June 1998

The Basics of Medicare

  • In 1965, Title 18, "Health Insurance for the Aged," of the Social Security Act created the Medicare program. Medicare consists of two parts: Part A, Hospital Insurance (HI), covers hospital services and some home health care and skilled nursing facility services, and Part B, Supplemental Medical Insurance (SMI), covers physician care, outpatient hospital services, and independent laboratory services. In 1972, the Medicare program was expanded to include disabled persons who qualified for benefits under the Disability Insurance (DI) program and certain individuals with end-stage renal (kidney) disease. In 1985, all state and local government employees hired after December 31, 1985, were included in the program.
  • Currently, the U.S. Department of the Treasury credits the Medicare and Social Security trust funds with any annual excess of Social Security and Medicare tax revenues over the amount spent for current benefits. By law, these assets must be invested in special securities issued by the Treasury. The government then spends these "assets" to ease fiscal pressures on other programs. The trust fund surpluses are not reserved for future Social Security and Medicare benefits but are bookkeeping entries showing how much the Social Security and Medicare programs have lent to the Treasury (or alternatively, what is owed to Social Security and Medicare, including interest, by the Treasury). When the trust funds go into negative cash flow, the Treasury must start repaying the money.
  • For budgetary purposes, the date on which the trust funds go into negative cash flow (i.e., the benefit payments exceed the income from payroll taxes and the taxation of benefits) is more important than the insolvency date (i.e., the date on which the trust fund is projected to exhaust its funds and be unable to pay benefits on time and in full). This date is more important because it marks the point at which the government must provide cash from general revenues to the programs rather than receive surplus cash from them to fund other current spending.
  • The Balanced Budget Act of 1997 contained numerous provisions affecting the Medicare program. These provisions were designed in part to postpone the imminent depletion of the HI trust fund, which had been projected for 2001. Under this legislation, fund exhaustion is postponed until 2008, based on the intermediate assumptions used in the Board of Trustees' report.
  • The SMI trust fund is financed on a year-by-year basis. The SMI program derives its revenues from premium payments by beneficiaries and general revenues from the federal budget. Under current law, no more than 25 percent of SMI's revenues can come from premium payments.
  • HI payroll taxes for 1998 were based on a combined employer/employee rate of 2.9 percent. The Omnibus Budget Reconciliation Act of 1993 completely removed any wage base limit for the HI payroll tax, effective January 1, 1994. For years 1998 and afterward, the payroll tax is scheduled to be 2.9 percent. In 1997, $130.2 billion was collected for the HI trust fund.
  • Medicare serves the elderly and disabled workers who qualify for DI benefits. Enrollment in Part A (HI) is mandatory, while enrollment in Part B (SMI) is voluntary. In 1997, 33 million elderly and 5 million disabled individuals were enrolled in Part A, and 32 million elderly and 4 million disabled individuals were enrolled in Part B.
  • In 1997, the average amount reimbursed per enrollee in Part A was $3,600. The average amount reimbursed per enrollee in Part B was $1,999.
  • Administrative costs for the Medicare program are low. In 1997, administrative costs for Part A were 1 percent of expenditures, and for Part B they were 2 percent of expenditures.
  • Treasury Secretary Robert E. Rubin acts as the Managing Trustee and Nancy-Ann Min DeParle, Administrator of the Health Care Financing Administration, acts as the Secretary of the Medicare trust funds. The other trustees include: Alexis M. Herman, Secretary of Labor; Donna E. Shalala, Secretary of Health and Human Services; Kenneth S. Apfel, Commissioner of Social Security; Stephen G. Kellison; and Marilyn Moon.

For more information, contact Ken McDonnell (202) 775-6342, e-mail: mcdonnell@ebri.org, or Paul Fronstin (202) 775-6352, e-mail: fronstin@ebri.org.

Source: EBRI Databook on Employee Benefits, fourth edition; and U.S. Social Security Administration, 1998 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund, and 1998 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund (Washington, DC: U.S. Government Printing Office, 1998).