
                          SECTION 2. MEDICARE

                                CONTENTS

Overview
Eligibility and Coverage
  Aged
  Disabled
  Number of Beneficiaries
Benefits and Beneficiary Cost Sharing
  Part A
  Part B
Financing
  Hospital Insurance Trust Fund--Income
  Supplementary Medical Insurance Trust Fund--Income
  Financial Status of Hospital Insurance Trust Fund
  Financial Status of Supplementary Medical Insurance Trust
            Fund
  Comparison of Medicare Lifetime Benefits with Beneficiary
            Contributions
Part A Services--Coverage and Payments
  Inpatient Hospital Services
  Skilled Nursing Facility Services
  Home Health Services
  Hospice Services
Part B Services--Coverage and Payments
  Physicians Services
   Services of Nonphysician Practitioners
  Clinical Laboratory Services
  Durable Medical Equipment and Prosthetics and Orthotics
  Hospital Outpatient Department Services
  Ambulatory Surgical Center Services
  Other Part B Services
End-Stage Renal Disease Services
  Coverage
  Reimbursement
Medicare+Choice
Selected Issues
  Utilization and Quality Control Peer Review Organizations
  Secondary Payer
  Supplementing Medicare Coverage
Legislative History, 1980-99
CBO Savings and Revenue Estimates for Budget Reconciliation and
        Related Acts, 1981-99
Medicare Historical Data
References

                                OVERVIEW

    Medicare is a nationwide health insurance program for the
aged and certain disabled persons. The program consists of two
parts--part A, hospital insurance (HI) and part B,
supplementary medical insurance (SMI). Total program outlays
were $212.0 billion in fiscal year 1999. Net outlays after
deduction of beneficiary premiums were $190.5 billion.

                                Coverage

    Almost all persons over age 65 are automatically entitled
to Medicare part A. Part A also provides coverage, after a 24-
month waiting period, for persons under age 65 who are
receiving Social Security cash benefits on the basis of
disability. Most persons who need a kidney transplant or renal
dialysis may also be covered, regardless of age. In fiscal year
1999, part A covered an estimated 38.8 million aged and
disabled persons (including those with chronic kidney disease).
    Medicare part B is voluntary. All persons over age 65 and
all persons enrolled in part A may enroll in part B by paying a
monthly premium--$45.50 in 2000. In fiscal year 1999, part B
covered an estimated 36.9 million aged and disabled persons.

                                Benefits

    Part A provides coverage for inpatient hospital services,
up to 100 days of posthospital skilled nursing facility (SNF)
care, some home health services, and hospice care. Patients
must pay a deductible ($776 in 2000) each time their hospital
admission begins a benefit period. (A benefit period begins
when a patient enters a hospital and ends when she has not been
in a hospital or SNF for 60 days.) Medicare pays the remaining
costs for the first 60 days of hospital care. The limited
number of beneficiaries requiring care beyond 60 days are
subject to additional charges. Patients requiring SNF care are
subject to a daily coinsurance charge for days 21-100 ($97 in
2000). There are no cost-sharing charges for home health care
and limited charges for hospice care.
    Part B provides coverage for physicians' services,
laboratory services, durable medical equipment (DME), hospital
outpatient department (OPD) services, and other medical
services. The program generally pays 80 percent of Medicare's
fee schedule or other approved amount after the beneficiary has
met the annual $100 deductible. The beneficiary is liable for
the remaining 20 percent.

                         Payments for Services

    Taken together, spending for inpatient hospital and
physicians' and related services accounts for close to 70
percent of Medicare fee-for-service payments (spending for
managed care plans is not broken down by service category).
Medicare makes payments for inpatient hospital services under a
prospective payment system (PPS); a predetermined rate is paid
for each inpatient stay based on the patient's admitting
diagnosis. Payment for physicians' services is made on the
basis of a fee schedule. Specific payment rules are also used
for other services.

                             Administration

    Medicare is administered by the Health Care Financing
Administration (HCFA) within the U.S. Department of Health and
Human Services (DHHS). Much of the day-to-day work of reviewing
claims and making payments is done by intermediaries (for part
A) and carriers (for part B). These are generally commercial
insurers or Blue Cross Blue Shield plans.

                               Financing

    Medicare part A is financed primarily through the HI
payroll tax levied on current workers and their employers.
Employers and employees each pay a tax of 1.45 percent on all
earnings. The self-employed pay a single tax of 2.9 percent on
earnings.
    Part B is financed through a combination of monthly
premiums levied on program beneficiaries and Federal general
revenues. In 2000, the premium is $45.50. Beneficiary premiums
have generally represented about 25 percent of part B costs;
Federal general revenues (i.e., tax dollars) account for the
remaining 75 percent.

                            Federal Outlays

    Total program outlays were $212.0 billion in fiscal year
1999. Net outlays (i.e., net of premiums beneficiaries pay for
enrollment, largely for part B) were $190.5 billion.
    Tables 2-1, 2-2, and 2-3 provide historical spending and
coverage data for Medicare. Table 2-4 provides State-by-State
information for fiscal year 1998.

                        ELIGIBILITY AND COVERAGE

                                  Aged

Part A
    Most Americans age 65 or older are automatically entitled
to protection under part A. These individuals (or their
spouses) established entitlement during their working careers
by paying the HI payroll tax on earnings covered by either the
Social Security or Railroad Retirement Systems.
    The HI tax was extended to Federal employment with respect
to wages paid on or after January 1, 1983. Beginning January 1,
1983, Federal employment is included in determining eligibility
for protection under Medicare part A. A transitional provision
allows individuals who were in the employ of the Federal
Government both before and during January 1, 1983, to have
their prior Federal employment considered as employment for
purposes of providing Medicare coverage. Employees of State and
local governments, hired after March 31, 1986, are also liable
for the HI tax.
    Persons age 65 or older who are not automatically entitled
to part A may obtain coverage, providing they pay the full
actuarial cost. The 2000 monthly premium is $301 ($166 for
persons who have at least 30 quarters of covered employment).

                          TABLE 2-1.--MEDICARE OUTLAYS, SELECTED FISCAL YEARS 1967-2010
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                        Percent
                                                                        Total     Medicare     Net      increase
                  Fiscal year                     Part A     Part B    Medicare   premium    Medicare    (over
                                                                       outlays    offsets    outlays     prior
                                                                                                         year)
----------------------------------------------------------------------------------------------------------------
1967..........................................     $2,597       $798     $3,395      -$647     $2,748         NA
1970..........................................      4,953      2,196      7,149       -936      6,213        9.1
1972..........................................      6,276      2,544      8,820     -1,340      7,480       13.0
1973..........................................      6,842      2,637      9,479     -1,427      8,052        7.6
1974..........................................      8,065      3,283     11,348     -1,708      9,640       19.7
1975..........................................     10,612      4,170     14,782     -1,907     12,875       33.6
1976..........................................     12,579      5,200     17,779     -1,945     15,834       23.0
TQ............................................      3,404      1,401      4,805       -541      4,264         NA
1977..........................................     15,207      6,342     21,549     -2,204     19,345         NA
1978..........................................     17,862      7,350     25,212     -2,443     22,769       17.7
1979..........................................     20,343      8,805     29,148     -2,653     26,495       16.4
1980..........................................     24,288     10,746     35,034     -2,945     32,089       21.1
1981..........................................     29,248     13,240     42,488     -3,340     39,148       22.0
1982..........................................     34,864     15,559     50,423     -3,856     46,567       19.0
1983..........................................     38,551     18,317     56,868     -4,253     52,615       13.0
1984..........................................     42,295     20,374     62,669     -4,942     57,727        9.7
1985..........................................     48,667     22,730     71,397     -5,562     65,835       14.0
1986..........................................     49,685     26,217     75,902     -5,739     70,163        6.6
1987..........................................     50,803     30,837     81,640     -6,520     75,120        7.1
1988..........................................     52,730     34,947     87,677     -8,798     78,879        5.0
1989..........................................     58,238     38,316     96,554    -11,590     84,964        7.7
1990..........................................     66,687     43,022    109,709    -11,607     98,102       15.5
1991..........................................     70,742     47,021    117,763    -12,174    105,589        7.6
1992..........................................     81,971     50,285    132,256    -13,232    119,024       12.7
1993..........................................     91,604     54,254    145,858    -15,305    130,553        9.7
1994..........................................    102,770     59,724    162,494    -17,747    144,747       10.9
1995..........................................    114,883     65,213    180,096    -20,241    159,855       10.4
1996..........................................    127,683     68,946    196,629    -20,088    176,591       10.5
1997..........................................    137,884     72,553    210,437    -20,421    190,016        7.6
1998..........................................    137,298     76,272    213,570    -20,747    192,823        1.5
1999..........................................    131,500     80,518    212,018    -21,561    190,457       -1.2
2000 \1\......................................    133,100     88,300    221,300    -21,800    199,500        4.7
2001 \1\......................................    140,600     98,800    239,400    -23,300    216,100        8.3
2002 \1\......................................    143,600    103,500    247,100    -25,400    221,700        2.6
2003 \1\......................................    153,500    114,300    267,800    -28,100    239,800        8.2
2004 \1\......................................    163,200    123,800    287,000    -31,100    255,900        6.7
2005 \1\......................................    176,800    136,600    313,400    -34,200    279,200        9.1
2006 \1\......................................    182,400    141,600    324,000    -37,200    286,700        2.7
2007 \1\......................................    198,000    155,300    353,200    -40,300    312,900        9.1
2008 \1\......................................    211,300    167,400    378,800    -43,600    335,300        7.2
2009 \1\......................................    226,100    181,300    407,500    -47,200    360,200        7.4
2010 \1\......................................    241,600    196,800    438,400    -51,000    387,400        7.6
----------------------------------------------------------------------------------------------------------------
\1\ Congressional Budget Office projections.

NA--Not applicable.

Note.--Totals may not add due to rounding. TQ = transitional quarter.

Source: For 1967-99: Office of the President, 2000.

Part B
    Part B of Medicare is voluntary. All persons age 65 or
older (even those not entitled to part A) may elect to enroll
in the SMI Program by paying the monthly premium. The 2000
premium is $45.50 per month. Persons who voluntarily enroll in
part A are required to enroll in part B.

                                Disabled

Part A
    Part A also covers, after a 2-year waiting period, people
under age 65 who are either receiving monthly Social Security
benefits on the basis of disability or receiving payments as
disabled Railroad Retirement System annuitants. (Dependents of
the disabled are not eligible.) In addition, most people who
need a kidney transplant or renal dialysis because of chronic
kidney disease are entitled to benefits under part A regardless
of age.
Part B
    Persons eligible for part A by virtue of disability or
chronic kidney disease may also elect to enroll in part B.

                        Number of Beneficiaries

    In fiscal year 1998, 33.4 million aged and 5.1 million
disabled had protection under part A. In fiscal year 1998, 32.3
million aged and 4.4 million disabled were enrolled in part B
(table 2-2).

                 BENEFITS AND BENEFICIARY COST SHARING

                                 Part A

    Part A coverage includes:
    Inpatient hospital care.--The first 60 days of inpatient
hospital services in a benefit period are subject to a
deductible ($776 in calendar year 2000). A benefit period
begins when a patient enters a hospital and ends when he has
not been in a hospital or SNF for 60 days. For days 61-90 in a
benefit period, a coinsurance amount ($194 in calendar year
2000) is imposed. When more than 90 days are required in a
benefit period, a patient may elect to draw upon a 60-day
lifetime reserve. A coinsurance amount ($388 in calendar year
2000) is imposed for each reserve day.
    Skilled nursing facility care.--SNF care is up to 100 days
(following hospitalization) in an SNF for persons in need of
continued skilled nursing care and/or skilled rehabilitation
services on a daily basis. After the first 20 days, there is a
daily coinsurance ($97 in calendar year 2000) amount.
    Home health care.--Home health visits are provided to
persons who need skilled nursing care on an intermittent basis,
or physical therapy, or speech therapy. The Balanced Budget Act
(BBA) of 1997 gradually transfers from part A to part B home
health visits that are not part of the first 100 visits
following a beneficiary's stay in a hospital or SNF (i.e.,
postinstitutional visits) and during a home health spell of
illness. The transfer is being phased in over 6 years, between
1998 and 2003, with the Secretary transferring one-sixth of the
aggregate expenditures associated with transferred

                    TABLE 2-2.--NUMBER OF AGED AND DISABLED ELIGIBLE ENROLLEES AND BENEFICIARIES, AND AVERAGE MEDICARE BENEFIT PAYMENTS PER ENROLLEE, SELECTED YEARS 1975-99
                                                                                  [Beneficiaries in thousands]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                                       Projected
                                                                                                                                                                  Average    Average    average
                                                                     1975      1980      1985      1990      1995      1998      1999       2000        2001       annual     annual     annual
                           Fiscal year                             (actual)  (actual)  (actual)  (actual)  (actual)  (actual)  (actual)  (est.) \1\  (est.) \1\    growth     growth     growth
                                                                                                                                                                  1975-85    1985-95   1995-2001
                                                                                                                                                                 (percent)  (percent)  (percent)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                              Part A

Persons enrolled (monthly average):
    Aged.........................................................    21,795    24,572    27,121    30,050    32,649    33,384    33,585     33,816      34,059        2.2        1.9        0.7
    Disabled.....................................................     2,047     2,968     2,944     3,313     4,366     5,070     5,259      5,445       5,643        3.7        4.0        4.4
                                                                  ------------------------------------------------------------------------------------------------------------------------------
      Total......................................................    23,842    27,540    30,065    33,363    37,015    38,454    38,844     39,261      39,702        2.3        2.1        1.2
                                                                  ==============================================================================================================================
Average annual benefit per person enrolled: \2\ \3\
    Aged.........................................................      $432      $853    $1,563    $1,947    $3,078    $3,550    $3,366     $3,331      $3,577       13.7        7.0        2.5
    Disabled.....................................................       460       948     1,808     2,176     2,955     3,118     3,055      3,042       3,195       14.7        5.0        1.3
                                                                  ------------------------------------------------------------------------------------------------------------------------------
      Total......................................................       434       863     1,587     1,970     3,063     3,493     3,324      3,291       3,523       13.8        6.8        2.4
                                                                  ==============================================================================================================================
                              Part B

Persons enrolled (average):
    Aged.........................................................    21,504    24,422    27,049    29,426    31,622    32,257    32,350     32,550      32,759        2.3        1.6        0.6
    Disabled.....................................................     1,835     2,698     2,672     2,907     3,874     4,422     4,582      4,730       4,892        3.8        3.8        4.0
                                                                  ------------------------------------------------------------------------------------------------------------------------------
      Total......................................................    23,339    27,120    29,721    32,333    35,496    36,679    36,932     37,280      37,651        2.4        1.8        1.0
                                                                  ==============================================================================================================================
Average annual benefit per person enrolled: \2\
    Aged.........................................................       153       348       705     1,250     1,728     1,989     2,108      2,395       2,628       16.5        9.4        7.2
    Disabled.....................................................       259       610     1,022     1,603     2,282     2,623     2,388      2,667       2,897       14.7        8.4        4.1
                                                                  ------------------------------------------------------------------------------------------------------------------------------
      Total......................................................       161       374       734     1,282     1,788     2,066     2,143      2,430       2,663       16.4        9.3        6.9
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Represents projections of current law. Does not include legislative proposals.
\2\ Does not include administrative cost.
\3\ Includes part A catastrophic benefits in fiscal year 1990.

Source: Health Care Financing Administration, Division of Budget Formulation.

                                                                  TABLE 2-3.--BENEFIT PAYMENTS BY SERVICE UNDER MEDICARE PARTS A AND B, SELECTED FISCAL YEARS 1975-2001
                                                                                                        [In millions of dollars]
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   1975               1980               1985             1990 \1\             1995          2000 (est.) \2\    2001 (est.) \2\    Average annual     Projected average
                                                            -------------------------------------------------------------------------------------------------------------------------------------    growth rate     annual growth rate
                          Service                                                                                                                                                                     (percent)           (percent)
                                                             Percent   Amount  Percent   Amount   Percent   Amount   Percent   Amount   Percent    Amount   Percent   Amount   Percent   Amount  ---------------------------------------
                                                                                                                                                                                                  1975-85  1985-95  1995-2000  1995-2001
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                           Part A

Inpatient hospital.........................................     70.5   $9,947     67.4   $22,877     65.0   $45,218     55.3   $59,285     49.4    $87,449     40.0   $87,930     38.3   $91,932    16.3      6.8        0.1        0.8
Skilled nursing facility...................................      1.9      273      1.2       392      0.8       550      2.6     2,821      5.1      9,104      5.7    12,598      6.2    14,823     7.3     32.4        6.7        8.5
Home health \3\............................................      0.9      133      1.5       524      2.7     1,908      3.1     3,297      8.5     14,995      1.8     3,876      1.5     3,504    30.5     22.9      -23.7      -21.5
Hospice....................................................        0        0        0         0        0        34      0.3       318      1.0      1,854      1.2     2,597      1.1     2,730      NA     49.2        7.0        6.7
Managed care...............................................        0    (\4\)        0     (\4\)        0     (\4\)        0     (\4\)        0      (\4\)     10.1    22,215     11.2    26,880      NA       NA         NA         NA
                                                            ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total benefit payments.................................     73.3   10,353     70.1    23,793     68.6    47,710     61.3    65,721     64.1    113,402     58.8   129,216     58.2   139,869    16.5      9.0        2.7        3.6
                                                            ============================================================================================================================================================================
                           Part B

Physician..................................................     21.7    3,067     23.0     7,813     24.1    16,788     27.0    28,920    (\5\)      (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    18.5    (\5\)      (\5\)      (\5\)
Outpatient.................................................      3.7      529      5.3     1,803      5.6     3,917      7.8     8,365    (\5\)      (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    22.2    (\5\)      (\5\)      (\5\)
Home health................................................      0.5       75      0.7       232      0.1        40      0.3        75    (\5\)      (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    -6.1    (\5\)      (\5\)      (\5\)
Other medical and health...................................      0.7       94      0.9       296      1.5     1,063      3.8     4,090    (\5\)      (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    27.5    (\5\)      (\5\)      (\5\)
Physician fee schedule.....................................    (\5\)    (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    (\5\)     (\5\)     17.6     31,101     16.2    35,619     15.3    36,647   (\5\)    (\5\)        2.8        2.8
Durable medical equipment..................................    (\5\)    (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    (\5\)     (\5\)      2.0      3,576      2.0     4,443      2.0     4,714   (\5\)    (\5\)        4.4        4.7
Carrier laboratory \6\.....................................    (\5\)    (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    (\5\)     (\5\)      1.6      2,819      0.9     2,038      0.9     2,062   (\5\)    (\5\)       -6.3       -5.1
Other carrier..............................................    (\5\)    (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    (\5\)     (\5\)      2.6      4,513      3.1     6,852      3.1     7,343   (\5\)    (\5\)        8.7        8.4
Hospital \7\...............................................    (\5\)    (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    (\5\)     (\5\)      4.8      8,449      4.1     9,087      4.7    11,356   (\5\)    (\5\)        1.4        5.1
Home health \3\............................................    (\5\)    (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    (\5\)     (\5\)      0.1        223      2.6     5,790      2.9     6,884   (\5\)    (\5\)       91.8       77.1
Intermediary laboratory \8\................................    (\5\)    (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    (\5\)     (\5\)      0.8      1,437      0.7     1,607      0.7     1,667   (\5\)    (\5\)        2.3        2.5
Other intermediary \9\.....................................    (\5\)    (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    (\5\)     (\5\)      2.9      5,111      2.7     6,037      2.7     6,511   (\5\)    (\5\)        3.4        4.1
Managed care...............................................    (\5\)    (\5\)    (\5\)     (\5\)    (\5\)     (\5\)    (\5\)     (\5\)      3.5      6,253      8.7    19,102     9.63    23,089   (\5\)    (\5\)       25.0       24.3
                                                            ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total benefit payments.................................     26.7    3,765     29.9    10,144     31.4    21,808     38.7    41,450     35.9     63,482     41.2    90,574     41.8   100,273    19.2     11.3        7.4        7.9
                                                            ============================================================================================================================================================================
    Total parts A and B....................................    100.0   14,118    100.0    33,937    100.0    69,518    100.0   107,171    100.0    176,884    100.0   219,790  .......   240,142    17.3      9.8        4.4        5.2
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Includes part A catastrophic benefits in fiscal year 1990.
\2\ Represents current law. Does not include legislative proposals.
\3\ Reflects the Balanced Budget Act of 1997's partial shift of home health to part B, beginning January 1, 1998.
\4\ Part A managed care amounts for fiscal years 1995 and earlier are reflected within the four other service categories.
\5\ Service categories were revised beginning in 1992.
\6\ Laboratory services paid under the laboratory fee schedule performed in a physician's office laboratory or an independent laboratory.
\7\ Includes the hospital facility costs for Medicare part B services which are predominantly in the outpatient department. The physician reimbursement associated with these services is included on the ``physician fee schedule''
  line.
\8\ Laboratory fee services paid under the laboratory fee schedule performed in a hospital outpatient department.
\9\ Includes end-stage renal disease (ESRD) freestanding dialysis facility payments and payments to rural health clinics, outpatient rehabilitation facilities, psychiatric hospitals, and federally qualified health centers.

NA--Not available.

Note.--Totals may not add due to rounding.

Source: Health Care Financing Administration, Division of Budget Formulation.

