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President Johnson signing the Medicare amendment.[1] Harry Truman and his wife, Bess, are on the far right

Medicare refers to the government-administered health insurance program for people aged 65 and over in the U.S.. The program was part of the Great Society proposals under President Johnson and was enacted into law on July 30, 1965[2]. At the bill-signing ceremony President Johnson enrolled former President Harry S. Truman as the first Medicare beneficiary and presented him with the first Medicare card.[3]


The Centers for Medicare and Medicaid Services (CMS), a component of the Department of Health and Human Services (HHS), administers Medicare, Medicaid, the State Children's Health Insurance Program (SCHIP), and the Clinical Laboratory Improvement Amendments (CLIA). Along with the Departments of Labor and Treasury, CMS also implements the insurance reform provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The Social Security Administration is responsible for determining Medicare eligibility and processing premium payments for the Medicare program.

CMS determines coverage of a new procedures or devices ([4]

Taxes imposed to finance Medicare

Medicare is financed by payroll taxes imposed by the Federal Insurance Contributions Act (FICA) and the Self-Employment Contributions Act of 1954. In the case of employees, the tax is equal to 2.9% (1.45% withheld from the worker and a matching 1.45% paid by the employer) of the wages, salaries and other compensation in connection with employment. The law had provided a maximum amount of wages, etc., on which the Medicare tax could be imposed each yearn but beginning in 1994, the compensation limit was removed. In the case of self-employed individuals, the tax is 2.9% of net earnings from self-employment, and the entire amount is paid by the self-employed individual.


According to the 2004 "Green Book" of the House Ways and Means Committee, Medicare expenditures from the American government were $256.8 billion in fiscal year 2002. Beneficiary premiums are highly subsidized, and net outlays for the program, accounting for the premiums paid by subscribers, were $230.9 billion.


In general, individuals are eligible for Medicare if they (or their spouse) worked for at least 10 years in Medicare-covered employment and are at least 65 years old and are a citizen or permanent resident of the United States of America.

Individuals who are under 65 years old can also be eligible if they are disabled or have end stage renal disease. People under 65 and disabled must be receiving disability benefits from either Social Security or the Railroad Retirement Board for at least 24 months before automatic enrollment occurs.

In 2005, Medicare provided health care coverage for 42.5 million Americans. Enrollment is expected to reach 77 million by 2031, when the baby boom generation is fully enrolled.[5]


The "Original Medicare" program has two parts: Part A (Hospital Insurance), and Part B (Medical Insurance). Only a few special cases exist where prescription drugs are covered by Original Medicare, but as of January 2006, Medicare Part D provides more comprehensive drug coverage. Medicare Advantage plans are another way for beneficiaries to receive their Part A, B and D benefits.

Part A: Hospital Insurance

Part A covers hospital stays. It will pay for nursing home stays as well if certain criteria are met:

  1. The hospital stay must be of at least 72 hours with the count starting at the first midnight after admission and not counting any hours of the discharge date.
  2. The nursing home stay must be for something diagnosed during the hospital stay or for the main cause of hospital stay. For instance, hospital stay for broken hip and then nursing home stay for physical therapy would be covered.
  3. If the patient is not receiving rehabilitation but has some other ailment that requires skilled nursing supervision then the nursing home stay would be covered.
  4. The care being rendered by the nursing home must be skilled. Medicare part A does not pay for custodial, non-skilled, or long-term care activities, including activities of daily living (ADLs) such as personal hygiene, cooking, cleaning, etc.

The maximum length of stay that Medicare Part A will cover in a skilled nursing facility per ailment is 100 days. The first 20 of those days would be paid for in full by Medicare with the remaining 80 days requiring a co-payment (as of 2007, $124.00 per day). Many insurance companies will have a provision for skilled nursing care in the policies they sell.

Part B: Medical Insurance

Part B medical insurance helps pay for some services and products not covered by Part A, generally on an outpatient basis. Part B is optional and may be deferred if the beneficiary or their spouse is still actively working. There is a lifetime penalty (10% per year) imposed for not taking Part B if not actively working.

Part B coverage includes physician and nursing services, x-rays, laboratory and diagnostic tests, influenza and pneumonia vaccinations, blood transfusions, renal dialysis, outpatient hospital procedures, limited ambulance transportation, Immunosuppressive drugs for organ transplant recipients, chemotherapy, hormonal treatments such as lupron, and other outpatient medical treatments administered in a doctor's office. Medication administration is covered under Part B only if it is administered by the physician during an office visit.

