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A federally funded system of health and hospital insurance for persons aged 65 and older and for DISABLED PERSONS.

The Medicare program provides basic HEALTH CARE benefits to recipients of SOCIAL SECURITY and is funded through the Social Security Trust Fund. President HARRY S. TRUMAN first proposed a medical care program for the aged during the late 1940s, but Medicare was not enacted until 1965, as one of President Lyndon B. Johnson's GREAT SOCIETY programs (42 U.S.C.A. §§ 1395 et seq.).

Medicare went into effect in 1966 and was first administered by the SOCIAL SECURITY ADMINISTRATION. In 1977, the Medicare program was transferred to the newly created Health Care Financing Administration (HCFA). The HCFA is concerned with the development of policies, programs, procedures, and guidance regarding Medicare recipients, the providers of services—such as hospitals, nursing homes, and physicians—and other organizations that are closely related to the Medicare program.

Unlike other federal programs, Medicare is not supported by a large, federal organizational hierarchy. The federal government enters into contracts with private insurance companies for the processing of Medicare claims. Health care providers must meet state and local licensing laws and standards set by the HCFA in order to qualify for Medicare payments for their services.

Eligibility for Medicare does not depend on income. Almost everyone aged 65 and older is entitled to Medicare coverage. Disabled persons under age 65 may receive Medicare benefits after they have been collecting Social Security or railroad disability payments for at least two years. Workers do not have to retire at age 65 in order to be protected by Medicare. People who have not worked long enough under Social Security to receive retirement benefits may enroll in the plan by paying a monthly premium. For those individuals who are not covered under Social Security and who are too poor to pay the monthly premium, MEDICAID, the state and federal program for low-income persons, is available.

Medicare is divided into a hospital insurance program and a supplementary medical insurance program. The Medicare hospital insurance plan is funded through Social Security payroll taxes. It covers reasonable and medically necessary treatment in a hospital or skilled nursing home, meals, regular nursing-care services, and the cost of necessary special care. Medicare also pays for home health services and hospice care for terminally ill patients.

The hospital insurance program extends coverage based on "benefit periods." An episode of illness is termed a benefit period and starts when the patient enters the hospital or nursing home facility and ends 60 days after the patient has been discharged from the facility. A new benefit period starts with the next hospital stay, and there is no limit to the number of benefit periods that a person can have. In any benefit period, Medicare will pay the cost of hospitalization for up to 90 days. The patient must pay a one-time deductible fee for the first 60 days in a benefit period and an additional daily fee called a co-payment for hospital care for the following 30 days. Apart from these payments, Medicare covers the full cost of hospital care.

Medicare also pays for the first 20 days of care in a skilled nursing home and for expenses exceeding a daily minimum amount for the next 80 days when certain conditions show that such care is necessary. Payment also may be made for up to 100 home-health visits provided by a home-health agency for up to 12 months after the patient's discharge from a hospital or nursing home, provided that certain conditions apply.

Medicare's supplementary medical insurance program is financed by monthly insurance premiums paid by people who sign up for coverage, combined with money contributed by the federal government. The government contributes the major portion of the cost of the program, which is funded out of general tax revenues. Persons who enroll pay small, annual, deductible fees for any medical costs incurred above that amount during the year, and also a regular monthly premium. Once the deductible has been paid, Medicare pays 80 percent for any bills incurred for physicians' and surgeons' services, diagnostic and laboratory tests, and other services. Doctors are not required to accept Medicare patients, but almost all do. Payments may not be made for routine physical checkups, drugs and medicines, eyeglasses, hearing aids, dentures, or orthopedic shoes.

Medicare bases its 80 percent payment for medical expenses on what is considered to be a reasonable charge for each kind of service. The reasonable charge is an amount that is determined by the insurance organizations that process Medicare claims for the federal government, based on the customary charge for that service in that part of the country.

