RELATIONSHIP WITH MEDICARE | Plan Provisions and Taxation

Because most employees and their dependents are eligible for Medicare on reaching age 65 (and possibly under other circumstances), a provision that eliminates any possible duplication of coverage is necessary. The simplest solution is to exclude any person eligible for Medicare from eligibility under the group contract. However, in most cases this approach conflicts with the Age Discrimination in Employment Act, which prohibits discrimination in welfare benefit plans for active employees.

Medicare Secondary Rules
Medicare is often the secondary payer to employer-provided medical expense coverage. Employers with 20 or more employees must make coverage available under their medical expense plans to active employees aged 65 or older and to active employees' spouses who are eligible for Medicare. Unless an employee elects otherwise, the employer's plan is primary and Medicare is secondary. Except in plans that require large employee contributions, it is doubtful that employees will elect Medicare to be primary because employers are prohibited from offering active employees or their spouses a Medicare carve-out, a Medicare supplement, or some other incentive not to enroll in the employer's plan.

Medicare is the secondary payer of benefits in two other situations. The first situation involves persons who are eligible for Medicare benefits to treat end-stage renal disease with dialysis or kidney transplants. Medicare provides these benefits to any insured workers (either active or retired) and to their spouses and dependent children, but the employer's plan is primary during the first 30 months of treatment only; after that time, Medicare is primary and the employer's plan is secondary. It should be noted that the employer's plan could totally exclude dialysis and/or kidney transplants, in which case Medicare would pay. However, the employer is prevented by law from excluding these benefits for the first 30 months if they are covered thereafter. This rule for renal disease applies to medical expense plans of all employers, not just those with 20 or more employees.

Medicare is also the secondary payer of benefits to disabled employees (or the disabled dependents of employees) under age 65 who are eligible for Medicare and who are covered under the medical expense plan of large employers (defined as plans with 100 or more employees). Medicare, however, does not pay anything until a person has been eligible for Social Security disability income benefits for two years. The rule applies only if an employer continues medical expense coverage for disabled persons; there is no requirement for such a continuation.

When an employer's plan is primary, Medicare payments are made for any expenses that are covered by Medicare but not by the employer's plan. For purposes of these payments, Medicare deductibles, copayments, and percentage participation generally do not apply, although Medicare benefits are limited to what would have been paid in the absence of the employer's plan.

Medicare Carve-Outs and Supplements
An employer's plan may cover certain persons aged 65 or older who are not covered by the provisions of the Age Discrimination in Employment Act—specifically, retirees and active employees of firms with fewer than 20 employees. Although there is nothing to prevent an employer from terminating coverage for these persons, many employers provide them with either a Medicare carveout or Medicare supplement.

With a Medicare carve-out, plan benefits are reduced to the extent that benefits are payable under Medicare for the same expenses. (Medicare may also pay for some expenses not covered by the group plan.) For example, if a person who incurs $1,000 of covered expenses is not eligible for Medicare, $720 in benefits is paid under a medical expense plan that has a $100 deductible and an 80 percent coinsurance provision. However, if the same person is eligible for Medicare and if Medicare pays $650 for the same expenses, the employer's plan pays only $70, for a total benefit of $720.

Some medical expense plans use a more liberal carve-out approach and reduce covered expenses (rather than benefits payable) by any amounts received under Medicare. In the previous example, the $650 paid by Medicare would be subtracted from the $1,000 of covered expenses, which would leave $350. After the deductible and coinsurance are applied to this amount, the employer's plan would pay $200, so the covered person would receive a total of $850 in benefits, or $130 more than a person not eligible for Medicare.

As an alternative to using a carve-out approach, some employers use a Medicare supplement that provides benefits for certain specific expenses not covered under Medicare. These include (1) the portion of expenses that is not paid by Medicare because of deductibles, coinsurance, or copayments and (2) certain expenses excluded by Medicare, such as prescription drugs. Such a supplement may or may not provide benefits similar to those available under a carve-out plan.

MEDICARE+CHOICE

In 1985, Congress amended the Medicare program to allow a beneficiary to elect coverage under a health maintenance organization (HMO) as an alternative to the traditional Medicare program. At first, the number of persons electing this option was relatively small. Many of the elderly had not had HMO coverage during their working years and viewed such coverage with some skepticism. In addition, many HMOs continued to focus on expanding their traditional market of younger, healthier lives rather than entering a new and demographically different market. In addition, there were complex federal rules that had to be satisfied to enter the Medicare market.