Part B also helps with Durable Medical Equipment (DME), including canes, walkers, wheelchairs, and mobility scooters for those with mobility impairments. Prosthetic devices such as artificial limbs and breast prosthesis following mastectomy, as well as oxygen for home use is also covered. Critics complain that Medicare is highly overcharged for many of these services.[6]

As with all Medicare benefits, Part B coverage is subject to medical necessity. Complex rules are used to manage the benefit, and advisories are periodically issued which describe coverage criteria. On the national level these advisories are issued by CMS, and are known as National Coverage Determinations (NCD). Local Coverage Determinations (LCD) only apply within the multi-state area managed by a specific regional Medicare Part B contractor, and Local Medical Review Policies (LMRP) were superseded by LCDs in 2003.

Part C: Medicare Advantage plans

For more information, see: Medicare Part C.

With the passage of the Balanced Budget Act of 1997, Medicare beneficiaries were given the option to receive their Medicare benefits through private health insurance plans, instead of through the Original Medicare plan (Parts A and B). These programs were known as "Medicare+Choice" or "Part C" plans. Pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the compensation and business practices changed for insurers that offer these plans, and "Medicare+Choice" plans became known as "Medicare Advantage" (MA) plans. In addition to offering comparable coverage to Part A and Part B, Medicare Advantage plans may also offer Medicare Part D coverage.

Part D: Prescription Drug plans

For more information, see: Medicare Part D.

In order to receive this benefit, a person with Medicare must enroll in a stand-alone Prescription Drug Plan (PDP) or Medicare Advantage plan with prescription drug coverage (MA-PD). These plans are approved and regulated by the Medicare program, but are actually designed and administered by private health insurance companies. Unlike Original Medicare (Part A and B), Part D coverage is not standardized. Plans choose which drugs (or even classes of drugs) they wish to cover, at what level (or tier) they wish to cover it, and are free to choose not to cover some drugs at all. The exception to this is drugs that Medicare specifically excludes from coverage, including but not limited to benzodiazepines, cough suppressants and barbiturates.[7] [8] Plans that cover excluded drugs are not allowed to pass on those costs to Medicare, and plans are required to repay CMS if they are found to have billed Medicare in these cases.[9]

Out-of-pocket costs

Neither Part A nor Part B pays for all of a covered person's medical costs. The program contains premiums, deductibles and co-pays, which the covered individual must pay out-of-pocket. Some people may qualify to have other governmental programs (such as Medicaid) pay premiums and some or all of the costs associated with Medicare.

Some people elect to purchase a type of supplemental coverage, called a Medigap plan, to help fill the holes in Original Medicare (Part A and B). These Medigap insurance policies are standardized by CMS, but are sold and administered by private companies. There is currently no CMS approved supplemental coverage available to fill the Donut Hole, a coverage gap built into Medicare's Part D benefit.


Most people do not pay a monthly Part A premium, because they (or a spouse) have had 40 or more quarters where they paid FICA taxes. For Medicare eligible beneficiaries who do not have 40 or more quarters of Medicare-covered employment, Part A may be purchased for a monthly premium of:

  • $226.00 per month (in 2007) for people having 30-39 quarters of Medicare-covered employment.
  • $410.00 per month (in 2007) for people who are not otherwise eligible for premium-free hospital insurance and have less than 30 quarters of Medicare-covered employment.

Everyone with Medicare Part B pays an insurance premium for this coverage; the standard Part B premium for 2007 is $93.50 per month. A new income-based premium schema has been introduced for 2007, where Part B premiums will be higher for beneficiary's whose income exceeds $80,000 for individuals, or $160,000 for married couple’s. Depending on the extent to which their income exceeds this base amount, the income-related Part B premiums for 2007 will be $105.80, $124.40, $142.90, or $161.40. The highest premium rates will be paid by beneficiaries whose incomes are over $200,000, or $400,000 for a married couple.

It is common for the Medicare Part B premium to be automatically deducted from a beneficiaries monthly Social Security check.

Part C and D plans may or may not charge a premium, at their discretion.

Deductible and Coinsurance

Part A — For each benefit period, a beneficiary will pay:

  • A Part A deductible of $992 (in 2007) for a hospital stay of 1-60 days.
  • A $248 per day co-pay (in 2007) for days 61-90 of a hospital stay.
  • A $496 per day co-pay (in 2007) for days 91-150 of a hospital stay, as part of their limited Lifetime Reserve Days.
  • All costs for each day beyond 150 days
  • Coinsurance for a Skilled Nursing Facility is $124.00 per day (in 2007) for days 21 through 100 for each benefit period.

Part B — After a beneficiary meets the yearly deductible of $131.00 (in 2007), they will be required to pay a co-insurance of 20% of the Medicare-approved amount for all services covered by Part B.

The deductibles and coinsurance charges for Part C and D plans vary from plan to plan.

