11/05/2012 02:56 pm ET Updated Jan 23, 2014

The Election and the Real Future of Medicare

President Obama and Governor Romney see different futures for Medicare, the federally-funded health insurance program for senior citizens and disabled Americans. According to the most recent data, over 49 million Americans rely on Medicare. The Medicare trust fund that pays for hospital insurance is expected to run out of resources in 2024, making Medicare an especially important issue this election.

What is a Medicare Trust Fund?

The U.S. Treasury holds two trust funds that can only be used to pay for Medicare. The first, the Hospital Insurance (HI) trust fund pays for Medicare Part A (Hospital Insurance) benefits, including inpatient, skilled nursing facility, hospice and home health care. The HI trust fund also pays for a myriad of Medicare administration costs, including fraud prevention.

The second trust fund is the Supplementary Medical Insurance (SMI) trust fund. The SMI covers Medicare Part B (Medical Insurance) benefits such as doctor visits, outpatient hospital care, lab tests, durable medical equipment and some preventive care. In addition, SMI money is used for Medicare Part D prescription drug benefits and home health care benefits not covered by Part A.

So then, where does the money for the trust funds come from?

Much like Social Security, funds for the HI trust fund come from payroll taxes paid by employees, employers and self-employed individuals, as well as, general revenue, premiums collected from Medicare beneficiaries, taxes on Social Security benefits, and from state funding.
The SMI trust fund is primarily financed from general revenue funds authorized by Congress and premiums paid by those enrolled in Medicare Part B and D. Interest earned on the trust fund investments also pays into the pot.

Obama's Plan - An Overview

President Obama is not proposing a new plan for Medicare. His strategies are already outlined and expected to take place as part of the Affordable Care Act (ACA).

The ACA requires that $716 billion be cut from Medicare. This is expected to be achieved by slashing Medicare payments to the following:
• Hospitals and skilled nursing facilities
• Home health care agencies
• Medicare Advantage health insurers (private insurers who offer eligible beneficiaries more coverage options than the traditional Medicare program).

Romney's Plan - An Overview

Governor Romney wants to open Medicare to the private market, believing that increased competition will result in cutting costs. Romney supports issuing a defined contribution or "premium support" to Medicare beneficiaries. This would involve giving eligible Americans a flat amount of money to purchase their own health insurance coverage. Any health insurance or medical costs that exceed that defined contribution will have to be paid for out-of-pocket.

Obama's plan - What We Know Will Happen:

• The life of the trust fund gets longer. The annual Medicare Trustees report concluded that without the provisions of the ACA, the hospital insurance trust fund would be exhausted in just four years.
• Medicare benefits cannot be diminished by law. The ACA created the Independent Payment Advisory Board (IPAB), a government agency tasked with making sure that the steps to save on Medicare do not affect coverage or quality of care. The IPAB is charged with keeping costs under control if they exceed a preset cap.
• The donut hole gets closed. The term "donut hole" refers to the coverage gap for Medicare beneficiaries taking prescription drugs. Prior to the ACA, Medicare would pay up to $896 for prescription drugs and then pass the responsibility on to the beneficiary. Once a person had spent a total of $4,350 of their own money on prescriptions, Medicare prescription drug coverage would kick back in.

Romney's Plan - What We Know Will Happen

• No immediate changes. With an effective date of 2023, none of Governor Romney's plans for Medicare would change things for current beneficiaries or those nearing retirement.
• Traditional Medicare would remain an option. Under Romney's plan, traditional Medicare would compete against private Medicare plans.
• Medicare stays the course. All insurance plans must offer coverage at least comparable to what Medicare provides today.

Obama's Plan - What We Don't Know

• How will cutting Medicare Advantage payments affect monthly premiums?
Right now 25 percent of Medicare beneficiaries have a Medicare Advantage plan. With Medicare Advantage providers receiving lower payments for offering the same service as before, it lends some people to believe that the logical next step for providers would be higher premiums.
• Will there be a drop in the number of doctors who accept Medicare patients? Lowering payments to health care providers offers less incentive for them to continue treating Medicare patients.

Romney's Plan - What We Don't Know

Will he be able to push "premium support" through Congress? Contrary to popular belief, premium support is not a new concept invented by the Ryan/Romney camp. Premium support has been proposed and defeated for over three decades, beginning in 1981 with President Reagan's FY budget proposal.
What happens to the donut hole? Governor Romney wants to completely repeal the ACA, which would mean scrapping the current plan to close the donut hole. His campaign team has expressed that Romney believes repealing the ACA would help Medicare beneficiaries in much bigger ways than just the donut hole.