                TABLE 2-4.--MEDICARE ESTIMATED BENEFIT PAYMENTS, ENROLLMENT, AND PAYMENTS PER ENROLLEE, BY JURISDICTION, FISCAL YEAR 1998
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                               Estimated
                                                                                                           Total estimated     HI and/or SMI   payments
                             State                                 Managed care       Fee for service      benefit payments      Medicare         per
                                                                                                                                enrollment     enrollee
--------------------------------------------------------------------------------------------------------------------------------------------------------
Alabama.......................................................        $205,426,344       $3,355,291,164       $3,560,717,508         662,299      $5,376
Alaska........................................................                  NA          159,758,199          159,758,199          36,522       4,374
Arizona.......................................................       1,239,778,917        1,745,752,051        2,985,530,968         636,450       4,691
Arkansas......................................................          49,224,065        1,879,525,269        1,928,749,334         431,020       4,475
California....................................................       8,773,118,477       13,784,518,629       22,557,637,106       3,738,081       6,035
Colorado......................................................         643,203,173        1,635,431,750        2,278,634,923         442,452       5,150
Connecticut...................................................         400,112,935        2,728,217,584        3,128,330,518         507,927       6,159
Delaware......................................................                  NA          405,179,514          405,179,514         105,693       3,834
District of Columbia..........................................         144,373,478          777,918,684          922,292,162          78,151      11,801
Florida.......................................................       4,524,774,836       13,378,150,436       17,902,925,272       2,727,545       6,564
Georgia.......................................................         176,623,168        4,110,432,452        4,287,055,620         869,443       4,931
Hawaii........................................................         239,875,943          398,863,192          638,739,135         156,103       4,092
Idaho.........................................................          10,980,148          589,589,258          600,569,407         155,810       3,854
Illinois......................................................         834,190,968        7,656,027,597        8,490,218,565       1,622,181       5,234
Indiana.......................................................          65,964,275        4,197,139,053        4,263,103,328         835,183       5,104
Iowa..........................................................          12,850,611        1,797,001,383        1,809,851,994         475,786       3,804
Kansas........................................................          25,109,448        1,783,589,354        1,808,698,803         387,589       4,667
Kentucky......................................................          53,879,786        2,843,156,472        2,897,036,258         602,570       4,808
Louisiana.....................................................         538,912,807        3,754,572,687        4,293,485,495         592,543       7,246
Maine.........................................................             366,850          792,926,706          793,293,556         207,784       3,818
Maryland......................................................         517,992,313        3,123,552,630        3,641,544,943         619,700       5,876
Massachusetts.................................................       1,117,102,982        4,689,557,576        5,806,660,558         946,879       6,132
Michigan......................................................         257,643,533        7,452,965,590        7,710,609,123       1,369,629       5,630
Minnesota.....................................................         355,714,448        2,442,292,853        2,798,007,301         639,293       4,377
Mississippi...................................................                  NA        2,216,407,663        2,216,407,663         407,440       5,440
Missouri......................................................         602,636,855        4,092,810,974        4,695,447,829         844,920       5,557
Montana.......................................................           4,359,566          529,898,775          534,258,341         133,089       4,014
Nebraska......................................................          54,981,437        1,024,707,802        1,079,689,239         251,029       4,301
Nevada........................................................         399,145,276          706,198,480        1,105,343,755         213,742       5,171
New Hampshire.................................................          43,577,945          603,936,891          647,514,836         161,759       4,003
New Jersey....................................................         697,261,271        6,210,460,644        6,907,721,916       1,182,204       5,843
New Mexico....................................................         167,306,872          662,125,184          829,432,056         221,061       3,752
New York......................................................       2,592,564,064       14,472,498,088       17,065,062,152       2,651,677       6,436
North Carolina................................................          87,759,036        5,207,921,577        5,295,680,613       1,073,564       4,933
North Dakota..................................................           1,024,727          479,367,786          480,392,514         102,764       4,675
Ohio..........................................................       1,175,552,456        7,658,951,361        8,834,503,816       1,683,167       5,249
Oklahoma......................................................         170,664,498        2,201,883,236        2,372,547,734         497,066       4,773
Oregon........................................................         679,992,754        1,151,812,303        1,831,805.057         477,022       3,840
Pennsylvania..................................................       2,783,739,255       10,399,395,849       13,183,135,104       2,084,565       6,324
Puerto Rico...................................................                  NA        1,085,621,690        1,085,621,690         502,760       2,159
Rhode Island..................................................         222,688,282          799,438,068        1,022,126,351         169,359       6,035
South Carolina................................................           8,107,599        2,555,180,022        2,563,287,620         534,827       4,793
South Dakota..................................................                  NA          503,514,478          503,514,478         117,931       4,270
Tennessee.....................................................          69,099,978        4,659,088,195        4,728,188,173         796,692       5,935
Texas.........................................................       1,566,883,357       13,099,231,346       14,666,114,703       2,162,917       6,781
Utah..........................................................         100,786,356          787,529,116          888,315,472         195,326       4,548
Vermont.......................................................           1,282,393          287,952,764          289,235,157          85,562       3,380
Virginia......................................................          61,555,988        3,595,463,713        3,657,019,701         849,493       4,305
Washington....................................................         735,189,539        2,147,994,124        2,883,183,663         708,607       4,069
West Virginia.................................................          13,047,291        1,515,162,298        1,528,209,589         333,217       4,586
Wisconsin.....................................................          89,029,594        3,178,402,378        3,267,431,972         770,405       4,241
Wyoming.......................................................                  NA          218,451,250          218,451,250          62,654       3,487
Outlying areas................................................                  NA           53,543,743           53,543,743         323,287         166
                                                               -----------------------------------------------------------------------------------------
    Total all areas...........................................      32,515,455,895      177,586,359,882      210,101,815,777      38,444,739       5,465
--------------------------------------------------------------------------------------------------------------------------------------------------------
NA--Not available.

Source: Health Care Financing Administration, Office of Information Services.

visits in 1998; two-sixths in 1999; three-sixths in 2000; four-
sixths in 2001; five-sixths in 2002; and six-sixths in 2003.
Beginning January 1, 2003, part A will cover only
postinstitutional home health services for up to 100 visits
during a home health spell of illness, except for those persons
with part A coverage only, who will be covered for services
without regard to the postinstitutional limitation.
    Hospice care.--Hospice care services are provided to
terminally ill Medicare beneficiaries with a life expectancy of
6 months or less for two 90-day periods, followed by an
unlimited number of 60-day periods. The medical director or
physician member of the hospice interdisciplinary team must
recertify, at the beginning of 60-day periods, that the
beneficiary is terminally ill.

                                 Part B

    Part B of Medicare generally pays 80 percent of the
approved amount (fee schedule, reasonable charge, or reasonable
cost) for covered services in excess of an annual deductible
($100). Services covered include:
    Doctor's services.--This category includes surgery,
consultation, and home, office and institutional visits.
Certain limitations apply for services rendered by dentists,
podiatrists, and chiropractors and for the treatment of mental
illness.
    Other medical and health services.--This category includes
laboratory and other diagnostic tests, x ray and other
radiation therapy, outpatient hospital services, rural health
clinic services, DME, home dialysis supplies and equipment,
artificial devices (other than dental), physical and speech
therapy, and ambulance services.
    Specified preventive services.--These services include: an
annual screening mammography for all women over age 40; a
screening Pap smear and a screening pelvic exam once every 3
years, except for women who are at a high risk of developing
cervical cancer; specified colorectal screening procedures;
diabetes self-management training services; bone mass
measurements for high-risk persons; and prostate cancer
screenings.
    Drugs and vaccines.--Generally Medicare does not pay for
outpatient prescription drugs or biologicals. Part B pays for
immunosuppressive drugs for a minimum of 36 months following a
covered organ transplant, erythropoietin (EPO) for treatment of
anemia for persons with chronic kidney failure, and certain
oral cancer drugs. The program also covers flu shots,
pneumococcal pneumonia vaccines, and hepatitis B vaccines for
those at risk.
    Home health services.--Home services include an unlimited
number of medically necessary home health visits for persons
not covered under part A. The 20-percent coinsurance and $100
deductible do not apply for such benefits. As noted above, BBA
1997 gradually transfers some home health costs from part A to
part B, beginning in 1998.
    Table 2-5 illustrates the deductible, coinsurance and
premium amounts for both part A and part B services from the
inception of Medicare.

                               FINANCING

    The Medicare Hospital Insurance (HI) Trust Fund finances
services covered under Medicare part A. The Supplementary
Medical Insurance (SMI) Trust Fund finances services covered
under Medicare part B. The trust funds are maintained by the
Department of the Treasury. Each trust fund is actually an
accounting mechanism; there is no actual transfer of money into
and out of the fund. Income to each trust fund is credited to
the fund in the form of interest-bearing government securities.
The securities represent obligations that the government has
issued to itself. Expenditures for services and administrative
costs are recorded against the fund.

                 Hospital Insurance Trust Fund--Income

    The primary source of income to the HI fund is HI payroll
taxes. This source accounted for $134.4 billion (87.8 percent)
of the total $153.0 billion in income for fiscal year 1999.
Additional income sources include premiums paid by voluntary
enrollees, government credits, interest on Federal securities,
and taxation of a portion of Social Security benefits.
Payroll taxes
    The HI Trust Fund is financed primarily through Social
Security payroll tax contributions paid by employees and
employers. Each pays a tax of 1.45 percent on all earnings in
covered employment. The self-employed pay 2.9 percent. Prior to
1994, there was an upper limit on earnings subject to the tax.
An upper limit of $76,200 in 2000 continues to apply under
Social Security. Table 2-6 shows the history of the
contribution rates and maximum taxable earnings base for the HI
Program.
Other income
    The following are additional sources of income to the HI
fund:
 1. Railroad retirement account transfers.--In fiscal year
        1999, $430 million was transferred from the railroad
        retirement fund. This is the estimated amount that
        would have been in the fund if railroad employment had
        always been covered under the Social Security Act.
 2. Reimbursements for uninsured persons.--HI benefits are
        provided to certain uninsured persons who turned 65
        before 1968. Persons who turned 65 after 1967 but
        before 1974 are covered under transitional provisions.
        Similar transitional entitlement applies to Federal
        employees who retire before earning sufficient quarters
        of Medicare-qualified Federal employment provided they
        were employed before and during January 1983. Payments
        for these persons are made initially from the HI Trust
        Fund, with reimbursement from the general fund of the
        Treasury for the costs, including administrative
        expenses, of the payments. In fiscal year 1999, $652
        million was transferred to HI on this basis.

                             TABLE 2-5.--PART A AND PART B DEDUCTIBLE, COINSURANCE AND PREMIUMS,\1\ SELECTED YEARS 1966-2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Inpatient hospital \2\                                HI monthly premium \6\                     SMI premium
                             --------------------------------------------     Skilled    -------------------------------            --------------------
                                                          60 lifetime         nursing
        Calendar year          First 60    61st-90th      reserve days    facility 21st-                                     SMI
                                 days         day        (nonrenewable)      100th day    Effective    Full     Reduced  deductible  Effective   Amount
                              deductible  coinsurance   coinsurance per     coinsurance      date     amount    amount                  date
                                          per day \3\       day \4\         per day \5\
--------------------------------------------------------------------------------------------------------------------------------------------------------
1966........................        $40           $10              (\7\)           (\7\)      (\8\)     (\8\)        NA        $50        7/66     $3.00
1968........................         40            10                $20           $5.00      (\8\)     (\8\)        NA         50        4/68      4.00
1970........................         52            13                 26            6.50      (\8\)     (\8\)        NA         50        7/70      5.30
1972........................         68            17                 34            8.50      (\8\)     (\8\)        NA         50        7/72      5.80
1973........................         72            18                 36            9.00       7/73       $33        NA         60    \9\ 9/73      6.30
1974........................         84            21                 42           10.50       7/74        36        NA         60        7/74      6.70
1975........................         92            23                 46           11.50       7/75        40        NA         60       (\8\)      6.70
1976........................        104            26                 52           13.00       7/76        45        NA         60        7/76      7.20
1977........................        124            31                 62           15.50       7/77        54        NA         60        7/77      7.70
1978........................        144            36                 72           18.00       7/78        63        NA         60        7/78      8.20
1979........................        160            40                 80           20.00       7/79        69        NA         60        7/79      8.70
1980........................        180            45                 90           22.50       7/80        78        NA         60        7/80      9.60
1981........................        204            51                102           25.50       7/81        89        NA         60        7/81     11.00
1982........................        260            65                130           32.50       7/82       113        NA         75        7/82     12.20
1983........................        304            76                152           38.00      (\8\)       113        NA         75       (\8\)     12.20
1984........................        356            89                178           44.50       1/84       155        NA         75        1/84     14.60
1985........................        400           100                200           50.00       1/85       174        NA         75        1/85     15.50
1986........................        492           123                246           61.50       1/86       214        NA         75        1/86     15.50
1987........................        520           130                260           65.00       1/87       226        NA         75        1/87     17.90
1988........................        540           135                270           67.50       1/88       234        NA         75        1/88     24.80
1989........................   \10\ 560            NA                 NA      \11\ 25.50       1/89       156        NA         75        1/89     31.90
1990........................        592           148                296           74.00       1/90       175        NA         75        1/90     28.60
1991........................        628           157                314           78.50       1/91       177        NA        100        1/91     29.90
1992........................        652           163                326           81.50       1/92       192        NA        100        1/92     31.80
1993........................        676           169                338           84.50       1/93       221        NA        100        1/93     36.60
1994........................        696           174                348           87.00       1/94       245      $184        100        1/94     41.10
1995........................        716           179                358           89.50       1/95       261       183        100        1/95     46.10
1996........................        736           184                368           92.00       1/96       289       188        100        1/96     42.50
1997........................        760           190                380           95.00       1/97       311       187        100        1/97     43.80
1998........................        764           191                382           95.50       1/98       309       170        100        1/98     43.80
1999........................        768           192                384           96.00       1/99       309       170        100        1/99     45.50
2000........................        776           194                388           97.00       1/00       301       166        100        1/00     45.50
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For services furnished on or after January 1, 1982, the coinsurance amounts are based on the inpatient hospital deductible for the year in which the
  services were furnished. For services furnished prior to January 1, 1982, the coinsurance amounts are based on the inpatient hospital deductible
  applicable for the year in which the individual's benefit period began.
\2\ For care in psychiatric hospital there is a 190-day lifetime limit.
\3\ Always equal to one-fourth of inpatient hospital deductible through 1988 and for 1990 and later; eliminated for 1989.
\4\ Always equal to one-half of inpatient hospital deductible through 1988 and for 1990 and later; eliminated for 1989.
\5\ Always equal to one-third of inpatient hospital deductible through 1988 and for 1990 and later. For 1989 it was equal to 20 percent of estimated
  Medicare covered average cost per day.
\6\ Not applicable prior to July 1973. Applies to aged individuals who are not fully insured, and to certain disabled individuals who have exhausted
  other entitlement. The reduced amount is available to aged individuals who are not fully insured but who have, or whose spouse has or had, at least 30
  quarters of coverage under title II of the Social Security Act. The reduced amount is 75 percent of the full amount in 1994, 70 percent in 1995, 65
  percent in 1996, 60 percent in 1997, and 55 percent in 1998 and thereafter.
\7\ Not covered.
\8\ Not applicable.
\9\ For August 1973 the premium was $6.10.
\10\ In 1989, the HI deductible was applied on an annual basis, not a benefit period basis (unlike the other years).
\11\ In 1989, the skilled nursing facility coinsurance was on days 1-8 of the 150 days allowed annually; for the other years it is on days 21-100 of 100
  days allowed per benefit period.

NA--Not available.

Note.--In addition to the deductible and coinsurance amounts shown in the table, the first three pints of blood are not reimbursed by Medicare.
  Currently there is no deductible or coinsurance on home health benefits. From January 1973 to June 30, 1982, there was a $60 annual deductible and
  prior to July 1, 1981, benefits were limited to 100 visits per benefit period under part A and 100 visits per calendar year under part B. Special
  limits apply to certain benefits: (1) Outpatient physician services for mental illness; 50 percent of approved charges, up to a maximum of $250 in
  benefits per year, July 1, 1966 through December 31, 1987; $450 in benefits per year, January 1, 1988 through December 31, 1988; $1,100 in benefits
  per year, January 1, 1989 through December 31, 1989; beginning January 1, 1990, the limit was removed; (2) physical and occupational therapy services
  furnished by physical therapists in independent practice: maximum annual approved charges July 1, 1973 through December 31, 1981, $80 per year;
  January 1, 1982 through December 31, 1982, $400 per year; January 1, 1983 through December 31, 1989, $500 per year; January 1, 1990 through December
  31, 1993, $750 per year; and January 1, 1994 through December 31, 1998; in 1999 there was an annual $1,500 limit on all physical therapy services
  (except those provided by a hospital) and an annual $1,500 limit on all occupational therapy services (except those provided by a hospital); and no
  limit in 2000.

Source: Health Care Financing Administration, Office of the Actuary.

   TABLE 2-6.--CURRENT LAW SOCIAL SECURITY PAYROLL TAX RATES FOR EMPLOYERS AND EMPLOYEES AND TAXABLE EARNINGS
                                                BASES, 1977-2000
----------------------------------------------------------------------------------------------------------------
                                                            Employee and employer rates,
                                                                   each (percent)         HI taxable
                       Calendar year                       ------------------------------  earnings   Maximum HI
                                                              OASDI              OASDHI      base         tax
                                                            combined     HI     combined
----------------------------------------------------------------------------------------------------------------
1977......................................................      4.95      0.90      5.85     $16,500     $148.50
1978......................................................      5.05      1.10      6.05      17,700      194.70
1979......................................................      5.08      1.05      6.13      22,900      240.45
1980......................................................      5.08      1.05      6.13      25,900      271.95
1981......................................................      5.35      1.30      6.65      29,700      386.10
1982......................................................      5.40      1.30      6.70      32,400      421.20
1983......................................................      5.40      1.30      6.70      35,700      464.10
1984......................................................      5.70      1.30      7.00      37,800      491.40
1985......................................................      5.70      1.35      7.05      39,600      534.60
1986......................................................      5.70      1.45      7.15      42,000      609.00
1987......................................................      5.70      1.45      7.15      43,800      635.10
1988......................................................      6.06      1.45      7.51      45,000      652.50
1989......................................................      6.06      1.45      7.51      48,000      696.00
1990......................................................      6.20      1.45      7.65      51,300      743.85
1991......................................................      6.20      1.45      7.65  \1\ 125,00    1,812.50
                                                                                                   0
1992......................................................      6.20      1.45      7.65     130,200    1,887.90
1993......................................................      6.20      1.45      7.65     135,000    1,957.50
1994......................................................      6.20      1.45      7.65      \2\ no    no limit
                                                                                               limit
1995......................................................      6.20      1.45      7.65    no limit    no limit
1996......................................................      6.20      1.45      7.65    no limit    no limit
1997......................................................      6.20      1.45      7.65    no limit    no limit
1998......................................................      6.20      1.45      7.65    no limit    no limit
1999......................................................      6.20      1.45      7.65    no limit    no limit
2000......................................................      6.20      1.45      7.65    no limit    no limit
----------------------------------------------------------------------------------------------------------------
\1\ Prior to 1991, the upper limit on tax earnings was the same as for Social Security. The Omnibus Budget
  Reconciliation Act of 1990 raised the limit in 1991 to $125,000. Under automatic indexing provisions, the
  maximum was increased to $130,200 in 1992 and $135,000 in 1993.
\2\ The Omnibus Budget Reconciliation Act of 1993 eliminated the ceiling on the earnings base beginning in 1994.

Source: Health Care Financing Administration.

 3. Premiums from voluntary enrollees.--Certain persons not
        eligible for HI protection either on an insured basis
        or on the uninsured basis described above may obtain
        protection by enrolling in the program and paying a
        monthly premium ($309 in 2000; for persons who have at
        least 30 quarters of covered employment, $170 in 2000).
        This accounted for an estimated $1.4 billion of
        financing in fiscal year 1999.
 4. Payments for military wage credits.--Sections 217(g) and
        229(b) of the Social Security Act, prior to
        modification by the Social Security Amendments of 1983,
        authorized annual reimbursement from the general fund
        of the Treasury to the HI Trust Fund for costs arising
        from the granting of deemed wage credits for military
        service prior to 1957, according to quinquennial
        determinations made by the Secretary of the U.S.
        Department of Health and Human Services (DHHS). These
        sections, as modified by the Social Security Amendments
        of 1983, provided for a lump-sum transfer in 1983 for
        costs arising from such wage credits. In addition, the
        lump-sum transfer included combined employer-employee
        HI taxes on the noncontributory wage credits for
        military service after 1965 and before 1984. After
        1983, HI taxes on military wage credits are credited to
        the fund on July 1 of each year. The Social Security
        Amendments of 1983 also provided for: (1) quinquennial
        adjustments to the lump-sum amount transferred in 1983
        for costs arising from pre-1957 deemed wage credits;
        and (2) adjustments as deemed necessary to any
        previously transferred amounts representing HI taxes on
        noncontributory wage credits. In fiscal year 1999, this
        adjustment was $67 million.
 5. Tax on Social Security benefits.--Beginning in 1994, the
        trust fund acquired an additional funding source. The
        Omnibus Budget Reconciliation Act of 1993 (OBRA 1993)
        increased the maximum amount of Social Security
        benefits subject to income tax from 50 to 85 percent
        and provided that the additional revenues would be
        credited to the HI Trust Fund. Revenue from this source
        totaled $6.6 billion in fiscal year 1999.
 6. Interest.--The remaining income to the trust fund consists
        almost entirely of interest on the investments of the
        trust fund. Interest amounted to an estimated $9.5
        billion in fiscal year 1999.

           Supplementary Medical Insurance Trust Fund--Income

    Part B is financed from premiums paid by the aged, disabled
and chronic renal disease enrollees and from general revenues.
The premium rate is derived annually based on the projected
costs of the program for the coming year. The monthly premium
amount in calendar year 2000 is $45.50.
    When the program first went into effect in July 1966, the
part B monthly premium was set at a level to finance one-half
of part B program costs. Legislation enacted in 1972 limited
the annual percentage increase in the premium to the same
percentage by which Social Security benefits were adjusted for
changes in cost of living (i.e., cost-of-living adjustments).
Under this formula, revenues from premiums soon dropped from 50
to below 25 percent of program costs because part B program
costs increased much faster than inflation as measured by the
Consumer Price Index (CPI) on which the Social Security cost-
of-living adjustment is based.
    Beginning in the early 1980s, Congress regularly voted to
set part B premiums at a level to cover 25 percent of program
costs, in effect overriding the cost-of-living adjustment
limitation. The 25-percent provisions first became effective
January 1, 1984. General revenues covered the remaining 75
percent of part B program costs. BBA 1997 permanently sets the
part B premium equal to 25 percent of program costs.

           Financial Status of Hospital Insurance Trust Fund

    The Hospital Insurance Trust Fund balance is dependent on
total income to the HI Trust Fund exceeding total outlays from
the fund. Tables 2-7 and 2-8 show historical information from
the 2000

                                                  TABLE 2-7.--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED FISCAL YEARS 1970-2009
                                                                                    [In millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Income                                                           Disbursements
                                -----------------------------------------------------------------------------------------------------------------------------------------
                                            Income                                          Payments                                                                          Net     Balance at
        Fiscal year \1\                      from     Railroad   Reimbursement   Premiums      for      Interest                                                           increase     end of
                                  Payroll  taxation  retirement  for uninsured     from     military    and other    Total     Benefits    Administrative      Total        in fund      year
                                   taxes      of       account      persons     voluntary     wage     income \2\   income   payments \3\   expenses \4\   disbursements
                                           benefits   transfers                 enrollees    credits
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1970...........................    $4,785        NA       $64          $617           NA          $11        $137    $5,614       $4,804         $149           $4,953          $661      $2,677
1975...........................    11,291        NA       132           481           $6           48         609    12,568       10,353          259           10,612         1,956       9,870
1980...........................    23,244        NA       244           697           17          141       1,072    25,415       23,790          497           24,288         1,127      14,490
1985...........................    46,490        NA       371           766           38           86       3,182    50,933       47,841          813           48,654     \5\ 4,103      21,277
1990...........................    70,655        NA       367           413          113          107       7,908    79,563       65,912          774           66,687        12,876      95,631
1991...........................    74,655        NA       352           605          367   \6\ -1,011       8,969    83,938       68,705          934           69,638        14,299     109,930
1992...........................    80,978        NA       374           621          484           86      10,133    92,677       80,784        1,191           81,974        10,703     120,633
1993...........................    83,147        NA       400           367          622           81  \7\ 12,484    97,101       90,738          866           91,604         5,497     126,131
1994...........................    92,028    $1,639       413           506          852           80      10,676   106,195      101,535        1,235          102,770         3,425     129,555
1995...........................    98,053     3,913       396           462          998           61      10,963   114,847      113,583        1,300          114,883           -36     129,520
1996...........................   106,934     4,069       401           419        1,107   \8\ -2,293      10,496   121,135      124,088        1,229          125,317        -4,182     125,338
1997...........................   112,725     3,558       419           481        1,279           70      10,017   128,548      136,175        1,661          137,836        -9,287     116,050
1998...........................   121,913     5,067       419            34        1,320           67       9,382   138,203  \9\ 135,487        1,653          137,140         1,063     117,113
1999...........................   134,385     6,552       430           652        1,401           67       9,523   153,011  \9\ 129,463        1,979          131,441        21,570     138,683
2000...........................   136,327     7,200       458           470        1,397           68      10,629   156,549  \9\ 131,541        2,310          133,851        22,698     161,381
2001...........................   146,921     6,883       463           453        1,403   \10\ -1,26      12,176   167,035  \9\ 141,106        2,464          143,570        23,465     184,845
                                                                                                    4
2002...........................   153,981     7,446       481           205        1,476           68      13,826   177,484  \9\ 144,634        2,603          147,237        30,246     215,091
2003...........................   160,831     8,052       489           176        1,571           68      15,345   186,532  \9\ 154,335        2,748          157,083        29,449     244,540
2004...........................   168,031     8,646       494           167        1,681           68      16,834   195,920      163,103        2,829          165,932        29,988     274,529
2005...........................   177,923     9,211       510           174        1,804           69      18,460   208,151      176,833        2,911          179,744        28,407     302,935
2006...........................   185,688     9,856       528           183        1,938           69      20,026   218,288      183,591        2,997          186,588        31,700     334,635
2007...........................   195,121    10,593       548           195        2,078           70      21,619   230,223      199,209        3,091          202,300        27,923     362,558
2008...........................   204,366    11,464       569           204        2,218           71      23,182   242,074      212,680        3,192          215,872        26,203     388,761
2009...........................   214,167    12,534       592           212        2,357           71      24,752   254,685      226,774        3,298          230,072        24,613     413,374
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Fiscal years 1970 and 1975 consist of the 12 months ending on June 30 of each year; fiscal years 1980 and later consist of the 12 months ending on September 30 of each year.
\2\ Other income includes recoveries of amounts reimbursed from the trust fund which are not obligations of the trust fund and a small amount of miscellaneous income.
\3\ Includes costs of peer review organizations (beginning with the implementation of the prospective payment system on October 1, 1983).
\4\ Includes costs of experiments and demonstration projects. Beginning in 1997, includes fraud and abuse control expenses, as provided for by Public Law 104-191.
\5\ Includes repayment of loan principal from the Old-Age and Survivors Insurance Trust Fund of $1,824 million.
\6\ Includes the lump-sum general revenue adjustment of -$1,100 million, as provided for by section 151 of Public Law 98-21.
\7\ Includes $1,805 million transfer from the SMI catastrophic coverage reserve fund, as provided for by Public Law 102-394.
\8\ Includes the lump-sum general revenue adjustment of -$2,366 million, as provided for by section 151 of Public Law 98-21.
\9\ For 1998-2003, includes moneys transferred to the SMI Trust Fund for home health agency costs, as provided for by Public Law 105-33.
\10\ Includes a preliminary estimate of -$1,332 million for the lump-sum general revenue adjustment provided for by section 151 of Public Law 98-21.

