Medicare: 35 Years of Service...ly were estimated to go without medical care due to cost concerns (Harris, 1966b). Medicare, along with other programs, notably Social Security, and

MEDICARE IN 1965

For persons who are trying to understandwhat we were up to, the first broad pointto keep in mind is that all of us whodeveloped Medicare and fought for it hadbeen advocates of universal nationalhealth insurance. We all saw insurancefor the elderly as a fallback position,which we advocated solely because itseemed to have the best chance politically.Although the public record contains someexplicit denials, we expected Medicare tobe a first step toward universal nationalhealth insurance, perhaps with“Kiddicare” as another step… PresidentFranklin Roosevelt feared that healthinsurance was so controversial, becauseof doctors’ opposition, that if he includedit in his program for economic security hemight lose the entire program. Robert M.Ball, Social Security Commissioner underPresidents Kennedy, Johnson, and Nixon,1995

Enactment of Medicare

After President Franklin D. Rooseveltdecided not to include health insurance inhis proposed Social Security Act in 1934,he authorized his staff to do additionalwork on the proposal, including consulta-tions with a broad array of groups(Corning, 1969). This work was subse-quently incorporated into a national healthinsurance bill introduced in the Congressin 1943—commonly referred to as the

Wagner, Murray, Dingell bill (Congres-sional Quarterly Almanac, 1965). In 1945,President Truman endorsed this bill andbecame the first president to send a nation-al health insurance bill to the Congress.By the end of Truman’s term, in 1952,Medicare was proposed as a scaled downversion of national health insurance thatwould cover all Social Security beneficia-ries—the elderly, widows, and orphans.President Eisenhower was opposed tosocial insurance for health care; in 1954, heproposed a Federal reinsurance plan forprivate insurance companies. PresidentKennedy’s 1963 proposal for health carefor the elderly passed the Senate in 1964,but failed in the House.

After more than a decade of debate onhealth insurance for the elderly, whenJohnson was elected President in 1964, heasked Congress to give Medicare top pri-ority. The earlier efforts towards nationalhealth reform finally resulted in coveragefor the elderly (Medicare) and the poor(Medicaid), with advocates hoping thatcoverage would be expanded to other pop-ulation groups at a later date. In honor ofPresident Truman’s leadership, PresidentJohnson flew to the Truman Library inIndependence, Missouri to sign the billinto law on July 30, 1965 and presented thefirst two Medicare cards to formerPresident Truman and Mrs. Truman.Reflecting on the amount of time that hadtranspired, Johnson noted at the ceremo-ny: “We marvel not simply at the passageof this bill, but what we marvel at is that ittook so many years to pass it.” (Harris,1966a).

HEALTH CARE FINANCING REVIEW/Fall 2000/Volume 22, Number 1 75

The author is with the Office of Strategic Planning, Health CareFinancing Administration (HCFA). The views expressed in thisarticle are those of the author and do not necessarily reflect theviews of HCFA.

Medicare: 35 Years of ServiceNancy De Lew, M.A., M.A.P.A

Medicare Covers the Elderly in 1965

I am one of your old retired teachers thathas been forgotten. I am 80 years old andfor 10 years I have been living on a barenothing, two meals a day, one egg, a soup,because I want to be independent. I am ofScotch ancestry, my father fought in theCivil War to the end of the war, therefore,I have it in my blood to be independentand my dignity would not let me go downand be on welfare. And I worked so hardthat I have pernicious anemia, $9.95 fora little bottle of liquid for shots, wholesale,I couldn’t pay for it. Hearings of theSubcommittee on Problems of the Agedand Aging of the Committee of Laborand Public Welfare, 1959 (Stevens, 1996)

When Medicare was enacted in 1965,America was in many ways a differentplace than it is today.

Poverty

In 1965, the elderly were the group mostlikely to be living in poverty—nearly one inthree were poor (Figure 1). Today, thepoverty rate for the elderly is similar to thatof the age group 18-64—about 1 in 10 arepoor. Children are now the group mostlikely to be living in poverty.

Access to Care for Minorities

Before a hospital could be certified forMedicare, it had to do more than have a planto end discrimination: It had to demonstratenondiscrimination. (Ball, 1995)

Segregation denied minorities access tothe same health care as white persons.With the passage of the Civil Rights Act(recipients of Federal funds are prohibitedfrom discrimination based on race) in 1964

and Medicare (the source of the Federalfunds) in 1965, minorities were able toreceive health care in the same hospitalsand clinics used by white persons. Morethan 1,000 Medicare and Public HealthService staff worked with hospitals tomake sure they understood they wouldhave to serve all Americans when theysigned up for the federally fundedMedicare program.

Black hospitalization rates were about 70percent of white hospitalization rates in theprogram’s first few years. Over the nextseveral years, hospitalization rates rose tocomparable levels. In 1963, minorities age75 or over averaged 4.8 visits to the doctor;by 1971, their visits grew to 7.3, comparablewith white utilization rates (National Centerfor Health Statistics, 1963-1964; 1971).

While Medicare and Medicaid have con-tributed to considerable progress in thehealth of minorities, there is still room forimprovement as disparities in health sta-tus, utilization, and outcomes persist today(Gornick, 2000).

Insurance Coverage

About one-half of America’s seniors didnot have hospital insurance prior toMedicare. By contrast, 75 percent ofadults under age 65 had hospital insurance,primarily through their employer. For theuninsured, needing hospital services couldmean going without health care or turningto family, friends, and/or charity to covermedical bills. More than one in four elder-ly were estimated to go without medicalcare due to cost concerns (Harris, 1966b).

Medicare, along with other programs,notably Social Security, and a strong econ-omy, have greatly improved the ability ofthe elderly and the disabled to live withoutthese worries. Medicare covers nearly allof the elderly (about 97 percent), making

76 HEALTH CARE FINANCING REVIEW/Fall 2000/Volume 22, Number 1

them the population group most likely tohave health insurance coverage. Today,the groups least likely to have health insurance coverage are young people,Hispanics, and low-wage workers.

