Medicare Structure

The Original Medicare: Parts A and B

Part A covers hospital stays (including stays in a skilled nursing facility) if certain criteria are met. Part B coverage includes physician and nursing services, x-rays, laboratory and diagnostic tests, influenza and pneumonia vaccinations, blood transfusions, renal dialysis, outpatient hospital procedures, limited ambulance transportation, Immunosuppressive drugs for organ transplant recipients, chemotherapy, hormonal treatments such as lupron, and other outpatient medical treatments administered in a doctor's office. Medication administration is covered under Part B only if it is administered by the physician during an office visit. Part B is optional and may be deferred if the beneficiary or their spouse is still actively working. There is a lifetime penalty (10% per year) imposed for not taking Part B if not actively working.

Part C: Medicare Advantage plans

With the passage of the Balanced Budget Act of 1997, Medicare beneficiaries were given the option to receive their Medicare benefits through private health insurance plans, instead of through the original Medicare plan (Parts A and B). These programs were known as "Medicare+Choice" or "Part C" plans.

Medicare has a standard benefit package that covers medically necessary care members can receive from nearly any hospital or doctor in the country. For people who choose to enroll in a Medicare private health plan, Medicare pays the private health plan a set amount every month for each member. Members may have to pay a monthly premium in addition to the Medicare Part B premium and generally pay a fixed amount (a copayment of $20, for example) every time they see a doctor.

The private plans are required to offer a benefit package that is at least as good as Medicare’s, but they do not have to cover every benefit in the same way. Plans that pay less than Medicare for some benefits, like skilled nursing facility care, can balance their benefits package by offering lower copayments for doctor visits. Private plans get a hefty subsidy from the government for each beneficiary they enroll, and use some of the excess payments they receive to offer supplemental benefits.

Part D: Prescription Drug Plans

Medicare Part D went into effect on January 1, 2006. Anyone with Part A or B is eligible for Part D. In order to receive this benefit, a person with Medicare must enroll in a stand-alone Prescription Drug Plan (PDP) or Medicare Advantage plan with prescription drug coverage (MA-PD). These plans are approved and regulated by the Medicare program, but are actually designed and administered by private health insurance companies. Unlike Original Medicare (Part A and B), Part D coverage is not standardized. Plans choose which drugs (or even classes of drugs) they wish to cover, at what level (or tier) they wish to cover it, and are free to choose not to cover some drugs at all.

Out-of-pocket costs

Neither Part A nor Part B pays for all of a covered person's medical costs. The program contains premiums, deductibles and co-pays, which the covered individual must pay out-of-pocket. Some people may qualify to have other governmental programs (such as Medicaid) pay premiums and some or all of the costs associated with Medicare.
Part C and D plans may or may not charge premiums, at the programs' discretion. Part C plans may also choose to rebate a portion of the Part B premium to the member.

Payment for Services

Medicare contracts with regional insurance companies who process over one billion fee-for-service claims per year. In 2003, Medicare accounted for almost 13% of the entire federal budget. Based on the CMS projections, 33 cents of every dollar spent on health care in the U.S. is paid by Medicare and Medicaid (including State funding). Looked at from three different perspectives, 61 cents of every dollar spent on nursing homes, 47 cents of every dollar received by U.S. hospitals, and 27 cents of every dollar spent on physician services is funded by Medicare or Medicaid.

For institutional care such as hospital and nursing home care, Medicare uses prospective payment systems. A prospective payment system is one in which the health care institution receives a set amount of money for each episode of care provided to a patient, regardless of the actual amount of care used. The actual allotment of funds is based on a list of diagnosis-related groups (DRG). The actual amount depends on the kind of diagnosis made at the hospital. There are some issues surrounding Medicare's use of DRGs because if the patient uses less care, the hospital gets to keep the remainder. This, in theory, should balance the costs for the hospital. However, if the patient uses more care, then the hospital has to cover its own losses. This results in the issue of "upcoding," when a physician makes a more severe diagnosis to hedge against accidental costs.

Payment for physician services under Medicare has evolved since the program was created in 1965. Initially, Medicare compensated physicians based on the physician's charges, and allowed physicians to bill Medicare beneficiaries the amount in excess of Medicare's reimbursement. In 1975, annual increases in physician fees were limited by the Medicare Economic Index (MEI). The MEI was designed to measure changes in costs of physician's time and operating expenses, adjusted for changes in physician productivity. From 1984 to 1991, the yearly change in fees was determined by legislation. This was done because physician fees were rising faster than projected.