Chapter 2 – Medicare


  • Medicare covered 57 million Americans in 2016, including 47.9 million people 65 and older and 9.1 million people with disabilities (source).
  • Nearly one-third of beneficiaries opted for private Medicare Advantage plans (mostly HMOs and PPOs) in 2016 (source).
  • Nearly 10 million low-income Medicare beneficiaries also receive supplemental coverage from Medicaid (source).
  • Half of Medicare beneficiaries had annual incomes below $24,150 and savings below $63,350 in 2014 (source).
  • The Hospital Insurance (Part A) trust fund is projected to be depleted in 2028. At that time, Medicare will be unable to fully pay for benefits covered under Part A (source).
  • In 2015, nearly one-quarter of Medicare spending on beneficiaries was for inpatient services, 12 percent was for the Part D drug benefit, and 11 percent was for physician services; another 27 percent was for Medicare-covered services provided by Medicare Advantage plans (source).
  • Net Medicare spending is projected to grow from $591 billion in 2016 to $1.1 trillion in 2026 (source).
  • Medicare spending rose 5.0 percent in 2016, an increase from 4.5 percent in 2015 (source).
  • Medicare per capita spending is projected to grow at a faster rate between 2015 and 2025 (4.3 percent) than it did between 2010 and 2015 (1.4 percent), but slower than between 2000 and 2010 (7.4 percent) (source).

Medicare provides health insurance coverage to 57 million Americans, including people age 65 and older and people with permanent disabilities. In 2015, spending on Medicare accounted for 15 percent of the federal budget (source). In recent years, the cost of the program has grown at a more moderate rate than in prior decades. While the growth in costs per beneficiary is expected to continue to rise modestly in the near future relative to historical trends, there will be an unprecedented increase in the number of Medicare beneficiaries over the next two decades, as the baby boom generation ages on to Medicare, which will contribute to higher program spending over time.


Medicare is the federal health insurance program for people age 65 and older and for other adults who qualify due to having a permanent disability or end-stage renal disease (ESRD) (source). While most beneficiaries are age 65 and older, 9.1 million (16 percent) are younger people with disabilities (source). Eligibility is not based on income or medical history, although people with higher incomes have recently begun to pay higher premiums for some parts of Medicare (source).

Medicare began in 1965 as a fee-for-service insurance system to help people 65 and older pay their hospital and physician bills. Seniors could choose any medical provider, and the federal government would pay 80 percent of the cost of physician services. Medicare coverage, benefits, and cost-sharing requirements have evolved since that time. While most beneficiaries continue to get coverage under traditional (fee-for-service) Medicare, in 2016, 31 percent (17.6 million people) instead received their Medicare-covered benefits from Medicare Advantage plans, which are private plans such as HMOs and PPOs (source).

Since the beginning of the program, Medicare has evolved in important ways (source). For example, starting in 1973, Medicare coverage was extended to people under age 65 living with permanent disabilities, and in 2006, the program started covering an outpatient prescription drug benefit (source) More recently, the Affordable Care Act (ACA) incorporated many provisions related to Medicare, including improvements in benefits along with reductions in payments to providers and Medicare Advantage plans aimed at slowing the growth in Medicare spending (source).


Coverage of Medicare benefits is divided into four parts, as described below. These parts are structured differently, with different methods of financing and different cost-sharing requirements for beneficiaries.

Part A – Hospital Coverage

Part A is administered by the federal government and covers stays at hospitals, limited stays at skilled nursing facilities (100 days after a hospitalization), and also home health visits and hospice care. Beneficiaries pay varying amounts for services covered under Part A, including a deductible for each “spell of illness” ($1,316 per benefit period in 2017), and also coinsurance after the first 60 days of hospitalization (source).

Part A is funded primarily by a 2.9 percent tax on wages, with employers and employees each paying half. Beginning in 2013, the ACA levied an additional 0.9 percent employee tax on individuals with annual earnings above $200,000 and couples with earnings exceeding $250,000 (source).

Part B – Physician Services

Part B, known as Supplementary Medical Insurance, is administered by the federal government and covers physician services, outpatient care and home health care visits beyond what Part A covers. General federal revenues pay for 75 percent of Part B costs, while premiums paid by beneficiaries fund the remaining 25 percent.

The standard monthly premium for Part B will be $134 in 2017 (source). People with higher incomes ($85,000 for an individual and $170,000 for a couple) pay more (source). The income-related thresholds are scheduled to continue at the 2010 levels through 2019 (source). For some low-income individuals, the state Medicaid program pays their Part B premium (source).

