Medicare: Past, Present and Future

Policy Reports | Health

No. 299
Sunday, July 01, 2007
by Andrew J. Rettenmaier and Thomas R. Saving

The Structure of Medicare

Medicare has three major parts:  Part A, Part B and Part D.  Medicare Part A (Hospital Insurance) - which pays for inpatient hospital care, skilled nursing, home health and hospice care - is funded by a 2.9 percent payroll tax on wages and taxes collected on Social Security benefits.  According to the 2006 Trustees Report, Medicare Part A is already paying out more than it collects.  The program can pay full benefits because it is able to draw on general federal government revenues. 5

“Spending on Medicare-covered services will average $15,269 per beneficiary in 2007.”

Medicare Part B mainly pays physicians' fees.  Taxpayers fund three-fourths of the cost through general federal revenues and the remaining one-fourth is paid in premiums by retirees.  Medicare Part D is the newly enacted prescription drug program.  General revenues and state transfers (that is, taxpayers) foot the bill for 86 percent of the cost and the rest is funded by seniors' premiums.  Medicare Parts B and D are sometimes collectively referred to as Supplemental Medical Insurance. 

Table 1

Table I summarizes each of Medicare's parts in terms of covered services, funding, and average spending and premiums:

  • Total Medicare spending per beneficiary in 2007 is expected to average $4,785 for Medicare Part A, $4,351 for Part B and $1,969 for Part D. 
  • Thus, total Medicare spending this year is expected to be $11,105 per beneficiary. 
  • Of this total, beneficiary premiums will total $1,178 for Part B and $430 for Part D. 

Table II shows the distribution of average spending by various sources on all services covered by Medicare. 

  • Total spending on Medicare-covered services are estimated to average $15,269 per beneficiary in 2007.
  • Medicare will pay for about 73 percent of this total ($11,105), although beneficiaries will cover some of this amount through Part B and Part D premiums. 
  • Private insurance spending and seniors' out-of-pocket spending combined will pay an estimated $3,512 or 23 percent of the total; 6  the remaining 4 percent comes from Medicaid and other payers. 

Table 2 

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