Payment for services

Medicare contracts with regional insurance companies who process over one billion fee-for-service claims per year. In 2003, Medicare accounted for almost 13% of the entire Federal Budget. Based on the CMS projections, 33 cents of every dollar spent on health care in the U.S. is paid by Medicare and Medicaid (including State funding). Looked at from three different perspectives, 61 cents of every dollar spent on nursing homes, 47 cents of every dollar received by U.S. hospitals, and 27 cents of every dollar spent on physician services is funded by Medicare or Medicaid.

Reimbursement for Part A services

For institutional care such as hospital and nursing home care, Medicare uses prospective payment systems. A prospective payment system is one in which the health care institution receives a set amount of money for each episode of care provided to a patient, regardless of the actual amount of care used. The actual allotment of funds is based on a list of diagnosis-related groups (DRG). The actual amount depends on the kind of diagnosis made at the hospital. There are some issues surrounding Medicare's use of DRGs because if the patient uses less care, the hospital gets to keep the remainder. This, in theory, should balance the costs for the hospital. However, if the patient uses more care, then the hospital has to cover its own losses. This results in the issue of "upcoding," when a physician makes a more severe diagnosis to hedge against accidental costs.

Reimbursement for Part B services

Payment for physician services under Medicare has evolved since the program was created in 1965. Initially, Medicare compensated physicians based on the physician's charges, and allowed physicians to bill Medicare beneficiaries the amount in excess of Medicare's reimbursement. In 1975, annual increases in physician fees were limited by the Medicare Economic Index (MEI). The MEI was designed to measure changes in costs of physician's time and operating expenses, adjusted for changes in physician productivity. From 1984 to 1991, the yearly change in fees was determined by legislation. This was done because physician fees were rising faster than projected.

The Omnibus Budget Reconciliation Act of 1989 made several changes to physician payments under Medicare. Firstly, it introduced the Medicare Fee Schedule, which took effect in 1992. Secondly, it limited the amount Medicare non-providers could balance bill Medicare beneficiaries. Thirdly, it introduced the Medicare Volume Performance Standards (MVPS) as a way to control costs.[10]

On January 1, 1992, Medicare introduced the Medicare Fee Schedule (MFS). The MFS assigned Relative Value Units (RVUs) for each procedure from the Resource-Based Relative Value Scale (RBRVS). The Medicare reimbursement for a physician was the product of the RVU for the procedure, a Geographic Adjustment Factor (GAF) for geographic variations in payments, and a global Conversion Factor (CF) which converts RBRVS units to dollars.

From 1992 to 1997, adjustments to physician payments were adjusted using the MEI and the MVPS, which essentially tried to compensate for the increasing volume of services provided by physicians by decreasing their reimbursement per service.

In 1998, Congress replaced the VPS with the Sustainable Growth Rate (SGR). This was done because of highly variable payment rates under the MVPS. The SGR attempts to control spending by setting yearly and cumulative spending targets. If actual spending for a given year exceeds the spending target for that year, reimbursement rates are adjusted downward by decreasing the Conversion Factor (CF) for RBRVS RVUs.

Since 2002, actual Medicare Part B expenditures have exceeded projections.

In 2002, payment rates were cut by 4.8%. In 2003, payment rates were scheduled to be reduced by 4.4%. However, Congress boosted the cumulative SGR target in the Consolidated Appropriation Resolution of 2003 (P.L. 108-7), allowing payments for physician services to rise 1.6%. In 2004 and 2005, payment rates were again scheduled to be reduced. The Medicare Modernization Act (P.L. 108-173) increased payments 1.5% for those two years.

In 2006, the SGR mechanism was scheduled to decrease physician payments by 4.4%. (This number results from a 7% decrease in physician payments times a 2.8% inflation adjustment increase.) Congress overrode this decrease in the Deficit Reduction Act (P.L. 109-362), and held physician payments in 2006 at their 2005 levels. Without further continuing congressional intervention, the SGR is expected to decrease physician payments from 25% to 35% over the next several years.

MFS has been criticized for not paying doctors enough because of the low conversion factor. By adjustments to the MFS conversion factor, it is possible to pay all doctors more or less depending on how much money the person paying (CMS in this case) is willing to pay.[11]

Office medication reimbursement

Chemotherapy and other medications dispensed in a physician's office are reimbursed according to the Average Sales Price, a number computed by taking the total dollar sales of a drug as the numerator and the number of units sold nationwide as the denominator. The current reimbursement formula is known as "ASP+6" since it reimburses physicians at 106% of the ASP of drugs. Pharmaceutical company discounts and rebates are included in the calculation of ASP, and tend to reduce it. ASP+6 superseded Average Wholesale Price in 2005, after a 2004 front-page New York Times article drew attention to the inaccuracies of Average Wholesale Price calculations. Average Wholesale Price (AWP) reimbursement tended to be more favorable for physicians, since it was an arbitrary number provided by the pharmaceutical company to CMS. Since the change, some outpatient chemotherapy drugs are "underwater," since the wholesale price from drug distributors may be higher than ASP+6 for some drugs. Stakeholders are involved in active discussions with Congress to address this issue.