Medicare Modeled on PrivateInsurance Plans

We proposed assuring the same level ofcare for the elderly as was then enjoyed bypaying and insured patients; otherwise,we did not intend to disrupt the status quo.Had we advocated anything else, it neverwould have passed. (Ball, 1995)

Medicare’s benefit package, administra-tion, and payment methods were modeledon the private sector insurance plans preva-lent at the time, such as Blue Cross and BlueShield plans and Aetna’s plan for Federalemployees (the model for Medicare Part B)(Ball, 1995). Hospitals were allowed tonominate an intermediary (a private insur-ance company) to do the actual work of billpayment and to be the contact point with thehospitals. Payment methods for facilities(hospitals, nursing home, and home health)were based on reasonable costs. Paymentsfor physicians and other suppliers werebased on the lower of the area’s prevailing ortheir own customary or actual charge.These payment methods were designed tomake sure Medicare beneficiaries wouldhave access to care on the same terms as pri-vately insured patients. When Medicarebegan, there was concern, which did notturn out to be the case, that demand for ser-vices would strain the capacity of the healthcare system (Gornick, 1996).

Advantages of this approach included:faster implementation—and with 11months between enactment and implemen-tation that was no small consideration—and political acceptability: The program

looked familiar to providers, insurancecompanies who would administer the newprogram, and beneficiaries.

Disadvantages of this approach included:payment methods that turned out to beinflationary, prompting considerable leg-islative activity in subsequent years to con-trol escalating costs; and using privateinsurance companies to administer the pro-gram without allowing for their selection ona competitive basis, which hampered con-trol of the program. Medicare’s benefitpackage was not designed for some of thespecific needs of the elderly. For instance,today, nearly one-third have hearing impair-ments, nearly 20 percent have visualimpairments, and nearly one-third have nonatural teeth (National Center for HealthStatistics, 1999). Yet, hearing aids, eye-glasses, dentures, outpatient prescriptiondrugs, and long term nursing home carewere not generally covered by privateinsurance and so were not covered byMedicare. There was no limit on beneficia-ry liability, leaving beneficiaries vulnerableto catastrophic expenses. Nor was thereprovision in the statute for what are nowknown as preventive services. Only med-ical care that was necessary for the treat-ment of an injury or an illness was covered.

Medicare Covers the Disabled in 1972

In 1972, Congress extended Medicarecoverage to the disabled on Social SecurityDisability Insurance (SSDI) and those withend stage renal disease (ESRD). Afterreceiving SSDI, the disabled have alengthy waiting period, 24 months, beforeMedicare coverage begins. In 1973, nearly2 million persons with disabilities andESRD enrolled in Medicare. People withESRD needed very expensive dialysis ser-vices to stay alive; concerns about theiraccess to such life-saving services motivat-


ed the expansion of Medicare coverage.ESRD remains the only disease-specificgroup eligible for Medicare coverage;although others have been proposed,notably human immunodeficiency virusacquired immunodeficiency syndrome,none has been enacted.

LEGISLATIVE HISTORY

When Medicare was enacted, the origi-nal statute comprised 58 pages of text.Over the subsequent 35 years, the statutehas grown nearly tenfold to more than 500pages. Highlights by type of reforminclude:

Eligibility—Significant expansion of eli-gibility occurred once, when the disabledand those with ESRD were included in1972. Public-sector employees wererequired to pay Medicare payroll taxes inthe early 1980s.

Financing—Part A revenue sourceswere expanded several times in the 1980sand 1990s to delay insolvency of theHospital Insurance (HI) Trust Fund. PartB premiums were initially set at one-half ofthe program’s cost, but due to programspending growing faster than SocialSecurity benefit increases, premiums werelimited to the growth in the Social Securitycost of living adjustment and are now set bystatute at 25 percent of program spending.

Payment Policy—Most of the major leg-islative activity in the 1980s and 1990sfocused on payment policy, in an effort tocontrol rapidly escalating program spend-ing. Hospitals and other Part A providerswere moved from cost-based payment toprospective payment systems (PPSs).Physicians and many other Part B suppli-ers were moved from charge-based pay-ment to fee schedules. Managed careplans’ risk-based payment was modified atthe end of the 1990s to reduce the geo-graphic variation in payment amounts and

to adjust for the relative health status oftheir patients.

Benefits—The benefit package was sub-stantially updated in the 1988 MedicareCatastrophic Coverage Act (MCCA) toinclude coverage of outpatient prescriptiondrugs and other changes. It was repealedin 1989 after higher income elderly protest-ed a new tax to partially finance the newbenefits. As the importance of preventivebenefits became clear, many have beenadded by the Congress on an incrementalbasis. Other changes in covered serviceshave included the addition of hospice care,improved coverage for mental health ser-vices, and expanded home health benefits.

Chronology of Major LegislativeActivity

July 30, 1965—The Medicare program,authorized under Title XVIII of the SocialSecurity Act, was enacted to provide healthinsurance coverage for the elderly.

July 1, 1966—Medicare benefits beganfor more than 19 million individualsenrolled in the program.

1972— Medicare eligibility was extend-ed to individuals under age 65 with long-term disabilities after 24 months of SocialSecurity disability benefits and to individu-als with ESRD after a 3-month course ofdialysis; 2 million such individuals enrolledin the program in 1973.

1980—The home health benefit wasbroadened; the prior hospitalizationrequirement was eliminated as was thelimit on visits. Medicare supplementalinsurance, also called “medigap,” wasbrought under Federal oversight.

1982—A prospective risk-contractingoption for health maintenance organiza-tions (HMOs) was added to facilitate planparticipation. Hospice benefits for the ter-minally ill were covered. Medicare wasmade secondary payer for aged workers


and their spouses. Medicare utilizationand quality-control peer review organiza-tions were established. Rate-of-increaselimits were placed on inpatient hospitalservices.

1983—An inpatient hospital PPS, inwhich a pre-determined rate is paid basedon patients’ diagnoses, was adopted toreplace cost-based payments. (The PPSwas subsequently adopted by other payersand other countries.) Federal employeeswere required to pay the HI payroll tax.

1985—Medicare coverage was mademandatory for newly hired State and localgovernment employees.

