ABSTRACT
The economic consequences of Medicare and Medicaid were only poorly understood initially, in part because no clear picture existed about the effects of insurance on demand for medical care at the time the law was under discussion. The Medicare program had two parts: Part A paid for services provided by hospitals. The entire cost of Part A is paid by the Medicare Trust Fund; a separate government account funded by general revenues and earmarked additions to each worker's current-year Social Security tax. Part B, called Supplemental Medical Insurance, was made voluntary, although the premiums paid by enrollees were so low that enrollment has been very nearly 100 percent from the beginning of the program. When Medicare Part C was created in 1997, the payment to Medicare HMOs used an average adjusted cost per case, but the adjustments employed only two factors: regional differences in costs and demographic mix of the enrollees. The Federal Medical Assistance Percentage (FMAP) primarily finances Medicaid.