Quality improvement initiatives

Medicare has used its payments to health care providers as incentives to achieve health care quality assurance.

Physician Quality Reporting Initiative

Per the MEDICARE website:[12]

"The 2006 Tax Relief and Health Care Act (TRHCA) (P.L. 109-432) required the establishment of a physician quality reporting system, including an incentive payment for eligible professionals (EPs) who satisfactorily report data on quality measures for covered professional services furnished to Medicare beneficiaries during the second half of 2007 (the 2007 reporting period). CMS named this program the Physician Quality Reporting Initiative (PQRI). The PQRI was further modified as a result of the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) (Pub. L. 110-275) and the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) (Pub. L. 110-275)."


Medicare faces continuing financial issues. In its 2006 annual report to Congress, the Medicare Board of Trustees reported that the program's hospital insurance trust fund could run out of money by 2018. The trustees have made such projections in the past, but this one was bleaker than the outlook reported just last year.[13]

The fundamental problem is that the ratio of workers paying Medicare taxes to retirees drawing benefits is shrinking at the same time that the price of health care services per person is increasing.[14][15] Currently there are 3.9 workers paying taxes into Medicare for every older American receiving services. By 2030, as the baby boom generation retires, that will drop to 2.4 workers for each beneficiary. Medicare spending is expected to grow by about 7 percent per year for the next 10 years.[16]

Part of the cost of Medicare is fraud, which government auditors estimate costs Medicare billions of dollars a year.[17][18] The Government Accountability Office lists Medicare as a "high-risk" government program in need of reform, in part because of its vulnerability to fraud and partly because of its long-term financial problems.[19]

Popular opinion surveys show that the public views Medicare’s problems as serious, but not as urgent as other concerns. In January 2006, the Pew Research Center found 62 percent of the public said addressing Medicare’s financial problems should be a high priority for the government, but that still put it behind other priorities.[20] Surveys suggest that there’s no public consensus behind any specific strategy to keep the program solvent.[21]

A study by the Government Accountability Office evaluated the quality of responses given by Medicare contractor customer service representatives to provider (physician) questions. The evaluators assembled a list of questions, which they asked during a random sampling of calls to Medicare contractors. The rate of complete, accurate information provided by Medicare customer service representatives was 15%.

Legislation and reform

President Bill Clinton attempted an overhaul of Medicare through his ambitious health care reform plan in 1993-1994 but was unable to get the legislation passed by Congress.

In 2003 Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act, as proposed by President George W. Bush. Part of this legislation included fixing loop holes in the Medicare Secondary Payer Act that was enacted in 1980. By fixing the loopholes, Congress strengthened the Workers' Compensation Medicare Set-Aside Program (WCMSA) that is monitored and administered by CMS.


Some content on this page may previously have appeared on Wikipedia.

Notes and references

  1. See Social Security History: Medicare Is Signed Into Law from the U.S. Social Security Administration for a photo of Presidents Johnson and Truman and the signing.
  2. Medicare was created in 1965 by Title XVIII of the Social Security Act, as amendments to Social Security law.
  3. The history of Medicare's promotion by Wilbur Mills and President Johnson has been summarized in The lessons of success--revisiting the Medicare story by Blumenthal D, Morone J in the New England Journal of Medicine PMID 19038885.
  4. Redberg RF, Walsh J (November 2008). "Pay Now, Benefits May Follow -- The Case of Cardiac Computed Tomographic Angiography". N. Engl. J. Med. 359 (22): 2309–2311. DOI:10.1056/NEJMp0805920. PMID 19038877. Research Blogging.
  6. see Medicare: Part A & B online
  10. Lauren A. McCormick, Russel T. Burge. Diffusion of Medicare's RBRVS and related physician payment policies - resource-based relative value scale - Medicare Payment Systems: Moving Toward the Future Health Care Financing Review. Winter, 1994.
  11. Medicare's Physician Payment Rates and the Sustainable Growth Rate.(PDF) CBO TESTIMONY Statement of Donald B. Marron, Acting Director. July 25, 2006.
  12. Physician Quality Reporting Initiative (PQRI)
  16. 2006 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplimentary Medical Insurance Trust Funds, 1 May 2006 (PDF). Retrieved on July 21, 2006.
  19. "High-Risk Series: An Update" U.S. Government Accountability Office, January 2003 (PDF). Retrieved on July 21, 2006.