1988—The MCCA was the largestexpansion of Medicare benefits since theprogram was enacted. It included an out-patient prescription drug benefit, a cap onpatient liability for catastrophic medicalexpenses, expanded skilled nursing facility(SNF) benefits, and modifications to thecost-sharing and episode-of-illness provi-sions of Part A. Expansions were funded inpart by an increase in the Part B premiumand a new supplemental income-relatedpremium for Part A beneficiaries. UnderMedicaid, States were required to provideassistance with Medicare cost-sharing tolow-income Medicare beneficiaries.

1989—The MCCA was repealed afterhigher-income elderly protested the newtax. A new fee schedule for physician ser-vices, called the resource-based relativevalue scale (RBRVS), was enacted.Physicians were required to submit bills toMedicare on behalf of all Medicarepatients. Beneficiary liability for physicianbills, above and beyond what Medicarepays, was limited. (The RBRVS was subse-quently adopted by other payers.)

1990—Additional Federal standards forMedicare supplemental insurance policieswere added. The Part B deductible wasincreased and prospective payments for inpa-tient hospital capital expenditures replaced

payments based on reasonable costs.Screening mammography was covered andpartial hospitalization services in communitymental health centers were covered.

1993—The HI payroll tax was appliedto all wages, rather than the lower SocialSecurity capped amount; and a new tax onSocial Security benefits was imposed abovea threshold, with revenues placed in the HITrust Fund. Under Medicaid, States wererequired to cover Medicare Part B premi-ums for specified low-income Medicarebeneficiaries.

1996—The Health Insurance Portabilityand Accountability Act contained a numberof provisions regarding fraud and abuse andestablished a mandatory appropriation tosecure stable funding for program integrityactivities and opened program integrity con-tracts to competitive procurement.

1997—The Balanced Budget Act (BBA)included the most extensive legislativechanges since the program was enacted. It:• Reduced payment increases to

providers, thereby extending solvency ofthe HI Trust Fund.

• Established Medicare+Choice, a newarray of managed care and other healthplan choices for beneficiaries, with acoordinated annual open enrollmentprocess, a major new beneficiary educa-tion campaign, and significant changesin payment rules for health plans.

• Expanded coverage of preventive benefits.• Created new home health, SNF, inpatient

rehabilitation and outpatient hospital PPSsfor Medicare services to improve paymentaccuracy and to help further restrain thegrowth of health care spending.

• Created new approaches to payment andservice delivery through research anddemonstrations.1999—The Balanced Budget Refinement

Act increased payments for some providersrelative to the payment reductions in theBBA 1997.


MEDICARE IN 2000

During the past 35 years, Medicare hasprovided health care coverage to morethan 93 million elderly and persons withdisabilities; more than 39 million are alivetoday. As a consequence, Medicare hasmade important contributions to improve-ments in health status for elderly and dis-abled beneficiaries.

Medicare Beneficiaries

The Medicare program provides healthinsurance coverage to a diverse and growingsegment of the U.S. population (Figure 2).Over its history, the population that is cov-ered under the program has not onlyexpanded in numbers, but has grown morecomplex in composition and health careneeds. More than 19 million elderly enteredMedicare in 1966; today, Medicare providesinsurance coverage for 34 million olderAmericans. The number of elderly and dis-abled enrollees has more than doubled since1965 to 39 million today. The Medicare pop-ulation is expected to nearly double again tomore than 77 million in 2030 (22 percent ofthe population) (Figures 2 and 3).

Medicare quickly expanded access tocare for the elderly. Hospital dischargesaveraged 190 per 1,000 elderly in 1964 and350 per 1,000 by 1973; the proportion ofelderly using physician services jumpedfrom 68 to 76 percent from 1963-1970.Currently, more than 94 percent of elderlybeneficiaries receive a health care servicepaid for by Medicare. Similarly, Medicarehas improved access for disabled enrollees.

Sex, Marital Status, Race, and Age

Within the elderly population, there aremore females than males enrolled inMedicare, primarily because of the longerlife expectancy of females. The proportion

that is female increases with age: femalesare more than 70 percent of the populationage 85 or over, according to the MedicareCurrent Beneficiary Survey. However, therelationship is reversed in the disabledpopulation, where more males areenrolled, reflecting the makeup of theSSDI program population.

Older females are much more likely tobe widowed and to live alone than oldermales due to a number of factors, includingfemales’ longer life expectancy, the tenden-cy for females to marry males who areslightly older, and higher remarriage ratesfor widowed males. Among people age 85or over, about one-half of the males werestill married compared with only 13 per-cent of the females. (Federal InteragencyForum on Aging-Related Statistics, 2000).

The majority of the elderly Medicare pop-ulation is white (84 percent), black comprise7 percent, Hispanic 6 percent, and all otherraces/ethnicities 3 percent. Among dis-abled enrollees, 69 percent are white, 17 per-cent are black, and 11 percent are Hispanic.

The living arrangements of the elderlyvary by racial and ethnic group. Olderwhite females are much less likely to livewith other relatives than older minorityfemales (15 percent compared with 30-40percent) (Federal Interagency Forum onAging-Related Statistics, 2000). Livingalone is a risk factor for nursing homeplacement, as the elderly grow older.

Over 13 percent, or 4.5 million, of theMedicare elderly population is age 85 orover. The U.S. Census Bureau estimatesthat more than 70,000 Americans are age 100or over (U.S. Bureau of the Census, 1999).

Economic Status

Although the economic status of theelderly as a group has improved over thepast 35 years, most elderly individuals havemodest incomes. Reflecting the income


distribution of beneficiaries, the majority ofMedicare spending is for beneficiaries withmodest incomes: 33 percent of programspending is on behalf of those withincomes of less than $10,000 (Figure 4).

Many elderly Medicare beneficiariesdepend upon their Social Security benefitsfor much of their income. The reliance onSocial Security income is greater amongsingle elderly individuals, and increasesdramatically as individuals age: SocialSecurity is one-half of the average 85 yearold’s income. In 1998, Social Security ben-efits provided about two-fifths of theincome of older persons; asset income,pensions, and personal earnings each pro-vided about one-fifth of total income(Federal Interagency Forum on Aging-Related Statistics, 2000).

Nearly 30 percent of Medicare beneficia-ries live alone, and they are disproportion-ately female and poor: 72 percent arefemale, 60 percent have incomes under$15,000. About 15 percent of those wholive alone are age 85 or over (Figure 5).