NA--Not applicable.

Note.--Totals do not necessarily equal the sums of rounded components.

Source: Board of Trustees, Federal Hospital Insurance Trust Fund (2000) and Health Care Financing Administration unpublished tables.

                                                 TABLE 2-8.--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED CALENDAR YEARS 1970-2009
                                                                                    [In millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Income                                                            Disbursements
                              -------------------------------------------------------------------------------------------------------------------------------------------
                                           Income                                           Payments                                                                          Net     Balance at
        Calendar year                       from     Railroad   Reimbursement   Premiums      for       Interest                                                           increase     end of
                                Payroll   taxation  retirement  for uninsured     from      military    and other    Total     Benefits    Administrative      Total        in fund      year
                                 taxes       of       account      persons     voluntary      wage     income \1\   income   payments \2\   expenses \3\   disbursements
                                          benefits   transfers                 enrollees    credits
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1970.........................     $4,881        NA       $66          $863           NA           $11        $158    $5,979       $5,124         $157           $5,281          $698      $3,202
1975.........................     11,502        NA       138           621           $7            48         664    12,980       11,315          266           11,581         1,399      10,517
1980.........................     23,848        NA       244           697           18           141       1,149    26,097       25,064          512           25,577           521      13,749
1985.........................     47,576        NA       371           766           41      \4\ -719       3,362    51,397       47,580          834           48,414     \5\ 4,808      20,499
1990.........................     72,013        NA       367           413          122      \6\ -993       8,451    80,372       66,239          758           66,997        13,375      98,933
1991.........................     77,851        NA       352           605          432            89       9,510    88,839       71,549        1,021           72,570        16,269     115,202
1992.........................     81,745        NA       374           621          522            86      10,487    93,836       83,895        1,121           85,015         8,821     124,022
1993.........................     84,133        NA       400           367          675            81  \7\ 12,531    98,187       93,487          904           94,391         3,796     127,818
1994.........................     95,280    $1,639       413           506          907            80      10,745   109,570      103,282        1,263          104,545         5,025     132,844
1995.........................     98,421     3,913       396           462          954            61      10,820   115,027      116,368        1,236          117,604        -2,577     130,267
1996.........................    110,585     4,069       401           419        1,199     \8\ 2,293      10,222   124,603      128,632        1,297          129,929        -5,325     124,942
1997.........................    114,670     3,558       419           481        1,319            70       9,637   130,154      137,762        1,690          139,452        -9,298     115,643
1998.........................    124,317     5,067       419            34        1,316            67       9,327   140,547  \9\ 133,990        1,782          135,771         4,776     120,419
1999.........................    132,306     6,552       430           652        1,447            67      10,139   151,593  \9\ 128,766        1,866          130,632        20,961     141,380
2000.........................    141,141     7,200       458           470        1,380   \10\ -1,264      11,404   160,789  \9\ 134,075        2,336          136,411        24,377     165,757
2001.........................    148,750     6,883       463           453        1,411            68      12,983   171,011  \9\ 141,222        2,500          143,721        27,289     193,046
2002.........................    155,748     7,446       481           205        1,497            68      14,582   180,028  \9\ 148,682        2,638          151,320        28,708     221,754
2003.........................    162,906     8,052       489           176        1,595            68      16,084   189,370  \9\ 156,710        2,768          159,478        29,892     251,646
2004.........................    170,576     8,646       494           167        1,709            68      17,648   199,307      165,857        2,849          168,706        30,601     282,248
2005.........................    179,205     9,211       510           174        1,835            69      19,250   210,254      177,342        2,931          180,273        29,981     312,228
2006.........................    187,868     9,856       528           183        1,972            69      20,825   221,302      189,780        3,019          192,799        28,503     340,732
2007.........................    197,497    10,593       548           195        2,113            70      22,410   233,425      202,840        3,115          205,955        27,470     368,202
2008.........................    207,076    11,464       569           204        2,253            71      23,973   245,610      216,431        3,217          219,648        25,962     394,164
2009.........................    217,557    12,534       592           212        2,391            71      25,466   258,823      230,714        3,325          234,039        24,784     418,948
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Other income includes recoveries of amounts reimbursed from the trust fund, receipts from the fraud and abuse control program, which are not obligations of the trust fund and a small
  amount of miscellaneous income.
\2\ Includes cost of peer review organizations (beginning with the implementation of the prospective payment system on October 1, 1983).
\3\ Includes costs of experiments and demonstration projects. Beginning in 1997, includes fraud and abuse control expenses, as provided for by Public Law 104-91.
\4\ Includes the lump-sum general revenue adjustment of -$805 million, as provided for by section 151 of Public Law 98-21.
\5\ Includes repayment of loan principal from the Old-Age and Survivors Insurance Trust Fund of $1,824 million.
\6\ Includes the lump-sum general revenue adjustment of -$1,100 million, as provided for by section 151 of Public Law 98-21.
\7\ Includes $1,805 million transfer from the SMI catastrophic coverage reserve fund, as provided for by Public Law 102-394.
\8\ Includes the lump-sum general revenue adjustment of -$2,366 million provided for by section 151 of Public Law 98-21.
\9\ For 1998-2003, includes moneys transferred to the SMI Trust Fund for home health agency costs, as provided for by Public Law 105-33.
\10\ Includes a preliminary estimate of -$1,332 million for the lump-sum general revenue adjustment provided for by section 151 of Public Law 98-21.

NA--Not applicable.

Note.--Totals do not necessarily equal the sums of rounded components.

Source: Board of Trustees, Federal Hospital Insurance Trust Fund (2000) and Health Care Financing Administration, unpublished tables.

Trustees' Report (as amended) on the operation of the trust
fund. The Trustees' Report also included projections that were
subsequently revised. The revised figures are reflected in
tables 2-7 and 2-8.
    Each year, the HI Trustees make projections for the date
the trust fund will become insolvent (table 2-9). The 1997
report stated that under the Trustees intermediate assumptions,
the fund would become insolvent in 2001. Subsequent reports
significantly delayed the projected insolvency date. The 2000
report (as amended) projects that the fund will become
insolvent in 2025. The improve-

  TABLE 2-9.--HISTORICAL PROJECTIONS OF HI TRUST FUND INSOLVENCY, 1970-
                                  2000
------------------------------------------------------------------------
                                                               Projected
                                                               number of
         Year of Trustees' Report            Projected year      years
                                              of insolvency      until
                                                              insolvency
------------------------------------------------------------------------
1970......................................              1972           2
1971......................................              1973           2
1972......................................              1976           4
1973......................................    none indicated          NA
1974......................................    none indicated          NA
1975......................................        late 1990s          NA
1976......................................       early 1990s          NA
1977......................................        late 1980s          NA
1978......................................              1990          12
1979......................................              1992          13
1980......................................              1994          14
1981......................................              1991          10
1982......................................              1987           5
1983......................................              1990           7
1984......................................              1991           7
1985......................................              1998          13
1986......................................              1996          10
1986 amended..............................              1998          12
1987......................................              2002          15
1988......................................              2005          17
1989......................................             (\1\)          NA
1990......................................              2003          13
1991......................................              2005          14
1992......................................              2002          10
1993......................................              1999           6
1994......................................              2001           7
1995......................................              2002           7
1996......................................              2001           5
1997......................................              2001           4
1998......................................              2008          10
1999......................................              2015          16
2000 \2\..................................              2025          25
------------------------------------------------------------------------
\1\ Contained no long-range projections.
\2\ As amended.

NA--Not applicable.

Source: Intermediate projections of various HI Trustees' Reports, 1970-
  2000.

ments can be attributed to a number of factors including
improvements in the economy as a whole (which are reflected in
higher payroll tax revenues) and a lower rate of growth in
program expenditures. A key factor was the enactment of BBA
1997. This legislation provided for the transfer of a portion
of home health spending (which at the time was the fastest
growing component of part A expenditures) from part A to part
B. It also included additional provisions to stem the growth in
part A expenditures. These provisions included the
implementation of new payment limits for home health services,
a prospective payment system (PPS) for skilled nursing facility
(SNF) services, and limits on the increases in hospital
payments. BBA 1997 also established the Medicare+Choice (M+C)
Program and modified the calculation of payments to managed
care entities.
    Following enactment of BBA 1997, a number of observers
claimed that the actual savings achieved by BBA 1997 were
larger than was intended when the legislation was enacted. As a
result, legislation was enacted in 1999 (Balanced Budget
Refinement Act (BBRA) of 1999) which mitigated the impact of
BBA 1997 on providers. Notwithstanding enactment of BBRA 1999,
the 2000 Trustees' Report (as amended) delays the trust fund
insolvency date an additional 10 years over that projected in
the 1999 report (from 2015 to 2025).
    The 2000 report states that the fund meets the Trustees'
test of short-range financial adequacy for the first time since
1991. The projected long-range actuarial balance is moderately
improved, but a substantial long-range deficit remains. The
Trustees note that future operations will be very sensitive to
future economic, demographic, and health cost trends and could
differ substantially from the intermediate projections.
    Beginning in 2011, the program will begin to experience the
impact of major demographic changes. First, baby boomers
(persons born between 1946 and 1964) begin turning age 65.
Second, there will be a shift in the number of covered workers
supporting each HI enrollee. In 1999, there were 4 workers for
every beneficiary; in 2030 there will only be an estimated 2.3.

     Financial Status of Supplementary Medical Insurance Trust Fund

    Because the SMI Trust Fund is financed through beneficiary
premiums and Federal general revenues, it does not face the
prospect of depletion, as does the HI Trust Fund. However, the
rising cost of the program is placing a burden on the trust
fund, and by extension on beneficiaries (in the form of
premiums) and Federal general revenues. Table 2-10 shows
historical information from the 2000 Trustees' Report (Board of
Trustees, Federal Supplementary Medical Insurance Trust Fund,
2000).

Comparison of Medicare Lifetime Benefits with Beneficiary Contributions

    Medicare beneficiaries typically get back considerably more
in Medicare benefits than they contribute in payroll taxes and
premiums over their lifetimes. The Congressional Budget Office
(CBO)

                 TABLE 2-10.--OPERATIONS OF THE SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND (CASH BASIS), SELECTED FISCAL YEARS 1970-2000
                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Income                                          Disbursements
                                      ------------------------------------------------------------------------------------------------------- Balance at
           Fiscal year \1\                                                  Interest                                                            end of
                                        Premium from       Government      and other      Total      Benefit   Administrative      Total       year \4\
                                          enrollees    contributions \2\   income \3\    income     payments      expenses     disbursements
--------------------------------------------------------------------------------------------------------------------------------------------------------
1970.................................            $936              $928           $12      $1,876      $1,979          $217          $2,196          $57
1975.................................           1,887             2,330           105       4,322       3,765           405           4,170        1,424
1980.................................           2,928             6,932           415      10,275      10,144           593          10,737        4,532
1985.................................           5,524            17,898         1,155      24,577      21,808           922          22,730       10,646
1986.................................           5,699            18,076         1,228      25,003      25,169         1,049          26,218        9,432
1987.................................           6,480            20,299         1,018      27,797      29,937           900          30,837        6,392
1988.................................           8,756            25,418           828      35,002      33,682         1,265          34,947        6,447
1989.................................      \5\ 11,548            30,712     \5\ 1,022  \5\ 43,282      36,867     \5\ 1,450      \5\ 38,317   \5\ 11,412
1990.................................      \5\ 11,494            33,210     \5\ 1,434  \5\ 46,138      41,498     \5\ 1,524      \5\ 43,022   \5\ 14,527
1991.................................          11,807            34,730         1,629      48,166      45,514         1,505          47,019       15,675
1992.................................          12,748            38,684         1,717      53,149      48,627         1,661          50,288       18,535
1993.................................          14,683            44,227         1,889      60,799  \6\ 54,214         1,845          56,059       23,276
1994.................................          16,895            38,355         2,118      57,368      58,006         1,718          59,724       20,919
1995.................................          19,244            36,988         1,937      58,169      63,491         1,722          65,213       13,874
1996.................................          18,731            61,702         1,392      82,025      67,176         1,771          68,946       26,953
1997.................................          19,141            59,471         2,193      80,806      71,133         1,420          72,553       35,206
1998.................................          19,427            59,919         2,608      81,955  \7\ 74,837         1,435          76,272       40,889
1999.................................          20,160            62,185         2,933      85,278  \7\ 79,008         1,510          80,518       45,649
2000.................................          20,405            65,209         3,054      88,667  \7\ 89,571         1,510          91,081       43,235
2001.................................          22,102            71,015         3,048      96,166  \7\ 96,043         1,696          97,738       41,663
2002.................................          24,389            78,322         2,976     105,687  \7\ 102,85         1,753         104,608       42,742
                                                                                                            5
2003.................................          26,909            86,262         2,917     116,088  \7\ 114,03         1,827         115,863       42,967
                                                                                                            6
2004.................................          29,347            92,268         2,898     124,513  \7\ 122,05         1,903         123,956       43,524
                                                                                                            3
2005.................................          31,863            99,291         2,916     134,070     133,145         1,981         135,126       42,469
2006.................................          34,319           106,725         2,969     144,013     137,601         2,063         139,665       46,818
2007.................................          36,865           114,591         3,056     154,512     150,385         2,150         152,535       48,795
2008.................................          39,716           124,009         3,192     166,918     161,939         2,242         164,180       51,533
2009.................................          42,885           135,079         3,396     181,360     174,789         2,336         177,125       55,767
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For 1970 and 1975, fiscal years cover the interval from July 1 through June 30; fiscal years 1980-2005 cover the interval from October 1 through
  September 30.
\2\ General fund matching payments, plus certain interest-adjustment items.
\3\ Other income includes recoveries of amounts reimbursed from the trust fund which are not obligations of the trust fund and other miscellaneous
  income.
\4\ The financial status of the program depends on both the total net assets and the liabilities of the program.
\5\ Includes the impact of the Medicare Catastrophic Coverage Act of 1988 (Public Law 100-360).
\6\ Includes the impact of the transfer to the HI Trust Fund of the SMI catastrophic coverage reserve fund on March 31, 1993 as specified in Public Law
  102-394. Actual benefit payments for 1993 were $52,409 million and the amount transferred was $1,805 million.
\7\ Benefit payments less moneys transferred from the HI Trust Fund for home health agency costs, as provided for by the Balanced Budget Act of 1997.

Source: Board of Trustees, Federal Supplementary Medical Insurance Trust Fund (2000).

has estimated (based on the 1999 Trustees' Report) the extent
to which Medicare enrollees' contributions (through the HI
payroll tax and the SMI premium) cover the expected value of
their benefits under the program. Results are presented only
for self-insured men and women (i.e., those who obtain benefits
on the basis of their own work history) who worked each year at
an average wage from 1966 until retirement at age 65 (table 2-
11). Three groups are shown--persons who reach 65 as of 1985,
1995, and 2005. All estimates are dependent on uncertain
projections of future health spending.

  TABLE 2-11.--CONTRIBUTIONS AS A PERCENT OF EXPECTED LIFETIME BENEFITS
UNDER MEDICARE FOR SELECTED SELF-INSURED ENROLLEES REACHING AGE 65 AS OF
                           1985, 1995, OR 2005
------------------------------------------------------------------------
                                                        Year
                 Category                  -----------------------------
                                              1985      1995      2005
------------------------------------------------------------------------
Self-insured men who earned average wages:
    Hospital insurance (HI)...............      33.1      69.5     111.3
    Supplementary medical insurance (SMI).      24.3      22.8      22.1
                                           -----------------------------
        Medicare total....................      29.8      49.6      68.8
                                           =============================
Self-insured women who earned average
 wages:
    Hospital insurance....................      30.3      62.2      99.1
    Supplementary medical insurance.......      25.3      24.2      23.7
                                           -----------------------------
        Medicare total....................      28.3      45.4      62.4
------------------------------------------------------------------------
Note.--Contributions include employers' and employees' HI payroll taxes,
  interest, and SMI premiums. Any other taxes paid by enrollees are not
  included. Estimates are for beneficiaries with sufficient work history
  to qualify for benefits. However, up to 20 percent of Medicare
  beneficiaries qualify on the basis of their spouse's work history, not
  their own. For spouse-insured beneficiaries, contributions as a
  percent of benefits are lower because spouse-insured beneficiaries
  paid little or no HI payroll taxes. Estimates assume an expected
  lifetime at age 65 of 15 years for men (to age 80) and 19 years for
  women (to age 84). Present discounted values for expected benefits
  were obtained using the average interest rate projected for HI Trust
  Fund earnings over the same years.

Source: Congressional Budget Office, unpublished tables.

    For a self-insured man who worked continuously at an
average wage from 1966 (when Medicare began) until retirement
in 1985, the present discounted value of their contributions is
about 30 percent of the expected value of lifetime Medicare
benefits. For men retiring in 1995, contributions represent
about 50 percent of benefits; for those retiring in 2005,
contributions represent about 69 percent. Contributions through
HI payroll taxes increase relative to HI benefits for later
retirees because the HI payroll tax (which began in 1966) was
paid for a greater proportion of their working years (table 2-
11).
    Contributions by self-insured women as a percentage of
expected benefits are smaller than they are for men. Actual
contributions by men and women are the same in the illustrative
calculations. However, a woman's lifetime benefits are larger
because a woman's lifetime expectancy is 4 years longer at age
65 (table 2-11).
    In 1995 dollars, the present discounted value of Medicare
benefits net of contributions (i.e., the net transfer or
subsidy value) is estimated at $30,742 for men and $35,623 for
women who retired in 1985. For those retiring in 1995, the
value is estimated at $31,429 for men and $39,069 for women.
CBO projects that values will decline in the future, reaching
$26,429 for men and $36,354 for women by 2005 (table 2-12).

       TABLE 2-12.--PRESENT DISCOUNTED VALUE OF LIFETIME BENEFITS,
CONTRIBUTIONS, AND NET TRANSFER UNDER MEDICARE FOR SELECTED SELF-INSURED
            ENROLLEES REACHING AGE 65 IN 1985, 1995, OR 2005
                       [In constant 1995 dollars]
------------------------------------------------------------------------
                                                    Year
             Category             --------------------------------------
                                       1985         1995         2005
------------------------------------------------------------------------
Self-insured men who earned
 average wages:
    Benefits.....................     $43,780      $62,336      $84,627
    Contributions................     -13,038      -30,907      -58,198
                                  --------------------------------------
        Net transfer.............      30,742       31,429       26,429
                                  ======================================
Self-insured women who earned
 average wages
    Benefits.....................      49,673       71,570       96,802
    Contributions................     -14,051      -32,502      -60,448
                                  --------------------------------------
        Net transfer.............      35,623       39,069       36,354
------------------------------------------------------------------------
Note.--Contributions include employers' and employees' HI payroll taxes,
  interest, and SMI premiums. Any other taxes paid by enrollees are
  included. Net transfer is benefits net of contributions. Estimates are
  for beneficiaries with sufficient work history to qualify for
  benefits. However, up to 20 percent of Medicare beneficiaries qualify
  on the basis of their spouse's work history, not their own. Spouse-
  insured beneficiaries qualify on the basis of their spouse's work
  history, not their own. For spouse-insured beneficiaries,
  contributions as a percent of benefits are lower and the net transfer
  is larger because spouse-insured beneficiaries paid little or no HI
  payroll taxes. Estimates assume an expected lifetime at age 65 to 15
  years for men (to age 80) and 19 years for women (to age 84). Present
  discounted values for unexpected benefits were obtained using the
  average interest rate projected for HI Trust Fund earnings over the
  same years. The Consumer Price Index for All Urban Consumers (CPI-U)
  was used to get constant 1995 dollars.

Source: Congressional Budget Office, unpublished tables.

                 PART A SERVICES--COVERAGE AND PAYMENTS

                      Inpatient Hospital Services

    Medicare part A provides reimbursement for inpatient
hospital care through the prospective payment system (PPS),
established by Congress in the Social Security Amendments of
1983 (Public Law 98-21). Before the enactment of PPS, Medicare
paid hospitals retrospectively for the full costs they
incurred, subject to certain limits and tests of
reasonableness. Congress had previously acted to contain
growing hospital costs by placing certain limits on routine
inpatient care operating costs. However, medical costs
continued to grow faster than the rate of inflation in the
early 1980s, so PPS was enacted to constrain the growth of
Medicare's inpatient hospital costs by providing incentives for
hospitals to provide care more efficiently (see appendix D for
further information about hospital services).
    Under PPS, fixed hospital payment amounts are established
in advance of the provision of services on the basis of a
patient's diagnosis. Hospitals that are able to provide
services for less than the fixed PPS payment may keep the
difference. Hospitals with costs that exceed the fixed PPS
payment lose money on the case. The system's fixed prices are
determined in advance on a cost-per-case basis, using a
classification system of about 500 diagnosis-related groups
(DRGs). Each Medicare case is assigned to one of the DRGs based
on the patient's medical condition and treatment. DRGs are
assigned relative weights to reflect the variation in the costs
of treating a particular diagnosis. The DRG-based payment rate
is designed to represent the national average cost per case for
treating a patient with a particular diagnosis. Payments for a
particular DRG will vary among different hospitals depending on
the hospital's location and certain other characteristics. In a
particular hospital, all cases assigned to the same DRG are
reimbursed at the same predetermined rate.
    The PPS payment rates are updated each year using an update
factor which is determined, in part, by the projected increase
in the hospital market basket index (MBI). The hospital MBI
measures the cost of goods and services that are purchased by
hospitals, yielding one price inflator for all hospitals in a
given year.
    In addition to the basic DRG payment for each case, PPS
hospitals may also receive certain supplemental Medicare
payments. Additional hospital payments include indirect medical
education costs, disproportionate share hospital (DSH)
payments, outlier payments, and payments for inpatient dialysis
provided to end-stage renal disease (ESRD) beneficiaries.
Certain categories of hospital expenses, including direct
medical education costs, are not included in the PPS rates and
are reimbursed in some other way. Certain facilities receive
special treatment under PPS, particularly certain types of
isolated or essential hospitals in rural areas, including
regional referral centers, sole community hospitals, and
Medicare-dependent small rural hospitals.
    Specialized facilities are excluded from PPS and are paid
on the basis of reasonable costs subject to rate of increase
limits. PPS-exempt facilities include psychiatric hospitals,
rehabilitation hospitals, children's hospitals, cancer research
centers, and long-term care hospitals. States are also allowed
to apply for a waiver from PPS and establish a prospective
system for setting hospital rates instead of what would be paid
under PPS; Maryland is the only State that continues to operate
under such a waiver.
    Table 2-13 provides calendar year 1998 data on the
utilization of inpatient hospital services by type of enrollee
and type of hospital.

TABLE 2-13.--USE OF INPATIENT HOSPITAL SERVICES BY MEDICARE ENROLLEES, BY TYPE OF ENROLLEE AND TYPE OF HOSPITAL,
                                             CALENDAR YEAR 1998 \1\
----------------------------------------------------------------------------------------------------------------
                                    Bills \2\            Covered days of care               Reimbursement
                             -----------------------------------------------------------------------------------
Type of enrollee and type of                                                         Amount
          hospital            Number in  Per 1,000  Number in  Per bill  Per 1,000     in     Per bill     Per
                              thousands  enrollees  thousands            enrollees  millions            enrollee
----------------------------------------------------------------------------------------------------------------
All enrollees:
  All hospitals.............     11,834        308     69,924       5.9      1,819   $74,153    $6,266    $1,929
    Short stay..............     11,335        295     64,454       5.7      1,677    70,813     6,247     1,843
    Long stay...............        499         13      5,470      11.0        142     3,340     6,693        87
      Psychiatric...........        205          5      1,837       9.0         48       712     3,473        19
      All other.............        294          8      3,633      12.4         95     2,628     8,939        68
Aged:
  All hospitals.............     10,021        300     58,849       5.9      1,761    63,372     6,324     1,897
    Short stay..............      9,249        277     55,133       6.0      1,650    60,868     6,581     1,822
    Long stay...............        772         23      3,716       4.8        111     2,504     3,244        75
      Psychiatric...........         52          2        563      10.8         17       242     4,654         7
      All other.............        720         22      2,295       3.2         69     2,262     3,142        68
Disabled:
  All hospitals.............      1,775        353     11,075       6.2      2,205    10,780     6,073     2,146
    Short stay..............      1,553        309      9,322       6.0      1,856     9,945     6,404     1,980
    Long stay...............        222         44      1,753       7.9        349       835     3,761       166
      Psychiatric...........        153         30      1,274       8.3        254       470     3,072        94
      All other.............         69         14        479       6.9         95       365     5,290        73
----------------------------------------------------------------------------------------------------------------
\1\ Preliminary data. Totals may not add due to rounding.
\2\ Discharges not available by type of hospital.

Note.--Only services rendered by inpatient hospitals are included.

Source: Health Care Financing Administration, Office of Information Services, unpublished data.

                   Skilled Nursing Facility Services

Coverage
    The Medicare Program covers extended care services provided
in nursing homes for beneficiaries who require additional
skilled nursing care and rehabilitation services following a
hospitalization. These extended care services, commonly known
as skilled nursing facility (SNF) benefits, are covered under
part A of the program for up to 100 days per spell of illness
and must be provided in an SNF certified to participate in
Medicare. A spell of illness is that period which begins when a
beneficiary is furnished inpatient hospital or SNF care and
ends when the beneficiary has been neither an inpatient of a
hospital nor an SNF for 60 consecutive days. A beneficiary may
have more than one spell of illness per year.
    In order to be eligible for SNF care, the beneficiary must
have been an inpatient of a hospital for at least 3 consecutive
days and must be transferred to an SNF, usually within 30 days
of discharge from the hospital. Furthermore, a physician must
certify that the beneficiary is in need of skilled nursing care
or other skilled rehabilitation services, which, as a practical
matter, can only be provided on an inpatient basis and which
are related to the condition for which the beneficiary was
hospitalized.
    Covered SNF services include the following:
  --Nursing care provided by or under the supervision of a
        registered nurse;
  --Room and board;
  --Physical or occupational therapy or speech-language
        pathology;
  --Medical social services;
  --Drugs, biologicals, supplies, appliances, and equipment
        ordinarily furnished by an SNF for the care of
        patients;
  --Medical services of interns and residents in training under
        an approved teaching program of a hospital with which
        the SNF has a transfer agreement; and
  --Other services necessary to the health of patients that are
        generally provided by SNFs.
Reimbursement
    Prior to the Balanced Budget Act (BBA) of 1997 Medicare
reimbursed SNF care on a retrospective cost-based basis. This
meant that SNFs were paid after services were delivered for the
reasonable costs (as defined by program) they incurred for the
care they provided. SNFs had few incentives to maximize
efficiency and minimize their costs, and little inducement to
control the amount or number of services they provided.
    Prospective payment system.--In BBA 1997, Congress required
that a prospective payment system (PPS) for SNF care be phased
in over 3 years, beginning with the SNF's first cost reporting
period after July 1, 1998. Prospective payment involves
grouping patients according to the type and intensity of
services they require and setting a daily payment rate for each
payment group before the services are provided. Like other PPSs
that pay health care providers for care to Medicare
beneficiaries on the basis of predetermined, fixed amounts,
Medicare payments to SNFs are intended to pay the provider for
its Medicare beneficiary costs on average. That is, although
the payment is a fixed daily rate, a facility's actual costs
may be above or below that amount for an individual patient.
The goal for the facility is to incur costs that, on average,
over time, do not exceed the PPS average amounts.
    Under BBA 1997 provisions, an SNF is paid a daily rate
(``Federal per-diem rate''), prospectively determined, for all
covered services provided to beneficiaries while they are
eligible for SNF benefits. These include all routine,
ancillary, and capital-related costs. An amount is added to
this daily rate to cover part B services received by SNF-
eligible patients; some part B services are excluded from this
``add on''--primarily the services of physicians and certain
nonphysician practitioners such as physician assistants, nurse
practitioners, and psychologists, who are paid separately under
part B.
    The SNF PPS required by BBA 1997 reflects the resource
utilization group (RUG) design developed by HCFA. It is a
hierarchical classification system accounting for the type and
level of care needed by SNF patients and the relative amount of
resources needed to provide a patient's care. Under the
original RUG system implemented in 1998, there were seven basic
categories of care, including, in hierarchical order: (1)
rehabilitation; (2) extensive services; (3) special care; (4)
clinically complex; (5) impaired cognition; (6) behavior
problems; and (7) reduced physical function. These seven
categories were further broken down into 44 specific patient
groupings. The system ascribed a per-diem payment amount for
each of the 44 groupings. These amounts are adjusted by a wage
index to account for geographic variations in wages among urban
and rural areas. The rates are updated annually using an SNF
MBI. HCFA issued a final rule implementing the PPS on July 30,
1999 (64 Federal Register 41644-701).
    Transition period.--BBA 1997 provided that the Federal per-
diem rate would apply immediately to all SNFs that received
their first Medicare payment on or after October 1, 1995. For
those that received their first Medicare payment before that
date, a 3-year transition period was established. During the
transition period, the PPS has two components: a Federal PPS
component under the RUG system and a ``facility-specific''
component. This latter is computed separately for each SNF to
reflect the facility's own average costs under the pre-PPS
system. Payments for the first cost reporting period beginning
on or after July 1, 1998, are a blend of 75 percent facility-
specific rate and 25 percent Federal rate. For the second cost
reporting period, the facility-specific percentage is 50
percent and the Federal, 50 percent. For the third period, the
facility-specific percentage is 25 percent and the Federal, 75
percent. For all subsequent years, payments will be based
entirely on the Federal per-diem rate.
    Consolidated billing.--Congress also included a
consolidated billing provision in BBA 1997 to address the
potential for fraud and duplicate billing for SNF services.
Under this provision, the SNF is responsible for billing
Medicare for all services (with certain exceptions) provided to
its residents under both parts A and B. This provision applies
to beneficiaries residing in an SNF or in any part of a nursing
home which contains a Medicare-certified SNF portion. It
applies both to patients who are in a part A covered stay and
those who are not. Although the SNF might provide these
services under arrangements with outside providers, the outside
provider must get its payment through the SNF rather than by
billing Medicare directly.
    BBA 1997 excluded some services from the SNF consolidated
billing requirement, including those provided by physicians and
certain nonphysician practitioners, and dialysis-related
services and supplies. Regulations excluded hospice care
related to a beneficiary's terminal illness and certain
ambulance trips to and from SNFs. Providers of these services,
which are covered under part B, bill Medicare directly.
    BBA 1997 established the PPS for SNFs with the purpose of
slowing the rate of growth in SNF payments under Medicare. In
January 1998, a few months after enactment of BBA 1997, CBO
projected that Medicare spending on SNFs for 1998 would remain
at 1997 levels. However, actual spending in 1998 was much lower
than anticipated. In March 1999, CBO revised its 1998 estimate
to indicate a decrease in SNF spending of $900 million. It has
also revised downward its 5- and 10-year estimates for total
SNF spending. A number of factors contributed to the reductions
in Medicare spending for SNFs. These include lower inflation,
which results in lower payments to providers; and HCFA's
heightened efforts to combat fraud and abuse, resulting in a
reduction in incorrect overpayments. However, SNF industry
spokespersons said that these reductions indicate that changes
made to Medicare's reimbursement policies were too drastic,
causing financial problems for SNFs, and that they should be
reexamined.
    In addition, industry representatives and others (including
the Medicare Payment Advisory Commission) were concerned that
the RUG system based on 44 payment categories might not
adequately cover the costs of treating patients with clinically
complex problems requiring skilled nursing care (high acuity
patients), and those needing extensive ancillary nontherapy
services, such as laboratory tests, drugs and biologicals,
imaging services, and transportation.
    Balanced Budget Refinement Act (BBRA) of 1999.--In response
to concerns about the adequacy of payments under the RUG
system, Congress enacted, in BBRA, temporary increases for
Medicare payments for 15 of the 44 RUGs. These 20-percent
increases apply to SNF care furnished to patients categorized
as needing extensive services, special care, clinically complex
care, and certain high level and medium level rehabilitation
services. The special payments are available beginning April 1,
2000, and ending the later of October 1, 2000, or the date of
implementation of a refined, revised RUG system.
    BBRA also provided for a 4-percent increase in the Federal
per-diem rate for SNF services for fiscal year 2001 and fiscal
year 2002. This increase is not to be considered in the base
amount used to compute updates to the Federal per-diem rate.
    Other changes made by BBRA include the following items:
 1. SNFs may elect to receive Medicare payments based 100
        percent on the Federal per-diem rate, rather than under
        the phase-in schedule, if it would be more advantageous
        for them to do so.
 2. Starting April 1, 2000, separate payments above the RUG
        per-diem rate would be made for certain ambulance
        services for dialysis patients, certain prostheses, and
        certain chemotherapy drugs for SNF patients.
 3. If at least 60 percent of an SNF's patients are
        immunocompromised, RUG payments will be based 50
        percent on the facility specific rate and 50 percent on
        the Federal per-diem rate (rather than moving to 100
        percent of the Federal rate) until October 1, 2001.
    CBO estimates that the changes in payments to SNFs made by
BBRA will increase spending for SNF care by $2.2 billion in the
first 5 years.
SNF payments and utilization
    For a number of years, SNF care was one of Medicare's
fastest growing benefits. Tables 2-14 and 2-15 show that SNF
utilization and spending first began to increase substantially
in 1988 and 1989. These increases can be traced to changes that
occurred in the benefit at that time.

  TABLE 2-14.--ESTIMATED MEDICARE PAYMENTS FOR SKILLED NURSING FACILITY
                              CARE, 1983-99
------------------------------------------------------------------------
                                                  Payments
                                                    (in        Percent
                                                 billions)    change \1\
------------------------------------------------------------------------
Calendar year:
    1983......................................         $0.5           NA
    1984......................................          0.5          0.2
    1985......................................          0.5          0.7
    1986......................................          0.6          4.9
    1987......................................          0.6         10.4
    1988......................................          0.8         29.3
    1989......................................          2.8        242.5
    1990......................................          2.5        -11.5
    1991......................................          2.5         -0.3
    1992......................................          3.5         42.4
    1993......................................          5.0         41.0
    1994......................................          6.9         38.3
    1995......................................          9.2         34.1
    1996......................................         11.1         20.2
    1997......................................         13.0         17.1
    1998......................................         13.5          3.8
    1999......................................         11.8        -12.6
------------------------------------------------------------------------
\1\ Rounding in payments may not reflect actual change.

NA--Not applicable.

Note.--Payments reported here are incurred expenditures, net of
  beneficiary copayments.

Source: Health Care Financing Administration, Office of the Actuary.

       TABLE 2-15.--MEDICARE SKILLED NURSING FACILITY UTILIZATION AND PAYMENTS PER PERSON SERVED, 1983-99
----------------------------------------------------------------------------------------------------------------
                                                    People served             Days             Payment per day
                                               -----------------------------------------------------------------
                                                                        Number      Per
                                                  Number   Per 1,000     (in       person     Amount    Percent
                                                           enrollees  millions)    served                change
----------------------------------------------------------------------------------------------------------------
1983..........................................    265,000          9        9.3       35.1        $56         NA
1984..........................................    299,000         10        9.6       32.2         58        3.2
1985..........................................    314,000         10        8.9       28.4         65       11.1
1986..........................................    304,000         10        8.2       26.8         71        9.6
1987..........................................    293,000          9        7.4       25.4         84       19.3
1988..........................................    384,000         12       10.7       27.8         87        2.6
1989..........................................    636,000         19       29.8       46.8        117       34.6
1990..........................................    638,000         19       25.1       39.5         98      -16.1
1991..........................................    671,000         20       23.7       35.3        123       25.9
1992..........................................    785,000         22       29.0       36.9        157       27.1
1993..........................................    908,000         25       34.4       37.9        188       20.1
1994..........................................  1,068,000         29       37.1       39.7        226       20.1
1995..........................................  1,240,000         33       43.3       34.9        222        9.5
1996..........................................  1,384,000         37       47.7       34.4        240        8.5
1997..........................................  1,570,000         41       50.6       32.2        262        9.1
1998..........................................         NA         NA       48.6         NA        268        2.2
1999..........................................         NA         NA       50.1         NA        243       -9.3
----------------------------------------------------------------------------------------------------------------
NA--Not applicable.

Source: Health Care Financing Administration, Office of the Actuary.

    First, HCFA issued new coverage guidelines that became
effective early in 1988. Prior to this time, studies had
pointed to a lack of adequate written guidance on coverage
criteria that led to inconsistencies in coverage decisions for
a benefit that was intended to be uniform across the country.
As a result, many SNFs were reluctant to accept Medicare
beneficiaries because of the possibility that a submitted claim
would be retroactively denied. The 1988 guidelines clarified
coverage criteria by providing numerous examples of covered and
noncovered care. Furthermore, the guidelines explained that
even when a patient's full or partial recovery is not possible,
care could be covered if it were needed to prevent
deterioration or to maintain current capabilities. Previously,
some care had been denied coverage because patients' health
status was not expected to improve.
    The second major, though temporary, change in Medicare's
SNF benefit came in 1988 with the enactment of the Medicare
Catastrophic Coverage Act (MCCA). Effective beginning in 1989,
this legislation eliminated the SNF benefit's prior
hospitalization requirement; revised the coinsurance
requirement to be equal to 20 percent of the national average
estimated per-diem cost of SNF services for the first 8 days of
care; and authorized coverage of up to 150 days of care per
calendar year (rather than 100 days per spell of illness).
These changes were repealed in 1989, and the SNF benefit's
structure assumed its prior form.
    Studies have suggested that the coverage guidelines and
MCCA changes together might have caused a long-run shift in the
nursing home industry toward Medicare patients that would not
end with repeal of MCCA. Table 2-14 shows that SNF spending in
calendar year 1990 stood at $2.5 billion; by 1997 it had
increased to $13.0 billion, for an average annual growth rate
of 27 percent. With implementation of the RUG payment system in
mid-1998, however, the rate of increase dropped precipitously:
between 1997 and 1998 the increase was 3.8 percent, and
payments decreased by 12.6 percent in 1999.
    Table 2-15 shows that between 1992 and 1997 the number of
Medicare beneficiaries receiving SNF care doubled from 785,000
to 1.57 million. The number of covered days grew from 29
million to 50.6 million, or by 74 percent. Payments per day
grew from $157 in 1992 to $262 in 1997, a 67-percent increase.
However, in 1998 when the RUG system went into effect, these
payments increased by only 2.2 percent to $268, and decreased
to $243 per day in 1999, a 9.3 percent decrease. These
decreases in payments led to the changes enacted in BBRA
described above.

                          Home Health Services

Coverage and eligibility
    Medicare home health services are covered under part A of
the program and, in certain circumstances, under part B. Prior
to BBA 1997, home health care was paid under part A unless an
individual was ineligible for part A but had purchased part B
coverage. In BBA 1997, Congress transferred payment for some
home health care from part A to part B. The transfer applies to
home visits beyond the first 100 visits that follow a stay in a
hospital or an SNF, beginning in 1998, phased in over 6 years.
No beneficiary deductibles or coinsurance are required for home
health care.
    To qualify for home health care under Medicare an
individual must be homebound. A homebound individual is defined
as one who cannot leave home without a considerable and taxing
effort and only with the aid of devices such as a wheelchair, a
walker, or through use of special transportation. Absences from
home may occur infrequently for short periods of time for such
purposes as to receive medical treatment.
    Homebound individuals qualify for coverage of home health
care if they need intermittent skilled nursing care, physical
therapy, or speech-language pathology services. Beneficiaries
needing one or more of these ``qualifying services'' may also
receive occupational therapy, the services of a medical social
worker, or a home health aide. Occupational therapy can
continue to be provided after the need for skilled nursing
care, physical therapy, or speech therapy ends, but social work
or aide services may not.
    Home health care is covered by Medicare as long as the care
is medically reasonable and necessary for the treatment of
illness or injury. Although the number of home health visits a
beneficiary may receive is unlimited, services must be provided
pursuant to a plan of care that is prescribed and periodically
reviewed by a physician. In general, Medicare's home health
benefit is intended to serve beneficiaries needing acute
medical care requiring the services of skilled health care
personnel. It was never envisioned as providing coverage for
the nonmedical supportive care and personal care assistance
needed by chronically impaired persons. It is not a long-term
care program for the disabled or the frail elderly.
    For beneficiaries meeting the qualifying criteria,
Medicare's home health benefit covers the following services:
 1. Part-time or intermittent nursing care provided by or under
        the supervision of a registered nurse;
 2. Physical or occupational therapy or speech-language
        pathology services;
 3. Medical social services;
 4. Part-time or intermittent services of a home health aide
        who has successfully completed a training program
        approved by the Secretary;
 5. Medical supplies (excluding drugs and biologicals) and
        durable medical equipment (DME);
 6. Medical services provided by an intern or resident in
        training under an approved training program with which
        the agency may be affiliated; and
 7. Certain other outpatient services which involve the use of
        equipment that cannot readily be made available in the
        beneficiary's home.
    Home health services are provided by private or public home
health agencies (HHAs) that specialize in provision of such
services and that are certified to participate in Medicare by
HCFA. HHAs may be public or government-sponsored entities,
private nonprofit agencies, or proprietary for-profit agencies.
Hospitals may own or sponsor an HHA. Home health care givers
may be employees of the HHA or may work for an agency under
contract. HCFA characterizes a typical HHA as having 486
Medicare admissions and 30,000 visits per year and an 18 person
staff. Often, Medicare beneficiaries constitute the great
majority of an HHA's caseload, although other users include
individuals covered by Medicaid and those with private
insurance or who pay out of pocket.
    According to HCFA data, the overall average number of home
health care visits received by Medicare home health patients in
1997 was 82, up from 23 in 1987. On average, Medicare
beneficiaries qualifying for home health care have one episode
of covered care, and the average number of visits received in
one episode of coverage is 36.
Background of the Medicare home health benefit
    In the early years of the program, Medicare part A covered
up to 100 home health visits for beneficiaries who had an
immediate prior hospitalization or care in an SNF. Home health
care was also covered under part B, up to 100 visits, for
beneficiaries who had no prior hospitalization, or who had
exhausted their 100 part A visits, or who had part B coverage
only. It was required that a physician determine that the
individual could be discharged to his or her home but would
require skilled nursing care on less than a full-time basis, or
physical therapy, or speech therapy.
    The Omnibus Budget Reconciliation Act of 1980 (Public Law
96-499) made several liberalizing changes in the rules
governing Medicare's coverage of home health services,
including elimination of the requirement for a prior
hospitalization and removal of the limitation on the number of
visits. It also allowed the need for occupational therapy to
trigger coverage of home health services furnished after June
1981, although less than a year later, as part of a larger
strategy to meet budget targets for reductions in Medicare
spending, Congress removed occupational therapy as a qualifying
trigger for home health care (Public Law 97-35, the Omnibus
Reconciliation Act of 1981).
    Growth in volume of services and payments.--During the
first 10 years of the Medicare Program, home health care
accounted for less than 2 percent of total Medicare spending.
Between 1977 and about 1990 it accounted for 2-3 percent of
total program spending. This small increase reflected the 1980
liberalizations and, many say, the delayed response to
implementation in 1983 of a PPS for hospital inpatient care
under Medicare. Some analysts had predicted that the inpatient
PPS would lead to large growth in home health care utilization
by Medicare beneficiaries. However, home health care spending
increases that might have occurred as a result of the inpatient
PPS were offset by changes in the law and in certain
administrative procedures. For instance, the 1984 Deficit
Reduction Act required HCFA to reduce the number of ``fiscal
intermediaries'' with which HCFA contracts to process Medicare
home health care claims. These entities approve or deny
beneficiary eligibility for home health care as well as HHA
claims for payment. As HCFA reduced the number of fiscal
intermediaries, eligibility and claims decisions became more
standardized. HCFA also intensified educational programs for
claims processors, required HHAs to submit increased
documentation with each claim, and increased the number of
claims subjected to indepth medical reviews. Some say these
actions tempered the effect of early hospital discharges
prompted by the hospital inpatient PPS, noting that the home
health care claims denial rate rose from 3.4 percent in 1985 to
7.9 percent in 1987.
    A significant event in the history of the Medicare home
health benefit was settlement of a class action lawsuit filed
in 1988 (Duggan v. Bowen) which sought to liberalize HCFA's
interpretation of benefit coverage requirements. As a result of
the suit, in 1989, HCFA revised the home health eligibility
criteria to cover patients needing ``part-time or intermittent
care'' instead of the previous requirement that patients need
``part-time and intermittent care.'' This change allowed the
number of visits to be increased because they no longer had to
be ``intermittent'' but could be made on a daily basis. HCFA's
revised guidelines also loosened the claims procedures that had
been tightened between 1985 and 1987. The revised guidelines
may have opened the door to eligibility for persons who have
ongoing medical problems that require personal care assistance
associated more with long-term care rather than acute care.
    Home health spending rose from $2.1 billion in 1988 to
$18.1 billion in 1996, an average annual increase of over 31
percent (table 2-16). Medicare payment increases were driven by
the increase in the number of beneficiaries served and the
average number of visits per beneficiary served. The number of
beneficiaries served more than doubled during this time period,
and the average number of visits per home care patient
increased more than threefold, from 23 visits in 1987 and 1988
to 82 in 1997 (table 2-17). The number of HHAs participating in
Medicare also increased sharply, growing from 5,686 agencies in
1989 to 10,492 in 1997. However, the average cost per home care
visit rose relatively modestly, from $55 in 1988 to $71 in
1999, an increase of only 16 percent.

