Public and Private Healthcare- Medicare

In the last blog we talked about the 5 segments of health care consumers in the US (Medicare, Medicaid, Employer Based Insurance, Private Insurance and the uninsured.) The US spent $374 million on Medicare in 2006 (about 2.3% of GDP) and it accounted for about 12% of the federal budget. Medicare provides health care for the elderly and disabled and is a popular program. Medicare is Insurance provided by the Federal Government and consists of 4 parts: Parts A, B, C & D.

1) Part A: Pays for Hospital insurance and accounts for 39% of benefit payments and is largely financed through a dedicated tax of 2.9% of earnings paid by employers and 1.45% of earnings paid by employees

2) Part B: Pays for Supplementary Medical Insurance (SMI) and accounts for 32% of the total benefits paid out. It is financed by general revenues (investments of the HI and SMI Trust Funds?) and premiums.

3) Part C: Pays for Medicare Advantage, consisting of private health care plans, and accounts for 15% of benefits payments. Part C is not financed separately.

4) Part D: Pays for prescrition drug coverage and accounts for 9% of benefit payments. It is financed from beneficiary premiums, general revenues and state payments.

Because of the age of the beneficiaries, as would be expected, older beneficiaries consume more of health care benefits than younger beneficiaries. So, 10% of beneficiaries account for two-thirds of total Medicare spending. Medical spending on for beneficiaries in their last year of life is on average 4 times greater ($22,107) than for all other beneficaries ($5,694).

To the beneficiaries, Medicare should not be supposed to be free. Medicare Part B costs beneficiaries $93.50 per month. In addition, of the $12,763 in per beneficiary costs in 2004, Medicare paid for about half, while beneficiaries had out of pocket expenses amounting to about 19%.

Since the Reagan years people have been led to believe that the government cannot do anything right. However, the popularity of Medicare as well as the fact that growth in Medicare spending has increased annually by 7.8%- 1% below that for private health insurance. It is true that private health insurance spends money on sales and marketing that Medicare does not have to. However, there is no indication that Medicare- simply because it is a Government provided service is run poorly.

From an overall health care perspective, there are problems ahead for Medicare. Firstly, it is estimated that Medicare will form 10.8% of GDP by 2082 (Office of the Actuary in the Centers for Medicare and Medicaid Services). Because these are projections based on estimates around population growth and health care consumption statistics there can be debate on the exact percentage of GDP that Medicare will form.

Secondly, there is a tsunami of baby-boomers who will be retiring and begin to participate in Medicare. Because of the constitution of the population, there will be far fewer employees to support those in retirement.

Thirdly, the same disease that ails overall health care expense increases, ails Medicare.

For all these reasons, there is a potential Medicare funding shortfall that will need to be addressed.