Assignment: Beneficiary Premiums

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Assignment: Beneficiary Premiums

Assignment: Beneficiary Premiums

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fInAncIng Medicare was initially financed by assessments on employers for Part A (0.35 percent of payroll up to $6,500), by a coinsurance of $3 per month paid by beneficiaries for Part B, and by general revenue allocations to Part B (Harris 1975). Initial Medicare expenditures had been grossly underprojected, however. President Johnson reportedly believed that Medi- care spending would run about $500 million a year (Peterson 1996). Yet actual Medicare expenditures were $4.2 billion in 1967, the first full year of the program (Helbing 1993). The growth of Medicare expenditures was also grossly underprojected. Even critics of the program underestimated—they guessed that Medicare would cost $1 billion by the end of the twentieth century; in fact, it cost $205 billion per year by 2000. In 2014, Medicare spending was $618.7 billion, and it is expected to surpass $1 trillion by 2022 (Keehan et al. 2016).

In 2015, Medicare was financed from three primary sources—general revenues (41 percent), payroll tax contributions (38 percent), and beneficiary premiums (13 percent)— with other sources accounting for 8 percent. The parts are funded as follows (Kaiser Family Foundation 2016):

◆ Part A is financed through a 2.9 percent tax on earnings. This tax is split evenly between the employer and the employee; it accounts for 87 percent of all Part A revenue. The ACA increased the payroll tax contributions to 3.8 percent starting in 2013 for individuals earning more than $200,000 and couples earning more than $250,000.

◆ Part B is financed through general revenues (73 percent), beneficiary premiums (25 percent), and interest (2 percent). Beneficiaries earning more than $85,000 per individual and $170,000 per couple pay a higher premium related to their income. The ACA froze the income limits at 2010 levels through 2019.

◆ Part D is financed through general revenues (74 percent), beneficiary premiums (15 percent), and state payments for Medicare beneficiaries also eligible for Medicaid (11 percent). As with Part B, beneficiaries with higher incomes pay a larger share of the cost of Part D coverage.

Note that Medicare does not pay for all of a beneficiary’s healthcare expenditures. For instance, in 2012 (the most current year for which data have been analyzed), Medicare beneficiaries spent $18,988 on healthcare, of which Medicare paid 64 percent (CMS 2014; see also exhibit 6.2).

Total Medicare payments for 2014 were $618.7 billion (CMS 2015b). Twenty-six percent of that money paid for Medicare Advantage, 23 percent paid for hospital inpatient services, and 12 percent paid physicians (see exhibit 6.3).

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