Medicare: Complex Social Insurance Program
With Insufficient Funding
e Social Insurance Program — Created in 1965 to provide health insurance to the elderly (65+).
e Four Parts — A) Hospital Insurance (to cover inpatient expenses, introduced in 1965); B) Medical Insurance (optional outpatient expenses, 1965); C) Medicare Advantage Plans (private alternative to A&B, 1997) and D) Prescription Drug Coverage (enacted 2003).
e Funding Mechanism Varies
— Part A has dedicated funding via payroll taxes (2.9% of total payroll), though has been running at an annual deficit since 2008 as related payments exceed taxes; Trust Fund is expected to be depleted by 2017E, per Social Security Administration.
— Part B &D has no dedicated funding (75% of funding came from government allocation / 25% came from enrollees’ premium payments).
— Part C funding came Part A & Part B.
e Ever-Growing Expenses — $452 billion expenses in F2010, up 2x from 10 years ago
— Rising Healthcare Costs — Owing to aging population + unhealthy life styles + technology advances.
— Moral Hazard — As a “free good,” Medicare reduced demand for private long-term insurance’ while loopholes in the regulations + need-based benefit policies created incentives to abuse the system.
Note: 1) for more information, please see Jeffrey Brown and Amy Finkelstein, “The Interaction of Public and Private Insurance: Medicaid and the Long-Term Ke Care Insurance Market,” 2006. Source: National Center for Health Statistics, Kaiser Family Foundation, World Bank, Social Security Administration. CB
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Medicare: Underfunded by $1.9 Trillion Over 45 Years
USA Inc. Real Annual Medicare Revenue & Expenses, 1966 — 2009
mi Medicare Part B / D Expenditure
-$300 -- mam Medicare PartAExpenditure = ~~~ ~~~...)
Medicare Revenue / Expenses ($B) 2 o Oo
‘am Medicare Part A Tax Receipts
—Total Medicare Net Income
1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Note: Medicare Part A (hospital insurance) has dedicated trust fund while Part B (medical insurance) and Part D (prescription KP drug benefits) do not have dedicated funding. Data are inflation adjusted. Source: Dept. of Health & Human Services.. (@E) www.kpcb.com USA Inc. | Income Statement Drilldown 102
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