5 - Medicare

Summary

After Social Security, no trust fund program enjoys greater political support, or induces more citizens to rely more heavily on governmental promises, than Medicare, the federal health insurance program for the aged and the disabled. Created in 1965, Medicare has grown into the second largest domestic program in the US budget. What makes the Medicare case especially intriguing is that the program is actually financed through two distinct trust fund structures. Medicare Part A, which covers hospital stays, is financed by the Hospital Insurance (HI) Trust Fund, which in turn obtains its revenue primarily from a 2.9 percent payroll tax. Medicare Part B, which covers doctor visits and outpatient care, is financed by the Supplementary Medical Insurance (SMI) Trust Fund, which is currently funded three-quarters from general revenues and one-quarter from beneficiary premiums.

What accounts for this dual financing structure? Many health experts argue that the historical division of Medicare financing is no more than an “artifact” of legislative bargaining over the Medicare bill in 1965. “The notion of having separate funding was a historical accident,” says former Health Care Financing Administration head Gail Wilensky. But while this design clearly did emerge during eleventh-hour legislative negotiations, it was not random or adventitious. Powerful House Ways and Means Committee chairman Wilbur Mills (D-Arkansas) in fact deliberately created separate Medicare trust funds in a conscious attempt to protect the Treasury and, especially, the government's capacity to make good on its existing Social Security promises.