The Medicare program has become a dominant component of the health care system, providing health and income security to more than 40 million elderly and disabled citizens. The program is the single largest payer in U.S. health care and has a record of program innovation, particularly in the development of prospective payment approaches, many of which have been adopted by private sector payers.

However, the future of the program is in doubt. Indeed, many believe the cost projections for Medicare, particularly as “baby boomers” begin reaching Medicare eligibility in 2011, suggest an unsustainable program structure; yet, there is no consensus on needed changes.

The Medicare Modernization Act of 2003 (MMA), which passed the House of Representatives by a single vote, moved Medicare decisively in the direction of relying much more on private health insurance plans to organize and even deliver Medicare services. For example, the prescription drug provisions in Medicare - Part D require beneficiaries to choose among a broad array of private insurers to provide the benefit rather than on administration by traditional Medicare itself.

Equally important, the MMA, by providing generous “extra” payments to private insurers participating as Medicare Advantage (MA) plans, gives incentives for beneficiaries to opt out of traditional Medicare to receive their basic Parts A and B services under the auspices of a variety of private insurance plans offerings. The law was successful – since its passage, the enrollment of Medicare beneficiaries in private MA plans has increased from 13 to 20 percent, with these enrollment trends continuing. Unfortunately, this objective of expanding plan choices for beneficiaries and partly privatizing Medicare has come at a cost. Currently, Medicare spends 12 percent more, on average, for a beneficiary selecting care in a private plan than one staying in the traditional program.

In short, the financial sustainability of Medicare, and the relative performances of the traditional Medicare program and private MA plans currently are critical policy issues. Urban Institute researchers and policy analysts have been involved in a number of the inquiries that help policy makers sort out the conflicting political values and wade through the welter of evidence and assertions on how best to structure and operate Medicare into the future. In addition, UI researchers have continued to perform technical projects that permit Medicare to adopt and implement improved payment systems that provide beneficiary access while promoting better provider incentives for efficiency. Specifically, UI researchers have made important contributions in recent years on a range of topics: