Medicare Coverage Explained

Partner content from Kaiser Health News

Are You Covered?

A look at Americans and health insurance.

What is Medicare?

Medicare is the federal program that covers many of the health costs for people age 65 and older, as well as people younger than 65 who are permanently disabled. Within these groups, no one is excluded because of income or pre-existing conditions.

Medicare covers 45 million Americans, 7 million of whom are disabled.

What is the current state of Medicare?

Medicare is a huge program that makes up 13 percent of the federal budget.

The program faces a number of critical challenges, including the financing of care for an aging population, improving the management of care for chronically ill, high-cost beneficiaries, and setting fair payments to providers and plans.

Medicare is spending more than it is taking in from taxes. Spending is projected to nearly double by 2018 from $477 billion to $871 billion, according to the Congressional Budget Office. In May, the Obama administration announced that Medicare's Hospital Insurance Trust Fund is projected to run out of money in 2017. To keep it solvent, Congress would have to increase taxes, reduce benefits, or reduce payments to hospitals or other providers, or all of the above.

Currently, disabled people wait to qualify for Medicare for two years. If that wait were to be eliminated, it would cost the program an additional $113 billion over 10 years.

What does Medicare cover?

Medicare is divided into four parts. Medicare Part A pays for inpatient hospital services, skilled nursing facilities, home health and hospice care. Most people do not pay a premium for Part A and have a $1,068 deductible for inpatient hospital stays.

Part B pays for physician, outpatient and preventive services, as well as some home health visits. Most people pay a $96.40 monthly premium, with a $135 deductible, and pay 20 percent of their bill.

Part A and Part B operate on a fee-for-service arrangement: Patients choose their own doctors and hospitals, and those providers generally bill Medicare directly.

Part C, also known the Medicare Advantage program, allows beneficiaries to enroll in private health plans, such as HMOs, and receive all Medicare-covered benefits. The initial idea was to improve coordination of care at a lower cost than fee-for-service. However, the federal government spends more on average per beneficiary in the Medicare Advantage program than traditional Medicare.

Part D is the voluntary, subsidized prescription drug benefit administered by private plans. The premiums and deductibles for Part D vary, depending on the plan. The drug plan covers 75 percent of allowable drug expenses up to $2,700, and then does not kick back in until the patient has reached a catastrophic limit of $4,350 on out-of-pocket spending. This creates a "doughnut hole" in which patients have to pay 100 percent of prescription costs.

About 90 percent of Medicare beneficiaries have some form of supplemental insurance to fill in the benefit gaps.

Medicare does not pay for some important services for the elderly and disabled, such as long-term care in nursing homes, or routine dental and vision care.

How could health overhaul proposals affect Medicare?

Congressional proposals have provisions to make Medicare more efficient and slow the growth in Medicare spending.

To curtail Medicare spending, some suggested provisions would reduce federal payments to Medicare Advantage plans and require improvements in hospital practices to cut down the number of patients who need to be readmitted. Another provision would trim the yearly increase in payments to hospitals and other providers. Depending on the final bill, the government may get some savings on prescription drug prices.

Under a deal with the pharmaceutical industry, if a bill passes, Medicare beneficiaries would see a 50 percent price reduction of brand-name prescription drugs that currently cost full price when the patient spends enough to hit the "doughnut hole." And, in the House bill, the gap in prescription coverage would be phased out completely over 14 years.

Some proposed bills would cost the government money. For example, the House bill would increase costs by $230 billion over 10 years by eliminating planned cuts in Medicare payments to doctors. In addition, the bills call for paying primary care doctors and other providers more money for coordinating patient care and making more low-income Medicare patients eligible for subsidies.

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