Health, Chronic Conditions, andFunctional Status

Nearly 30 percent of the elderly report-ed that they were in fair or poor health,compared with 17 percent of those aged 45-64. The percentage reporting fair or poorhealth was higher for minority groups andincreased with age: About 35 percent ofthose age 85 or over considered them-selves in relatively poor health. (NationalCenter for Health Statistics, 1999).

Differences in self-reported health sta-tus are reflected in Medicare per capitaspending. Not surprisingly, the beneficia-ries who reported their health status aspoor spent five times as much as the bene-ficiaries reporting excellent health.Medicare per capita spending also increas-es as functional status declines.

The incidence of chronic conditionsamong the elderly, defined as prolonged ill-nesses that are rarely cured completely,varies significantly by age and racial group.For instance, about 1 in 10 of the elderlyhas diabetes. However, both the incidenceof diabetes and the mortality rates from itare higher for minority groups: Diabetes isthe third leading cause of death for elderlyAmerican Indians, the fourth leading causeof death among elderly black and Hispanicpersons, and the sixth leading cause ofdeath for white persons (National Centerfor Health Statistics, 1999). The majority ofthe elderly report arthritis, which hasimportant implications for the ability tocare for oneself while living in the commu-nity. About 1 in 10 of those who need assis-tance with the tasks of daily living reportarthritis as one of the causes of their needfor assistance (National Center for HealthStatistics, 1999). Hypertension and respi-ratory illnesses each affect about one inthree of the elderly. About one in four ofthe elderly have heart disease (NationalCenter for Health Statistics, 1999).

Nearly one in three of the elderlyreported limitations with 1 or more activi-ties of daily living (ADLs).1 About 11 per-cent of the elderly report limitations ininstrumental activities of daily living(IADLs).2 About 30 percent of the disabledMedicare beneficiaries had difficultieswith 1 or more ADLs (Figure 6).

MEDICARE SPENDING

Medicare benefit spending for fiscal year(FY) 1967 was $3.3 billion and for FY 1999is estimated at nearly $212 billion (Figure7). The largest shares of spending are forinpatient hospital services (48 percent)and physician services (27 percent)(Figure 8). As medical care has moved to


1 ADLs, e.g. eating, bathing, toileting.2 IADLs, e.g. making telephone call, paying bills, shopping.

the outpatient setting, these numbers havechanged significantly over time. For exam-ple, inpatient hospital services accountedfor a much higher share of spending, 67percent, in 1970.

Medicare Spending per Beneficiary

In FY 1999 Medicare spent an average of$5,410 per beneficiary. The amount varieson the basis of eligibility and masks con-siderable variation across individuals. Likeother insurance programs, a small per-centage of beneficiaries account for a dis-proportionate share of Medicare spending.More than 75 percent of Medicare’s pay-ments for elderly and disabled beneficia-ries in 1997 were spent on the 15 percent ofenrollees who incurred Medicare pay-ments of $10,000 or more. A similar distri-bution of payments has existed for much ofthe program’s history.

Historical Spending GrowthComparison

Policymakers have often gaugedMedicare’s success by measuring programspending against the growth in privatehealth insurance (PHI) spending, thesource of insurance for the majority of theworking population under age 65.Medicare and PHI are the two largestsources of payment for health care.

Over the 1969-1998 period, Medicareand PHI benefits have grown at similaraverage annual rates—10.0 and 11.2 per-cent respectively (Figure 9). During select-ed periods, however, the growth rates havediverged dramatically. Divergence ingrowth rates is not unusual between thetwo major health care payers. Growthrates have often differed, with Medicarealternatively being charged with not “pay-ing its fair share” or “cost-shifting” (1985-1991, 1997-1998) or with being “unable to

control costs” (1993-1997). Private andpublic sector forces act to bring spendinggrowth into balance over the long run.

SUPPLEMENTAL INSURANCE,ACCESS TO CARE, AND OUT-OF-POCKET SPENDING

While Medicare is a very important pro-gram for the elderly, its benefit package hasnot kept up with changes in PHI coverageand consequently is less generous thanmost health plans offered today by largeemployers. Only about one-half of the per-sonal health care expenditures of the elder-ly (not including Medicare Part B or privatesupplemental insurance premiums) arepaid by Medicare (Figure 10). Total annu-al health care spending, from all sources,averaged $9,340 per Medicare beneficiaryin 1997. This total masks considerablevariation: For instance, total health spend-ing for those who lived in the communityaveraged $7,181, compared with $43,131 forthose who lived in a facility.

Supplemental Insurance

Medicare has been a life saver with astroke, two heart attacks and removal ofone kidney. There is no way I could’vepaid for all of that without the help ofMedicare and supplemental insurance.Medicare beneficiary in Richmond, VA.(Health Care Financing Administration,2000.)

Most beneficiaries have other supple-mental insurance (e.g., private medigappolicies, retiree coverage, or Medicaid) tosupplement their Medicare benefits(Figure 11). About 14 percent of Medicarebeneficiaries have no supplemental cover-age; groups most likely to rely solely onMedicare are the disabled, minorities, andthose with low incomes. Supplemental


insurance reduces beneficiaries’ out-of-pocket expenditures associated with theuse of health care services includingMedicare cost sharing.

The majority (approximately 67 percent)of Medicare’s elderly beneficiaries in fee-for-service (FFS) have private supplemen-tal insurance, either through an employerand/or purchased individually. Most of theelderly enrolled in managed care plans(about 75 percent) do not have any othertype of coverage, in part because managedcare plans tend to have more generous ben-efits, making a medigap policy duplicative.

While Federal law guarantees the avail-ability of supplemental insurance policiesto elderly beneficiaries (through a limited6-month open enrollment period uponreaching age 65), only a few States guaran-tee medigap availability for the Medicaredisabled population. This may account inpart for the lower levels of medigap cover-age for the disabled.

Out-of-Pocket Health Care Spending

I’m thankful for Medicare, but I do have aproblem with prescriptions. I have sup-plemental insurance, but it pays some of itbut not that much. That’s what really getsme. Now, you go to the drugstore to getmedicine—$80, well…Female Medicarebeneficiary in Richmond, VA (HealthCare Financing Administration, 2000.)

