Medicare Part I: What is Medicare?

August 21, 2012 J

By: Nicole Kaeding

With the selection of Congressman Paul Ryan as the Republican vice presidential candidate, the subject of Medicare reform is dominating the news. Both Congressman Ryan and President Obama have distinctive plans to overhaul this huge entitlement program represented by a key choice: bureaucratic control or seniors’ choice. In a series of blog posts this week, Americans for Prosperity will be examining what Medicare is and whether it is sustainable, President Obama’s and Congressman Ryan’s Medicare plans, and the best path forward for American seniors.

Medicare is the health insurance program for American seniors and the disabled. Seniors reaching age 65 are eligible for this government-provided insurance. In 2011, Medicare provided insurance to more than 48 million individuals, including 40 million seniors. Expenditures in 2011 totaled more than $549 billion across the four Medicare parts dubbed Medicare A, Medicare B, Medicare C and Medicare D.

Traditional Medicare—Medicare A, B and D

When describing Medicare, policymakers are almost always referring to Medicare A, B and D. Part A provides coverage for services rendered while a patient is in a hospital. This represents the largest source of Medicare spending, almost $260 billion in 2011. Part B is a supplemental coverage purchased by seniors to cover outpatient services like doctors’ visits, laboratory tests and x-rays. Part D is additional coverage that seniors can purchase to offset the cost of prescription coverage.

Part A is financed through a payroll tax assessed on all Americans at a rate of 2.9 percent—1.45% paid by employees and 1.45% paid by employers. These taxes are pooled and put into the Hospital Insurance (HI) trust fund for future use. Medicare spending is increasing so dramatically that it must now use its past savings to pay for current spending. While Part A spent almost $260 billion in 2011, it only collected $228.9 billion in taxes. This drain on the HI trust fund is set to exhaust the fund in the near future.  Reform is a must.

Parts B and D are funded separately from Part A. Their revenues come from two sources: general governmental revenues and premiums assessed to seniors that are pooled into the Supplemental Medical Insurance (SMI) trust fund. Seniors are required to pay 25% of Part B’s costs. In 2012, premiums for seniors started at $99 a month; these premiums are means tested so that wealthier enrollees pay a larger premium than low-income seniors. Premiums for Part D are then additional expenses for seniors.

With all three of these Parts, bureaucrats in Washington, D.C. set reimbursement rates for any doctor willing to treat Medicare patients. Doctors are unable to charge patients, or the government, for the cost of providing the service. This type of payment structure is described as “fee-for-service.” For comparison, Medicare’s reimbursement rates are generally only 75% of those for private insurance.

Medicare Advantage—Medicare Part C

Unlike traditional Medicare, Medicare Advantage allows seniors to purchase health insurance from private insurers. These insurers compete for seniors’ business and typically provide benefits well in excess of traditional Medicare to attract consumers. The cost is split between seniors and the government.

Is Medicare Sustainable?

Medicare is unsustainable. Medicare spending is increasing rapidly even before the majority of baby boomers reach 65 years old. Over 10,000 baby boomers become eligible for Medicare daily.

The chart below shows the dramatic increase in Medicare spending since 2005 and its projected spending moving forward. By the end of the decade, Medicare will be spending more than $900 billion a year. The nonpartisan Congressional Budget Office estimates that Medicare will grow by more than 6% every year from 2012 to 2022, far faster than the projected growth of the economy.




Medicare spending in Part A is all ready exceeding its payroll tax revenue. Medicare’s trustees report that Part A’s trust fund will be bankrupt by 2016 without much-needed reform. The SMI trust fund for Parts B and D are considered sufficiently funded, but that is only because these parts of Medicare have access to Congress’ purse.

Like this post? Chip in $5 to AFP.

Join Our Fight

The road to economic freedom starts here.
Join a network of AFP activists in important issue battles across the country, get the inside scoop with breaking news updates and policy alerts, and be the first to hear about special events near your home.  Help us fight for a better tomorrow.  Together, we can work for lower taxes, less government spending, and greater economic freedom for everyone.

Your Information

[contact-form-7 id="544" title="Subscribe"] ×
*/?> Rocket Fuel