Discussions on the future of Medicare always center on the term “solvency,” making a pretty simple issue sound more complicated than it really is. And the big numbers being thrown around don’t ease the intimidation.

But in many ways, understanding Medicare’s fiscal reality is easy enough for anyone who’s ever held a bank account: Money comes in and money goes out.

This article will do just that: follow the money to explain where it comes from and how all $549.1 billion gets spent.

Experts and pundits alike agree that Medicare in its current financial state is vulnerable. A portion of Medicare funds are projected to be depleted by 2024, and other funds likely won’t be sufficient to meet obligations. The result: Medicare won’t have enough money to provide health care to beneficiaries.

However, projections are always in flux depending on economic factors and legislative changes to the health care system. A new analysis by the Congressional Budget Office (CBO) indicates that Medicare will spend less money over the coming decade than previously expected due to lower spending on provider payments and prescription drugs. The CBO cut its spending forecasts for Medicare by $169 billion, with total Medicare spending projected at $7.7 trillion over the decade.

“The rise and fall of the economy has a great deal to do with Medicare's solvency projections,” said Juliette Cubanski, associate director for the program on Medicare policy at the Kaiser Family Foundation, in an interview with MNG. “When there is a downturn in the economy that has a dampening effect on employment, that affects the level of payroll taxes coming into the trust fund, and—the converse is also true—when the economy experiences an upturn and payroll tax revenue increases, the trust fund financial status improves, all else (being) held constant.”  

With Medicare accounting for about 15 percent of the national budget, policy discussions about reducing the national budget deficit often look squarely at Medicare. President Obama’s major legislative achievement, the Affordable Care Act, aims to reign in Medicare spending while also boosting coverage for some 40 million people. Meanwhile,the GOP has embraced  Republican vice presidential candidate Rep. Paul Ryan’s (R-Wis.) plan to overhaul the program by implementing a premium support system in an effort to bring down the budget deficit.

How much is spent on care? How much is spent on fraud prevention? How much is spent on administration? By putting numbers on the various pieces of the pie, this article will give readers a stronger and clearer sense of the scale of Medicare spending and the controversy surrounding it.

THE OVERVIEW

In 2011, Medicare spent $549.1 billion to provide health coverage to 48.7 million elderly and disabled Americans. Medicare spending accounted for about 15 percent of the national budget and 21 percent of the total spent on national health care, according to the CBO

Medicare is paid for through two trust fund accounts held by the U.S. Treasury. The money in these accounts, a combination of dedicated taxes and general revenues, is designated solely for Medicare.

 PART A

The first fund—and the one at risk for insolvency—is the Hospital Insurance (HI) Trust Fund, more commonly known as Medicare Hospital Insurance (Part A). The HI fund typically starts the fiscal year with a balance. At the start of 2011, that balance was $271.9 billion. However, spending is growing faster than revenues, meaning the HI fund could be insolvent by 2024.

In 2011, Medicare spent $256.7 billion on Part A benefits, but total income only reached $228.9 billion, meaning the fund had a net shortfall of $27.7 billion, borrowed from the balance.

Most of the Part A funds are spent on hospital inpatient services, and last year that totaled $132.7 billion. Some $32.9 billion went to skilled nursing facilities, and $7.3 billion covered home health care. In addition, the government spent $3.8 billion to administer Part A benefits and spent another $15.4 billion on “other” expenses related to Part A benefits.  

The primary source of funding for the HI trust fund is the payroll tax on covered earnings or, more simply put, a tax on workers’ wages. Employers and employees each pay 1.45 percent of wages, while self-employed workers pay 2.9 percent of their net income. In 2011, these revenue streams totaled $195.6 billion.

Social Security recipients with income above certain thresholds also pay a tax on their benefits, which totaled $15.1 billion last year. Interest paid on the U.S. Treasury securities held in the HI trust fund came to $12 billion. People who are not eligible for premium-free Part A paid $3.3 billion toward the fund. The HI fund also received $500 million from general revenues and $2.4 billion from other nonitemized revenue sources.  