Beneficiaries also pay varying amounts for services covered by Part B, including a $183 deductible in 2017 and 20 percent coinsurance for physician visits (source). However, services for many preventive services are covered at no cost due to a provision in the ACA (source).

Part C – Medicare Advantage

Since the 1970s, Medicare beneficiaries have had the option to receive their Medicare benefits through private health plans as an alternative to traditional Medicare (source). The Balanced Budget Act (BBA) of 1997 named Medicare’s managed care program Medicare+Choice, and the Medicare Modernization Act (MMA) of 2003 renamed it Medicare Advantage. In 2016, the average Medicare beneficiary can choose from among 19 Medicare Advantage plans, most of which are health maintenance organizations (HMOs) and preferred provider organizations (PPOs) (source). Enrollment in Medicare Advantage plans has grown rapidly over the past decade, increasing from 6.8 million people in 2006 to 17.6 million people in 2016 (source).

Medicare Advantage plans provide all Medicare-covered benefits, and many plans provide some benefits not covered by traditional Medicare, such as eyeglasses, dental care, and gym memberships. In 2016, Most Medicare Advantage plans (87 percent) also provide prescription drug coverage (source). Additionally, all Medicare Advantage plans are required to limit beneficiaries’ out-of-pocket spending for services covered under Medicare Parts A and B to no more than $6,700 – a benefit absent from traditional Medicare.

Instead of paying for each medical service used (fee-for-service), the federal government pays a monthly lump sum to a participating private insurer, which takes on the risk of providing care to a patient (source). These payments include amounts for Part D, if the Medicare Advantage plan provides prescription drug coverage. Many Medicare Advantage plans are able to provide Part A, Part B, and Part D benefits for less than the government payment, and as a result, these plans do not charge their enrollees a premium, other than the Part B premium. In 2016, four-fifths of beneficiaries (81 percent) have access to a Medicare Advantage plan with prescription drug coverage that charges no premium (source). However, many Medicare Advantage enrollees select plans with premiums, and the average enrollee in a Medicare Advantage plan with prescription drug coverage pays $37 per month (in addition to the Part B premium) in 2016 (source).

Part D – Prescription Drug Benefit

The same law that created the Medicare Advantage program, the MMA, also added an outpatient prescription drug benefit to Medicare, known as Part D. Unlike other benefits covered under Part A and Part B, the Part D drug benefit is offered only through private drug plans — either stand-alone prescription drug plans known as PDPs or Medicare Advantage drug plans (MA-PDs) (source). The benefit helps pay for enrollees’ drug costs, with catastrophic coverage for very high drug costs, and additional financial assistance through the Low-Income Subsidy (LIS) program for beneficiaries with low incomes and modest assets (source). Part D enrollment is voluntary, but, as of 2016, nearly 41 million beneficiaries were enrolled in Part D plans, including employer-only group plans (source). Six in 10 Part D enrollees are in stand-alone drugs plans, and 4 in 10 receive drug coverage through Medicare Advantage plans (source).

Funding for Part D comes from general federal government revenue (76 percent), beneficiary premiums (14 percent), and contributions from the states for people who qualify for both Medicare and Medicaid (10 percent) (source).

Enrollees pay monthly premiums and cost sharing for prescriptions, with costs varying by plan (source). According to the Centers for Medicare & Medicaid Services (CMS), the 2018 Part D base beneficiary premium is $35.02 per month, a $0.61 decrease compared to the 2017 premium (source). Since 2011, Part D enrollees with higher incomes ($85,000/individual; $170,000/couple) have paid an income-related monthly premium surcharge, ranging from $13.30 to $76.20 in 2017, in addition to the monthly premium for their specific plan.

The standard Part D drug benefit includes a deductible ($400 in 2017), and coverage of 75 percent of drug costs (with enrollees paying 25 percent coinsurance) until an enrollee’s total drug costs reach a certain amount ($3,700 in 2017), when the so-called “doughnut hole” begins. During this coverage gap, enrollees are responsible for a larger share of their total drug costs than in the initial coverage period, until their total out-of-pocket spending reaches a catastrophic threshold ($4,950 in 2017) (source). After enrollees spend this amount, Medicare and plans together pay for most of their total drug costs, and enrollees pay 5 percent (source). The Affordable Care Act (ACA) included a provision to phase out the coverage gap by 2020, when enrollees will pay 25 percent coinsurance for the full period until they reach the catastrophic threshold (source).


