Medicare

Although Part B of Medicare is voluntary, because the premium required represents only 25 percent of the costs of the benefit, most who are eligible choose to enroll. In addition to the Part B premium, Medicare beneficiaries are required to pay an array of cost-sharing charges. That is, beneficiaries must pay for a share of much of the care they receive, either in up-front costs (deductibles) or each time they visit physicians (coinsurance). Both Parts A and B have a deductible, and most of the services are subject to some type of co-insurance. The Part A deductible ($776 in 2000) is particularly high. This requires cost-sharing, and the required exclusion of some benefits (such as prescription drugs) from coverage have resulted in a less comprehensive benefit package than what is available to many younger families. Consequently, a market for supplemental insurance has arisen, either supported by employers as part of a retirement package or purchased specifically by beneficiaries (and referred to as Medigap).

Persons covered by employer-subsidized retiree benefits have the best coverage. The extra coverage is usually quite comprehensive, and any premiums that retirees must pay are usually subsidized. This coverage usually fills in most of Medicare's required cost-sharing, as well as benefits such as prescription drugs. In contrast, Medigap plans are expensive and carry high administrative costs. Those who enroll in these Figure 2 SOURCE: Health Care Financing Administration plans get some protection from unusually high expenses, but also face substantially higher financial burdens from the premiums. Regulations on the Medigap market place controls on what can be offered but not on the costs of plans. These costs tend to be very high for the oldest beneficiaries and often are not available to beneficiaries under age sixty-five.

As noted above, beneficiaries also can obtain additional benefits to supplement Medicare's basic package by enrolling in Medicare+Choice. Cost sharing is lower, and some additional benefits are usually offered for less than the price of a Medigap plan. But these plans have also become more expensive and less comprehensive over time.

Gaps in coverage for low-income beneficiaries are made up through Medicaid, a joint federal/state program to which most Medicare beneficiaries can qualify if their financial resources are low enough. In addition, legislation enacted in 1988 established the Qualified Medicare Beneficiary Program, which allows Medicaid to further fill in the gaps. Later additions include the Specified Low-Income Medicare Beneficiary Program and the Qualified Individual Program. These programs help to fill in Medicare's cost-sharing or premium requirements for low-income persons who do not qualify for full Medicaid benefits, and each is targeted to a different income group. However, participation rates remain a problem, reducing the effectiveness of these programs. As a consequence, the comprehensiveness of coverage for older Americans and eligible disabled persons varies considerably via this complicated environment of patchwork supplemental benefits.

One important result of the absence of a comprehensive Medicare benefit is the financial burden that beneficiaries face in paying for their own care. When the premiums that they pay for Part B and supplemental insurance are added to the direct expenses for care not covered by any insurance, older Americans devote over 20 percent of their incomes to health care on average. This does not include the costs of long-term care for persons in institutions. Those enrolled in the Medicare+Choice program face smaller but not insignificant burdens. In 1965, when Medicare was instituted, the share of income that individuals paid for their care was about 19 percent. Medicare reduced that share, but it has gradually risen over time as the costs of health care have gone up faster than the incomes of older Americans. Even without further requirements on beneficiaries to pay more for their care, that share will likely rise over time as health costs continue to outpace retirement incomes.