Overview of Medicare Spending: Petersen G. Petersen Foundation.

1. Courtesy of the Non-Profit Petersen G. Petersen Foundation

2.  President Lyndon Johnson
signed Medicare into law 47
years ago.
 Addressing the program's rising
costs is a subject of great
controversy. Some argue that
Medicare is "broke," while others
advocate for making few, if any,
changes to a program on which
so many people rely.
 This budget explainer describes
the program, how it is financed,
what it pays for, and what role it
plays in financing American
health care.

3.  Medicare is the third largest program in
the federal budget and cost nearly $560
billion in 2011 — or 16 percent of total
federal spending.
 Medicare is a major driver of long-term
spending; the retirement of the baby
boom, combined with fast growth of
health care costs, is projected to push
Medicare spending from 3.7 percent of
GDP in 2011 to 6.4 percent of GDP in
2035.
 General federal revenues subsidize 44
percent of the program's costs; the rest is
covered by dedicated payroll taxes and
premiums paid by beneficiaries.
 Medicare has a large impact on the
overall health care market: it finances
nearly one-fourth of all personal health
care expenditures.

4.  In 2011, the Medicare program cost $560
billion, or 16 percent of federal
government spending. After Social
Security and defense, Medicare is the
third largest program in the federal
budget.
 In coming years, the program faces
significant financial pressures. If current
policies continue, Medicare spending
will rise from 3.7 percent of GDP in 2011
to 6.4 percent of GDP in 2035.
 The growth of these costs will put
growing pressure on the system's
finances — and the rest of the budget.
Indeed, the growth of federal spending
on major health care programs
(Medicare, Medicaid, the Children’s
Health Insurance Program, and subsidies
for the health insurance exchanges) is
projected to account for four-fifths of the
rise in federal non-interest spending over
the next 25 years.

5.  One of the biggest misconceptions about
Medicare is that it is self-financed by current
beneficiaries through premiums and by future
beneficiaries through payroll taxes. In truth,
the program is heavily subsidized with general
revenues. Premiums cover only a small fraction
of Medicare's overall costs, while payroll taxes
cover less than half of its costs.
 In 1970, 60 percent of its costs were
financed by payroll taxes, paid by both
workers and employers with each paying
0.6 percent of wages. Beneficiaries also paid
premiums for physician services under Part
B, but those premiums covered only about
40 percent of Part B's costs or 13 percent of
Medicare's overall costs. In total, payroll
taxes and premiums covered about 75
percent of Medicare's costs in 1970. General
revenues funded the remaining 25 percent.

6.  By 2010, however, the share funded
through payroll taxes had dropped to 40
percent, as wages and payroll taxes grew
more slowly than Medicare's costs.
 At the same time, the share funded by
beneficiaries remained about the same as
it did in 1970, though Medicare added a
new prescription drug benefit through
Part D in 2006 that required
beneficiaries who enrolled in the new
program to pay premiums.
 However, those premiums covered less
than 10 percent of Part D's costs.
 In total, payroll taxes and premiums
covered only about 55 percent of
Medicare's costs in 2011. General
revenues subsidized the remainder, with
the exception of a small amount of
revenue coming from taxes on high-
income beneficiaries.

8.  Hospitalizations are associated with very
high cost health episodes — and that fact
is reflected in Medicare's program
expenditures. Hospital expenses are the
largest single component of program
spending, accounting for about 43
percent of the total.
 The share of spending devoted to
hospital care has declined, though, from
about 70 percent at the program's
inception. In part, this is because the
Medicare program was expanded to
provide additional benefits.
 While spending for physician services
has hovered around 20 to 25 percent
throughout the program's history, the
share devoted to other benefits has
grown. In particular, the introduction of
the prescription drug benefit
dramatically shifted the composition of
Medicare spending.

9.  Medicare is a major player in our nation's
health system. The program pays for
nearly 45 percent of all home health
spending in the country, nearly 30
percent of all hospital bills, and more
than 20 percent of all nursing care
expenses. For all health care spending, it
finances about 21 percent of the total.
 Medicare's share of payments for other
services has also increased over the past
twenty years.
 Although Medicare's share of the costs
for physician services and hospital care
has risen only modestly, its share of other
health care services has increased
dramatically.
 For example, in 1990, Medicare paid for
less than 0.5 percent of total prescription
drug costs; in 2010 it financed more than
20 percent of the total. Major increases
can also be seen in Medicare's share of
home health, nursing, and equipment
and device spending.