Although Medicare covers many health care services, traditional Medicare has relatively high deductibles and cost-sharing requirements, and places no annual limit on beneficiaries’ out-of-pocket costs for services covered under Parts A and B (source). Traditional Medicare also does not cover some health care services that many beneficiaries may need, such as dental care, eye exams, eyeglasses, and hearing aids, or long-term care services and supports.

In light of Medicare’s cost-sharing requirements, benefit gaps, and the lack of an out-of-pocket spending limit, most traditional Medicare beneficiaries have some type of supplemental coverage. Types of supplemental coverage include:

  • Employer-sponsored retiree health coverage: About 4 in 10 traditional Medicare beneficiaries had coverage from a previous employer in 2011 (source). However, this share has declined throughout the past several decades and is expected to continue to decrease in the future (source).
  • Medigap: Medigap policies, also called Medicare Supplement Insurance, are sold by private insurance companies and help beneficiaries cover the cost of coinsurance, copayments, and/or deductibles for covered services in traditional Medicare. At the end of 2014, 11.2 million Medicare beneficiaries held Medigap policies (source).
  • Medicaid: About 10 million people were enrolled in both Medicare and Medicaid in 2011 (source). For these people, referred to as dual-eligible beneficiaries, Medicaid helps pay for Medicare’s premiums and cost-sharing, and also covers some benefits that Medicare does not cover (source).

Medicare Advantage plans may also provide coverage of services not covered under traditional Medicare, and 17.6 million people are enrolled in Medicare Advantage plans in 2016. Nearly 1 in 5 traditional Medicare beneficiaries had no supplemental coverage in 2011 (source).


Payment systems in traditional Medicare have evolved over the last several decades and continue to embrace systems that tie an increasing share of Medicare payments from volume to “value” as determined by performance on quality and spending outcomes. The ACA directed CMS to test and implement new approaches for Medicare to pay doctors, hospitals, and other providers to bring about changes in how providers organize and deliver care. The ACA also created the Center for Medicare and Medicaid Innovation (CMMI, also known as the Innovation Center), housed within CMS, to design and test new payment and delivery system reform models (source). Separately, the Department of Health and Human Services (HHS) has set a goal of tying 50 percent of traditional Medicare payments to alternative payment models by the end of 2018 (source).

Accountable Care Organizations (ACOs) are one example of a delivery system reform model currently being implemented and tested within Medicare. The ACO model allows groups of providers to accept responsibility for the overall care of Medicare beneficiaries and share in financial savings if spending and care quality targets are met. Other new models include various payment approaches for primary care including patient-centered medical homes, bundled payments (models that combine Medicare payments to multiple providers across a single episode rather than pay for each service separately), and initiatives aimed to reduce hospital readmissions. These models are being evaluated to determine their effect on Medicare spending and the quality of care provided to beneficiaries (source).

Medicare payment to physicians. For many years leading up to 2015, Congress regularly passed stop-gap legislation to prevent steep payment cuts for physicians in Medicare stemming from the Sustainable Growth Rate (SGR) payment formula (source). In April 2015, Congress finally repealed the SGR with passage of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), which established a new payment system for physician services that takes into account performance on quality and spending measures or participation in alternative payment models that incorporate these measures.

Under MACRA, health care professionals who see Medicare patients are expected to participate in one of two separate Quality Payment Programs: Advanced Alternative Payment Models (Advanced APMs) or the Merit-based Incentive Payment System (MIPS) (source).

An APM is a payment system that provides health professionals with incentives to provide high-quality, cost-efficient care. Advanced APMs differ from other APMs by allowing providers to earn more by taking on some of the risk related to patient outcomes. MIPS, on the other hand, allows providers to remain in traditional, fee-for-service Medicare. Based on practice-specific quality data, providers in the MIPS program will see their Medicare reimbursements adjusted up or down by up to 4 percent in 2019 and up to 9 percent after 2021 (source). New payments under this system will begin in 2019.


Despite moderate Medicare spending growth in recent years, the aging of the U.S. population and overall health care spending growth will place financial pressure on the Medicare program in the coming years. The first of the baby boom generation became eligible for Medicare in 2011, when approximately 40 million Americans were over the age of 65. By 2030, that number will have grown by more than 30 million, and by more than 40 million by 2040 (source). Although a significant portion of Medicare is financed through payroll taxes (37 percent in 2015), funding from the workforce is not expected to keep pace with the aging population (source).