The situation slowly changed as more HMOs got into the Medicare market and the public became more familiar with HMO coverage. In addition, as medical costs continued to rise, the election of an HMO option made more sense from a cost standpoint. As a result, HMO coverage for Medicare beneficiaries grew rapidly in the mid to late 1990s, and approximately one out of six beneficiaries now has such coverage.

Under the 1985 rules, an HMO is basically given 95 percent of what Medicare would expect to pay to provide benefits if a beneficiary electing HMO coverage had stayed in the traditional Medicare program. In turn, the HMO is expected to provide at least the same benefits as those that are available under Medicare. While an HMO can provide additional benefits and charge an extra premium, many HMOs have provided additional benefits such as prescription drugs without charging an additional premium. Such zero-premium plans have been very popular among Medicare beneficiaries. While they must continue to pay the Part B Medicare premium, these beneficiaries have been able to receive coverage that is broader than traditional Medicare and thus have no reason to purchase a supplemental medigap policy.

In 1999, Part C of Medicare (called Medicare+Choice) went into effect. It expands the choices available to most Medicare beneficiaries by allowing them to elect health care benefits through one of several alternatives to the traditional Parts A and B as long as the providers of these alternatives enter into contracts with the Health Care Financing Administration. However, beneficiaries must still pay the Part B premium.

The new Medicare+Choice plans include the following:

- HMOs as previously allowed

- Preferred-provider organizations (PPOs)

- Provider-sponsor organizations (PSOs), similar to HMOs but established by doctors and hospitals that have formed their own health plans

- Private fee-for-service plans

- Private contracts with physicians

- Medical savings accounts

These plans must provide all benefits available under Parts A and B. They may include additional benefits as part of the basic plan or for an additional fee.

Through 2001, beneficiaries may enroll in a Medicare+Choice plan or switch options (including reenrollment in parts A and B) at any time. In 2002, changes will be allowed only once during the first six months of the year. Beginning in 2003, an annual change will be allowed only during the first three months of the year.

Unfortunately, the initial reaction to Medicare+Choice has been less than overwhelming. As of early 2000, few new providers of alternative coverage have entered the marketplace. One reason for this is that the Medicare+Choice rules are extremely complex, and it is questionable if many of the potential providers can enter the market in a viable way. In addition, several HMOs that previously offered coverage have left the market for a variety of reasons; other HMOs no longer offer zero-premium plans or have increased premiums and/or reduced benefits. These changes stem from two factors. First, HMO costs have increased significantly in recent years, partially because of major increases in the cost of prescription drugs, which are a major source of medical expenses for the elderly. Second, the rate of growth of Medicare payments to HMOs has been reduced so that many HMOs are receiving increases that fail to match their increases in expenses.

MEDICARE: PART B BENEFITS

Benefits
Part B of Medicare provides benefits for most medical expenses not covered under Part A. These include the following:

- Physicians' and surgeons' fees. These fees may result from house calls, office visits, or services provided in a hospital or other institution. Under certain circumstances, benefits are also provided for the services of chiropractors, podiatrists, and optometrists.

- Diagnostic tests in a hospital or in a physician's office.

- Physical therapy in a physician's office, or as an outpatient of a hospital, skilled-nursing facility, or other approved clinic, rehabilitative agency, or public-health agency.

- Drugs and biologicals that cannot be self-administered.

- Radiation therapy.

- Medical supplies such as surgical dressings, splints, and casts.

- Rental of medical equipment such as oxygen tents, hospital beds, and wheelchairs.

- Prosthetic devices such as artificial heart valves or lenses after a cataract operation.

- Ambulance service if a patient's condition does not permit the use of other methods of transportation.

- Mammograms and Pap smears.

- Diabetes glucose monitoring and education.

- Colorectal cancer screening.

- Bone mass measurement.

- Prostate cancer screening.

- Pneumococcal vaccine and its administration.

Home health care services as described for Part A when a person does not have Part A coverage or Part A benefits are not applicable.

There were proposals by President Clinton and others to add prescription drug coverage to Medicare that would be partially financed by the large budget surpluses of recent years. In addition, there would be a relatively large increase in the Part B premium. Although the coverage would be subject to maximum annual limits and substantial copayments, the cost of this coverage would be significant because of the high use of expensive prescription drugs by the elderly.

