Medicare Insurance Analysis Essay Sample

Medicare Insurance Analysis


Medicare is a government-funded health insurance program that was established in 1965. The program provides health coverage for Americans in the age of 65 years and above, as well as permanently disabled people below age 65. Medicare has four constituents: 1) Hospital insurance also referred to as Medicare Part A, 2) Supplementary Medical Insurance which encompasses Part B and D of Medicare, and Part C. Part A finances the payment for hospital and home health services subsequent to hospital stays, skilled nursing facility, along with the hospice care for the aged and disabled people. Part B of Supplementary Medical Insurance (SMI) finances the payment for physician, home health, outpatient among other health services for the elderly and the disabled people who are voluntary registered under the program. Part D of SMI finances the subsidization of access to insurance coverage for drugs on a voluntary basis for all eligible individuals and premium and cost sharing for enrollees in the low income bracket. Part C of Medicare provides a substitute to part A and Part B. Eligible individuals can opt to enroll to the program and obtain healthcare from the Medicare Advantage and other specific plans provided by private health insurance vendors.

Currently, Medicare provides health coverage for 55 million eligible individuals, thus making it one of the most cost-intensive federal programs (Kaiser Family Foundation, 2015). Medicare has seen dramatic reforms over the years aimed at improving the quality of health care provided under the program and to expand coverage. Some of such changes are due to the Affordable Care Act. The major ongoing issues regarding Medicare are its solvency in the future in light of the fast aging population, and the changes that should be enacted to ensure the sustainability of the program in terms of costs and provision of quality healthcare.

Medicare Financing

The financing of Medicare is a done via the help of two funds managed by the treasury department: Hospital Insurance (HI) trust fund for Medicare Part A and the Supplementary Medical Insurance(SMI) trust fund for Medicare Part B and D. Part D payments are made on behalf of the enrollees in some predetermined proportions from the two stated funds. HI trust fund is principally financed by payroll taxes while SMI is mainly financed by general transfers of revenue and premiums. The two funds are monitored by a board of trustees that furnishes the congress with annual reports (Davis, 2013).

Hospital Insurance Trust Fund

HI includes the Medicare Part A, which provides coverage for hospice care, home health services, hospital services as well as skilled nursing facility services. Payments for the services in question are financed by HI trust fund. The fund also pays for administrative expenses incurred in the operation of the program. The HI fund is designed to have self-supporting capacity and is financed via dedicated income sources, instead of depending on the general revenue from taxes (Davis, 2013).

The primary incomes sources channeled to the HI trust fund comprise payroll taxes, levied from both the employers and employees. Each party is required to pay a tax equivalent to 1.45 percent on earnings. Self-employed enrollees pay 2.9 percent of their income to the fund (Davis, 2013). High income individuals with the earnings amounting to over $200,000 are required to pay an extra tax of 0.9 percent of their income for single enrollees and $250,000 for joint enrollees following g the enactment of the Affordable Care Act (Davis, 2013). Other income credited to the fund include premiums charged from voluntary enrollees who are not eligible to the premium free Part A, a certain percentage of federal income taxes charged for Social Security benefit, and interest earned on federal government’s securities, held by the HI trust fund.

Provided that the HI trust fund contains a balance, the department to the treasury is mandated to pay for all services provided under Medicare part A (Kaiser Family Foundation, 2015). The HI has never run out funds and the law does not provide the measures that would be taken if the fund’s resources were to be depleted. In such regard, the Congress adjusts payroll tax periodically in order to maintain financial sustainability of the trust fund as well as executing measures to decelerate the growth of expenditures under Part A (Kaiser Family Foundation, 2015).

Supplementary Medical Insurance (SMI) Trust Fund

SMI comprises part B and D parts of Medicare. Benefits under part A include specific home-care services, outpatient hospital care; physician services diagnostic tests, durable medical apparatus among other services. Part D provides subsidized drug benefits. The fund is essentially financed through general tax revenue and premiums paid by beneficiaries (The Board of Trustees, 2015). With the effect of 2011, extra revenues from a yearly fee charged on stipulated categories of branded drugs manufacturers and importers are paid to the trust fund (The Board of Trustees, 2015). Contributions into the SMI fund are automatically adjusted annually to ensure the sufficient amount of liquidity to the fund. To this end, the SMI fund should remain in balance indefinitely, that is, the fund should suffer insolvency. Incomes from the stated sources are channeled to the fund and excess revenues are let to accumulate in the fund (The Board of Trustees, 2015).