Medicare and other sources of healthinsurance have covered a growing share ofthe Nation’s health spending on the elder-ly. Before Medicare was enacted, theelderly paid 53 percent of the cost of theirhealth care; that share dropped to 29 per-cent in 1975 and 18 percent in 1997 (SocialSecurity Administration, 1976; Health CareFinancing Administration, 2000). Theelderly’s health costs consumed 24 percentof the average Social Security check short-

ly before Medicare; by 1975, that sharedropped to 17 percent (Social SecurityAdministration, 1976.)

The elderly spend a higher proportion oftheir income on health than the generalpopulation, both because they have higherhealth care costs (on average four timesthat of the under age 65 population) andbecause they have lower incomes. Lower-income elderly spend a higher proportionof their income on health than higher-income elderly: Those with incomes below$10,000 spent one-quarter of their incomeon health care, those with incomes above$70,000 spent about 5 percent of theirincome on health care (Figure 12).

The vast majority of beneficiary out-of-pocket spending on health care is concen-trated on three services: long- term facili-ty care accounts for the largest share at 44percent, with outpatient prescription drugstied with spending on physician and othersupplier services at nearly 19 percent each(Figure 13).

Vulnerable Populations and Access toCare

If it was not for Medicare, I could not goto the doctor. Medicare Beneficiary (HealthCare Financing Administration, 1999.)

Certain vulnerable populations historical-ly have experienced problems with accessto care. The groups include the disabled,Medicare beneficiaries who are eligible forMedicaid (dual eligibles), beneficiarieswith low incomes, those age 85 or over,minorities, persons living in rural areas, orin areas designated as health professionalshortage areas. A variety of populationgroups have significantly higher rates ofhospitalization for “ambulatory care sensi-tive” conditions. These are medical condi-tions that are responsive to good and con-tinuous ambulatory care, like asthma or


diabetes. For instance, black beneficiariesare more than three times as likely as whitebeneficiaries to have a lower limb amputat-ed—often a result of diabetes complica-tions; they are more than two times as like-ly as white beneficiaries to be treated forwound infections and skin breakdowns,also associated with poor quality care(Gornick, 2000).

Administrative Costs

Medicare’s overall administrative costsare less than 2 percent of total benefit pay-ments (Figure 14). Medicare’s adminis-trative costs are significantly lower thanprivate insurers, which the BlueCross/Blue Shield Association estimatesat 12 percent for their plans. Medicare’sadministrative costs have been declining,reflecting greater efficiency through highlevels of electronic claims processing.

In FY 1999 Medicare processed over 850million claims at a unit cost per claim of$.84 for Part A fiscal intermediaries and$.77 for Part B carriers (Figure 15). Costper Part A claim has declined by 50 per-cent in nominal dollars (if the dollars wereadjusted for inflation, the decline would beeven larger) over the past 10 years, whilethe number of claims has doubled.

Electronic claims processing is a keyreason that the cost per claim has signifi-cantly declined (Figure 16). Electronicsubmission of claims increased from 74percent of Part A claims in 1990 to 97 per-cent in 1999, Part B rates rose from 36 per-cent to 80 percent over the same period.

MEDICARE+CHOICE

The vast majority of Medicare beneficia-ries (83 percent) rely on Medicare’s tradi-tional FFS benefits, while 15 percent areenrolled in Medicare+Choice plans. Bycontrast, in the private sector nearly 80 per-

cent of insured individuals receive theircoverage through a managed care plansuch as a preferred provider organization(PPO), point-of-service plan, or traditionalHMO.

Enrollment in Medicare+Choice

Enrollment in Medicare+Choice, andbefore that under the risk HMO program,increased every year since the beginningof the risk program in 1985. Increases inenrollment accelerated significantly in thelate 1990s, though in recent months,growth has tapered off or even declined.By the end of 1999, 17 percent of Medicarebeneficiaries were enrolled in risk HMOs(Figure 17). The trend in Medicare HMOenrollment is similar to that of the privatesector.

Access Under Medicare+Choice

HMO interest in Medicare contractingresulted in dramatic increases in the num-ber of contractors in the mid-1990s. Thenumber of risk contracts more than tripledfrom 1990-1997. Over the decade of the1990s, the increase in the availability ofplans with benefits more generous thanFFS Medicare, coupled with increasingmedigap premiums, led more Medicarebeneficiaries to enroll in HMOs. Today,about 70 percent of Medicare beneficiarieslive in an area with at least one Medicare+Choice plan available. Medicare+Choiceenrollment is highly concentrated in cer-tain areas of the country and in certainplans.

Medicare+Choice enrollees are less likelyto be eligible for both Medicare andMedicaid, and are less likely to be institu-tionalized. Medicare+Choice enrolleesalso have better-than-average health andare less likely to be very poor or verywealthy.


Benefits Available toMedicare+Choice Enrollees

Most Medicare+Choice enrollees areprovided with extra services not coveredby Medicare, such as preventive carebeyond what Medicare covers and pre-scription drugs. Some Medicare+Choiceplans charge no premium, and in almost allcases, Medicare+Choice premiums are sig-nificantly lower than medigap premiumsfor similar benefits.

MEDICARE BENEFICIARY SATISFACTION

Medicare beneficiaries, whether enrolledin FFS or a Medicare+Choice plan, are gen-erally well satisfied with their medical care(Figure 18). Members of Medicare+Choice plans are somewhat more likely tobe satisfied or very satisfied with their out-of-pocket costs than FFS beneficiaries (94percent versus 87 percent). About 13 per-cent of FFS beneficiaries were unsatisfiedwith their out-of-pocket costs, comparedwith 6 percent of Medicare+Choiceenrollees. While Medicare+ Choice mem-bers were slightly more unhappy abouttheir ability to get answers to their ques-tions by telephone, they found the ease ofgetting to a doctor and the availability ofcare comparable with that experienced byFFS beneficiaries.