         TABLE 2-16.--MEDICARE PAYMENTS FOR HOME HEALTH, 1983-99
------------------------------------------------------------------------
                                                  Payments
                 Calendar year                      (in        Percent
                                                 billions)      change
------------------------------------------------------------------------
1983..........................................         $1.6           NA
1984..........................................          1.8         15.4
1985..........................................          1.9          7.6
1986..........................................          2.0          1.6
1987..........................................          1.7        -12.6
1988..........................................          2.1         19.2
1989..........................................          2.5         20.4
1990..........................................          3.7         51.0
1991..........................................          5.3         40.8
1992..........................................          7.2         37.0
1993..........................................         10.3         42.6
1994..........................................         13.3         28.9
1995..........................................         16.6         25.2
1996..........................................         18.1          8.9
1997..........................................         17.9         -0.8
1998..........................................         12.0        -33.4
1999..........................................          9.3        -22.3
------------------------------------------------------------------------
NA--Not applicable.

Source: Health Care Financing Administration.

    Medicare payment policies for home health care.--Prior to
the changes made by BBA 1997, Medicare reimbursed HHAs for the
lesser of: (1) their reasonable costs; or (2) a limited amount
per visit, applied in the aggregate. The per-visit limit was
set at 112 percent of the national average cost, which was
calculated separately for each type of service (nursing,
therapy, etc.). It was based on costs for freestanding agencies
(i.e., agencies not affiliated with hospitals) and varied
according to whether an agency was located in an urban or rural
area and according to wage level differentials from area to
area. Per-visit cost limits were updated annually by applying
an MBI to base-year data derived from HHA cost reports. These
limits, however, were applied to aggregate agency payments and
not to individual visits; that is, an aggregate cost limit was
set for each agency equal to the sum of the agency's limit for
each type of service multiplied by the number of visits of each
type provided by the agency.
    This cost-based reimbursement system was criticized as
providing few incentives for HHAs to maximize efficiency or
control the volume of services they delivered because HHAs were
paid for every visit their workers made.
Balanced Budget Act of 1997
    The Balanced Budget Act (BBA) of 1997 made several changes
to home health eligibility, coverage, and payment rules. In
general, through these changes, Congress sought to curtail the
steep annual rates of increase in the volume of Medicare home
health services and payments. In addition, BBA 1997 provided
for the transfer of some home health spending from part A to
part B; the purpose of this transfer was to reduce part A
spending and thereby extend the solvency period of the part A
trust fund.

               TABLE 2-17.--MEDICARE HOME HEALTH CARE UTILIZATION AND PAYMENTS PER VISIT, 1983-99
----------------------------------------------------------------------------------------------------------------
                                         People served                  Visits
                                    -------------------------------------------------------
      Calendar year of service                               Number                 Per      Payment    Percent
                                       Number   Per 1,000     (in     Per 1,000    person   per visit    change
                                                enrollees  millions)  enrollees    served
----------------------------------------------------------------------------------------------------------------
1983...............................  1,318,000         45       36.9      1,264         28        $43      (\1\)
1984...............................  1,498,000         50       40.4      1,378         27         46        7.2
1985...............................  1,549,000         51       39.4      1,327         25         49        6.4
1986...............................  1,571,000         51       38.0      1,263         24         50        3.4
1987...............................  1,544,000         49       35.6      1,163         23         53        5.2
1988...............................  1,582,000         49       37.1      1,193         23         55        3.8
1989...............................  1,685,000         51       46.3      1,459         27         55       -0.4
1990...............................  1,940,000         58       69.4      2,146         36         56        1.7
1991...............................  2,223,000         65       98.6      2,996         44         56        1.1
1992...............................  2,523,000         72      132.5      3,958         53         58        3.9
1993...............................  2,868,000         80      167.8      4,939         59         61        4.1
1994...............................  3,175,000         87      218.8      6,388         69         62        2.2
1995...............................  3,457,000         93      266.3      7,801         77         62        0.7
1996...............................  3,583,000         95      284.4      8,439         79         63        1.7
1997...............................  3,370,000         88      276.5      8,390         82         64        0.6
1998...............................         NA         NA      161.0      4,980         NA         67        5.1
1999...............................         NA         NA       97.0      3,027         NA         71        6.2
----------------------------------------------------------------------------------------------------------------
\1\ Not applicable.

NA--Not available.

Source: Health Care Financing Administration.

    Clarification of coverage rules.--BBA 1997 included several
provisions that clarified coverage criteria for home health
care, including:
 1. Clarification of the definition of ``part-time'' and
        ``intermittent'' regarding skilled nursing care and
        home health aide services for purposes of eligibility
        for, and coverage of home health care. First, patients
        needing skilled nursing care are eligible for
        Medicare's home health benefit if the need is for
        ``intermittent'' care, defined as skilled nursing care
        that is either provided or needed on fewer than 7 days
        each week, or less than 8 hours of each day for periods
        of 21 days or less (with extensions in exceptional
        circumstances when the need for additional care is
        finite and predictable). Second, for beneficiaries who
        qualify for home health care and who need both skilled
        nursing and home health aide services, coverage is
        provided only to the extent that these two services
        combined is ``part-time or intermittent,'' defined as
        skilled nursing and home health aide services furnished
        any number of days per week as long as they are
        furnished (in combination) less than 8 hours each day
        and 28 or fewer hours each week (or, subject to review
        on a case-by-care basis as to the need for care, less
        than 8 hours each day and 35 or fewer hours per week);
 2. Elimination of eligibility based solely on needing a
        skilled nurse to draw blood;
 3. A requirement that claims include a physician identifier;
 4. A requirement that home health workers report their
        activities during a visit in 15-minute intervals (the
        data are used in designing a home health PPS);
 5. Extension of savings from a July 1994-June 1996 freeze on
        home health cost limit updates;
 6. A requirement for a study of the definition of
        ``homebound'' and a study to establish guidelines to
        standardize the frequency and duration of home health
        services for patients with similar needs and
        circumstances (``normative guidelines''). (The
        Secretary determined that no change was needed for the
        definition of homebound, and the first results from the
        study of normative guidelines will be available in fall
        2000);
 7. A requirement for ``consolidated billing'' for services to
        home health patients, under which payment for any
        Medicare-covered service or item provided for a
        beneficiary during a spell of home health care coverage
        is to be made to the HHA. The HHA would then pay the
        provider of the service or item. (BBRA 1999 later
        excluded the supply of DME from consolidated billing.)
    Transfer certain coverage from part A to part B.--BBA 1997
transfers from part A to part B payments for home health visits
that are not part of the first 100 visits following a
hospitalization. Part A benefits are financed through the
Hospital Insurance (HI) Trust Fund, whereas part B benefits are
financed by beneficiary premiums and general revenues. Thus,
the solvency of the HI Trust Fund is extended by removing from
it some of the costs of home health benefits. The transfer is
being phased in over 6 years, between 1998 and 2003, with the
Secretary transferring one-sixth of the aggregate expenditures
associated with transferred visits in 1998 and an additional
one-sixth each year thereafter until fully implemented in 2003.
Beginning January 1, 2003, part A coverage for home health care
will apply only to postinstitutional home health services for
up to 100 visits during a spell of illness, except for those
persons with part A coverage only, who will be covered for
services without regard to the postinstitutional limitation.
    Moving home health care costs to part B could increase
beneficiary premiums for that component of Medicare. The
increase in the part B premium attributable to transferred
expenditures will be phased in over a period of 7 years,
between 1998 and 2004. For 1998 the part B premium was
increased by one-seventh of the extra costs due to the
transfer; for 1999 it was increased by two-sevenths, etc.,
until 2004 when the total cost of the transfer will be included
in the part B premium. The increases have been very small, only
slightly over $1 a month in 1999.
    Postinstitutional home health services are defined for
these purposes as services furnished to a Medicare beneficiary:
(1) after an inpatient hospital or rural primary care hospital
stay of at least 3 consecutive days, initiated within 14 days
after discharge; or (2) after a stay in an SNF, initiated
within 14 days after discharge. A home health spell of illness
is defined as the period beginning when a patient first
receives postinstitutional home health services and ending when
the beneficiary has not received inpatient hospital, SNF, or
home health services for 60 days.
    Claims administration for transferred visits will continue
to be done by part A fiscal intermediaries.
    Requirement for a PPS.--BBA 1997 required that a PPS be
implemented for home health care beginning in 1999 and required
that the PPS be designed to reduce home health payments by 15
percent. It specified that the 15-percent reduction was to go
into effect even if the PPS was not ready for implementation in
1999. In Public Law 105-277 (the Omnibus Consolidated and
Emergency Supplemental Appropriations Act for fiscal year 1999)
Congress delayed the implementation date for the PPS until
October 1, 2000, and moved the 15-percent reduction to coincide
with commencement of the PPS. BBRA 1999 subsequently postponed
the 15-percent reduction to 12 months after implementation of
the PPS.
    Implementation of an interim payment system.--Because of
concern about the rapidly rising costs of Medicare's home
health benefit, Congress included in BBA 1997 an ``interim
payment system'' (IPS) for home health care in order to achieve
immediate spending reductions prior to implementation of the
PPS. This interim system was effective for HHA cost reporting
periods starting on or after October 1, 1997, and will remain
in effect until the PPS is implemented in October 2000.
    Table 2-16 shows the substantial reductions in Medicare
payments for home health services that have coincided with
implementation of the IPS. In 1999, total payments were almost
half the 1996 level. The IPS achieves cost savings by
establishing a new methodology for limiting aggregate annual
Medicare payments to individual HHAs. Under this procedure, an
agency receives payments totaling the least of three amounts
(pre-IPS payments were the lesser of the first two of these
amounts): (1) the agency's reasonable costs; or (2) payments
determined under the per-visit limits, with the limit set at
106 percent of the national median cost per visit by service
type (pre-IPS limit was 112 percent of the national average
cost per visit); \1\ or (3) aggregate payments under a new
formula based on per-beneficiary limits.
---------------------------------------------------------------------------
    \1\ Public Law 105-277 increased the limit from 105 percent of the
national median cost of a service (estimated at the time of BBA 1997
enactment to be about 98 percent of the mean) to 106 percent of the
median.
---------------------------------------------------------------------------
    HCFA estimates that 79 percent of HHAs are subject to the
new per-beneficiary limit; the others receive less under the
reasonable cost or per-visit limit. Determining an agency's
aggregate Medicare payment limit under the new per-beneficiary
formula includes four steps:
 1. Divide the total payments the agency received from Medicare
        for cost reporting periods ending in fiscal year 1994
        by the number of Medicare patients it served that year
        to get an average amount per beneficiary (certain wage
        adjustments and cost updates are applied to bring the
        amount up to values in the year to which the limits are
        being applied, e.g., in 2000). Per-beneficiary limits
        for agencies that were not operational in 1994 are set
        at the national median;
 2. Reduce that average amount per beneficiary to 75 percent of
        the full amount;
 3. Add a sum that is 25 percent of the average Medicare per-
        beneficiary costs of all agencies in the same census
        region to get a new average cost per beneficiary;
 4. Multiply the agency's average cost per beneficiary from
        step three by the number of Medicare patients the
        agency is serving in the current year or cost reporting
        period. The result is an aggregate annual payment limit
        that an agency is held to for serving all its Medicare
        patients in a cost reporting period under the IPS.
    If an agency's average costs for its patients are lower
than others in the region, it benefits from the sum that is
added based on the average regional per-beneficiary limits
(step 3, above); if an agency's costs are higher than others in
the area, it loses money from the regional component of the
formula. This regional component of the formula also decreases
disparities that had existed among agencies in the same general
area.
    The per-beneficiary aggregate limit does not restrict the
amount an HHA can spend on any individual beneficiary. It is
simply a technique for arriving at an aggregate budget amount
for an agency's Medicare patients. However, many HHAs
misunderstood how this limit works, and there are reports that
some agencies ended a patient's care when spending for that
individual reached the amount of the per-beneficiary payment
(i.e., the amount arrived at by step three above). In reality,
agencies have some patients whose costs are below the per-
beneficiary average and some whose costs are above it. The idea
behind the new formula was that payments on behalf of patients
whose costs were lower than average would ``subsidize'' more
costly patients; the balance of low and high cost patients
would determine whether an agency would exceed its aggregate
per beneficiary cap.
    Congress based the per-beneficiary calculation on fiscal
year 1994 levels of operation in order to discount the large
volume growth that still appeared to be occurring after that
year (program costs grew by nearly 25 percent from 1994 to
1995). Using fiscal year 1994 as the base year caused agencies
that had increased their costs per patient after that time
(generally by increasing the number of visits per patient) to
have a larger reduction in their Medicare revenues under the
IPS than agencies that had maintained relatively constant
average costs per beneficiary.
    Response to BBA 1997 and the IPS.--Table 2-16 shows the
significant decrease in Medicare spending for home health care
that occurred with implementation of the provisions in BBA 1997
and the IPS. Table 2-17 shows the sharp drop after 1997 in the
number of home health visits covered by Medicare. At the same
time, the average payment per visit increased. Most analysts
agree that the reduction in the number of home health visits is
attributable largely to the IPS, but note also that the
provision of BBA 1997 that eliminated venipuncture (the drawing
of a blood specimen) as the sole home health service qualifying
an individual for home care also contributed to the reduction
in visits. Presumably, elimination of less costly visits (e.g.,
home health aide visits) resulted in an increase in the average
payment per visit from $64 in 1997 to $71 in 1999. Moreover,
the Health Insurance Portability and Accountability Act of 1996
included civil money penalties for physicians who falsely
certify that a beneficiary needs home health care, a provision
some say has had a chilling effect on physician referrals.
    As the apparent effects of the IPS began to be evident,
representatives of the home health industry claimed that (1)
the IPS was limiting HHAs' ability to provide necessary care;
(2) agencies with low average costs per beneficiary in the
fiscal year 1994 base period were realizing the severest
reductions; and (3) these older agencies were being paid
inequitably in comparison with newer agencies because agencies
that had not been in business long enough to have had a cost
reporting period ending in fiscal year 1994 were assigned a
per-beneficiary limit equal to the national median.
    Because the payment limits imposed by the IPS induce
agencies to balance the number of expensive patients against
the number of inexpensive patients they serve in order to stay
within their total Medicare payment limit, questions arose
about whether the IPS created incentives for HHAs to refuse to
serve beneficiaries with the most serious medical needs and who
require extensive home health visits. An HHA might refuse to
accept certain expensive patients if it were concerned that the
balance of patients in its caseload would be tipped too far
toward costly cases and result in expenditures exceeding the
agency's total funding limit.
    In January 1998, the Congressional Budget Office (CBO)
projected 10-year BBA 1997 home health care savings of almost
$75 billion. In March 1999, CBO reestimated the effects of BBA
1997, and the new projections showed an additional $56 billion
in savings. The original CBO estimate reflected an annual rate
of growth in home health spending of 8.3 percent a year over 10
years, but the revised estimate showed an annual increase of
5.6 percent a year. (Under the old law, in the early 1990s,
Medicare home health spending had been growing at rates of
between 20 and 30 percent a year.) However, CBO's revised
estimates included changes in their underlying economic
assumptions as well as revised estimates of the effects of BBA
1997. Additionally, HCFA officials cautioned that reduced
Medicare payments for home health care since 1997 reflect an
intensified case review process HCFA required claims processors
to implement along with the IPS as well as stepped-up fraud and
abuse detection activities.
    To address concerns about the impact of the IPS and the
large decrease in estimates of program payments for home health
care, in Public Law 105-277, Congress modified the IPS formula
to increase per-visit limits for HHAs from 105 percent of the
median to 106 percent and increased payments to agencies whose
per-beneficiary limits under the IPS were less than the
national median per-beneficiary limits. The per-beneficiary
limits for older agencies (those in operation in fiscal year
1994) were increased by one-third of the difference between the
agency's per-beneficiary limit and the national median of per-
beneficiary limits; per-beneficiary limits for agencies
starting operation after fiscal year 1994 but before fiscal
year 1999 were set at the national median limit; new HHAs that
began treating Medicare patients on or after October 1, 1998,
were set at 75 percent of the national median, with a 2-percent
reduction. These modifications to home health payments were
estimated to increase Medicare payments to 65 percent of HHAs.
 Home health prospective payment system
    As noted above, BBA 1997 required a prospective payment
system (PPS) to be implemented for Medicare payments for home
health care. Final PPS rules were published in the Federal
Register on July 3, 2000. Under those rules, beneficiaries are
categorized into one of 80 home health resource groups, each of
which carries a standard payment for a 60-day episode of care
for a beneficiary. The standard payment is computed using the
average national cost per visit (computed and weighted by visit
type, that is, skilled nursing, physical therapy, etc.)
multiplied by the national average number of visits (by type)
in a 60-day period. Average costs for nonroutine medical
supplies, certain therapy services, and administration of the
outcome and assessment information set (OASIS) interview
questionnaire are added.\2\ The payments include adjustments to
reflect geographic wage levels among HHAs, to account for
unusually costly patients (``outlier'' payments), and to
achieve ``budget neutrality.'' The budget neutrality adjustment
ensures that total home health payments under the PPS in fiscal
year 2001 will be equal to the estimated total payments that
would have been made by Medicare in that year had the IPS
continued in effect in fiscal year 2001, including limits on
the market basket index (MBI). Total fiscal year 2001 payments
will equal the IPS projected to that year minus 1.1 percentage
points.
---------------------------------------------------------------------------
    \2\ OASIS is a data collection instrument on which a home health
worker records, for new or renewing patients, clinical and other data
required to plan the individual's course of care. Data from OASIS are
also used in the definition of the payment categories under the home
health PPS.
---------------------------------------------------------------------------
    Special payment arrangements are made for beneficiaries
receiving fewer than five visits, or who transfer from one HHA
to another, or who have a significant change in their condition
during an episode of illness.
    HHAs will be paid 60 percent of the PPS amount after
completing an OASIS questionnaire for each new or renewing
patient and receiving a physician's certification and plan of
care. The remainder of the payment will be made when the
episode is completed (or, if earlier, when care is completed).
If, at the end of an initial 60-day episode, a physician orders
care to be continued, payment for the subsequent episode (or
episodes) is split to provide 50 percent of the payment at the
start of the episode and 50 percent at the end of care or the
episode.
Balanced Budget Refinement Act (BBRA) of 1999
    As a result of concern that many provisions of BBA 1997 had
caused unanticipated reductions in Medicare payments across the
spectrum of health care providers, Congress included
modifications to Medicare in BBRA 1999. That act included the
following provisions pertaining to Medicare home health care:
 1. Delays the 15-percent payment reduction required under the
        PPS by BBA 1997 until 12 months after implementation of
        the PPS and requires the Secretary to report within 6
        months after implementation of the PPS on the need for
        the 15 percent or some other reduction.
 2. Provides HHAs with a payment of $10 per beneficiary for
        administration of the OASIS questionnaire to new home
        health patients for services furnished during cost
        reporting periods in fiscal year 2000. One-half of the
        payment will be made in April 2000 and the remainder at
        cost report settlement. It requires GAO to study the
        costs of collecting these data and to report by April
        2000.
 3. Requires that per-beneficiary limits under BBA 1997 IPS be
        increased by 2 percent in cost reporting periods
        starting in fiscal year 2000 for those HHAs for which
        the per-beneficiary limit is below the national median;
        the increase will not be included in the base for
        determining the budget neutral PPS amounts.
 4. Establishes the surety bond requirement for HHAs as the
        lesser of $50,000 or 10 percent of an HHA's Medicare
        payments in the previous year and requires the bond to
        be in effect for 4 years (or longer if ownership of the
        HHA changes). Prior periods covered by a bond may be
        counted and Medicare and Medicaid bond requirements are
        to be coordinated.
 5. Excludes DME from the home health consolidated billing
        requirement of BBA 1997.
 6. Clarifies that the increase in the home health PPS in
        fiscal year 2002 and fiscal year 2003 will be the MBI
        minus 1.1 percentage points.
 7. Requires the Medicare Payment Advisory Commission to study
        and report within 2 years of enactment on the
        feasibility and advisability of excluding rural HHAs
        and beneficiaries living in rural areas from the home
        health PPS.
    Because the new PPS will go into effect in fiscal year
2001, the BBRA 1999 provisions pertaining to home health care
under Medicare were not extensive. However, the provision that
had caused substantial concern in the industry was the
requirement that the PPS be designed to reduce total Medicare
payments for home health care by 15 percent compared with pre-
PPS levels. Because of the sharp declines in payments to HHAs
under the IPS, some said that a further 15-percent reduction
would affect the availability of home health services and make
care inaccessible to beneficiaries, particularly those with
extensive and costly care needs. Congress addressed that issue
in BBRA 1999 by delaying implementation of the 15-percent
reduction until 12 months after implementation of the PPS and
requiring the Secretary to evaluate and report, within 6 months
of implementation of the PPS, on the need for payment
reductions.