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Financing of Part B. Part B of Medicare is chiefly financed the general revenues from the federal government and premiums from beneficiaries. In 2013, the premium per month was $104.90 for the majority of enrollees of Part B (Davis, 2013).

Financing of Part D. Part D of Medicare is majorly financed by federal general revenues and premium from beneficiaries in the provided proportions (The Board of Trustees, 2015). Furthermore, particular transfers are made from state governments (The Board of Trustees, 2015). Such transfers denote a percentage of the amounts that states should be expected to incur in paying for drugs under the Medicaid program if the coverage for drugs for individuals who are eligible for enrollment in both Medicaid and Medicare had not been transferred to Medicare Part D (Davis, 2013). As of 2013, the average monthly premium was $31.1 (Davis, 2013). Nevertheless, enrollees par varying premiums, depending on the plan they choose and whether they are eligible to receive the low-income subsidies(Davis, 2013).Starting in 2011, high income part D enrollees are required to pay higher premiums, similar to high income part B enrollees (The Board Of Trustees, 2015).

On a historical basis, expenditure on Medicare has appreciated at an annual rate of 7.5 percent between 1969 and 2013, slower than the mean annual growth in spending per enrollee on private health insurance programs (Centers for Medicare & Medicaid Services, 2015). Such a comparison takes into account the benefits typically provided under Medicare and Private insurance programs over this period, which include hospital services, physician services, clinical services and related professional services and durable medical equipment (Centers for Medicare & Medicaid Services, 2015).

Annual growth in the aggregate Medicare spending was 4.1 percent on average between 2010 and 2014 (Centers for Medicare & Medicaid Services, 2015).The growth is rate observed is far less compared to the growth over period 2000 to 2010, despite the higher growth in the number of beneficiaries and health care costs in the latest years (Centers for Medicare & Medicaid Services, 2015). The growth of the average expenditure per beneficiary in the period 2010-2014 was 1.0%, as compared to 7.0% in the period of 2000-2010 (Centers for Medicare & Medicaid Services, 2015). According to Congressional Budgetary Office baselines, Medicare expenditures were expected to be reduced by $1,200 per individual in 2015, compared to the expenditure per person in 2010, following the enactment of the Affordable Care Act.

Focusing into the future, Medicare expenditure less income from premiums and related receipts is forecasted to rise from $527 billion in 2015 to an astounding $866 billion in 2024 (Congressional Budget Office, 2015). The total gross Medicare program expenditure is projected to increase from the current $632 billion to $1.1 trillion by 2024 (Congressional Budgetary Office, 2015). Taking into account the impact of changes that will be rendered by the Medicare Access and Chip Reauthorization Act, it is predicted that the aggregate Medicare spending will rise from the current $649 billion to 1.2 trillion in 2024(Centers for Medicare and Medicaid Services, 2014).

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The Net Medicare expenditure is expected to appreciate moderately, as a percentage of the aggregate federal budget and the gross domestic product. As a percentage of the federal budget, Medicare expenditure was projected to rise from 14.3 percent to 15.2% between 2015 and 2024 (Congressional Budget Office, 2015). As part of the GDP, Medicare expenditure will grow from 3.0% to 3.3% between 2015 and 2024 (Congressional Budget Office, 2015).

Measured on a per-capita criteria, Medicare expenditure is expected to appreciate at a rate of 4.1% between 2014 and 2024(Congressional Budgetary Office, 2015). This rate is faster than the rate observed between 2010 and 2014. However, the ratio is expected to be slower in the coming years, compared to the per capita spending in the private health insurance expenditure (4.7%) (Congressional Budgetary Office, 2015). Between period 2014 and 2024, the per capita expenditure growth for part D was forecasted to be 5.7%, 3.05 for Part A and 4.7% for Part B(Centers for Medicare and Medicaid Services, 2015). The higher projected growth for Part D is attributed to the high costs specialty drugs (Centers for Medicare and Medicaid Services, 2014).

Sustainability of Medicare Program

The financial sustainability or solvency of Medicare is commonly measured by examining the financial conditions of HI fund, from which Medicare Part A benefits are financed. The solvency of Medicare is evaluated by measuring the amount of assets in Part A of trust fund of the larger HI trust fund (Kaiser Family Foundation, 2015). The level of assets declines every time the income channeled to the trust fund is less than spending incurred in any particular year. The perpetual excessiveness of expenditure over the income to the fund could culminate in full depletion of the trust fund and consequent incapacity to finance all the benefits provided under Medicare Part A (Kaiser Family Foundation, 2015).

