What Actually is Medicare?

When it comes to long-term restructuring and reform of the American healthcare system, it is probably safe to say that a lot of focus is on whether America should adopt a single-payer model of healthcare.

Such a “Medicare for All” proposal suggests expanding the existing Medicare program to cover more treatments and services and allowing coverage of virtually every American. In addition to versions of the proposal in the House and Senate, proposals have been introduced at the state level in places from Massachusetts and California to even Iowa and Ohio.

But wait… what is Medicare like for beneficiaries right now? It’s the largest existing federal social program, but a lot of voters who get polled on this likely do not already qualify for Medicare, and let’s be honest, you’re probably not asking your relatives about the details of their Medicare coverage.

Medicare spent $830 billion dollars in 2020, and as a mandatory program, Congress doesn’t even need to approve budget increases every year. Given this size, there are bound to be issues that voters, and by proxy taxpayers, should more easily understand.

The Basics

Medicare is operated by the federal government, specifically through the Centers for Medicare and Medicaid Services, which operates under the Department of Health and Human Services. The Medicare.gov website briefly explains eligibility with the following criteria:

People who are 65 or older

Certain younger people with disabilities

People with End-Stage Renal Disease (permanent kidney failure requiring dialysis or a transplant, sometimes called ESRD)

As of October 2021, Medicare enrollment stands at over 63 million Americans, which is almost 20% of the US population. However, not all of these 63 million Americans get their coverage directly from the federal government, and you may have heard that there are actually multiple sub-parts that make up Medicare like Part A, B, and D.

Original/Traditional Medicare

When Medicare first came about in 1965, there was only Original Medicare, consisting of Part A and Part B. Part A Medicare covers hospital stays and stays at places like skilled nursing facilities and some hospice care. Most Original Medicare recipients do not pay a monthly premium on Medicare Part A as long as they’ve paid payroll taxes for at least 10 years.

Part B covers outpatient treatment and preventative services. Outpatient care refers to care that doesn’t require you to be admitted to a hospital, for example visiting a specialist. Generally, everyone pays a premium for Part B, and those with higher incomes pay extra in what’s called the Income-Related Monthly Adjustment Amount (IRMAA).

With the rising burden of prescription drug costs, Part D Medicare was introduced in 2006, wherein Original Medicare members had the choice to pay for supplemental drug coverage. This focus on drugs is also why news outlets and politicians talk about “Medicare Part D” when people are talking about Medicare negotiating drug prices.

Original Medicare has its limits, however. There are many treatments that are simply not covered, and there is no out-of-pocket spending limit for recipients of Medicare benefits. Some may opt to buy supplemental insurance called Medigap.

Supplemental Insurance and Benefits

Before moving onto a discussion of how Medicare Advantage works, it is worthwhile to address that many beneficiaries of Original Medicare have supplemental insurance which add onto benefits received through Original Medicare.

Medigap plans are supplemental plans usually sold through private insurers. One of its greatest appeals is that they may help limit out-of-pocket spending, but they can average $150–200 in monthly premiums. That also explains why those with Medigap tend to have higher incomes.

Lower income individuals are eligible for the Medicaid health insurance program, and thus those with Medicaid as supplemental coverage are considered “dual-eligible”, because they receive both Medicare and Medicaid benefits. Because Medicaid is operated through federal-state collaboration, the actual details of Medicaid coverage may vary depending on a member’s state.

The last notable section of supplemental coverage beneficiaries are those getting benefits through retirement benefits from employers, though rates of employer-sponsored retirement benefits are on the decline.

Medicare Advantage

Medicare Advantage (MA) is sometimes called Medicare Part C. The biggest difference between MA and Original Medicare is that MA members get their benefits through a private insurer. This one distinction is what can help explain a lot of the differences in coverage, costs to the patient, and the operation of MA plans.

Private insurers that administer MA plans are typically payed a fixed amount per MA member by the federal government to administer coverage that would typically be provided by Part A and Part B of Original Medicare. The member of the MA plan will continue to pay the same basic premiums that they would for Part B Medicare, but they may also be subject to extra premiums paid directly to the MA private insurer.

These MA plans tend to include prescription drug coverage (similar to Part D plans), out-of-pocket spending limits (that are not part of Original Medicare), and extra services such as dental coverage or gym memberships.

How Medicare Pays Doctors

Another key difference between MA and Original Medicare comes down to the way that providers in the network are reimbursed. Remember, with a health insurance plan, the insurer commits to pay providers some amount after the patient’s out-of-pocket expenditures.

Original Medicare uses a fee-for-service model, where each service given to a Medicare patient gets a specific pre-determined fee. For example, the Prospective Payment System (PPS) is a formula-based system for setting the reimbursement amount for hospital services. If the care provider does not want to work for that reimbursement rate, they can opt out of accepting Medicare coverage, however most providers in the US accept Medicare.

In this regard, MA plans tend to seem more like other private health plans. Like much of private insurance, MA plans follow a managed care organization (MCO) model, where the insurer works with a network of care providers. The reimbursement that these care providers get is determined through the insurer negotiating such rates, which explains why certain providers may not be covered by MA plans, and why in other situations, the amount providers are reimbursed by MA plans is significantly more varied.

This also means that in an MA plan, the member will typically be limited to getting care from in-network providers. There are more specific classifications of MCO (such as HMOs, PPOs, and EPOs), but review of their differences to patients are better suited for a discussion specifically about private insurance.

So why bother with giving Medicare benefits through MCOs and other private bodies? Well, one analysis provides this explanation:

…the MA program has pursued two stated goals. The first is to expand Medicare beneficiaries’ choices to include private plans with coordinated care and more comprehensive benefits than those provided through traditional Medicare ™… The second is to take advantage of efficiencies in managed care and save Medicare money

Whether MA allowed saved money is a bit disputed, as there has been debate over whether the managed care organizations can deliver on promised efficiency.

Scope and Spending

No discussion of Medicare is complete without at least hitting on some of the issues with it. As the discussion on supplemental coverage suggests, one glaring issue is that current beneficiaries of Original Medicare could benefit from policies that would cap out-of-pocket spending and expand coverage into areas like dental care.

But probably what is most commonly addressed in the media is the rising cost of the Medicare program. Just like Social Security, Medicare is called a mandatory spending program, which means that Congress does not have to authorize increases to its budget every year.

The problem is that because the cost of healthcare services has been increasing, and as the Baby Boomer generation has aged into the Medicare system, the cost of covering all of these peoples’ healthcare has increased. Don’t also forget that those over 65 years of age are more likely to have expensive health conditions.

Any talks of expanding Medicare’s reach would need to address these issues at to root to ensure that the program would have to means to get funding whilst also filling important gaps in services that are covered. Even if you’re a fiscal hawk seeking to cut Medicare’s reach, considerations still have to be made to ensure that the crisis of rising healthcare costs does not simply get pushed into private health plans and that those most vulnerable to the expenses of chronic and complex medical conditions are not left without some coverage.