MEDICARE’S ROLE IN THE BROADER HEALTH SYSTEM

Medicare covers about 14 percent of thepopulation, but because of the extensivehealth care needs of the elderly and dis-abled, finances about 21 percent of theNation’s health spending, up from 11 per-

cent in 1970 (Figure 19). Medicare’s sharevaries significantly by type of service andhas changed over time as Medicare hasbecome a more important source of financ-ing of health care. For example, in 1970,Medicare paid for 19 percent of all hospitalspending; by 1998, Medicare’s share roseto 32 percent.

Medicare spending finances care for itsbeneficiaries and also has important rami-fications for the health system as a whole.Special payments for rural, inner-city, andteaching hospitals and other safety netproviders help to guarantee access to carefor other population groups who live inthose areas. Medicare’s role in qualityassurance in hospitals, nursing homes, andother settings helps to assure that allAmericans receive high-quality health careservices from those providers. Medicareplays an important role in educating theNation’s physicians by financing a portionof the costs of graduate medical educationat teaching hospitals, where much of thecountry’s medical research occurs.

Medicare spending is a growing share ofthe Federal Government’s budget: Thisyear, it will account for 12 percent of thebudget, compared with 10 percent in 1993and 4 percent in 1970 (De Lew, 1995).

ACKNOWLEDGMENTS

The author is grateful for the assistanceof numerous HCFA staff including: GerryAdler, Nicole Carey, Frank Eppig, DaveGibson, Chris Klots, Helen Lazenby, LindaLebovic, Katharine Levit, Rick McNaney,Solomon Mussey, Andrew Shatto,Sharman Stephens, and Dan Waldo, with-out whom this article would not have beenpossible.


REFERENCES

Ball, R.: What Medicare’s Architects Had In Mind.Health Affairs 14(4):62-72, Winter 1995.Congressional Quarterly Almanac: 89th Congress1st Session 1965. Volume XXI. Washington,Congressional Quarterly News Features, 1965.Corning, P.: The Evolution of Medicare…from ideato law. Social Security Administration. Baltimore,MD. 1969. De Lew, N.: The First 30 Years of Medicare andMedicaid. Journal of the American MedicalAssociation 274 (3): 262-267, 1995.Federal Interagency Forum on Aging-RelatedStatistics: Older Americans 2000: Key Indicators ofWell-Being. Chartbook, 2000. Gornick, M., Warren, J.L., Eggers, P.W., et al.:Twenty Years of Medicare and Medicaid: CoveredPopulations, Use of Benefits, and ProgramExpenditures. Health Care Financing Review 1985Annual Supplement. December 1985.Gornick, M., Warren, J.L., Eggers, P.W., et al.:Thirty Years of Medicare: Impact on the CoveredPopulation. Health Care Financing Review18(2):179-237, Winter 1996.Gornick, M.: Plausible Explanations for Disparitiesin the Use of Medicare Services and Ways to Effecta Change. Health Care Financing Review 21(4):23-43, Summer 2000.Harris, R.: Annals of Legislation. Medicare I: AllVery Hegelian. The New Yorker: 29-62, July 2,1966a.Harris, R.: Annals of Legislation. Medicare II:More Than a Lot of Statistics. The New Yorker: 30-77, July 9, 1966b.Health Care Financing Administration: Office ofStrategic Planning: Data from the MedicareCurrent Beneficiary Survey. Baltimore, MD. 1999.

Health Care Financing Administration: Center forBeneficiary Services. Baltimore, MD. 2000.Manton, K.G., Corder, L., and Stallard, E.: ChronicDisability Trends in Elderly United StatesPopulations: 1982-1994. Proceedings of the NationalAcademy of Sciences 94:2593-2598, Washington, DC.1997.National Center for Health Statistics: Volume ofPhysician Visits by Place of Visit and Type of Service.Series 10, No. 18. Public Health Service. U.S.Government Printing Office, July 1963-June,Washington, DC. 1964. National Center for Health Statistics: PhysicianVisits. Volume and Interval Since Last Visit. Series10, No. 97. Public Health Service. U.S. GovernmentPrinting Office. Washington, DC. 1971.National Center for Health Statistics: Health, UnitedStates, 1999. DHHS Pub. No. (PHS)-99-1232.Public Health Service. U.S. Government PrintingOffice. Hyattsville, MD. 1999. Social Security Administration: Ten Years ofMedicare: Impact on the Covered Population.Social Security Bulletin Pub. No. (SSA)76-11700.Baltimore, MD. July 1976. Stevens, R.A.: Health Care in the Early 1960s.Health Care Financing Review 18(2):11-22, Winter1996.U.S. Bureau of the Census: Centenarians in theUnited States. Current Population Reports. SeriesP23, No. 199RV. U.S. Government Printing Office.Washington, DC. 1999.

Reprint Requests: Nancy De Lew, M.A., M.A.P.A., Health CareFinancing Administration, Room 323H, Hubert H. HumphreyBuilding, 200 Independence Avenue, SW., Washington, DC.20201. E-mail: [email protected]



0

15

20

25

5

10

1966 19741970 1978 1982

Year

1986 1990 1994 1998

Per

cen

t

35

30Under 18 Years

18-64 Years

65 Years or Over

Figure 1

Poverty Rates, by Age: 1966-1998

NOTE: Improvements in Social Security and private pension coverage are important factors in the decline of the elderly’spoverty rate.

SOURCE: (U.S. Bureau of the Census, 1999.)


0

30

40

50

10

20

19801970 1990 2000

Year

2010 2020 2030

Med

icar

e E

nro

llmen

t in

Mill

ion

s80

20.4

28.5

34.3

39.9

46.6

61.5

77.2

70

60

Elderly

Disabled and ESRD

20.425.5

31.034.4

39.0

52.6

68.6

Figure 2

Number of Medicare Beneficiaries: 1970-2030

NOTES: ESRD is end stage renal disease. The number of Medicare beneficiaries will nearly double by 2030.

SOURCE: Health Care Financing Administration, Office of the Actuary: Data from the Medicare and MedicaidCost Estimates Group, 2000.


0

15

20

5

10

19801970 1990 2000 2010 2020 2030

Per

cen

t o

f P

op

ula

tio

n

Year

25

9.5

12.1 13.113.9

15.0

18.5

22.0

65 or Over

Disabled

9.510.8 11.9 12.0

12.6

15.8

19.6

Figure 3

Aging of the U.S. Population: 1970-2030

NOTE: The U.S. population will age rapidly through 2030, when 22 percent of the population will be eligible for Medicare.