Exclusions
Although the preceding list may appear to be comprehensive, there are numerous medical products and services not covered by Part B, some of which represent significant expenses for the elderly. They include the following:

Most drugs and biologicals that can be self-administered, except drugs for osteoporosis, oral cancer treatment, and immune-suppressive therapy under specified circumstances

- Routine physical, eye, and hearing examinations, except those previously mentioned

- Routine foot care

- Immunizations, except pneumococcal vaccinations or immunization required because of an injury or immediate risk of infection

- Cosmetic surgery, unless it is needed because of an accidental injury or to improve the function of a malformed part of the body

- Dental care, unless it involves jaw or facial bone surgery or the setting of fractures

- Custodial care

- Eyeglasses, hearing aids, or orthopedic shoes

In addition, benefits are not provided to persons eligible for workers' compensation or to those treated in government hospitals. Benefits are provided only for services received in the United States, except for physicians' services and ambulance services rendered for a hospitalization that is covered in Mexico or Canada under Part A. Part B is also a secondary payer of benefits under the same circumstances described for Part A.

Amount of Benefits
With some exceptions, Part B pays 80 percent of the approved charges for covered medical expenses after the satisfaction of a $100 annual deductible. Annual maximums apply to outpatient psychiatric benefits ($450) and physical therapy in a therapist's office or at the patient's home ($400). A few charges are paid in full without any cost sharing. These include (1) home health services, (2) pneumococcal vaccine and its administration, (3) certain surgical procedures that are performed on an outpatient basis in lieu of hospitalization, (4) diagnostic preadmission tests performed on an outpatient basis within 7 days prior to hospitalization, (5) mammograms, and (6) Pap smears.

The approved charge for doctor's services covered by Medicare is based on a fee schedule issued by the Health Care Financing Administration. A patient is reimbursed for only 80 percent of the approved charges above the deductible—regardless of the doctor's actual charge. Most doctors and other suppliers of medical services accept an assignment of Medicare benefits and therefore are prohibited from charging a patient in excess of the fee schedule. They can, however, bill the patient for any portion of the approved charges that were not paid by Medicare because of the annual deductible and/or coinsurance. They can also bill for any services that are not covered by Medicare.

Doctors who do not accept assignment of Medicare benefits cannot charge a Medicare patient more than 115 percent of the approved fee for nonparticipating doctors. Because the approved fee for nonparticipating doctors is set at 95 percent of the fee paid for participating doctors, a doctor who does not accept assignment of Medicare benefits can charge a fee that is only 9.25 percent greater than if assignment had been accepted (115 percent × 95 percent = 109.25 percent). As a result, some doctors either do not see Medicare participants or limit the number of such patients that they treat.

The previous limitation on charges does not apply to providers of medical services other than doctors. Although a provider who does not accept assignment can charge any fee, Medicare pays only 80 percent of what the fee schedule shows has been approved. For example, assume the approved charge for medical equipment is $100 and the actual charge is $190. Medicare reimburses $80 (.80 × $100), and the balance is borne by the Medicare recipient.

MEDICARE: PART A BENEFITS

Part A of Medicare provides benefits for expenses incurred in hospitals, skilled-nursing facilities and hospices. Some home health care benefits are also covered. For benefits to be paid, the facility or agency providing benefits must participate in the Medicare program. Virtually all hospitals are participants, as are most other facilities or agencies that meet the requirements of Medicare.

Part A of Medicare along with Part B provides a high level of benefits for medical expenses. However, as is described in the next few pages, deductibles and copayments may be higher than in prior group or individual coverage. In addition, certain benefits that were previously provided may be excluded or limited. For this reason, persons without supplemental retiree coverage from prior employment may wish to consider the purchase of a medigap policy in the individual marketplace.

Hospital Benefits
Part A pays for inpatient hospital services for up to 90 days in each benefit period (also referred to as a spell of illness). A benefit period begins the first time a Medicare recipient is hospitalized and ends only after the recipient has been out of a hospital or skilled-nursing facility for 60 consecutive days. A subsequent hospitalization then begins a new benefit period.

In each benefit period, covered hospital expenses are paid in full for 60 days, subject to an initial deductible of $792 in 2001. This deductible is adjusted annually to reflect increasing hospital costs. Benefits for an additional 30 days of hospitalization are also provided in each benefit period, but the patient must pay a daily copayment ($198 in 2001) equal to 25 percent of the initial deductible amount. In addition, each recipient also has a lifetime reserve of 60 additional days that may be used if the regular 90 days of benefits have been exhausted, but once a reserve day is used, it cannot be restored for use in future benefit periods. When using reserve days, patients must pay a daily copayment ($396 in 2001) equal to 50 percent of the initial deductible amount.

