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An Overview of Medicare Financing and Payments

by Patrick C. Alguire, MD, FACP
Director, Education and Career Development

Medicare Part A Financing: Financing for the Hospital Insurance Program is primarily through a mandatory payroll deduction, the "FICA tax." Currently, the FICA tax is 1.45% of earnings paid by each employee and their employer, or 2.90% for the self-employed. The money is paid into a trust fund that is a special account in the U.S. Treasury. The trust fund also receives income from a portion of income taxes levied on Social Security benefits paid to high income beneficiaries, premiums from those who are not otherwise entitled Medicare benefits and choose to enroll voluntarily, and interest earnings. The taxes paid each year are used primarily to pay benefits for current beneficiaries. The hospital insurance funds can be used only to pay for the Medicare Part A, and Part B funds cannot be transferred for Part A use.

Medicare Part B Financing: The Supplemental Medical Insurance Program is financed through premiums which are usually deducted from the Social Security benefit checks of those enrolled in Part B. In 1998, this amount was $43.80 per month. Other sources of revenue include contributions from general revenue of the U.S. Treasury. Beneficiary premiums are currently set at a level that covers 25% of the average expenditures for aged beneficiaries.

Beneficiary Payment Liabilities: Beneficiaries are responsible for charges not covered by the Medicare Program and for the various cost-sharing aspects of Parts A and B. These liabilities may be paid "out of pocket" by the beneficiary, or by a third party insurance company as part of a "medigap" coverage plan. Medigap refers to private insurance policies that will pay most of the health care charges not covered by Parts A or B. These policies must meet Federally imposed standards, and are offered by Blue Cross and Blue Shield and other commercial health insurance companies.

For Part A (hospital insurance), the beneficiary's payment share is a one time deductible of $764 at the beginning of each benefit period. See Overview of the Medicare Program . This covers the beneficiary's first 60 days of each period of hospital care. If continued care is needed beyond 60 days, additional co-insurance payments of $191 per day are required through hospital day 90. Medicare payments stop after 90 in-patient days, unless the beneficiary elects to use "lifetime reserve" for which a co-payment of $382 per day is required.

For skilled nursing care, the first 20 days are fully covered, but days 21 through 100 require a co-payment of $95.50 per day. Medicare payments stop after 100 days. Home health care has no deductible or co-insurance payments.

For Part B, the beneficiary pays one annual deductible of $100, the monthly premiums, and co-insurance payments of 20% of the medically allowed charges.

Vendor Payments: Since 1983, Medicare payments are made for hospital care under a plan known as the Prospective Payment System (PPS). Under PPS, the hospital is paid a pre-determined amount based upon the patient's diagnosis within a "diagnosis related group" or DRG. This payment pays for whatever medical care is required; in some cases it is less than the hospital's actual costs, in some cases it is more. Certain payment adjustments exist for extraordinary costly cases.

Beginning in 1992, outpatient physicians were paid an "allowed charge" defined as the lesser of (1) submitted charges or (2) a fee schedule based on a relative value scale (RVS). If a physician agrees to accept the approved payment rate, it becomes payment in full for services rendered to Medicare beneficiaries. No added payments (beyond the initial deductible and co-insurance) may be sought for that service from the beneficiary or Medicare. If the provider does not accept the fee schedule, the beneficiary will be charged for the difference between the charge and the Medicare payment. However, limits now exist on the excess that doctors can charge. Physicians are "participating" physicians if they agree before the beginning of the year to accept Medicare's fee schedule for all Medicare services they furnish for the year. Since Medicare beneficiaries can select their own doctors, they have the option to choose those doctors who participate with Medicare.

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