PART B

The second Medicare trust fund is the Supplementary Medical Insurance (SMI) Trust Fund, also known as Medicare Medical Insurance (Part B) and Medicare Prescription Drug Plans (Part D). The SMI fund also starts the fiscal year with a balance; that balance was $71.4 billion in 2011. In total, some $225.3 billion was spent on Medicare Part B services last year.

The majority of Part B spending is on physician services, which came to $67.6 billion last year. An additional $35.1 billion was spent on outpatient hospital care and $12.4 billion on home health care not covered under Part A. The SMI Trust also spent $47.5 billion on durable medical equipment, certain preventative services and lab tests. Administrative expenses for Medicare Part B came to $3.6 billion.

Unlike Part A, Part B funds aren’t drawn from taxes earmarked specifically for Medicare. Instead, Congress authorizes transfers to the SMI fund from the general fund of the Treasury. This money represents the trust’s largest source of income, totaling $170.2 billion last year. Beneficiaries’ monthly premium payments of $57.5 billion also helped finance Part B, along with $3.2 billion in earned interest from U.S. Treasury securities held in the SMI trust fund. Other nonitemized income totaled $2.7 billion.

Part B also differs from Part A in that it does not have a specific insolvency date. Many Medicare debates focus on Part A because of the specific date it’s expected to be depleted, but Medicare Part B is also at risk.

“There’s an unfunded obligation under Part B, and that amount of money is so large” that the government will have to either raise more general revenue or cut spending to fund these obligations, said Stuart Guterman, vice president of payment and system reform at The Commonwealth Fund and executive director of the organization’s Commission on a High Performance Health System at The Commonwealth Fund, in an interview with MNG.

PART D

Medicare Part D, which is also paid for out of the SMI Trust Fund, offers prescription drug coverage to anyone who is eligible for Medicare. Private insurance companies contract with Medicare to offer the drug coverage, and benefits vary depending on the plan.

Last year, the government spent $67.1 billion from the SMI Trust fund for Part D benefits. Some $66.7 billion covered prescription drugs and $400 million covered administrative expenses.

Income designated for Part D totaled $67.4 billion. Transfers from the general fund of the Treasury accounted for $52.6 billion, premium payments totaled $7.7 billion and $7.1 billion came from state transfers. (When Part D was introduced, Medicare usurped Medicaid as the primary payer of drug benefits for dual-eligible beneficiaries. For those beneficiaries, states now contribute part of the estimated drug costs for this population.)  

PART C

Medicare Part C, also known as Medicare Advantage, is a type of Medicare health plan offered by insurance companies that contract with Medicare to provide beneficiaries with Part A and Part B benefits. Most Part C plans also offer prescription drug coverage. These plans include Health Maintenance Organizations, Preferred Provider Organizations, private fee-for-service plans, special-needs plans and Medicare medical savings account plans.

Last year about 25 percent of those eligible for Medicare chose to enroll in Part C health plans. Some $64.6 billion came out of the HI Trust Fund to pay for Part C health plans last year, while SMI funds paid $59.1 billion toward Part C benefits. 

ANCILLARY SPENDING

Aside from what the two trust funds set aside to fund Medicare, other government agencies, namely the Department of Health and Human Services (HHS) and the Department of Justice (DOJ), spend money on Medicare. In 2011, HHS spent $610 million in discretionary program integrity funding (authorized by Congress) to implement programs that reduce payment error rates, prevent fraud and abuse, target high-risk services and supplies, and enhance civil and criminal enforcement for Medicare and other government health programs.

Of that $610 million, $220 million funded the Health Care Fraud and Abuse Control (HCFAC) account. That money was spent by the DOJ in its efforts to combat health care fraud.

All figures regarding Medicare Parts A, B, C and D were obtained from the 2011 Medicare Trustees Report. 

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