There is no limit on the number of benefit periods a person may have during his or her lifetime. However, there is a lifetime limit of 190 days of benefits for treatment in psychiatric hospitals.

Covered inpatient expenses include the following:

-Room and board in semiprivate accommodations. Private rooms are covered only if required for medical reasons.

- Nursing services (except private-duty nurses).

- Use of regular hospital equipment, such as oxygen tents or wheelchairs.

- Drugs and biologicals ordinarily furnished by the hospital.

- Diagnostic or therapeutic items or services.

- Operating room costs.

- Blood transfusions after the first three pints of blood. Patients must pay for the first three pints of blood unless they get donors to replace the blood.

- There is no coverage under Part A of Medicare for the services of physicians or surgeons.

Skilled-Nursing Facility Benefits
In many cases, a patient may no longer require continuous hospital care but may not be well enough to go home. Consequently, Part A provides benefits for care in a skilled-nursing facility if a physician certifies that skilled-nursing care or rehabilitative services are needed for a condition that was treated in a hospital within the past 30 days. In addition, the prior hospitalization must have lasted at least three days. Benefits are paid in full for 20 days in each benefit period and for an additional 80 days with a daily copayment ($98 in 2001) that is equal to 12.5 percent of the initial hospital deductible. Covered expenses are the same as those described for hospital benefits.

A skilled-nursing facility may be a separate facility for providing such care or a separate section of a hospital or nursing home. The facility must have at least one full-time registered nurse, and nursing services must be provided at all times. Every patient must be under the supervision of a physician, and a physician must always be available for emergency care.

One very important point should be made about skilled-nursing facility benefits: Custodial care is not provided under any part of the Medicare program unless skilled-nursing or rehabilitative services are also needed.

Home Health Care Benefits
If a patient can be treated at home for a medical condition, Medicare pays the full cost for an unlimited number of home visits by a home health agency. Such agencies specialize in providing nursing and other therapeutic services. To receive these benefits, a person must be confined at home and be treated under a home health plan set up by a physician. No prior hospitalization is required. The care needed must include skilled-nursing services, physical therapy, or speech therapy. In addition to these services, Medicare also pays for the cost of part-time home health aides, medical social services, occupational therapy, and medical supplies and equipment provided by the home health agency. There is no charge for these services other than a required 20 percent copayment for the cost of such durable medical equipment as iron lungs, oxygen tanks, and hospital beds. Medicare does not cover home services furnished primarily to assist people in activities of daily living such as housecleaning, preparing meals, shopping, dressing, or bathing.

If a person has only Part A of Medicare, all home health care services are covered under Part A. If a person has both Parts A and B, the first 100 visits that commence within 14 days of a hospital stay of at least three days are covered under Part A. All other home health visits are covered under Part B.

Hospice Benefits
Hospice benefits are available under Part A of Medicare for beneficiaries who are certified as being terminally ill persons with a life expectancy of six months or less. While a hospice is thought of as a facility for treating the terminally ill, Medicare benefits are available primarily for services provided by a Medicare-approved hospice to patients in their own homes. However, inpatient care can be provided if needed by the patient. In addition to including the types of benefits described for home health care, hospice benefits also include drugs, bereavement counseling, and inpatient respite care when family members need a break from caring for the ill person.

To qualify for hospice benefits, a Medicare recipient must elect such coverage in lieu of other Medicare benefits, except for the services of the attending physician or services and benefits that do not pertain to the terminal condition. There are modest copayments for some services.

The benefit period consists of two 90-day periods followed by an unlimited number of 60-day periods. These periods can be used consecutively or at intervals. A beneficiary may cancel the hospice coverage at any time (for example, to pursue chemotherapy treatments) and return to regular Medicare coverage. Any remaining days of the current hospice benefit period are lost forever, but the beneficiary can elect hospice benefits again. However, the beneficiary must be recertified as terminally ill at the beginning of each new benefit period.

Exclusions
There are some circumstances under which Part A of Medicare does not pay benefits. In addition, there are times when Medicare acts as the secondary payer of benefits. Exclusions under Part A include the following:

Services outside the United States and its territories or possessions. There are a few exceptions to this rule for qualified Mexican and Canadian hospitals. Benefits are paid if an emergency occurs in the United States and the closest hospital is in one of these countries. In addition, persons living closer to a hospital in one of these countries than to a hospital in the United States may use the foreign hospital even if an emergency does not exist. Finally, there is coverage for Canadian hospitals if a person needs hospitalization while traveling the most direct route between Alaska and another state in the United States. However, this latter provision does not apply to persons vacationing in Canada.