SOURCE: Social Security Administration, Office of the Actuary: Data from the Office of the Actuary, 2000.


$5,000 or Less(7%)

$40,001 or More(10%)

$25,000-$40,000(16%)

$15,001-$25,000(23%)

$10,001-$15,000(18%)

$5,001-$10,000(26%)

Figure 4

Medicare Spending for Fee-for-Service Beneficiaries, by Income: 1997

NOTE: Seventy-four percent of Medicare expenditures are on behalf of individuals with annual income of $25,000 or less.

SOURCE: Health Care Financing Administration, Office of Strategic Planning: Data from the Medicare Current BeneficiarySurvey, 1997.


Live with Spouse(49%)

Live in LTC Facility(6%)

Live with Children/Others

(16%)

Live Alone(29%) Have Income less

than $15,000 (60%)

Are Female (72%)

Are Age 85 or Over (15%)

Figure 5

Living Arrangements of Medicare Beneficiaries: 1998

NOTES: LTC is long-term care. Nearly 30 percent of Medicare beneficiaries live alone.

SOURCE: Health Care Financing Administration, Office of Strategic Planning: Data from the Medicare CurrentBeneficiary Survey, 1998.


0

50

60

30

20

10

40

All

51

13

21

15

55

11

20

14

Elderly

Functional Status

Disabled

Per

cen

t70 No ADLs or IADLs Limitations

IADLs Only

1-2 ADLs

3-6 ADLs

24 25

30

21

Figure 6

Distribution of Medicare Enrollees, by Functional Status: 1998

NOTES: ADL is activities of daily living (e.g., eating, bathing). IADL is instrumental activities of daily living (e.g., shopping, use of telephone, cleaning). More than one-third of the Medicare population needs assistancewith at least 1 ADL.


Outpatient Hospital andOther Outpatient Facility1

(5.3%)

Outpatient Hospital andOther Outpatient Facility1

(9.8%)

Physician and Other SMI

Non-Facility1

(27.2%)

Hospice(1.2%)

HHA(6.2%) SNF

(7.3%)

1980 1998

Inpatient Hospital(67.4%)

Inpatient Hospital(48.2%)

HHA(2.2%)

Physician1

(24.1%)

SNF(1.1%)

Figure 8

Where the Medicare Dollar Went: 1980 and 1998

1 The definition of these categories has changed over time, so they are not directly comparable over the period.Managed care spending is incorporated within the categories.

NOTES: HHA is home health agency. SNF is skilled nursing facility. SMI is supplementary medical insurance.Medicare spending is shifting away from inpatient hospital services toward outpatient services and other providers.

SOURCE: Health Care Financing Administration, Office of the Actuary: Data from the Medicare and Medicaid CostEstimates Group, 2000.


0

50

100

150

1967

39

23

50

81

132

211 212

19871972

Fiscal Year

1999

Am

ou

nt

in B

illio

ns

$250

200

1977 1982 19971992

Figure 7

Medicare Spending: Fiscal Years 1967-1999

NOTE: Medicare spending grew from $3.3 billion in 1967 to nearly $212 billion in 1999.

SOURCE: Health Care Financing Administration, Office of the Actuary: Data from the Medicare and Medicaid CostEstimates Group, 2000.


0

12

14

16

4

2

8

6

10

1970 19801975 1985 1990 1995 1998

Per

cen

t

Year

20

18

Private Health Insurance

Medicare

Figure 9

Rate of Growth in Per Enrollee Medicare and Private Health Insurance Spending: 1970-1998

NOTES: Medicare and private health insurance (PHI) are the two largest payers of health care. In 1998, benefits perenrollee under Medicare increased 1.2 percent, while those under private health insurance increased 7.2 percent,respectively. This represents a reversal of trends experienced from 1992-1997.

SOURCE: Health Care Financing Administration, Office of the Actuary: Data from the National Health StatisticsGroup, 2000.


Medicare(55.1%) ($5,114)

Other Sources(5.0%) ($516)

Total Average Spending Per Beneficiary $9,340

Out-of-Pocket(18.0%) ($1,681)

Private Insurance(10.0%) ($922)

Medicaid(11.9%) ($1,107)

Figure 10

Sources of Payment for Medicare Beneficiaries’ Use of Medical Services: 1997

NOTES: Medicare pays about one-half the total cost of beneficiaries’ medical care. Beneficiary out-of-pocket spendingdoes not include their payments for Medicare Part B premiums, private insurance premiums, or health maintenance organization premiums


Elderly Households Health Spendingas a Percentage of Income

Percent of ElderlyHouseholds by Income

Amount in ThousandsAmount in Thousands

Per

cen

t

Per

cen

t

0

15

40

5

10

20

25

30

35

<$10

23.2

$10-19 $20-39 $40-69 $70+

36.3

26.7

9.8

4.0

0

15

30

5

10

20

25

<$10 $10-19 $20-39 $40-69 $70+

26.8

20.3

13.1

8.2

4.6

Figure 12

Elderly Health Spending as a Percentage of Income: 1998

NOTE: Most elderly households have income below $40,000 and they spend a greater percentage of their income onhealth than more affluent elderly households.

SOURCE: U.S. Bureau of Labor Statistics: Consumer Expenditure Survey, 1997-1998. U.S. Government Printing Office.Washington, DC.


Medicare Only(14%) Medicare Only

(75%)

Individual Medigap

(29%)

Individual Medigap

(8%)

Risk HMOFee-For-Service

Total Beneficiaries6.2 Million

Total Beneficiaries33.3 Million

Both Private Types(5%)

Both Private Types(1%)Other

(2%)

Other(3%)

Medicaid(18%)

Medicaid(7%)

Employer-Sponsored(33%)

Employer-Sponsored

(7%)

Figure 11

Type of Supplemental Health Insurance Held, by Medicare Beneficiaries: 1998

NOTES: HMO is health maintenance organization. Most beneficiaries using fee-for-service have private, supplementalhealth plans; however, most elderly beneficiaries enrolled in managed care plans have no other supplemental coverage.



