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Overview of the Medicare and Medicaid Programs

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Health insurance coverage has been a major issue in America since the beginning of this century. Between 1915 and 1920, the first coordinated efforts to establish state-level health insurance were made at the State level. These efforts were unsuccessful. There was renewed interest in government-sponsored health insurance at the Federal level in the 1930s. However, nothing concrete came of it beyond the Social Security Act's limited provisions that supported State activities in public health and care for children and mothers.

Since the 1930s, people have wanted some type of insurance to protect against unpredicted and potentially fatal medical expenses. The key issue was whether public or private health insurance should be financed. The vast majority of the population chose to have private health insurance. This was mainly group insurance that was financed through their employment relationship.

Private insurance coverage for health soared rapidly after World War II as employees received fringe benefits that were extended because the government restricted direct wage increases. The trend continued even after the war. In the 1940s, many bills were introduced in Congress that included proposals for national insurance. However, none of them was ever voted on.

In 1950, Congress took action to increase access to medical care for those who received public assistance. This act allowed the Federal to participate in financing State payments directly to providers of medical care, which was the first time that this had been done.

Congress also believed that older people, such as the needy, needed better access to medical care. However, opinions differed on the best way to achieve this goal. In the 1950s and 1960s, there were many different approaches to legislative proposals. Congress failed to reach consensus in 1960 and passed limited legislation, including "Medical Assistance for the Aged," which offered medical assistance to those who were less financially able but still required assistance with their medical bills.

After a long national debate, Congress approved 1965 legislation establishing Medicare and Medicaid as Title XVIII, and Title XIX of the Social Security Act, respectively. Medicare was created to meet the medical needs of the elderly. In 1973, coverage was added for certain disabled people and those with kidney disease. Medicaid was created in response to widespread inadequacy in public assistance welfare medical care. The Department of Health, Education, and Welfare was responsible for the administration of Medicare and Medicaid. This is the predecessor to the current DHHS. The Medicare program was administered by the Social Security Administration (SSA), while the Social and Rehabilitation Service managed the Medicaid program. The duties of the SSA and SRS were transferred to the newly created HCFA.



Title XVIII, also known as "Health Insurance for the Aged and Disabled" in the Social Security Act is more commonly known under the name Medicare. The Medicare legislation, which was part of the Social Security Amendments Act 1965, established a Medicare program to provide health insurance for the aged. This program is intended to supplement the benefits of Title II, Social Security Act, in retirement, survivors and disability.

Medicare was first introduced in 1966 and covered all persons over 65 years old. The following people became eligible for Medicare benefits in 1973: People who were entitled to Social Security and Railroad Retirement disability cash benefits for at most 24 months; persons with end-stage kidney disease (ESRD) and certain other non-covered elderly persons who choose to pay a premium to Medicare coverage.

Medicare traditionally had two parts: hospital insurance, also known under Part A, or supplementary medical insurance, also known under Part B. The Medicare+Choice program (sometimes known as Part C) is a third component of Medicare. It was created by the BBA (Public Law 105-33) to expand beneficiaries' access to private-sector plans. About 19 million people were enrolled in Medicare when it was launched on July 1, 1966. About 40 million people were enrolled in Parts A or B of Medicare in 2000. 6.4 million have chosen to enroll in Medicare+Choice plans.

Program Financing, Beneficiary Liabilities, & Provider Payments

Two trust funds are used to manage all financial operations for Medicare. One for the HI program, and one for SMI. These trust funds are special accounts held in the U.S. Treasury and are charged with all expenses for benefits and administrative costs. You cannot use the trust funds for any other purposes. Special Treasury securities are used to invest assets not required for costs payment. These sections provide information about Medicare's financing arrangements, beneficiary cost-sharing requirements and the basis for Medicare reimbursements to providers of health care.

Program Financing

The mandatory payroll tax is the main source of funding for the HI program. Nearly all Americans, both employees and self-employed, work under the HI program. They also pay taxes to help with the costs of the benefits for the aged and disabled. The HI tax rate for employees is 1.45 percent on earnings. Employers must match the amount. Self-employed people are responsible for 2.90 percent. This tax was introduced in 1994 and is applicable to all self-employment income as well as covered wages. Prior to 1994, this tax was only applicable up to a certain maximum earnings. The Social Security Act sets out the HI tax rate and it cannot be modified without legislation.

The HI trust fund also gets income from the following: (1) a portion the income taxes levied upon Social Security benefits paid high-income beneficiaries; (2) premiums received from certain persons who aren't otherwise eligible and who choose to enroll voluntarily; (3) reimbursements to the U.S. Treasury to cover the cost of providing HI coverage for certain elderly persons who retired before the HI program started and were unable or unwilling to work enough quarters of Medicare-qualified Federal employment; (4) interest on its invested assets; and (5) small income sources. Each year, the taxes are paid mainly to pay benefits to current beneficiaries.