- Elective luxury services, such as private rooms or televisions.

- Hospitalization for services not necessary for the treatment of an illness or injury, such as custodial care or elective cosmetic surgery.

- Services performed in a federal facility, such as a veterans' hospital.

- Services covered under workers' compensation.

Under the following circumstances, Medicare is the secondary payer of benefits:

- When primary coverage under an employer-provided medical expense plan is elected by (1) an employee or spouse aged 65 or older or (2) a disabled beneficiary.

- When medical care can be paid under any liability policy, including policies providing automobile no-fault benefits.

- In the first 30 months for end-stage renal disease when an employer-provided medical expense plan provides coverage. By law, employer plans cannot specifically exclude this coverage during this 30-month period.

- Medicare pays only if complete coverage is not available from these sources and then only to the extent that benefits are less than would otherwise be payable under Medicare.

MEDICARE: ELIGIBILITY

Part A, the hospital portion of Medicare, is available to any person aged 65 or older as long as the person is entitled to monthly retirement benefits under Social Security or the railroad retirement program. Civilian employees of the federal government aged 65 or older are also eligible. It is not necessary for these workers to actually be receiving retirement benefits, but they must be fully insured for purposes of retirement benefits. The following persons are also eligible for Part A of Medicare at no monthly cost:

Persons aged 65 or older who are dependents of fully insured workers aged 62 or older.

Survivors aged 65 or older who are eligible for Social Security survivors benefits.

Disabled persons at any age who have been eligible to receive Social Security benefits for two years because of their disability. This includes workers under age 65, disabled widows and widowers aged 50 or over, and children 18 or older who were disabled prior to age 22.

Workers who are either fully or currently insured and their spouses and dependent children with end-stage renal (kidney) disease who require renal dialysis or kidney transplants. Coverage begins either the first day of the third month after dialysis begins or earlier for admission to a hospital for kidney-transplant surgery.

Most persons aged 65 or over who do not meet the previously discussed eligibility requirements may voluntarily enroll in Medicare. However, they must pay a monthly Part A premium and also enroll in Part B. The monthly Part A premium may be as high as $300 in 2001, depending on the quarters of coverage a person earned under Social Security. The premium is adjusted annually to reflect the full cost of the benefits provided.

Any person eligible for Part A of Medicare is also eligible for Part B. A monthly premium must be paid for Part B. This premium, $50.00 in 2001, is adjusted annually and represents only about 25 percent of the cost of the benefits provided. The remaining cost of the program is financed from the general revenues of the federal government.

Persons receiving Social Security or railroad retirement benefits are automatically enrolled in Medicare if they are eligible. If they do not want Part B, they must reject it in writing. Other persons eligible for Medicare must apply for benefits. As a general rule, anyone who rejects Part B or who does not enroll when initially eligible may later apply for benefits during a general enrollment period that occurs between January 1 and March 31 of each year. However, the monthly premium is increased by 10 percent for each 12-month period during which the person was eligible but failed to enroll.

Medicare secondary rules make employer-provided medical expense coverage primary to Medicare for certain classes of individuals who are over 65, who are disabled, or who are suffering end-stage renal disease. These persons (and any other Medicare-eligible persons still covered as active employees under their employer's plans) may not wish to elect Medicare because it largely constitutes duplicate coverage. When their employer-provided coverage ends, these persons have a seven-month special enrollment period to elect Part B coverage, and the late enrollment penalty is waived.

Medicare is also secondary to benefits received by persons (1) entitled to veterans' or black-lung benefits, (2) covered by workers' compensation laws, or (3) whose medical expenses are paid under no-fault or liability insurance.

SOCIAL SECURITY AND MEDICARE

In a broad sense, the term Social Security can be used to refer to any of several programs resulting from the Social Security Act of 1935 and its frequent amendments over the years. The act established four programs aimed at providing economic security for the American society:

- Old-age insurance

- Unemployment insurance

- Federal grants for assistance to certain needy groups: the aged, the blind, and children

- Federal grants for maternal and child welfare, public health work, and vocational rehabilitation

The main focus in this post is on the old-age insurance program and the benefits that have been added to that program over the years. These additional benefits include survivors insurance (1939), disability insurance (1956), hospital insurance (1965), and supplementary medical insurance (1965). Taken together, these programs constitute the old-age, survivors, disability, and health insurance (OASDHI) program of the federal government. This program is often separated into two broad parts. The first part is the old-age, survivors and disability insurance (OASDI) program. Over the years, OASDI has become commonly referred to as Social Security. The remainder of the OASDHI program is called Medicare, with hospital insurance being called Part A and supplemental medical insurance being called Part B.