                            Hospice Services

Coverage and benefits
    Medicare covers hospice care, in lieu of most other
Medicare benefits, for terminally ill beneficiaries. Hospice
care emphasizes palliative medical care, that is, relief from
pain, and supportive social and counseling services for the
terminally ill and their families. Services are provided
primarily in the patient's home. The Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Public Law 97-248, first
authorized Medicare part A coverage for hospice care (for the
period November 1, 1983 to October 1, 1986); in 1986, Congress
made the hospice benefit a permanent part of the Medicare
Program, effective April 7, 1986.
    For a person to be considered terminally ill and eligible
for Medicare's hospice benefit, the beneficiary's attending
physician and the medical director of the hospice (or physician
member of the hospice team) must certify that the individual
has a life expectancy of 6 months or less. As a result of an
amendment in BBA 1997, persons electing hospice are covered for
two 90-day periods, followed by an unlimited number of 60-day
periods. The medical director or physician member of the
hospice team must recertify at the beginning of each new
election period that the beneficiary is terminally ill.
Services must be provided under a written plan of care
established and periodically reviewed by the individual's
attending physician and by the medical director of the hospice.
    Covered hospice services include the following: (1) nursing
care provided by or under the supervision of a registered
nurse; (2) physical or occupational therapy or speech-language
pathology services; (3) medical social services; (4) services
of a home health aide who has successfully completed a training
program approved by the Secretary of the U.S. Department of
Health and Human Services (DHHS); (5) homemaker services; (6)
medical supplies (including drugs and biologicals) and the use
of medical appliances; (7) physician services; (8) short-term
inpatient care (including both respite care and procedures
necessary for pain control and acute and chronic symptom
management); (9) counseling, including dietary counseling, for
care of the terminally ill beneficiary and for adjustment to
the patient's death (bereavement counseling is not a
reimbursable service); and (10) any other item or service which
is specified in a patient's plan of care and which Medicare may
pay for.
    Medicare's hospice benefit is intended to be principally an
in-home benefit. For this reason, Medicare law prescribes that
respite care, or relief for the primary care giver of the
terminally ill patient, may be provided only on an
intermittent, nonroutine, and occasional basis and may not be
provided consecutively over longer than 5 days. In addition,
the aggregate number of inpatient care days provided in any 12-
month period to Medicare beneficiaries electing hospice care
can not exceed 20 percent of the total number of days of
hospice coverage provided to these persons.
    Only two covered hospice services--outpatient drugs or
biologicals and respite care--are subject to coinsurance.
Outpatient drugs and biologicals are subject to a coinsurance
amount that approximates 5 percent of the cost of the drug to
the hospice program, except that the amount may not exceed $5
per prescription. For respite care, coinsurance equals 5
percent of program payments for respite, but may not exceed
Medicare's inpatient hospital deductible during a hospice
coinsurance period (defined as the period when hospice election
is not broken by more than 14 days).
    Covered services must be provided by a Medicare-certified
hospice. Certified hospices must be either public agencies or
private organizations primarily engaged in providing covered
hospice services and must make services available on a 24-hour
basis, in individuals' homes, on an outpatient basis, and on a
short-term inpatient basis. Hospices must routinely and
directly provide substantially all of the following ``core''
services: nursing care, medical social services, and counseling
services. The remaining hospice services may be provided either
directly by the hospice or under arrangements with others. If
services are provided through arrangements with other
providers, the hospice must maintain professional management
responsibility for all such services, regardless of the
facility in which the services are furnished.
    The hospice program must also have an interdisciplinary
group of personnel which includes at least one registered
professional nurse and one social worker employed by the
hospice; one physician employed by or under contract with the
hospice; plus at least one pastoral or other counselor.
Reimbursement
    In implementing Medicare's hospice benefit, HCFA
established a prospective payment methodology. Under this
methodology, hospices are paid one of four prospectively
determined rates, which correspond to four different levels of
care, for each day a Medicare beneficiary is under the care of
the hospice. Reimbursement will thus vary by the length of the
patient's period in the hospice program as well as by the
characteristics of the services (intensity and site) furnished
to the beneficiary.
    The four rate categories for reimbursing hospices are:
 1. Routine home care day.--Routine home care day is a day on
        which an individual is at home and is not receiving
        continuous home care. The routine home care rate is
        paid for every day a patient is at home and under the
        care of the hospice regardless of the volume or
        intensity of the services provided on any given day as
        long as less than 8 hours of care are provided. This
        rate is $98.96 for services provided between October 1,
        1999 and September 30, 2000.
 2. Continuous home care day.--A continuous home care day is a
        day on which an individual receives hospice care
        consisting predominantly of nursing care on a
        continuous basis at home. Home health aide or homemaker
        services or both may also be provided on a continuous
        basis. Continuous home care is furnished only during
        brief periods of crisis and only as necessary to
        maintain the terminally ill patient at home. Home care
        must be provided for a period of at least 8 hours
        before it would be considered to fall within the
        category of continuous home care. Payment for
        continuous home care will vary depending on the number
        of hours of continuous services provided. Currently
        this rate is $577.59 for 24 hours or $24.07 per hour.
 3. Inpatient respite care day.--An inpatient respite care day
        is one on which the individual who has elected hospice
        care receives care in an approved facility on a short-
        term (not more than 5 days at a time) basis for the
        respite of his caretakers. Currently this rate is
        $102.37.
 4. General inpatient care day.--A general inpatient care day
        is one on which an individual receives general
        inpatient care in an inpatient facility for pain
        control or acute or chronic symptom management which
        cannot be managed in other settings. Care may be
        provided in a hospital, skilled nursing facility (SNF),
        or inpatient unit of a freestanding hospice. Currently
        this rate is $440.22.
    To reflect differences in wage levels from area to area,
each of these four payment rates is adjusted by the hospital
area wage index used by Medicare for adjusting payments to
hospitals, SNFs, and HHAs. HCFA separates each of the national
payment rates for hospice care into components which reflect
the estimated proportion of the rate attributable to wage and
nonwage costs. The wage component of each rate is then adjusted
by the index applicable to the area in which the hospice is
located.
    The Omnibus Budget Reconciliation Act (OBRA) of 1989
required that the payment rates be increased by the hospital
market basket percentage increase each fiscal year. OBRA 1993,
however, reduced the updates for the prospective rates as
follows: for fiscal year 1994, the hospital market basket
percentage increase minus 2.0 percentage points; for fiscal
years 1995 and 1996, the hospital market basket minus 1.5
percentage points; and for fiscal year 1997, market basket
minus 0.5 percentage points.
    BBA 1997 reduced the hospice payment update to market
basket minus 1.0 percentage point for each of fiscal years
1998-2002.
    Medicare law requires that payments to a hospice for care
furnished over the period of a year be limited to a ``cap
amount.'' The cap amount is applied on an aggregate rather than
a case-by-case basis. Therefore, each individual hospice's cap
amount is calculated by multiplying the yearly cap amount by
the number of Medicare beneficiaries who received hospice care
from the hospice during the cap period. Medicare defines a cap
year as the period from November 1 through October 31 of the
following year. The cap amount for the period November 1, 1999
through October 31, 2000, is $15,313.
Updates to hospice payment amounts
    Hospice daily payment rates for routine home care,
continuous home care, inpatient respite care, and general
inpatient care are updated annually by the increase in the
hospital MBI. BBA 1997 reduced these updates to the market
basket increase minus 1.0 percentage point for fiscal years
1998-2002. However, BBRA 1999 increased the rates otherwise in
effect for fiscal year 2001 by 0.5 percentage points and for
fiscal year 2002 by 0.75 percentage points.
    The hospice cap amount is adjusted annually by the
percentage change in the medical care component of the Consumer
Price Index for All Urban Consumers (CPI-U).
 Hospice program data
    Table 2-18 shows that the number of hospices participating
in Medicare grew from 553 in fiscal year 1988 to 2,293 in
fiscal year 1998.
    Total Medicare payments for hospice care in fiscal year
1988, 2 years after it became a permanent part of the Medicare
Program, totaled less than $120 million. Daily payment rates in
effect in 1989 were increased by 20 percent in 1990, which led
to more serv-

                                                TABLE 2-18.--NUMBER OF HOSPICES BY PROVIDER TYPE, 1988-98
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Month and year
                      Provider type                      -----------------------------------------------------------------------------------------------
                                                           7/88    7/89    5/90     9/91     1/92     5/93     8/94     6/95    10/96    12/97    12/98
--------------------------------------------------------------------------------------------------------------------------------------------------------
Freestanding............................................     191     220     260      394      404      499      608      656      762      875      897
Hospital based..........................................     138     182     221      282      291      341      401      447      507      559      567
Skilled nursing facility based..........................      11      13      12       10       10       10       12       18       21       23       22
Home health agency based................................     213     286     313      325      334      438      583      674      800      829      807
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................     553     701     806    1,011    1,039    1,288    1,604    1,795    2,090    2,286    2,293
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Program Operations.

ices becoming available. As shown in table 2-19, Medicare
payments for hospice care increased to $445.4 million in fiscal
year 1991 and subsequently to nearly $2.2 billion in fiscal
year 1998.
    From fiscal year 1991 through fiscal year 1998 the number
of beneficiaries using Medicare's hospice benefit increased
nearly fourfold, from 108,413 to 401,140, although the average
payment per beneficiary increased by less than one-third, from
$4,108 to $5,412.
    The data show that the average number of days of hospice
utilization increased sharply from fiscal year 1991 to fiscal
year 1992, reflecting the 20-percent increase in payment rates
and concomitant increase in availability and utilization of
this care. However, after 1995 the average duration of coverage
declined. The decline may be the result of: (1) continued
reluctance of physicians to refer patients to hospice rather
than continue treatment; (2) the availability of new treatment
therapies; and (3) increased regulatory scrutiny and focused
medical reviews.

                 PART B SERVICES--COVERAGE AND PAYMENTS

                          Physicians Services

    Medicare pays for physicians services on the basis of a fee
schedule which went into effect in 1992. The fee schedule
assigns relative values to services. Relative values reflect
three factors: physician work (time, skill, and intensity
involved in the service), practice expenses, and malpractice
costs. These relative values are adjusted for geographic
variations in the costs of practicing medicine. Geographically-
adjusted relative values are then converted into a dollar
payment amount by a dollar figure known as the conversion
factor. The 2000 conversion factor is $36.61.
    The annual percentage update to the conversion factor
equals the Medicare economic index (which measures inflation)
subject to an adjustment to match spending for physicians
services under the sustainable growth rate system. This
adjustment sets the conversion factor at a level so that
projected spending for a year will meet allowed spending by the
end of the year. Allowed spending for a year is calculated
using the sustainable growth rate. However, in no case can the
conversion factor update be more than 3 percentage points
above, nor more than 7 percentage points below, the Medicare
economic index.
    For a discussion of how Medicare calculates payments to
physicians, see appendix D.
    Anesthesiologists are paid under a separate fee schedule
which uses base and time units. A separate conversion factor
($17.77 in 2000) applies.
    Medicare payments are made for physicians' services after
the annual deductible requirement of $100 has been satisfied.
Payment is set at 80 percent of the fee schedule with
beneficiaries responsible for the remaining 20 percent, which
is referred to as coinsurance.
    Medicare payment is made either on an ``assigned'' or
``unassigned'' basis. By accepting assignment, physicians agree
to take the Medicare fee schedule amount as payment in full.
Thus, if assignment is accepted, beneficiaries are not liable
for any out-of-

                                      TABLE 2-19.--SELECTED MEASURES OF MEDICARE HOSPICE CARE, FISCAL YEARS 1991-98
                                                                   [By claim approved]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Fiscal year
                         Category                          ---------------------------------------------------------------------------------------------
                                                               1991       1992       1993        1994        1995        1996        1997        1998
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash outlays by provider type:
    Freestanding..........................................     $219.2     $444.2      $620.4      $724.2      $977.1    $1,042.3    $1,123.1    $1,205.7
    Hospital based........................................       92.0      168.0       205.3       226.1       319.3       331.1       345.3       373.4
    Skilled nursing facility based........................        8.6       17.1        22.6        17.7        26.0        24.5        12.9        16.8
    Home health agency based..............................      125.7      224.3       303.7       348.7       508.1       546.1       543.0       575.1
                                                           ---------------------------------------------------------------------------------------------
        Total.............................................      445.4      853.6     1,151.9     1,316.7     1,830.5     1,944.0     2,024.5     2,171.0
                                                           =============================================================================================
Cash outlays by care type:
    Routine home care.....................................      376.6      720.0     1,004.9     1,158.6     1,611.6     1,701.5     1,769.5     1,888.7
    Continuous home care..................................        3.9       10.4        12.2        14.5        25.6        29.2        28.5        32.1
    Inpatient respite care................................        1.3        2.5         2.6         2.7         4.4         4.7         4.8         5.4
    General inpatient care................................       59.7      114.0       125.5       134.1       179.1       197.6       209.5       231.7
    Physician services....................................        3.9        6.7         6.7         6.8         9.8        11.0        12.1        13.1
                                                           ---------------------------------------------------------------------------------------------
        Total.............................................      445.4      853.6     1,151.9     1,316.7     1,830.5     1,944.0     2,024.5     2,170.9
                                                           =============================================================================================
Average dollar amount per beneficiary:
    Freestanding..........................................      4,121      5,668       6,065       6,355       6,451       6,157       5,796       5,689
    Hospital based........................................      4,234      5,296       5,361       5,631       5,740       5,333       5,028       5,129
    Skilled nursing facility based........................      4,198      5,538       5,344       5,428       6,079       5,953       5,079       5,122
    Home health agency based..............................      3,993      5,169       5,239       5,408       5,569       5,313       4,949       5,084
                                                           ---------------------------------------------------------------------------------------------
        Total \1\.........................................      4,108      5,452       5,681       5,935       6,049       5,747       5,402       5,412
                                                           =============================================================================================
Number of beneficiaries:
    Freestanding..........................................     53,184     78,374     102,283     113,959     151,466     169,285     193,765     211,952
    Hospital based........................................     21,717     31,734      38,295      40,156      55,631      62,081      68,688      72,804
    Skilled nursing facility based........................      2,040      3,084       4,221       3,262       4,272       4,124       2,547       3,288
    Home health agency based..............................     31,472     43,391      57,969      64,472      91,239     102,783     109,723     113,096
                                                           ---------------------------------------------------------------------------------------------
        Total.............................................    108,413    156,583     202,768     221,849     302,608     338,273     374,723     401,140
                                                           =============================================================================================
Average number of days a beneficiary elects hospice care:
    Freestanding..........................................       46.2       59.1        62.0        63.7        62.9        58.5        63.4        50.8
    Hospital based........................................       44.2       54.6        53.8        55.4        56.7        51.6        47.9        44.1
    Skilled nursing facility based........................       37.6       44.5        42.7        45.5        49.3        47.7        39.9        41.0
    Home health agency based..............................       42.5       52.6        52.2        53.3        53.8        50.0        45.9        44.0
                                                           ---------------------------------------------------------------------------------------------
        Total \1\.........................................       44.5       56.1        57.2        58.9        58.8        54.5        50.1        47.6
                                                           =============================================================================================
Number of units by care type:
    Routine home care--days...............................  4,667,703  8,564,904  11,324,524  12,699,617  17,257,734  17,862,843  18,189,764  18,454,749
    Continuous home care--hours...........................    199,309    442,968     565,903     654,667   1,129,697   1,193,623   1,190,982   1,303,204
    Inpatient respite care--days..........................     14,867     28,495      27,887      28,769      45,932      47,218      47,790      47,905
    General inpatient care--days..........................    161,211    297,190     303,245     299,823     418,093     451,396     470,593     502,199
    Physicians--procedures................................     53,491    111,716     115,560     110,790     165,066     185,970     200,376     204,624
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Weighted by the number of beneficiaries in each hospice type.

Note.--Totals may not add due to rounding.

Source: Health Care Financing Administration.

pocket costs other than standard deductible and coinsurance
payments. In contrast, if assignment is not accepted,
beneficiaries may be liable for charges in excess of the
Medicare approved charge, subject to limits. This process is
known as balance billing.
    Medicare's Participating Physician Program was established
to provide beneficiaries with the opportunity to select
physicians (designated as ``participating physicians'') who
have agreed to accept assignment on all services provided
during a 12-month period. Nonparticipating physicians continue
to be able to accept or refuse assignment on a claim-by-claim
basis. There are a number of incentives for physicians to
become participating physicians, the chief of which is that the
fee schedule payment amount for nonparticipating physicians is
only 95 percent of the recognized amount paid to participating
physicians. Additional incentives include more rapid claims
payment and widespread distribution of participating physician
directories.
    Nonparticipating physicians may not charge more than 115
percent of Medicare's allowed amount for any service.
Medicare's allowed amount for nonparticipating physicians is
set at 95 percent of that for participating physicians. Thus,
nonparticipating physicians are only able to bill 9.25 percent
(115 percent times 95 percent) over the approved amount for
participating physicians.

                 Services of Nonphysician Practitioners

    The physician fee schedule is also used for calculating
payments made for certain services provided by nonphysician
practitioners.
Physician assistants and nurse practitioners
    Separate payments are made for physician assistant
services, when provided under the supervision of a physician.
Separate payments are also made for nurse practitioner
services, provided in collaboration with a physician.
    Payment for these services can only be made if no facility
or other provider charges are paid in connection with the
service. Payment equals 80 percent of the lesser of either the
actual charge or 85 percent of the fee schedule amount for the
same service if provided by a physician. For assistant-at-
surgery services, payment equals 80 percent of the lesser of
either the actual charge or 85 percent of the amount that would
have been recognized for a physician serving as an assistant-
at-surgery. The physician assistant may be in an independent
contractor relationship with the physician.
Certified nurse midwife services
    Certified nurse midwife services are paid at 65 percent of
the physician fee schedule amount.
Certified registered nurse anesthetists
    Certified registered nurse anesthetists are paid under the
same fee schedule used for anesthesiologists (see above).
Payments for services furnished by an anesthesia care team
composed of an anesthesiologist and a certified registered
nurse anesthetist are capped at 100 percent of the amount that
would be paid if the anesthesiologist were practicing alone.
The payments are evenly split between each practitioner.
Clinical psychologists and clinical social workers
    Diagnostic and therapeutic services provided by clinical
psychologists are paid under the physician fee schedule.
Payments for services provided by clinical social workers are
equal to 75 percent of the amount allowed for clinical
psychologists. Some services are subject to the psychiatric
services limitation which limits Medicare payments for some
services to 50 percent of incurred expenses.
Physical or occupational therapists
    Payments for physical therapy and occupational therapy
services are made under the physician fee schedule. In 1999, an
annual $1,500 per-beneficiary limit applied to all outpatient
physical therapy services (including speech-language pathology
services), except for those furnished by a hospital outpatient
department (OPD). A separate $1,500 limit applied to all
outpatient occupational therapy services except for those
furnished by hospital OPDs. Therapy services furnished as
incident to physicians professional services were included in
these limits.
    The $1,500 limits were to apply each year. However, BBRA
1999 suspended application of these limits in 2000 and 2001.
Thus, no limits apply in these 2 years. The limits are slated
to apply again in 2002.

                      Clinical Laboratory Services

    Medicare provides coverage for diagnostic clinical
laboratory services. These services may be provided by an
independent laboratory, a physician's office laboratory, or a
hospital laboratory to outpatients. Since 1984, Medicare has
paid for clinical laboratory services on the basis of a fee
schedule. Fee schedules have been established on a carrier
service area basis. The law set the initial payment amount for
services performed in physicians' offices or independent
laboratories at the 60th percentile of the prevailing charge
established for the 12-month period beginning July 1, 1984.
Similarly, the initial fee schedule payment amount for services
provided by hospital-based laboratories serving hospital
outpatients was set at the 62d percentile of the prevailing
charge level. Subsequent amendments to the payment rules
limited application of the hospital fee schedule to ``qualified
hospitals.'' A qualified hospital is a sole community hospital
(as that term is used for payment purposes under Medicare's
hospital prospective payment system (PPS)) which provides some
clinical diagnostic tests 24 hours a day in order to serve a
hospital emergency room which is available to provide services
24 hours a day, 7 days a week.
    The fee schedule payment amounts have been increased
periodically since 1984 to account for inflation. The updates
have generally occurred on January 1 of each year. The Balanced
Budget Act (BBA) of 1997 eliminated the updates for 1998-2002.
It also set the national ceiling on payment amounts at 74
percent of the median for all fee schedules for that test. BBA
1997 required the Secretary to adopt uniform coverage,
administration, and payment policies for laboratory tests using
a negotiated rulemaking process. The policies would be designed
to eliminate variation among carriers and to simplify
administrative requirements. A proposed rule was issued March
10, 2000.
     BBA 1997 also required the Secretary to divide the country
into no more than five regions and designate a single carrier
for each region to process laboratory claims (excluding those
for services provided to inpatients of hospitals and SNFs). The
allocation of claims to a particular carrier would be based on
whether the carrier served the geographic area where the
specimen was collected by another method selected by the
Secretary. The requirement would not apply to those physicians'
office laboratories that the Secretary determined would be
unduly burdened by the application of billing responsibilities
with respect to more than one carrier. This requirement has not
been implemented.
    Payment for clinical laboratory services (except for those
provided by a rural health clinic) may only be made on the
basis of assignment. The law specifically applies the
assignment requirement to clinical laboratory services provided
in physicians' offices. Payment for clinical laboratory
services equals 100 percent of the fee schedule amount; no
beneficiary cost sharing is imposed.
    Laboratories must meet the requirements of the Clinical
Laboratory Improvement Act Amendments of 1988. This
legislation, which focused on the quality and reliability of
medical tests, expanded Federal oversight to virtually all
laboratories in the country, including physician office
laboratories.

        Durable Medical Equipment and Prosthetics and Orthotics

    Medicare, under part B of the program, covers a wide
variety of medical supplies if they are medically necessary and
are prescribed by a physician. Under the program, durable
medical equipment (DME) includes such items as hospital beds,
intermittent positive pressure breathing machines, blood
glucose monitors, and wheelchairs. Guidelines define DME as
equipment that: (1) can withstand repeated use; (2) is
primarily and customarily used to serve a medical purpose; (3)
generally is not useful to a person in the absence of an
illness or injury; and (4) is appropriate for use in the home.
All of these requirements must be met before an item can be
covered. The benefit also includes related supplies, such as
drugs and biologicals that are necessary for the effective use
of the product.
    Medicare also covers prosthetic devices. These are defined
as items that replace all or part of an internal body organ,
such as colostomy bags, pacemakers, breast prostheses for
postmastectomy patients, parental and enteral nutrients, and
intraocular lenses. Prosthetics and orthotics include such
items as leg, arm, back and neck braces, and artificial legs,
arms, and eyes.
Reimbursement for durable medical equipment
    Medicare pays for DME on the basis of a fee schedule
originally established by the Omnibus Budget Reconciliation Act
of 1987 (OBRA 1987). Under the DME fee schedule, Medicare pays
the lower of either 80 percent of the item's actual charge or
the fee schedule amount. For payment purposes, covered DME
items are classified into five groups: (1) inexpensive or
routinely purchased DME (defined as equipment that costs less
than $150, or is purchased at least 75 percent of the time);
(2) items requiring frequent and substantial servicing; (3)
customized items (defined as equipment constructed or modified
substantially to meet the needs of an individual patient); (4)
other items of DME (frequently referred to as the ``capped
rental'' category); and (5) oxygen and oxygen equipment. Some
items that do not meet the definition of DME, such as
disposable surgical dressings, are also covered under the fee
schedule.
    In general, the fee schedule payment rates for DME are
determined locally (on a statewide basis). However, these local
payments are subject to floor and ceiling limits determined
nationally. Medicare will not pay less than 85 percent of the
median of all local payment amounts (floor), and will not pay
more than 100 percent of this median (ceiling).
    Prosthetics and orthotics are also paid according to a fee
schedule similar to the DME fee schedule. The payment rates are
determined regionally and are subject to national limits which
also have ceilings and floors. The floor is 90 percent of the
weighted average of all regional payment amounts, and the
ceiling is 120 percent of this weighted average.
    The fee schedules are generally updated annually by the
CPI-U. However, BBA 1997 froze payments for DME at the 1997
level for fiscal years 1998-2002. For oxygen and oxygen
equipment, BBA 1997 reduced payment limits beginning in fiscal
year 1999 to 70 percent of 1997 levels. The update for
prosthetics and orthotics was limited to 1.0 percent through
fiscal year 2002. The Balanced Budget Refinement Act (BBRA) of
1999 amended this provision as it related to DME (including
oxygen), allowing an update for fiscal year 2001 equal to 0.3
percent over fiscal year 2000 levels; for fiscal year 2002 the
update is 0.6 percent over fiscal year 2000 levels. Prosthetics
and orthotics updates were not affected by BBRA 1999.
    Medicare pays for a few items of medical equipment on a
reasonable cost basis, rather than under the fee schedule.
These include splints, casts, home dialysis equipment,
therapeutic shoes, and blood products. BBA 1997 authorized the
Secretary to establish fee schedules for these items;
regulations were proposed in July 1999.
    Table 2-20 shows total Medicare spending in calendar year
1998 for DME, prosthetics and orthotics, and certain other
items.
    Inherent reasonableness authority.--If the Secretary
determines that using standard procedures to calculate payment
for an item under the fee schedule results in an amount which
is ``grossly excessive or grossly deficient and not inherently
reasonable,'' the Secretary is authorized to increase or
decrease the payment amount accordingly. The authority to make
these adjustments is generally referred to as the inherent
reasonableness authority. It involves a complex procedure of
investigation, commentary, and notification.
     BBA 1997 sought to simplify the procedure and widen the
application of this authority, requiring HCFA to publish
criteria for determining if a fee schedule charge was
inherently unreasonable, and the factors to be used in
determining charges that are realistic and equitable. Using
these criteria, the Secretary would be permitted to adjust
payment levels. HCFA published interim final regulations (63
Federal Register 687, January 7, 1998) naming criteria such as
competitiveness in a particular marketplace, changes in
technology or supplier costs, and amounts paid by other
purchasers in the same area. However, industry voiced concerns
about how use of this authority might affect prices and
beneficiary access to services. As a result, in BBRA 1999,
Congress prohibited use of the inherent reasonableness
authority until the GAO reports on how the authority is used.