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Every year, the Board of Trustees gives estimates of when the level of assets in trust fund is forecasted to be exhausted fully. In light of the recent slowing of growth in Medicare expenditure, the solvency of the trust fund has been prolonged (Kaiser Family Foundation, 2015). In 2015, the Board of Trustees conjectured that Part A trust fund will be exhausted completely in 2030. A similar projection had been made in 2014 (The Board of Trustees, 2015). The financial sustainability of the fund is affected by the direction of movements of economic factors which affect income from payroll tax, trends in spending in healthcare, and demographic trends (Kaiser Family Foundation, 2015). The major concern about the financial stability of Part A trust funds emanates from the surging number of beneficiaries - a phenomenon that started in 2010 and expected to persist up to 2030. It is the range of years when the baby boom generation meets the age criterion for Medicare and a plummeting ratio of workers per the program’s beneficiary paying payroll taxes (Davis, 2013).

Part B and Part D do not face solvency problems, unlike Part A, since both are financed through premiums, paid by the beneficiaries and general revenues determined yearly to align to the projected expenditures (The Board of Trustees, 2015). Nevertheless, a future surge in expenses under the two Medicare Funds will demand raises in the general revenue financing and higher premiums charged from the beneficiaries (The Board of Trustees, 2015).

In addition to the financial condition of Part A trust fund, the financial sustainability of Medicare can be gauged in several other ways. For instance, the Affordable Care Act mandates the Independent Payment Advisory Board to make recommendations to the Congress appertaining reduction in Medicare expenditures if the forecasted expenditure growth surpasses the itemized target levels. The Board is supposed to recommend a reduction in expenditures if a five year rate of average growth in the per capita Medicare expenditure is forecasted to outstrip the per capital growth rate based on inflation (between 2015 and 2019), the nation’s economic growth (2020 and later) (Kaiser Family Foundation, 2015).Centers for Medicare and Medicaid Services(2014) through the Office of Actuary predicts that the boards process will cause modest reductions Medicare expenditure in after every years starting from 2019 to 2033, but not beyond this period (Kaiser Family Foundation, 2015).

Proposals to Ensure Financial Sustainability of Medicare

The fast aging American population poses the greatest threat to the solvency of Medicare program. A number of proposals to forestall the financial challenges have been put forward. They include the following: an upward revision of the eligibility age from 65 to 67 years; a further increase in Medicare premiums for higher wage beneficiaries; a conversion process Medicare to a premium support programs, enactment of a law that will require drug firms to provide discounts or rebates on prescription drugs bought by Medicare beneficiaries; increasing the payroll tax rate in order to generate new revenue, and raising the raise penalties for healthcare fraudulent practices (Aaron & Butler, 2012). Other recommendations encompass expediting the implementation of Affordable Care Act’s reforms (Kaiser Family Foundation, 2015). The viability of some of these proposals is not clear, but there is a question of their judiciousness in seeking to bolster healthcare insurance for an aging population.

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Summary and Conclusion

Medicare is the country’s health insurance program for people aged 65 and permanently disabled people below age 65. The program is constituted by four different parts - Part A and Part B, Part C and Part D. Part A program is principally funded through payroll taxes charged on employers and their employees, which are credited to the Hospital Insurance (HI) trust fund. Part B is funded partially by monthly premium charged on the beneficiaries and the general revenues. Incomes from the stated sources are credited to Supplementary Medical Insurance (SMI) fund. Part D is financed by general revenues, premiums from enrollees and transfers from states. The HI and SMI funds are monitored by a board of trustees.

Whereas the rate of growth of Medicare expenditure shows a slower upward trend when compared to the past decades, the aggregate and per capital rate of growth seem to be departing from the their historically low levels over the last few years. The question of solvency of the Medicare program, in particular Part A, is a major issue in view of the fast aging baby boom generation and the general increase in health care costs. The board of trustees projects that Part A fund will be exhausted by 2030. Various reforms are, therefore, required to ensure the financial sustainability of Medicare program. Proposals for reforms include those that would cut the share of federal government on Medicare expenditure, for example, raising the eligibility age, and those that would cut the aggregate health care spending regardless of who pays, for instance, reducing the prices paid for health services and items. The focus on policy makers in enacting any reform should be on slowing the growth of Medicare costs in the long run while ensuring provision of quality health care.

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