The following discussion of Social Security and Medicare begins with a description of the extent of coverage under the programs and the way the programs are financed. It then focuses on the eligibility requirements and benefits under the various parts of the programs. Because of the many differences between Social Security and Medicare, the discussion largely treats each program separately. This is followed by a discussion of the adequacy of the funding of these programs. Finally, there is a description of the tax implications of Social Security and Medicare benefits and contributions.

Extent of Coverage
More than 90 percent of the workers in the United States are in covered employment under the Social Security program and more than 95 percent under the Medicare program. This means that these workers have wages (if they are employees) or self-employment income (if they are self-employed) on which Social Security and Medicare taxes must be paid. The following are the major categories of workers who are not covered under the programs or who are covered only if they have met specific conditions:

Civilian employees of the federal government who were employed by the government prior to 1984 and who are covered under the Civil Service Retirement System or certain other federal retirement programs. These workers are covered by government plans that provide benefits similar to those available under Social Security. Coverage for new civilian federal employees under the Social Security program was one of the most significant changes resulting from 1983 amendments to the Social Security Act. It should be noted, however, that all federal employees have been covered under Social Security for purposes of Medicare since 1983.

Railroad workers. Under the Railroad Retirement Act, employees of railroads have their own benefit system that is similar to Social Security. However, they are covered under Medicare. In addition, there are certain circumstances under which railroad workers receive benefits from the Social Security program even though their contributions were paid to the railroad program.

Some state and local government employees. Historically, employees covered under state and local government retirement plans have been covered under Social Security and Medicare only if a state entered into a voluntary agreement with the Social Security Administration. Under such an agreement, the state may either require that employees of local governments be covered or allow local governments to decide whether to include their employees. In addition, the state may elect to include all or only certain groups of employees. It is estimated that more than 80 percent of state and local government employees have Social Security and Medicare coverage as a result of such agreements. In addition, coverage under Medicare is compulsory for state and local employees hired after March 1986, and coverage under Social Security is compulsory for employees hired after July 1, 1991, if they do not participate in a public retirement system.

American citizens working abroad for foreign affiliates of U.S. employers, unless the U.S. employer owns at least a 10 percent interest in the foreign affiliate and has made arrangements with the secretary of the treasury for the payment of Social Security and Medicare taxes. However, Americans working abroad are covered under Social Security and Medicare if they are working directly for U.S. employers rather than for their foreign subsidiaries.

Ministers who elect out of coverage because of conscience or religious principles.

Workers in certain jobs, such as student nurses, newspaper carriers under age 18, and students working for the school at which they are regularly enrolled or doing domestic work for a local college club, fraternity, or sorority.

Certain family employment. This includes the employment of a child under age 18 by a parent. This exclusion, however, does not apply if the employment is for a corporation owned by a family member.

Certain workers who must satisfy special earnings requirements. For example, self-employed persons are not covered unless they have net annual earnings of $400 or more. In addition, certain agricultural workers must have annual cash wages of $150 or more, and domestic workers must earn $1,200 or more in cash wages in a calendar year.

Tax Rates and Wage Bases
Part B of Medicare is financed by a combination of monthly premiums paid by persons eligible for benefits and contributions from the federal government. Part A of Medicare and all the benefits of the Social Security program are financed through a system of payroll and self-employment taxes paid by all persons covered under the programs. In addition, employers of covered persons are also taxed. These taxes are often referred to as FICA taxes because they are imposed under the Federal Insurance Contributions Act.

In 2001, an employee and his or her employer each pay a tax of 7.65 percent on the first $80,400 of the employee's wages. Of this tax rate, 6.2 percent is for Social Security; 1.45 percent is for the hospital insurance portion of Medicare. The Medicare tax rate of 1.45 percent is also levied on all wages in excess of $80,400. The tax rates are currently scheduled to remain the same after 2001; however, the wage bases are adjusted annually for changes in the national level of wages. Therefore, if wage levels increase by 4 percent in a particular year, the wage base for the following year will also increase by 4 percent. The tax rate for the self-employed is 15.3 percent on the first $80,400 of self-employment income and 2.9 percent on the balance of any self-employment income. This is equal to the combined employee and employer rates.

Over the years, both the tax rates and wage bases have risen dramatically to finance increased benefit levels under Social Security and Medicare as well as new benefits that have been added to the program...