverage is associated with higher out-of-pocket drug
spending and higher rates of skipping doses or not filling
prescriptions due to costs (Safran, et al., 2002). Average out-
of-pocket drug spending among beneficiaries increased from
$644 in 2000 to an estimated $996 in 2003 and is expected
to continue to rise due to eroding coverage and other factors
(ARC, 2003).

M
EDICARE S
F
INANCIAL
O
UTLOOK


CBO projects Medicare benefit spending to be $271 billion in
2003, accounting for 13% of the federal budget.
Medicare
spending increased by 7.8% in 2002, less than the 10.5%
rise in private health-care spending (Levit, et al., 2003). While
spending in Medicare is growing more slowly than in private
plans, it is increasing more rapidly than it did between 1997
and 2000, when spending grew at an annual average rate of
1.2%. CBO projects that Medicare spending will grow by 6%
in 2003 and by an average of 6.8% between 2004 and 2013.


The Medicare Part A Trust Fund, another measure of the
programs fiscal condition, is projected to remain solvent
through 2026.

In the future, the aging of the baby-boom generation, the
decline in the number of workers per beneficiary, and th