I.

Introduction

Medicare and Medicaid, programs of medical care for the aged and for the needy, respectively, in the United States. The Medicare and Medicaid programs are under the direction of the United States Department of Health and Human Services.

II.

Medicare

A.

How Medicare Works

Medicare is the popular name for the federal health insurance program for persons 65 years of age and over. The program, which the U.S. Congress adopted in 1965 and put into effect in 1966, was first administered by the Social Security Administration. In 1977 the Medicare program was transferred to the newly created Health Care Financing Administration (HCFA), which was later renamed the Centers for Medicare & Medicaid Services. Benefits are divided into two parts: (1) a basic hospital-insurance plan known as Medicare Part A, covering hospital care, extended care, home health services, and hospice care for terminally ill patients; and (2) a voluntary medical-insurance program known as Medicare Part B, covering physicians' fees, outpatient services, prescription drugs, and other medical services. Medicare costs are met by Social Security contributions, monthly premiums from participants, and general revenues.

Beginning in July 1973 Medicare was extended to persons under the age of 65 with certain disabling conditions. In 1988 Congress passed legislation to expand the program to cover health-care costs of catastrophic illnesses and prescription drugs. These new costs were to be financed by a surtax on the incomes of taxpayers over the age of 65. Many Medicare recipients, however, protested this legislation, citing the increased costs imposed by the surtax, and Congress repealed the bill the following year.

B.

Major Revision to Medicare

About 40.6 million people were enrolled in Medicare in 2003 when Medicare underwent the most extensive revision since the program was enacted in 1965. New legislation reestablished prescription drug coverage and for the first time opened Medicare to competition from private health insurers. In addition, the bill increased federal payments to doctors and hospitals, especially in rural areas, and gave subsidies to employers who provide health benefits for retirees. For the first time Medicare discarded the principle of equal fees for services by requiring wealthier recipients to pay more while some low-income recipients pay no premiums or deductibles.

Under the new law, Medicare recipients can opt to receive prescription drug coverage, which is phased in during two stages. In the first stage, from the spring of 2004 to the beginning of 2006, Medicare recipients can purchase a Medicare-approved discount card for a fee of $30 and receive discounts ranging from 10 to 25 percent off prescription drugs. Seniors with incomes less than $12,124 per year would receive a subsidy of $600 in 2004 and 2005 to pay for prescription medicines. In the second stage, beginning in 2006, the full drug benefit becomes effective. To receive it, Medicare recipients must choose between two private health plans: either a private health plan in their area that offers prescription drug coverage through Medicare, or a private insurance plan that also covers hospital costs and doctors’ visits, such as a preferred provider organization (PPO) or health maintenance organization (HMO). See also Managed Health Care.

Under the full benefit in 2006, recipients pay an average monthly premium of $35 and an annual deductible of $250. Medicare then pays 75 percent of prescription drug costs up to $2,250. Thereafter, a gap in the coverage, known as a doughnut, requires each beneficiary to pay up to $3,600 in out-of-pocket expenses until coverage again kicks in. Medicare then pays 95 percent of prescription drug costs for the remainder of the year. For individual seniors with an income less than $12,124 a year or married couples with income less than $16,363, both with liquid assets of less than $6,000, the premium and the deductible would be waived and there would be no gap in coverage.

C.

Controversy Over Revision

The new legislation was controversial, however, and narrowly passed both the House of Representatives and the U.S. Senate before being signed into law by President George W. Bush. The Senate passed the bill 54-44, largely along partisan lines with 42 Republicans, 11 Democrats, and 1 independent in favor, while 35 Democrats and 9 Republicans opposed the bill. The House approved the measure by a vote of 220 to 215. Some Democratic congressional leaders vowed to overhaul the bill in subsequent legislation.

The new provisions were controversial for a number of reasons. Critics argued that the law opened the way for the privatization of Medicare. They objected in particular to a provision that prohibits Medicare from negotiating with pharmaceutical companies to lower drug prices, arguing that this loss of purchasing power and the increased demand for prescription drugs resulting from the new coverage will likely drive up drug prices. Home health-care services were also expected to be negatively affected because the bill cut Medicare reimbursement for these services by an estimated $6.5 billion.

Supporters of the bill, including the American Association of Retired Persons (AARP), the largest organization of older Americans, said the legislation provided badly needed drug coverage to millions of Americans, particularly an estimated 14 million low-income seniors. Supporters also cited $70 billion in tax-free subsidies from 2006 to 2016 for employers who continue providing drug benefits to retirees. Tax benefits would also accrue, supporters said, to people aged 64 and younger with high-deductible health insurance policies—$1,000 a year for individuals and $2,000 a year for couples—who would be able to establish tax-free Health Savings Accounts to help them pay for medical expenses in their retirement years. Supporters of the bill countered the claim that privatizing some Medicare functions would harm the program, arguing instead that it would inject competition and market forces to make health care for the elderly more efficient.

III.

Medicaid

Medicaid, a federal-state program, is usually operated by state welfare or health departments, within the guidelines issued by the Centers for Medicare & Medicaid Services. Medicaid furnishes at least five basic services to needy persons: inpatient hospital care, outpatient hospital care, physicians' services, skilled nursing-home services for adults, and laboratory and X-ray services. The people who are eligible include families and certain children who qualify for public assistance and may include aged, blind, and disabled adults who are eligible for the Supplemental Security Income program of the Social Security Administration. States may also include persons and families termed “medically needy” who meet eligibility requirements except those for financial assistance. Each state decides who is eligible for Medicaid benefits and what services shall be included. Some of the benefits frequently provided are dental care; ambulance services; and the cost of prescription drugs, eyeglasses, and hearing aids. In determining eligibility for the program, a state may not hold adult children responsible for medical expenses of their parents.

All the states, the District of Columbia, Guam, Puerto Rico, and the Virgin Islands operate Medicaid plans. In 2002 some 39.9 million people received Medicaid health-care support. Under the 2003 legislation that revised Medicare, Medicaid recipients were brought under Medicare’s prescription drug program. As low-income recipients, Medicaid patients pay $1 for each generic drug prescription and $3 for each brand-name prescription.