BOX 5-2

Medicare and Medicaid

In 2008, Medicare spent about $468 billion and helped pay for hospital care, doctor visits, and outpatient care, and prescription drugs for 37 million elderly over the age of 65, as well as 7 million disabled beneficiaries under age 65 (Boards of Trustees, 2009). The Medicare program has four components:

  1. “Part A” helps pay for hospital, home health, skilled nursing facility, and hospice care. Funded primarily by a 2.9 percent payroll tax, it represented about half of total Medicare expenditures in 2008.

  2. “Part B” helps pay for doctor visits and outpatient care (as well as home health services) and represented about 40 percent of total Medicare expenditures in 2008. Part B services are funded by a combination of general revenues and beneficiary premiums (set bylaw to cover 25 percent of total spending under Part B).

  3. “Part C,” or “Medicare Advantage” (MA), is an alternative to traditional Medicare services offered under Parts A and B. It allows beneficiaries to receive care from private health insurance plans that contract with Medicare. Federal payments to MA plans are drawn from the trust fund accounts for Parts A and B.

  4. “Part D” covers outpatient prescription drugs through privately administered insurance plans and is funded by a combination of premiums and general revenues (set by law to cover 25 percent of total spending under Part D). It constituted about 10 percent of total Medicare spending in 2008.

About 22 percent of Medicare beneficiaries were enrolled in Medicare Advantage plans in 2008, and the rest were enrolled in traditional Medicare. In addition, about 70 percent of Medicare enrollees had prescription drug coverage under Part D (Boards of Trustees, 2009).

Medicaid covers the cost of acute and long-term care services for about 50 million low-income individuals, including children and parents in working families, children and adults with severe disabilities, and low-income Medicare beneficiaries. Although the elderly and disabled comprise only about one-third of Medicaid beneficiaries, they account for two-thirds of the program’s expenses (Council of Economic Advisers, 2009).9 The Medicaid program is financed jointly by federal and state governments, with the federal share varying according to state per capita income. On average, the federal government has paid about 57 percent of program costs (Congressional Budget Office, 2009h). The federal government spent about $201 billion on Medicaid in 2008 (U.S. Office of Management and Budget, 2009b).

imposed on most other programs by the appropriations process). As noted in Chapter 1, if current policies remain unchanged and health spending grows as projected, outlays for Medicare and Medicaid as a share of GDP would more than double over the next quarter century, rising from 4.1 percent of GDP in 2008 to 9.9 percent in 2035, and they would continue

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