National Bipartisan Commission on the Future of Medicare
Medicare's Share of Health Care Spending for Medicare Beneficiaries
There are many different ways to calculate Medicare's share of health care spending on Medicare beneficiaries. This memorandum discusses the different methodologies and associated percentages, and addresses how the percentage may change if a prescription drug benefit were added. It cites HCFA-provided data from the 1995 Medicare Current Beneficiary Survey, unless otherwise noted.
I. Methodological Variations
Medicare as a percent of total health care spending:Medicare spending can be thought of as either inclusive of Part B premiums (which is considered gross Medicare spending) or exclusive of Part B premiums (which is considered net Medicare spending). Net Medicare spending reflects only what the federal government spent on Medicare, and not the portion paid by beneficiaries through their premiums. (Deductibles and coinsurance paid by the beneficiary are not considered Medicare spending under either of these methodologies.)
- When including premiums in Medicare spending, Medicare pays 52 percent of beneficiaries' health care spending (1994 data). 1 This methodology is commonly used when considering who pays the claims. (See Chart 1)
- When excluding premiums from Medicare spending, Medicare pays about 48 percent of beneficiaries' health care spending. This methodology is useful in identifying the source of the financing. (See Chart 2)
- Medicare pays a higher percentage of total costs for lower income beneficiaries than higher income beneficiaries. For example, Medicare pays 51 percent for beneficiaries between 100 and 119 percent of poverty level and 45 percent for those above 400 percent of poverty. (See Chart 3)
- This percentage fluctuates depending upon supplementary insurance status. Medicare pays a greater percentage of total costs for beneficiaries with HMO coverage, and a lower percentage for beneficiaries with Medicaid coverage, many of whom are receiving long-term care services. (See Chart 4)
Public spending as a percent of total health care spending:
- Public spending on beneficiaries' health care spending accounts for about 67 percent of total health care costs for beneficiaries. Public spending includes Medicare, Medicaid, and other public spending (such as state drug assistance programs, Veterans' Administration benefits, etc.). Part B premiums are included in out-of-pocket spending in this calculation. (See Chart 5)
Net Medicare spending as a percent of "major medical" spending (which includes Medicare covered services and prescription drugs):
- Medicare pays about 67 percent of beneficiaries' major medical expenses. "Major medical expenses" does not include long-term care,
dental, or other non-covered services (e.g. cosmetic surgery). This figure reflects Part B premiums as part of out-of-pocket spending rather than Medicare spending. (See Chart 6)
- This percentage remains relatively constant regardless of income level. (See Chart 7)
- This percentage fluctuates depending upon insurance status. Beneficiaries with HMO or Medicaid coverage have a higher percentage of their care covered by Medicare, while those with employer-sponsored retiree coverage and/or Medigap have a lower portion covered. (See Chart 8)
Net Medicare spending as a percent of gross Medicare spending:
- After implementation of a Balanced Budget Act of 1997 provision shifting much of home health services to Part B, Medicare will pay about 88 percent of Medicare's total spending for each beneficiary. The beneficiary, through their Part B premium, pays the remaining 12 percent. Coinsurance and deductibles are separate from this calculation.
- Medicare premiums accounted for about 17 percent of out-of pocket spending. Prescription drugs accounted for another 11 percent. (See Chart 9)
II. Implications of Adding a Drug BenefitThe proposed premium support model makes the minimum premium equivalent to the current 88/12 percent split between Medicare and beneficiaries, assuming no additional benefits are added to the benefit package. If prescription drugs are added to the benefit package, the ratio would change, depending on if and how Medicare subsidizes the cost of the care. If beneficiaries bear the full cost of the additional benefit in their premium, Medicare is estimated to pay about 80 percent of gross Medicare spending, depending upon the cost of the drug benefit. This percentage is based upon the following example:
In 1995, the average spending for a beneficiary was $4,174. The part B premium was $553 and the average drug spending paid by insurance was $459 (the average amount paid by insurers for beneficiaries with drug coverage). Gross Medicare spending would equal $5,186 ($4,174+$553+$459) and net Medicare spending would be $4,174 ($4,174/$5,186=80%).
If the drug benefit were more generous, for example $600, net Medicare spending would be about 78 percent of gross Medicare spending.
This change in policy does not change the current 67/33 percent public/private split, except to the extent that beneficiaries spend more or less as a result of having drug coverage through Medicare.
If a portion of the drug benefit was financed by Medicare, the ratio would change with Medicare paying a greater portion of beneficiaries' total health care spending.