Medicare payments may be sent directly to the doctor or provider of the service or to the patient. In 1994, 93 percent of all charges to Medicare patients for covered physician services were billed directly to the insurance systems rather than to the patients themselves. Thus, few patients need to be reimbursed for payments that they had made directly to the physician or another provider of services. Under either method, the patient receives a notice after the doctor or provider files a medical insurance claim. The notice details the medical service and explains the expenses that are covered by Medicare and are approved; how much of the charge is credited toward the annual deductible amount; and how much Medicare has paid. A person who disagrees with the decision on the claim may ask the insurance company to review the decision. A formal hearing may be held on claims that, if paid, would total at least $100. Cases that involve $1,000 or more can eventually be appealed to a federal court.

The financial future of Medicare has been a hotly debated issue since the 1980s. In 1995, Medicare covered 37 million people. The number of people eligible for Medicare will continue to rise as the post–World War II baby boom generation begins to retire.

Other factors have had an impact on the financial future of Medicare. The quality of medical care has increased life expectancies.

Nearly three years have been added to life expectancies since Medicare was created. Modern medicine is likely to continue this trend, which means that Medicare will be taking care of people for longer. Another factor is the increased cost of medical care itself, which takes more resources out of the system.

Medicare's hospital insurance is financed by a payroll tax of 2.9 percent, divided equally between employers and workers. The money is placed in a trust fund and is invested in U.S. Treasury SECURITIES. A surplus accumulated during the 1980s and early 1990s, but the program's outlays are projected to rise more rapidly than the future payroll-tax revenues.

Changing the financing of Medicare has proved difficult. In 1988, Congress passed legislation to expand Medicare to cover the health care costs associated with catastrophic illnesses. The new coverage was to be financed by a surtax on the incomes of taxpayers over the age of 65. Elderly citizens and organizations such as the AMERICAN ASSOCIATION OF RETIRED PERSONS vigorously protested the tax. In the face of this opposition, Congress repealed the law in 1989.

In Fischer v. United States, 529 U.S. 667 S. Ct. 1780, 146 L. Ed. 2d 707 (2000), the U.S. Supreme Court addressed the issue of criminal aspects with respect to payment of Medicare benefits to an institution. Fischer, while president and part owner of Quality Medical Consultants, Inc. (QMC), negotiated a $1.2 million loan to QMC from West Volusia Hospital Authority (WVHA), a municipal agency that is responsible for operating two Florida hospitals, both of which participate in the federal Medicare program. In 1993 WHVA received between $10 and $15 million in Medicare funds. After a 1994 audit of WHVA raised questions about the QMC loan, the petitioner was indicted for violations of the federal BRIBERY statute, including defrauding an organization that receives benefits under a federal assistance program. A jury convicted him on all counts, and the district court sentenced him to prison, imposed a term of supervised release, and ordered the payment of restitution. On appeal, the petitioner argued that the government had failed to prove WHVA, as the organization affected by his wrongdoing. The U.S. Court of Appeals for the Eleventh Circuit rejected his argument and affirmed his conviction.

In 2003, President George W. Bush and Congress worked together to pass a new law to bring people with Medicare more choices in health care coverage and better health care benefits. The new Medicare Prescription Drug Improvement and Modernization Act of 2003 was passed. This new law preserved and strengthened the Medicare program by adding important new prescription drug and preventive benefits and provides extra help to people with low incomes. Seniors are still able to choose doctors, hospitals, and pharmacies.

If seniors are happy with the Medicare coverage they have, they can keep it exactly the same. Or, if they choose, may enroll in new options. One of the major changes is the Drug Discount Cards which began in 2004. Medicare-Approved Drug Discount Cards will help seniors save on prescription drugs. Medicare will contract with private companies to offer new drug discount cards until a Medicare prescription drug benefit starts in 2006. The cards will save seniors 10–25% on prescription drugs. The enrollment period for the cards is May 2004 through December 31, 2005.

Other highlights of the new law include a Medicare Advantage Plan, new and improved preventive benefits for 2005, prescription drug plans for 2006, and Health Savings Accounts for all Americans, which will work just like an Individual Retirement Account (IRA), whereby Americans will be able to set aside money each year, tax free, in Health Savings Accounts.

For the latest information on Medicare visit the Medicare web site at <www.medicare.gov>


Channick, Susan Adler. 2003. "The Ongoing Debate Over Medicare: Understanding the Philosophical and Policy Divides." Journal of Health Law 36 (winter): 59-106.

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