Skip to main content

Advanced Search

Advanced Search

Current Filters

Filter your query

Publication Types



Other Publication


Medicare Budget Savings: Are We on the Right Course for the Long Term?

Medicare works. It has brought millions of elderly Americans access to quality health care. Before the program’s enactment in 1966, half of elderly Americans were without health insurance—and often just one serious illness away from financial ruin.

Medicare’s fiscal future is now the subject of great controversy. With the program’s Part A Trust Fund facing exhaustion in 2001, the need for thoughtful analysis is evident.

On February 13th, the House Ways and Means Subcommittee on Health invited Commonwealth Fund President Karen Davis, a nationally recognized economist and expert on Medicare policy, to testify on these issues.

Since 75 percent of all beneficiaries have incomes below $25,000 and spend on average $2,605 in out-of-pocket costs for their medical care, Davis warns that few savings can be squeezed from the elderly.

She does suggest, however, that expanding Medicare’s prospective payment system to areas not yet covered—home health, skilled nursing services, sub-acute hospital care, and outpatient care—would better control costs and add a measure of accountability currently lacking, particularly in home health costs.

Managed care plans are also looked to as a potential source of savings. They now provide care to 10 percent of Medicare beneficiaries, a number expected to double by the year 2000. The program loses money on each enrollee, however, because payment does not adjust for differing health status of beneficiaries. Davis demonstrates that budget savings will not be realized in this area unless the HMO payment rate is lowered or adjusted for the health of those who enroll.

Davis also cautions against converting Medicare from a defined benefit program to a defined contribution, which would put beneficiaries at financial risk for costs above Medicare payments and undermine the program’s original intent to assure access to a defined set of benefits.

The proposal to move a portion of Part A's home health care costs into Part B makes both fiscal and administrative sense, adds Davis.

She concludes reform must first and foremost continue to provide financial security, quality, and access to elderly and disabled Americans. That is Medicare’s promise and strength.

Facts and Figures
  • Medicare’s hospital deductible is $736, in 1966 it was the equivalent of $190 in today’s dollars.
  • The Part B premium is $510, in 1966 it was $171 in today’s dollars.
  • Medicare currently loses 6 percent per managed care beneficiary because its HMO payment rate is too high.
  • The sickest 10 percent of Medicare beneficiaries account for 75 percent of outlays, and each costs the system $37,000.

Publication Details



Medicare Budget Savings: Are We on the Right Course for the Long Term?, Testimony before the Commitee on Ways and Means, Karen Davis, The Commonwealth Fund, February 13, 1997