      TABLE 2-20.--MEDICARE SPENDING FOR DURABLE MEDICAL EQUIPMENT,
   PROSTHETICS, ORTHOTICS, AND CERTAIN OTHER ITEMS, CALENDAR YEAR 1998
                        [In millions of dollars]
------------------------------------------------------------------------
                                                                Medicare
                           Category                             spending
------------------------------------------------------------------------
Inexpensive/routinely purchased \1\..........................     $633.9
Items with frequent maintenance \2\..........................      168.1
Customized items \3\.........................................       43.5
Capped rental \4\............................................    1,102.3
Oxygen \5\...................................................    1,621.3
Prosthetics/orthotics \6\....................................      937.5
Surgical dressings...........................................       54.3
Supplies/accessories.........................................       64.6
Parenteral/enteral nutrients.................................      803.0
Other........................................................        8.0
                                                              ----------
      Total..................................................    5,436.6
------------------------------------------------------------------------
\1\ Inexpensive defined as equipment for which the purchase price does
  not exceed $150. Routinely purchased defined as equipment that is
  acquired 75 percent of the time by purchase. These items include
  commode chairs, electric heat pads, bed rails, and blood glucose
  monitors.
\2\ Paid on a rental basis until medical necessity ends and includes
  such items as ventilators and continuous and intermittent positive
  breathing machines.
\3\ Includes such items as wheelchairs adapted specifically for an
  individual. Payment based on individual determination.
\4\ Items of DME paid on a monthly rental basis not to exceed a period
  of continuous use of 15 months. Includes such items as hospital beds
  and wheelchairs.
\5\ Payment for oxygen and oxygen equipment based on a monthly rate per
  beneficiary. Payment not made for purchased equipment except where
  installment payments continue.
\6\ These items include covered prosthetic and orthotic devices (except
  for items included in the categories ``customized items'' and ``items
  requiring frequent maintenance,'' transcutaneous electrical nerve
  stimulators, parenteral/enteral nutritional supplies and equipment,
  and intraocular lenses).

Source: Health Care Financing Administration, Office of Information
  Services. Data from the Division of Information Distribution.

Administering the DME benefit
    HCFA enters into contracts with insurance companies known
as carriers under part B of Medicare, to administer the
program, i.e., to process claims and make payments. In the case
of DME, administration is centralized in four regional carriers
(known as DME regional carriers, or DMERCs) who are responsible
for processing claims for all beneficiaries living within their
areas. As a result of the consolidation, which occurred in
1992, variation in coverage policy and utilization patterns has
been reduced.
    Suppliers provide Medicare beneficiaries with medical
equipment and bill the regional carrier in their area. Most
suppliers are small entities located in areas where the demand
is greatest. Before being issued a Medicare supplier number,
suppliers must comply with various standards. These include
maintaining a physical location, filling orders from their own
inventories or under contract with another company, being
responsible for deliveries to beneficiaries and honoring all
product warranties, and providing proof of appropriate
liability insurance. BBA 1997 required that suppliers provide a
$50,000 surety bond issued by a company approved by the
Treasury Department. Although regulations have been proposed
for this requirement, they have not been finalized.
Competitive bidding
    Investigations have shown that Medicare pays higher prices
for certain medical supplies than those paid by other health
care insurers and other government agencies, including the
Department of Veterans Affairs. In order to lower payments, the
Secretary currently must initiate the inherent reasonableness
process or rely on legislation. Many observers suggested
granting HCFA the authority to engage in a competitive bidding
arrangement similar to the one used by the Department of
Veterans Affairs. BBA 1997 provided such authority on a limited
basis. HCFA was authorized to establish five 3-year competitive
bidding demonstration projects.
    With the demonstration projects, HCFA intends to test how
effective competitive bidding is for the Medicare Program.
Goals for the projects are to maintain beneficiary access to
services and limit their out-of-pocket expenses while lowering
Medicare's payment for medical equipment. The projects will
also prevent Medicare from dealing with suppliers who engage in
fraudulent business practices.
    The first demonstration project site selected was in Polk
County, FL. Beginning in 1999, suppliers submitted bids to
HCFA, competing for the right to supply certain medical
equipment to the 92,000 Medicare beneficiaries in the area.
Bids were evaluated on the basis of quality and price. To
maintain beneficiary access to the medical equipment, HCFA
named between 4 and 13 companies for each item. HCFA expects
that savings will average 17 percent on medical equipment
overall, and will be as high as 30 percent for some products.
    A second demonstration project is expected to begin in
January 2001 in the San Antonio area of Texas. The project,
involving about 112,000 Medicare beneficiaries, will be similar
to the Polk County project, although different products will be
involved. In 1998, Medicare paid an average of $287 per
beneficiary in the San Antonio area for medical equipment.

                Hospital Outpatient Department Services

    Hospital outpatient department (OPD) services for Medicare
beneficiaries are paid under Medicare part B. Services provided
in OPDs include: (1) emergency room and clinic services; (2)
surgery and operating rooms; (3) laboratory and pharmacy
services; (4) physical therapy and rehabilitation services; (5)
DME; and (6) chemotherapy and radiation therapy. OPDs also
provide diagnostic and preventive procedures such as radiology,
computer axial tomography (CAT) scans, magnetic resonance
imaging, endoscopies, and colonoscopies.
    Table 2-21 shows the percent distribution of hospital OPD
charges by type of service provided to Medicare beneficiaries
in 1998. For example, it shows that, of the $50.6 billion in
hospital outpatient charges (table 2-22) for Medicare
beneficiaries, 20.6 percent were for radiology services, 12.8
percent were for laboratory services, and so forth.

   TABLE 2-21.--PERCENT DISTRIBUTION OF HOSPITAL OUTPATIENT DEPARTMENT
            CHARGES UNDER MEDICARE, BY TYPE OF SERVICE, 1998
------------------------------------------------------------------------
                          Service                            OPD charges
------------------------------------------------------------------------
Radiology..................................................         20.6
Laboratory.................................................         12.8
Operating room.............................................         11.4
End-stage renal disease....................................          6.6
Pharmacy...................................................          6.1
Emergency room.............................................          3.3
Clinic.....................................................          1.6
Rehabilitation.............................................          2.7
Medical/surgical supplies..................................          9.1
All other \1\..............................................         25.9
                                                            ------------
    Total..................................................        100.0
------------------------------------------------------------------------
\1\ Includes computerized axial tomography, durable medical equipment,
  blood, and so forth.

Note.--Total may not add due to rounding.

Source: Health Care Financing Administration.

   TABLE 2-22.--MEDICARE HOSPITAL OUTPATIENT CHARGES AND REIMBURSEMENTS BY TYPE OF ENROLLMENT AND YEAR SERVICE
                                        INCURRED, SELECTED YEARS 1974-98
----------------------------------------------------------------------------------------------------------------
                                                  Number of   Charges for             Program payments
                                                   SMI \1\      covered   --------------------------------------
     Type of enrollment and year of service       enrollees     services                              Percent of
                                                     (in          (in       Amount (in      Per        covered
                                                  thousands)   thousands)   thousands)    enrollee     charges
----------------------------------------------------------------------------------------------------------------
All beneficiaries:

    1974.......................................   23,166,570     $535,296     $323,383          $14         60.4
    1976.......................................   24,614,402      974,708      630,323           26         64.7
    1978.......................................   26,074,085    1,384,067      923,658           35         66.7
    1980.......................................   27,399,658    2,076,396    1,441,986           52         69.4
    1982.......................................   28,412,282    3,164,530    2,203,260           78         69.6
    1983.......................................   28,974,535    3,813,118    2,661,394           92         69.8
    1984.......................................   29,415,397    5,129,210    3,387,146          115         66.0
    1985.......................................   29,988,763    6,480,777    4,082,303          136         63.0
    1986.......................................   30,589,728    8,115,976    4,881,605          160         60.1
    1987.......................................   31,169,960    9,794,832    5,690,786          183         58.2
    1988.......................................   31,617,082   11,833,919    6,371,704          202         53.8
    1989.......................................   32,098,770   14,195,252    7,160,586          223         50.4
    1990.......................................   32,635,800   18,346,471    8,171,088          250         44.5
    1991.......................................   33,239,840   22,016,673    8,612,320          259         39.1
    1992.......................................   33,956,460   26,799,501    9,941,391          293         37.1
    1993.......................................   34,642,500   32,026,576   10,938,545          316         34.2
    1994.......................................   35,178,600   36,323,649   11,813,522          336         32.6
    1995 \2\...................................   31,806,740   40,476,180   12,933,358          407         31.9
    1996.......................................   31,775,280   44,564,665   13,896,048          437         31.2
    1997.......................................   31,022,040   47,888,129   14,382,561          464         30.0
    1998.......................................   30,304,340   50,607,564   14,212,983          469         28.1
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:

    1974-98....................................          1.1         20.9         17.1         15.8           NA
    1974-84....................................          2.4         25.4         26.5         23.4           NA
    1984-98....................................          0.2         17.8         10.8         10.6           NA
================================================================================================================
Aged:

    1974.......................................   21,421,545      394,680      220,742           10         55.9
    1976.......................................   22,445,911      704,569      432,971           19         61.5
    1978.......................................   23,530,893    1,005,467      648,249           28         64.5
    1980.......................................   24,680,432    1,517,183    1,030,896           42         69.9
    1982.......................................   25,706,792    2,402,462    1,645,064           64         68.5
    1983.......................................   26,292,124    2,995,784    2,066,207           79         69.0
    1984.......................................   26,764,150    4,122,859    2,679,571          100         65.0
    1985.......................................   27,310,894    5,210,762    3,211,744          118         61.6
    1986.......................................   27,862,737    6,529,273    3,809,992          137         58.4
    1987.......................................   28,382,203    7,859,038    4,522,841          159         56.4
    1988.......................................   28,780,154    9,790,273    5,098,546          177         52.1
    1989.......................................   29,216,027   11,855,127    5,767,589          197         48.7
    1990.......................................   29,691,180   15,384,510    6,563,454          221         42.7
    1991.......................................   30,183,480   18,460,835    6,842,329          227         37.1
    1992.......................................   30,722,080   22,253,657    7,741,774          252         34.8
    1993.......................................   31,162,480   26,556,415    8,522,089          273         32.1
    1994.......................................   31,443,800   29,768,892    9,116,610          290         30.6
    1995 \2\...................................   28,020,760   33,110,441    9,900,199          353         29.9
    1996.......................................   27,849,640   36,099,678   10,542,937          379         29.2
    1997.......................................   27,046,120   38,728,484   10,861,323          402         28.0
    1998.......................................   26,243,140   41,945,972   10,681,369          407         26.0
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:

    1974-98....................................          0.8         21.5         17.5         16.7           NA
    1974-84....................................          2.3         26.4         28.4         25.9           NA
    1984-98....................................         -0.1         18.0         10.4         10.5           NA
================================================================================================================
Disabled:

    1974.......................................    1,745,019      140,617      102,641           59         73.0
    1976.......................................    2,168,467      270,139      197,352           91         73.1
    1978.......................................    2,543,162      378,600      275,409          108         72.7
    1980.......................................    2,719,226      559,213      411,090          152         73.5
    1982.......................................    2,705,490      762,068      558,195          206         73.2
    1983.......................................    2,682,411      817,335      595,187          222         72.8
    1984.......................................    2,651,247    1,006,351      707,575          267         70.3
    1985.......................................    2,677,869    1,270,015      870,560          325         68.5
    1986.......................................    2,726,991    1,586,703    1,071,613          393         67.5
    1987.......................................    2,787,757    1,773,664    1,167,945          417         65.8
    1988.......................................    2,836,928    2,043,646    1,273,158          449         62.3
    1989.......................................    2,882,743    2,340,124    1,392,897          483         59.5
    1990.......................................    2,944,620    2,961,961    1,607,634          546         54.3
    1991.......................................    3,056,360    3,555,838    1,769,991          579         49.8
    1992.......................................    3,234,380    4,545,843    2,199,617          680         48.4
    1993.......................................    3,480,020    5,470,161    2,416,456          694         44.2
    1994.......................................    3,734,800    6,463,757    2,696,912          722         41.7
    1995 \2\...................................    3,785,980    7,465,739    3,033,158          801         40.6
    1996.......................................    3,925,640    8,464,987    3,353,211          854         39.6
    1997.......................................    3,975,920    9,159,645    3,521,238          886         38.4
    1998.......................................    4,061,200    9,561,592    3,531,614          870         36.9
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:

    1974-98....................................          3.6         19.2         15.9         11.9           NA
    1974-84....................................          4.6         27.4         26.4         20.9           NA
    1984-98....................................          3.1         17.4         12.2          8.8           NA
----------------------------------------------------------------------------------------------------------------
\1\ 1974 is the first full year of coverage for disabled beneficiaries under Medicare.
\2\ Beginning in 1995, Medicare enrollees in managed care plans are not included in the data.

NA--Not applicable.

Source: Health Care Financing Administration, Office of Strategic Planning.

Background
    In the early years of the Medicare Program, Medicare paid
for both inpatient and outpatient hospital care based on a
hospital's reasonable costs attributable to caring for Medicare
beneficiaries. These were retrospective payment systems,
meaning payment for the costs incurred in providing care was
determined and made after the service was rendered.
    Payment systems for hospital inpatient care and outpatient
services were separated in 1983 when a new prospective system
was implemented for inpatient care. Under that arrangement, a
hospital receives a fixed payment, known in advance of
providing care, covering all care and services required by a
patient during a hospital stay (exclusive of physician fees)
and determined by the diagnosis-related group (DRG) into which
the patient is classified at admission. However, outpatient
services remained under the costs-or-charges retrospective
payment arrangement.
    Throughout the 1980s, Medicare payments for hospital
outpatient services grew as the volume of services provided in
that setting increased. Although growth in the Medicare
population contributed to increased utilization of outpatient
care, a substantial share of the growth in the volume of
outpatient services is attributable to advances in medicine and
technology that permit procedures formerly restricted to the
inpatient hospital setting to be provided safely on an
outpatient basis. Implementation in 1983 of the inpatient PPS,
which included aggressive management of inpatient utilization,
also led to a shift in care from hospital inpatient to
outpatient departments. Currently, on average, outpatient
services generate about half of all hospital revenues.
    Since the early 1980s, Medicare's payments for OPD services
have grown for reasons other than increased volume, and that
growth is often attributed to the lack of incentives for
efficiency or cost control inherent in the retrospective cost-
based payment system. Congress sought to contain the rate of
increase in Medicare payments for certain outpatient services
by requiring implementation of ``fee schedules'' (a form of
PPS) to pay for those services. For example, Congress required
HCFA to establish fee schedules for many outpatient diagnostic
procedures and tests; provision of orthotics, prosthetics, and
other DME; dialysis for persons with end-stage renal disease
(ESRD); and surgeries that might also take place in another
outpatient setting such as ambulatory surgical centers (ASCs).
These fee schedules save Medicare money because the amounts
paid are generally less than payments under retrospective cost
reimbursement systems.
    In the Omnibus Budget Reconciliation Acts of 1986 and 1990,
Congress directed the Secretary of the U.S. Department of
Health and Human Services (DHHS) to develop a PPS for all
hospital OPD care. In addition, to achieve more immediate
savings, legislation required across-the-board reductions in
Medicare payments for hospital operating costs and capital
costs (including those associated with outpatient care)
starting in 1990.
    Although Medicare currently uses fee schedules for some OPD
services, payment for other OPD services have remained under
the retrospective costs-or-charges system, resulting in an
extremely complex set of payment rules. For instance, payments
for OPD services such as clinic and emergency room visits have
been paid based on the lesser of hospital costs or charges.
Certain surgeries carried out in OPDs, but which are also
approved by Medicare to be provided in ASCs are paid the lower
of costs, charges, or a blended payment that incorporates the
ASC fee schedule amount (again, excluding physician charges).
Payment for costs for certain radiology services and diagnostic
procedures are based on a blended payment that includes, in
part, the Medicare fee schedule for physician services. To add
to the complexity, blended payment calculations may vary among
different types of hospitals. Some OPD services are paid for
exclusively according to a fee schedule (e.g., laboratory
tests, physical therapy, prosthetics and orthotics, mammography
screening, and some surgical dressings and supplies). Kidney
dialysis services, which are often provided in specialized
dialysis centers to which a PPS applies, are also paid under
the dialysis PPS if provided in an OPD.
Beneficiary and hospital overpayment issues
    The complex arrangements under which Medicare's payments
for OPD care have been determined has meant that, often, the
final Medicare approved payment amount is not known until a
hospital's annual cost reports are settled with Medicare, which
might be long after services to any individual beneficiary are
rendered. However, the Social Security Act permits providers to
charge Medicare beneficiaries 20 percent of the reasonable and
customary charges for part B-covered services. In the case of
OPD services for which payment is based on the blended rate
formula, the amount Medicare eventually would approve for the
service might be considerably less than the hospital's charge.
Thus, hospital OPDs have often billed beneficiaries at the time
of service for 20 percent of charges rather than 20 percent of
the amount computed and approved under Medicare's formulas. As
a result, beneficiaries are ``overcharged,'' sometimes paying
as much as 50 percent of the Medicare approved amount. The
Medicare Payment Advisory Commission reported in 1999 that
beneficiary coinsurance for OPD care represented about 47
percent of the total Medicare payment hospitals received for
outpatient services. ``Medigap'' insurance policies, which
Medicare beneficiaries may purchase to pay Medicare's
deductibles, copayments and coinsurance, relieve policyholders
from these high charges, but the insurance industry has noted
that the prices of their policies reflect such overcharges.
    When Medicare paid for hospital outpatient services under
the blended rate formula, the program's share of the payment to
the hospital was computed as if the beneficiary had paid only
20 percent of the Medicare approved amount, including the
limited fee schedule payment, instead of 20 percent of the
hospital's charges, which generally disregarded the limitations
of a fee schedule. Thus, the Medicare formula that assumed the
beneficiary had paid a lesser amount resulted in a larger
Medicare payment, and, consequently, hospitals were
``overpaid'' by Medicare. This hospital overpayment situation
was referred to as the ``formula-driven overpayment.''
The Balanced Budget Act (BBA) of 1997
    Despite implementation of certain fee schedules and across-
the-board reductions in payments, Medicare payments to hospital
OPDs rose at an annual rate of over 12 percent from 1983 to
1997 and increased from 7 percent to 20 percent as a share of
all Medicare payments to hospitals. Many saw the patchwork
payment arrangements for OPD care as fraught with disincentives
for hospitals to provide care efficiently. Congress responded
to these cost issues in BBA 1997. In order to end the complex
and inequitable retrospective cost and charge-based
reimbursement system, the law directed the Secretary of DHHS to
implement the OPD PPS in 1999. It eliminated the formula-driven
overpayment, effective at the start of fiscal year 1998, a move
that resulted in an almost immediate reduction in Medicare
payments to hospitals for those OPD services for which Medicare
payments duplicated beneficiary payments. BBA 1997 also
extended the across-the-board reductions of 5.8 percent for
operating costs and 10 percent for capital costs through 1999.
     BBA 1997 established a procedure to bring beneficiary cost
sharing for OPD services gradually into line at 20 percent of
Medicare approved amounts by ``freezing'' the dollar amount
hospitals may charge beneficiaries at 20 percent of the median
of all hospital outpatient charges per procedure in 1996,
updated to the time of implementation of the PPS. Thus, over
time, as Medicare's payments under the new PPS rise according
to an indexing formula, the ``frozen'' dollar amounts hospitals
may charge beneficiaries will come to equal 20 percent of
Medicare's PPS payments, and Medicare's payment will be 80
percent of the full amount approved under the new system.
However, for those services for which the spread between the
median charge and the PPS approved amount is large, it could
take many years before the beneficiary copayment is 20 percent
of the amount specified in the PPS. The law allows hospitals
voluntarily to limit beneficiary copayments to 20 percent and
to disseminate information regarding their reduced beneficiary
charges.
    On September 8, 1998, HCFA published proposed OPD PPS
regulations for comment. Although the new PPS was then
scheduled for implementation in 1999, HCFA delayed
implementation until after the start of the year 2000 in order
to accommodate resolution of ``Y2K'' data processing problems.
HCFA extended the public comment period on the proposed
regulations through July 30, 1999, and published final rules on
April 7, 2000. Implementation began August 1, 2000.
Design and implementation of the outpatient department PPS
    Under the hospital outpatient PPS included in final rules
published by HCFA, individual OPD services that are similar
clinically and also in terms of resource utilization are
arranged into groups according to an ambulatory payment
classification (APC) system. The system includes 451 payment
groups. A payment amount is established for each group and is
the same for each service in the group. The payments cover
hospital facility and nonphysician personnel costs. The labor
component of a payment is adjusted to reflect regional
variations.
    Services delivered in an OPD that are already covered by a
PPS or fee schedule are excluded from the OPD PPS, but will
continue to be paid under the existing applicable system. The
OPD PPS does not apply for outpatient services provided to
patients receiving services under part A in a skilled nursing
facility (SNF) when the service is part of a patient's SNF plan
of care and which is furnished by the hospital under an
arrangement with the SNF.
    Hospitals excluded from the outpatient PPS altogether
include certain facilities in Maryland that are paid under a
special State program and critical access hospitals that are
paid under a reasonable cost-based system according to rules in
the Social Security Act.
Balanced Budget Refinement Act (BBRA) of 1999
    The proposed PPS regulations promulgated on September 8,
1998, raised concerns about the adequacy of the payments under
that system for certain kinds of services, patients, and
hospitals. As a result, in BBRA 1999 (Public Law 106-113,
November 19, 1999), Congress legislated several major changes
to Medicare payments under the hospital OPD PPS. The BBRA 1999:
(1) requires the Secretary of DHHS to provide payments (within
specified limits, and on a budget neutral basis) over and above
PPS payments for certain high cost (``outlier'') patients; (2)
as a transition to the PPS, for 2-3 years, on a budget neutral
basis, requires the Secretary of DHHS to provide ``passthrough
payments'' to hospital OPDs above and beyond PPS payments for
costs of certain ``current innovative'' and ``new, high cost''
devices, drugs, and biologicals; (3) limits the cost range of
items or services that are included in any one PPS payment
category so that the highest median (or mean) cost of an item
or service in the group cannot be more than two times higher
than the lowest median (or mean) cost for an item or service
within the group; (4) requires the Secretary of DHHS to review
the PPS groups and amounts annually and to update them as
necessary; (5) as a transition to the PPS, through 2003,
establishes ``transitional corridors'' which phase in
reductions in aggregate Medicare payments individual hospitals
experience due to the PPS; (6) provides special ``hold
harmless'' payments until January 1, 2004, for small, rural
hospitals to ensure that they receive no less under the
outpatient PPS than they would have received in aggregate under
the ``pre-BBA'' system and provides the same protection
permanently for cancer hospitals; (7) caps beneficiary
copayments for OPD care at the amount of the beneficiary
deductible for inpatient care ($776 in 2000, and indexed for
subsequent years); (8) requires that the pre-PPS payment base
used as the budget neutrality benchmark for Medicare spending
under the PPS include beneficiary coinsurance amounts as paid
under the pre-PPS system (i.e., 20 percent of hospital
charges); (9) requires coverage of the cost of implantable
items; (10) allows the Secretary of DHHS to use either the mean
or the median of hospital costs when establishing weights that
determine payment amounts under the PPS; (11) extends across-
the-board reductions to payments for hospital operating costs
and capital costs until implementation of the PPS; (12) allows
reclassification of certain hospitals as urban or rural.
    The ``budget neutral'' requirement applicable to some of
these changes means that the total cost of the Medicare Program
is to be the same with the change as it would have been without
the change. Thus, program cost increases would require payment
adjustments elsewhere to offset those increases.
    According to HCFA data, on average, hospitals would receive
4.6 percent more in payments under the new outpatient PPS,
including the BBRA 1999 changes, than under the retrospective
cost-based system.
    On December 8, 1999, the Congressional Budget Office (CBO)
estimated that the provisions of BBRA 1999 applicable to
Medicare OPD payments would add $11.2 billion in payments to
hospitals over the period fiscal years 2000-2009.
Medicare payments to outpatient departments
    Table 2-22 summarizes the history of Medicare payments for
hospital outpatient services from 1974 through 1998. (Starting
in 1995, the data include only beneficiaries enrolled in
traditional fee-for-service Medicare and exclude those who
elected to enroll in a managed care plan.) The total number of
beneficiaries enrolled in part B grew by about 31 percent
during this time period, at an average annual rate of about 1
percent, although disability caseload growth rates were higher
than the rate of increase of elderly beneficiaries. The table
documents the dramatic increase in hospital outpatient
utilization and Medicare payments for OPD services since the
early 1980s. Medicare payments increased 44-fold, from $323
million in 1974 to $14.2 billion in 1998, with annual rates of
increase averaging as high as 26.5 percent from 1974 to 1984.
The substantial rates of increase in OPD payments per part B
enrollee (from $14 in 1974 to $469 in 1998) reflect the
increase in the volume of services provided in OPDs as well as
growth in payments for those services under the retrospective
cost-based payment system.
    Since 1983, hospital charges for OPD care for Medicare
beneficiaries increased by 17.8 percent per year, on average.
Medicare's payments for OPD services increased by 10.8 percent
per year during that time period (table 2-22). The table shows
that Medicare's payments as a percent of hospital charges for
Medicare-covered OPD services has declined from nearly 70
percent in 1983 to 28.1 percent in 1998. This declining ratio
reflects primarily the high rates of increase in hospital
charges and, to a lesser extent, limits on the rate of increase
in Medicare's payments for OPD services due to fee schedules
and blended payment formulas. It also reflects the increasing
share of charges billed to beneficiaries. Payment systems under
Medicare have included incentives for hospitals to increase
their OPD charges. For example, since implementation in 1983 of
the PPS for hospital inpatient care, some hospitals have
shifted costs and charges from inpatient accounts to OPD
accounts because they receive higher payments from Medicare
under the outpatient payment formulas. In addition, because
hospitals have routinely billed Medicare beneficiaries (or
their Medigap plan) for 20 percent of charges, higher charges
generate greater revenues from beneficiaries.