As one of the nation’s largest entitlement programs, Medicare is often a focus of policymakers’ attention, with proposals to reform the program and reduce spending growth being raised alongside proposals to improve Medicare benefits and coverage. Over the past several years, policy makers have discussed a number of proposals that would affect future Medicare benefits, spending, and financing. Such proposals have included:

Although Medicare was not a central issue in the 2016 presidential election, President Donald Trump has stated that his administration will act to “modernize” Medicare (source).

House Speaker Paul Ryan, R-Wis., has introduced proposals that would significantly alter the Medicare program, including raising the age of Medicare eligibility and transforming Medicare to a “premium support” system (source). With a Republican majority in both houses of Congress and a new Republican president, these proposals are expected to get greater attention in 2017.

With the Republican Health Care Freedom Act (HCFA) failing passage in July 2017 (source).efforts to repeal the Affordable Care Act have stalled. However, any future overhaul of the ACA would have major implications for the Medicare program if the bill repeal the Medicare provisions of the law. Among other changes, a full repeal of the law would affect how Medicare pays providers and Medicare Advantage plans, eliminate the Center for Medicare and Medicaid Innovation and the Independent Payment Advisory Board, and reinstate the Part D “doughnut hole” and beneficiary cost sharing for preventive benefits.


Joseph Antos, Wilson H. Taylor scholar in health care and retirement policy, American Enterprise Institute, 202/862-5938,

Robert Berenson, institute fellow, Urban Institute, 202/261-5709,

Lisa Bielamowicz, chief medical officer, The Advisory Board, 202-266-6340,

Shawn Bishop, vice president, controlling health care costs and advancing Medicare, The Commonwealth Fund, 202/292-6740,

Cristina Boccuti, associate director, Program on Medicare Policy, Kaiser Family Foundation, 202/347-5270

Tom Bradley, chief, Health Systems and Medicare Cost Estimates Unit, Congressional Budget Office, 202/226-9010,

Randall Brown, director, health research, Mathematica Policy Research, 609/275-2393,

Craig Burns, vice president, research, America’s Health Insurance Plans, 202/778-8503,

Stuart Butler, senior fellow, The Brookings Institution, 202/238-3183,

James Capretta, resident fellow and Milton Friedman chair, American Enterprise Insititute,

Michael Cannon, director of health policy studies, Cato Institute, 202/789-5200,

Sean Cavanaugh, chief administrative officer, Aledade, Inc., 347/886-4080,

Juliette Cubanski, associate director, Program on Medicare Policy, Kaiser Family Foundation, 650/854-9400

Karen Davis, director, Roger C. Lipitz Center for Intergrated Care, Johns Hopkins Bloomberg School of Public Health, 410/502-6082,

Judy Feder, fellow, Urban Institute Health Policy Center, 202/261-5709,

Marsha Gold, independent consultant, senior fellow emeritus, Mathematica Policy Research,

Kate Goodrich, Centers for Medicare & Medicaid Services, 410-786-6841,

Douglas Holtz-Eakin, President, American Action Forum, 202-559-6420,

Gretchen Jacobson, associate director, Program on Medicare Policy, Kaiser Family Foundation, 202/347-5270

Mark McClellan, director, Robert J. Margolis Center for Health Policy, Duke University, 202-621-2817,

Mark Miller, vice president of health care, Laura and John Arnold Foundation,

Robert Moffitt, senior fellow, Heritage Foundation, 202/608-6210,

Marilyn Moon, institute fellow and director, Center on Aging, American Institutes for Research, 301/592-8600,

Tricia Neuman, senior vice president, Kaiser Family Foundation, 202/347-5270,

Leigh Purvis, director, health services research, AARP, 202/360-1681,

John Rother, president and CEO, National Coalition on Health Care, 202/638-7151,

Tom Scully, general partner, Welsh Carson Anderson and Stowe, 212/893-9594,

Chuck Shih, senior officer, The Pew Charitable Trusts, 202/540-6300,

Judith Stein, executive director, attorney, Center for Medicare Advocacy, 860/456-7790, 

Paul Van de Water, senior fellow, Center on Budget and Policy Priorities, 202/408-1080,

Bruce Vladeck, former administrator, Health Care Financing Administration, 917/583-0835,

Timothy A. Waidman, senior fellow, Urban Institute Health Policy Center, 202/261-5709,

Gail Wilensky, senior fellow, Project HOPE, 301/347-3902,

Stephen Zuckerman, codirector, Urban Institute Health Policy Center, 202/261-5709,

This guide was made possible with the support of the National Institute for Health Care Management (NIHCM) Foundation. This edition of the Sourcebook also had initial support from the Robert Wood Johnson Foundation.