Premium payments (45.50 per beneficiary per monthly in 2000) as well as contributions from the U.S. Treasury general fund are the main sources of funding the SMI program. The beneficiary premiums cover 25 percent of the average expenses for elderly beneficiaries. The largest source of SMI income is the U.S. Treasury general fund contributions. SMI trust funds also earn income from interest earned on their invested assets. There is also a small amount miscellaneous income. To match program costs for the next year, beneficiary premiums and general fund payments must be recalculated each year.

Capitation payments for Medicare+Choice plans can be financed from the HI or SMI trust funds proportionally to the relative weights HI and SMI benefits to total Medicare benefits.

Summary and Trends

Medicaid was originally created as an extension of federally funded programs that provide cash income assistance to the poor. It focuses on the elderly, dependent children, their mothers and disabled. Medicaid eligibility has expanded over the years to include eligibility for cash programs. In the 1980s, legislation provided Medicaid coverage for a larger number of low-income pregnant women and children. It also covered some Medicare beneficiaries who were not eligible for cash assistance programs. The legislative changes made in the late 1980s focused on improved access, higher quality care, targeted benefits, increased outreach programs, and fewer restrictions on services.

Medicaid's expenditures have increased rapidly in most years since its inception. However, the recent rate of growth has been somewhat slower. These are the main reasons for rapid growth in Medicaid spendings:

Federal mandates, population growth and earlier economic recession have all contributed to the increase in Medicaid-covered individuals. Recent years have seen a decrease in Medicaid enrollment.

Services are now more widely available and used.

The DSH payment program and its misuse to increase Federal payments for States is a problem.

An increase in the number disabled and very old people who require extensive acute and/or prolonged health care.

Technological advances have allowed for a higher number of babies born at very low birth weights and severely injured or critically ill children to live. They also allow them to continue receiving intensive and costly care.

When compared to general inflation, the increase in payments rates to providers of healthcare services is greater than that experienced by general inflation.

Like all insurance programs, Medicaid recipients have relatively low average annual expenditures and only a small number of people incur large expenses. The average cost of services for beneficiaries varies greatly. For example, 1998 data shows that Medicaid payments for services to 20.6 million children (51 percent) are approximately $1,150 per child. This is a small average expenditure per person. Similar figures are found for 8.6 millions adults who account for 21 percent of Medicaid recipients. They receive payments on average around $1,775 per individual. Certain groups, however, have higher per-person expenses. Medicaid payments for services to 4 million elderly, which makes up 11 percent of all Medicaid recipients', average $9,700 per individual; payments for the 7.2 million disabled who make up 18 percent of Medicaid recipients, average $8,600 per individual. The 1998 payments to health care vendors totaling $3,500 for 40.6 million Medicaid beneficiaries, if you add up the expenditures for both high- and low-cost recipients, it equals $3,500 per person.

LTC is an important part of Medicaid and will continue to be used as the nation's population grows older. In recent years, almost 45 percent of total care costs for people who use nursing facilities or home health services has been covered by the Medicaid program. Medicaid covers a greater percentage for people who need more than four months of LTC. Data for 1998 shows that Medicaid payments for nursing facilities services (excluding ICFs/MR), and home care services totaled $41.3Billion for more than 3.3M recipients. This is an average 1998 expenditure of $12.375 per LTC recipient. The need for LTC will increase as the elderly and disabled population grows faster than the younger ones.

The growth of managed care, an alternative delivery model to the FFS system, is another important development in Medicaid. Managed care systems allow HMOs, PHPs (prepaid health plans) and similar entities to agree to provide certain services to Medicaid enrollees in return for a predetermined periodic fee per enrollee. Managed care programs aim to improve access to quality healthcare at a reasonable cost. States may have greater flexibility when designing and implementing Medicaid managed care programs. Waivers could help them. The Medicaid program includes a significant part that allows waiver authority under sections 1915 (b) and 1115. Waivers under section 1915(b), allow States to create innovative health care delivery and reimbursement systems. Section 1115 waivers enable statewide demonstrations of health care reform to cover uninsured people and test new delivery methods without increasing costs. The BBA also gave States the option of using managed care. From 14 percent of Medicaid beneficiaries in 1993 to 54% in 1998, the number of Medicaid beneficiaries who are enrolled in managed care programs is on the rise.

According to the States, more than 41.0 millions people received Medicaid services in 1999. The 1999 Medicaid program's total outlays included direct payments to providers of $133.8 million, and payments for various premiums (for HMOs or Medicare, for example). $31.2 billion; $15.5 billion in payments to DSHs and $9.5 billion in administrative costs.

In 1999, the total cost of the Nation's Medicaid program was $180.9 billion, with no administrative costs. Federal funds spent $102.5 billion and State funds $78.4 billion. Projections for 2005 show that Medicaid spending could reach $285 billion, with $6 billion more expected to be spent on the new SCHIP.



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