Dental(9.1%)

Prescription Drugs(18.7%)

Home Health(1.2%)

Long-Term CareFacilities(44.0%)

Hospital Inpatient(4.1%)

Hospital Outpatient(4.4%)

Physician/Supplier(18.5%)

Total Out-of-Pocket Expenditures$66.8 Billion

Figure 13

Distribution of Beneficiary Out-of-Pocket1 Expenses: 1997

1 Beneficiary out-of-pocket spending does not include their payments for Medicare Part B premiums, private insurance premiums, or health maintenance organization premiums.

NOTE: Institutional long-term care services account for the highest share of beneficiary out-of-pocket payments, followedby outpatient prescription drugs, and physician services.



0

4

6

8

2

1970

11

3.1

2.1

5.8

3.7

1.2

1.9

1.5

Part A

Part B

19901980

Fiscal Year

1999

Per

cen

t12

10

Figure 14

Medicare Administrative Expenses as a Percent of Benefit Payments: Fiscal Years 1970-1999

NOTE: Medicare’s administrative costs have been declining as a percentage of total program spending.

SOURCE: Health Care Financing Administration, Office of the Actuary: Data from the Medicare and MedicaidCost Estimates Group, 2000.


0

1.00

1.25

1.50

.75

.50

.25

1988

74

1.57

1994

121

1.48

1991

99

1.56

Fiscal Year

1999

Co

st P

er C

laim

Nu

mb

er o

f C

laim

s in

Mill

ion

s

$2.00

1.75

70

110

120

130

100

90

80

150

140

1989

81

1.64

1990

89

1.64

1992

101

1.67

1993

109

1.59

1995

1.33

133

1996

1.27

142

1997

1.20

150145

0.91

0.84

148

1998

Figure 15

Medicare Part A Cost Per Claim and Number of Claims: Fiscal Years, 1988-1999

NOTES: 1999 data are preliminary estimates. Cost per claim is in nominal dollars. Over the last decade, the numberof Part A claims has doubled while the cost of processing each claim has been cut by one-half.

SOURCE: Health Care Financing Administration, Center for Beneficiary Services: Data from the Medicare ContractorManagement Group, 2000.


0

30

40

50

10

20

1990

73.9

36.4

76.6

42.8

19931991 1992 1994

Year

1995 1996 1997 1998 1999

Per

cen

t

100

60

70

80

90

Fiscal Intermediary

Carrier82.7

52.3

90

64.6

93.5

72.5

95.2 96.1 96.3 96.7 97.1

76.878.3 80 80.3 80.7

Figure 16

Percent of Medicare Electronic Claims, by Calendar Years: 1990-1999

NOTE: The rate of electronic submission of Medicare claims has grown considerably over the past decade.

SOURCE: Health Care Financing Administration, Center for Beneficiary Services: Data from the Medicare ContractorManagement Group, 2000.


0

20

40

60

1990 19931991 1992 1994 1995

Non-Medicare Enrollment in HMOs

January Enrollment

1996 1997 1998 1999

31.4838.86

33.1 35.75

42.79 47.57

54.91

62.26

70.59 75.04

Per

son

s in

Mill

ion

s

80

0

2

4

6

1990 19931991 1992 1994 1995

HMOs

1996 1997 1998 20001999

1.82

2.342.00 2.15 2.61

3.033.79

4.74

5.816.196.26

Per

son

s in

Mill

ion

s

8

Figure 17

Medicare and Non-Medicare Health Maintenance Organization (HMO) Enrollment Growth: 1990-1999

NOTES: Enrollment in each sector grew in this decade. Medicare enrollment increased rapidly in most of the 1990s, buthas declined slightly since then. Medicare enrollment numbers are for December of the preceding year, except in 1999,when January 1999 data are used. Non-Medicare numbers are Interstudy January numbers, less Medicare numbers.

SOURCES: Interstudy, Competitive Edge, 1999; Medicare Managed Care Plans: Data from Monthly Summary Plans.


0

20

40

60

Out-o

f-Poc

ket

Costs

HMO1.17

4.85

66.72

27.26

FFS3.00

10.25

70.44

16.31

HMO.82

Very Satisfied

3.82

60.73

34.63

FFS.53

3.36

65.9

30.20

HMO1.09

4.66

69.77

24.48

FFS.66

4.1

74.71

20.54

HMO1.54

3.65

70.63

24.19

FFS.49

2.77

76.39

20.35

HMO1.58

6.18

73.82

18.43

FFS1.26

4.43

79.12

15.19 15.19

HMO.89

3.75

70.90

24.46

FFS.77

4.71

75.73

HMO.99

4.49

72.56

21.96

FFS1.19

4.02

76.39

18.39

Specia

list C

are

Quality

Docto

r Con

cern

with H

ealth

Gettin

g Ans

wers

on th

e Tele

phon

e

Ease

of G

ettin

g

to th

e Doc

tor

Availa

bility

of C

are

Per

cen

t

100

80

Satisfied Unsatisfied Very Unsatisfied

Figure 18

Beneficiary Attitudes Towards Health Maintenance Organizations (HMO) and Fee-for-Service (FFS): 1998

SOURCE: Health Care Financing Administration, Office of Strategic Planning: Data from the Medicare Current BeneficiarySurvey, 1998.


Other Professionals

Nursing Home

Prescription Drugs1

Other Payers

Hospital Care$383 Billion-Medicare Pays 32%

$230 Billion-Medicare Pays 22%









Physician Services

Medical Durables

Home Health

Other Medical Nondurables

Dental Services

Other Personal Health Care

Medicare Spending

$0 30015050 100 200

Billions of Dollars

250 350 400

Figure 19

National Personal Health Expenditures, by Type of Service and Percent Medicare Paid: 1998

1 Medicare payments are from managed care plans only, since fee-for-service Medicare does not generally cover outpatient prescription drugs.

NOTE: Total national personal health spending in 1998 was $1 trillion; Medicare accounted for 21 percent.

SOURCE: Health Care Financing Administration, Office of the Actuary: Data from the National HealthStatistics Group, 2000.

Documents

Medicare: 35 Years of Service...ly were estimated to go without medical care due to cost concerns (Harris, 1966b). Medicare, along with other programs, notably Social Security, and