Overall Medicare Spending

The largest provider of medical services in the United States is Medicare.  Forty five million Americans receive Medicare.  Out of this total only 85% are elderly (aged 65 or older).  Disabled individuals, individuals with end-stage renal disease or Lou Gehrig’s disease are also eligible for Medicare coverage.

Medicare has 4 parts. Part A provides coverage for inpatient hospital services, Part B provides coverage for outpaitent and physician services and Part D provides a drug benefit. Medicare Advantage (or Medicare Part C) allows Medicare beneficiaries to enroll in private health insurance plans instead of the Parts A, B, and D.

Who pays for Medicare?

Medicare is funded by a payroll tax (2.9% of taxable earnings), general tax revenue and beneficiary premiums. Below I describe how each part of Medicare is funded.

  • Part A: Inpatient hospital services are paid almost entirely through the Medicare payroll tax.
  • Part B: Premiums paid by beneficiaries cover about one-quarter of outlays. General revenue covers the rest.
  • Part C: Medicare Advantage plans places bids with the government to provide the services at the lowest cost. This bids are compared to a benchmark based on a county-level fee-for-service Medicare Spending. Plans are either paid the benchmark if their bid is at or above the benchmark. Plans are paid 75% of the difference between the bid and the benchmark if the bid is below the benchmark.
  • Part D: Most enrollees pay one quarter of the Part D cost as premiums. In reality, however, receipts from premiums cover less than one-quarter of Part D’s total cost because some of the federal outlays for it (such as subsidies for low-income beneficiaries and for employers that maintain drug coverage for their retirees) are not included in the calculation of premiums.

What services make up the Medicare Budget?

Payment for inpatient hospital services (28%), Medicare Advantage Plans (20%) physician and supplier services (19%) make up the marjority of Medicare spending on enrollee benefits. In the fiscal year 2008, Medicare spent $453.9 billion on enrollee benefits. This chart lists the major types of services provided by Medicare and their cost.

Supplemental Insurance

Although all elderly are eligible for Medicare, some enrollees have additional coverage. For instance, 37% of fee-for-service Medicare beneficiaries also have coverage from former employers. Other individuals will purchase Medigap policies to cover the Medicare donut holeThis chart lists the proportion of Medicare beneficiaries with supplemental health insurance.


1 Comment

  1. For the description of who pays for Part C, should the last sentence be “Plans are paid THE BID AMOUNT PLUS 75% of the difference between the bid and the benchmark if the bid is below the benchmark”?

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