                  Ambulatory Surgical Center Services

    Services provided in an ambulatory surgical center (ASC)
are paid under Medicare part B. An ASC is a facility where
surgeries that do not require an inpatient hospital admission
are performed. ASCs treat only patients who have already seen a
health care provider and for whom surgery has been selected as
an appropriate treatment. All ASCs must have at least one
dedicated operating room and the equipment needed to perform
surgery safely and to provide for recovery from anesthesia.
Patients electing to have surgery in an ASC arrive for a
scheduled appointment on the day of the procedure, have the
surgery in an operating room, and recover under the care of the
nursing staff before leaving for home.
    Medicare began covering ASC services in 1982 as a way to
reduce costs for surgeries generally carried out on a hospital
inpatient basis but that could be performed safely in a less
costly outpatient setting. ASCs must meet certain conditions
specified by Medicare in order to participate in the program.
Some ASCs limit services to one type of surgery, such as
ophthalmology, and others provide a variety of procedures,
including gastroenterological, orthopedic, pain block, urology,
podiatry, and ear, nose, and throat procedures. About half of
all ASC procedures provided under Medicare in 1999 were related
to cataracts or other types of eye surgery.
    Currently, over 2,500 procedures are included on the
Medicare-approved list of ASC procedures. HCFA determines which
procedures will constitute the ASC list on the basis of certain
criteria related to the safety, appropriateness, and
effectiveness of performing the procedure in an ASC setting.
    Table 2-23 shows the procedures most often carried out for
Medicare beneficiaries in ASCs in 1999, the volume of those
procedures for Medicare beneficiaries, and Medicare's total
payments per procedure in that year.

 TABLE 2-23.--AMBULATORY SURGICAL CENTER UTILIZATION BY MEDICARE BENEFICIARIES IN 1999: INCIDENCE OF HIGH VOLUME
                                        PROCEDURES AND MEDICARE PAYMENTS
----------------------------------------------------------------------------------------------------------------
                                                                                                     Medicare
      Current procedural terminology code               Short descriptor             Volume of     payments (in
                                                                                  Medicare cases    thousands)
----------------------------------------------------------------------------------------------------------------
66984.........................................  Remove cataract, insert lens....         688,700        $689,700
66821.........................................  After cataract laser surgery....         208,342         208,342
43239.........................................  Upper GI endoscopy, biopsy......         133,783          39,791
45378.........................................  Diagnostic colonoscopy..........         114,330          37,283
45385.........................................  Colonoscopy, lesion removal.....          74,883          24,210
45380.........................................  Colonoscopy and biopsy..........          58,143          18,321
45384.........................................  Colonoscopy.....................          41,948          12,985
52000.........................................  Cystourethroscopy...............          35,359           8,348
43235.........................................  Upper GI endoscopy, diagnosis...          33,685           7,057
43248.........................................  Upper GI endoscopy, guidewire...          16,029           4,824
----------------------------------------------------------------------------------------------------------------
Note.--Data for calendar year 1999 are preliminary and are about 95 percent complete.

Source: Health Care Financing Administration.

Payment for ambulatory surgical centers
    From the start of Medicare coverage of ASC services,
Medicare-based payments on a prospective payment fee schedule.
This system was one of the first applications of a fee schedule
for outpatient, or ambulatory, care.
    The two primary cost components of a surgical procedure are
the physician's (or practitioner's) professional fees for
performing the procedure and the costs associated with services
furnished by the facility where the surgery is performed.
Medicare pays ASCs for facility and nonphysician personnel
costs incurred in connection with performing specific surgical
procedures. Payments are based on ``reasonable overhead
allowances.'' For example, items included among those covered
by the allowances are nursing and technician services;
supplies; drugs and biologicals; surgical dressings;
housekeeping services; and use of the facility. As with other
Medicare services, physician and certain practitioner fees are
paid under a separate system.
    The Medicare-approved ASC procedures (about 2,500
procedures) are consolidated into 8 payment groupings, each of
which has 1 payment amount; that amount is adjusted for
different geographic regions using the hospital wage index.
After a beneficiary meets the part B annual deductible,
Medicare pays ASCs 80 percent of the prospectively determined
rate, and the beneficiary is responsible for 20 percent. In
addition, Medicare and the beneficiary pay the physician or
surgeon separately, with Medicare paying 80 percent of the
approved amount under the physician fee schedule and the
beneficiary being responsible for 20 percent.
Growth in services
    At the end of 1983, 1 year after Medicare began coverage of
ASC care, 239 ASCs were approved to provide services for
beneficiaries. Use of ASCs grew rapidly, and, at the end of
1998, over 2,300 facilities participated in Medicare. From 1993
through 1998, the volume of Medicare-covered ASC services
provided grew from 1.06 million to 1.9 million. Medicare
payments to ASCs increased at an average of 12.8 percent per
year, from $495 million in 1993 to $902 million in 1998. Table
2-24 shows the annual volume of ASC services and Medicare
payments since 1993. Note that calendar year 1999 data do not
include a full year of payments.

   TABLE 2-24.--AMBULATORY SURGICAL CENTERS: UTILIZATION AND MEDICARE
                            PAYMENTS, 1993-99
------------------------------------------------------------------------
                                          Number of    Medicare payments
                 Year                     services          to ASCs
------------------------------------------------------------------------
1993.................................       1,059,644       $495,313,388
1994.................................       1,298,740        572,001,981
1995.................................       1,499,866        664,437,432
1996.................................       1,655,538        743,098,264
1997.................................       1,827,410        832,846,641
1998.................................       2,012,271        902,920,576
1999.................................       1,921,356        898,137,203
------------------------------------------------------------------------
Average annual increase 1993-98......                       12.8 percent
------------------------------------------------------------------------
Note.--Calendar year 1999 data are preliminary and are about 95 percent
  complete.

Source: Health Care Financing Administration.

    Starting January 1, 1995, the Secretary of DHHS has been
required to update ASC rates every 5 years based on a survey of
the actual audited costs incurred by a representative sample of
ASCs for a representative sample of procedures, and to increase
annual payments in the intervening years by the Consumer Price
Index for All Urban Consumers (CPI-U). However, for fiscal
years 1998-2002, BBA 1997 reduced the annual update to the CPI-
U increase minus 2 percentage points. Because the fiscal year
1999 adjustment would have been very small, HCFA made no
adjustment for that year.
    Effective October 1, 1999 (for fiscal year 2000), payments
for the eight categories into which all ASC procedures are
grouped were updated by the CPI-U increase minus 2 percentage
points. The increase was 0.8 percent. As of October 1, 1999,
the base rates (prior to geographic adjustments) are:

----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Group 1..............................       $317    Group 5.................  683
Group 2..............................        425    Group 6.................  644 + 150 for an intraocular lens
Group 3..............................        486    Group 7.................  949
Group 4..............................        600    Group 8.................  784 + 150 for an intraocular lens
Group 5..............................        683
----------------------------------------------------------------------------------------------------------------

Proposed changes to ASC Medicare payments
    On June 12, 1998, HCFA issued proposed rules which would
make major changes in Medicare payments to ASCs. The major
changes include replacing the eight payment groupings with an
APC system comprised of 105 payment groups; updating underlying
cost data using 1994 survey data updated to the present; and
making additions to and deletions from the list of Medicare
covered ASC procedures. Payments would range from $53 to $2,107
and would be updated by the CPI-U annually on a calendar year
basis. As of this writing, HCFA had received extensive comments
on the proposed new APC groups and payments and estimates that
final rules will be published in November 2000 for
implementation in April 2001.
    Some surgical procedures approved for ASCs are also
performed in hospital outpatient departments (OPDs). In
designing the new OPD prospective payment system (PPS) and the
new APC groups for ASC procedures, HCFA aimed to keep the
grouping of surgical procedures comparable.
    BBRA 1999 did not address ASC payment rates, the APC
system, or update procedures. However, it requires that, if the
Secretary implements new rates based on the 1994 data (or any
rates based on pre-99 Medicare cost survey data), those new
rates must be phased in by basing payments one-third on the new
rates in the first year, two-thirds in the second year, and
fully in the third year.

                         Other Part B Services

Preventive services
    Screening mammograms.--Medicare covers an annual screening
mammography for all women over age 40. Payment for a mammogram
is based on the lesser of the actual charge, the amount
established for the global procedure under Medicare's fee
schedule, or the payment limit established for the procedure.
The 2000 limit is $67.81.
    Screening Pap smears; pelvic exams.--Medicare authorizes
coverage for a screening Pap smear and a screening pelvic exam
once every 3 years; annual coverage is authorized for women at
high risk. Payment is based on the clinical diagnostic
laboratory fee schedule (see above). BBRA 1999 requires a
minimum payment of $14.60 for Pap tests furnished in 2000.
     Prostate cancer screening tests.--BBA 1997 authorized
coverage, beginning January 1, 2000, for an annual prostate
cancer screening test for men over age 50. The test could
consist of any (or all) of the following procedures: (1) a
digital rectal exam; (2) a prostate-specific antigen blood
test; and (3) after 2002, such other procedures as the
Secretary finds appropriate for the purpose of early detection
of prostate cancer.
    Colorectal screening.--BBA 1997 authorized coverage of and
established frequency limits for colorectal cancer screening
tests, effective January 1, 1998. A covered test is any of the
following procedures furnished for the purpose of early
detection of colorectal cancer: (1) screening fecal-occult
blood test (for persons over 50, no more than annually); (2)
screening flexible sigmoidoscopy (for persons over 50, no more
than one every 4 years); (3) screening colonoscopy for high-
risk individuals (limited to one every 2 years); and (4) such
other procedures as the Secretary finds appropriate for the
purpose of early detection of colorectal cancer. Payment limits
are established for the tests.
     BBA 1997 required the Secretary, within 90 days of
enactment, to publish a determination on the coverage of
screening barium enema. The Secretary determined that barium
enema tests, as an alternative to either a screening flexible
sigmoidoscopy or a screening colonoscopy, are to be covered in
accordance with the same screening parameters specified for
those tests.
    Diabetes screening tests.--Medicare's covered benefits
include diabetes outpatient self-management training services.
These services are defined as including educational and
training services furnished to an individual with diabetes by a
certified provider in an outpatient setting. They are covered
only if the physician who is managing the individual's diabetic
condition certifies that the services are needed under a
comprehensive plan of care to ensure therapy compliance or to
provide the individual with necessary skills and knowledge
(including skills related to the self-administration of
injectable drugs) to participate in the management of their own
condition. Certified providers for these purposes are defined
as physicians or other individuals or entities that, in
addition to providing diabetes outpatient self-management
training services, provide other items or services reimbursed
by Medicare. Providers must meet quality standards established
by the Secretary. They are deemed to meet the Secretary's
standards if they meet standards originally established by the
National Diabetes Advisory Board and subsequently revised by
organizations that participated in the establishment of
standards of the Board, or if they are recognized by an
organization representing persons with diabetes as meeting
standards for furnishing such services.
    In addition, Medicare covers blood glucose monitors and
testing strips for type I or type II diabetics (without regard
to a person's use of insulin, as determined under standards
established by the Secretary in consultation with appropriate
organizations). The national payment limit for testing strips
was reduced by 10 percent beginning in 1998.
    Bone mass measurements.--Bone mass measurement is covered
for the following high risk persons: an estrogen-deficient
woman at clinical risk for osteoporosis; an individual with
vertebral abnormalities; an individual receiving long-term
glucocorticoid steroid therapy; an individual with primary
hyperparathyroidism; or an individual being monitored to assess
osteoporosis drug therapy. The Secretary is required to
establish frequency limits.
Drugs/vaccines
    Medicare generally does not cover outpatient prescription
drugs. Despite the general limitation, Medicare law
specifically authorizes coverage for the following drugs:
  --Erythropoietin (EPO).--EPO for the treatment of anemia for
        persons with chronic kidney failure.
  --Osteoporosis drugs.--Injectable drugs approved for the
        treatment of postmenopausal osteoporosis provided to an
        individual by a home health agency (HHA). A physician
        must certify that the individual suffered a bone
        fracture related to postmenopausal osteoporosis and
        that the individual is unable to self-administer the
        drug.
  --Oral cancer drugs.--Oral drugs used in cancer chemotherapy
        when identical to drugs which would be covered if not
        self-administered. Also covered are oral antinausea
        drugs used as part of an anticancer chemotherapeutic
        regimen, subject to specified conditions.
    Medicare also covers immunosuppressive drugs (such as
cyclosporin) for 36 months following a covered organ
transplant. BBRA 1999 provides for a temporary extension of the
36-month limit on immunosuppressive drugs for persons otherwise
exhausting their coverage in 2000-2004. In each calendar year,
there will be an extension specified by the Secretary (as the
number of months or partial months), applicable to persons who
exhaust their benefits in that calendar year. The increase for
persons exhausting their benefits in 2000 is 8 months. The
minimum increase for persons exhausting their benefits in 2001
is 8 months.
    By May 1, 2001, the Secretary may increase the number of
months for the cohort exhausting their benefits in 2001. At the
same time, the Secretary is also required to announce the
additional months of benefits that will be available for the
cohort exhausting their benefits in 2002. Similarly by May 1,
2002 and 2003, the Secretary is required to announce the number
of months that will apply to the cohort exhausting their
benefits in the following year. Total expenditures over the 5-
year period are limited to $150 million.
    Medicare payment for drugs (not made on a cost or
prospective payment basis) equals 95 percent of the average
wholesale price. The Secretary is authorized to pay a
dispensing fee to pharmacies. A special payment limit ($10 per
1,000 units) applies for EPO.
    Medicare also pays for influenza virus vaccines (flu
shots), pneumococcal pneumonia vaccine, and hepatitis B vaccine
for persons at risk of contracting hepatitis B. Cost-sharing
charges do not apply for pneumococcal pneumonia or influenza
virus vaccines; cost-sharing charges do apply for hepatitis B
vaccines.
Ambulance services
    Medicare pays for ambulance services provided certain
conditions are met. The services must be medically necessary
and other methods of transportation must be contraindicated.
Ambulance services are currently paid on the basis of
reasonable costs when such services are provided by a hospital;
otherwise the payment is based on reasonable charge screens
developed by individual carriers based on local billings (which
may take a variety of forms). Based on these local billing
methods, carriers develop screens for one or more of the
following four main billing methods: (1) a single all inclusive
charge reflecting all services, supplies, and mileage; (2) one
charge reflecting all services and supplies, with separate
charge for mileage; (3) one charge for all services and
mileage, with separate charges for supplies; and (4) separate
charges for services, mileage, and supplies. Within each broad
payment method, additional distinctions are made based on
whether the service is basic life support service or advanced
life support, whether emergency or nonemergency transport was
used, and whether specialized advanced life services were
rendered.
    The Balanced Budget Act (BBA) of 1997 specified that the
reasonable cost and charge limits would apply through 1999,
with annual increases equal to the Consumer Price Index (CPI)
minus 1.0 percentage point. A fee schedule was to be
implemented in 2000. The aggregate amount of payments in 2000
could not exceed what would be paid if the interim reductions
remained in effect in that year. Annual increases in subsequent
years would equal the CPI increase, except that in 2001 and
2002 there would be a 1.0-percentage point reduction.
Implementation of the fee schedule has been delayed until at
least 2001.

                    END-STAGE RENAL DISEASE SERVICES

                                Coverage

    Medicare's End-Stage Renal Disease (ESRD) Program
established in the Social Security Amendments of 1972, covers
individuals who suffer from ESRD if they are: (1) fully insured
for Old-Age and Survivors Insurance benefits; (2) entitled to
monthly Social Security benefits; or (3) spouses or dependents
of individuals described in (1) or (2). Such persons must be
medically determined to be suffering from ESRD and must file an
application for benefits.
    Benefits for qualified ESRD beneficiaries include all part
A and part B medical items and services. ESRD beneficiaries are
automatically enrolled in the part B portion of Medicare and
must pay the monthly premium for such protection.
Medicare+Choice (M+C) plans may provide ESRD benefits to the
Medicare beneficiary who has been enrolled in an M+C
organization and subsequently develops ESRD. However,
beneficiaries with ESRD cannot enroll in an M+C plan.
    Table 2-25 shows expenditures, number of beneficiaries, and
the average expenditure per person for all persons with ESRD
(including the aged and disabled) from 1974 through 2005. Total
projected program expenditures for the Medicare ESRD Program
for fiscal year 2000 are estimated at $10.7 billion. In fiscal
year 2000, there are an estimated 320,005 beneficiaries,
including successful transplant patients and persons entitled
to Medicare on the basis of disability who also have ESRD.

 TABLE 2-25.--END-STAGE RENAL DISEASE MEDICARE BENEFICIARIES AND PROGRAM
                         EXPENDITURES, 1974-2005
------------------------------------------------------------------------
                                Expenditures
                                 (HI & SMI)         HI        Per person
          Fiscal year            in millions  beneficiaries      cost
                                 of dollars
------------------------------------------------------------------------
1974..........................          $229        15,993       $14,319
1975..........................           361        22,674        15,921
1976..........................           512        28,941        17,691
1977..........................           641        35,889        17,861
1978..........................           800        43,482        18,398
1979..........................         1,009        52,636        19,169
1980..........................         1,245        54,725        22,750
1981..........................         1,464        61,487        23,810
1982..........................         1,640        69,267        23,676
1983..........................         1,984        78,361        25,319
1984..........................         2,325        87,609        26,538
1985..........................         2,835        96,965        29,237
1986..........................         3,165       106,568        29,699
1987..........................         3,490       117,020        29,824
1988..........................         3,998       128,075        31,216
1989..........................         4,653       140,324        33,159
1990..........................         5,251       154,575        33,971
1991..........................         5,634       170,718        33,003
1992..........................         6,115       182,826        33,445
1993..........................         7,059       201,168        35,091
1994..........................         7,902       220,972        35,758
1995..........................         8,751       239,056        36,608
1996..........................         9,634       256,096        37,620
1997..........................         9,841       271,880        36,198
1998..........................         9,943       287,589        34,573
1999..........................         9,880       303,476        32,557
2000..........................        10,748       320,005        33,585
2001..........................        11,580       337,351        34,327
2002..........................        12,316       355,488        34,645
2003..........................        13,257       374,769        35,374
2004..........................        14,242       395,953        35,969
2005..........................        15,351       415,597        36,938
------------------------------------------------------------------------
Note.--Estimates for 1982-2005 are subject to revision by the Office of
  the Actuary, Office of Medicare and Medicaid Cost Estimates;
  projections for 1998-2005 are under the fiscal year 1996 budget
  assumptions.

Source: Health Care Financing Administration, Office of the Actuary.

    When the ESRD Program was created, it was assumed that
program enrollment would level out at about 90,000 enrollees by
1995. That mark was passed several years ago, and no indication
exists that enrollment will stabilize soon.
    Table 2-26 shows that new enrollment for all Medicare
beneficiaries receiving ESRD services grew at an average annual
rate of 4.6 percent from 1992 to 1998. Most of the growth in
program participation is attributable to growth in the numbers
of elderly people receiving services and growth in the numbers
of more seriously ill people entering treatment. Table 2-26
shows the greatest

                    TABLE 2-26.--MEDICARE END-STAGE RENAL DISEASE PROGRAM INCIDENCE BY AGE, SEX, RACE, AND PRIMARY DIAGNOSIS, 1992-98
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Number of new enrollees                                             Average
                                             ------------------------------------------------------------------------------------   Percent     annual
    Age, sex, race, and primary diagnosis                                                                                           change      percent
                                                 1992        1993        1994        1995        1996        1997        1998       1997-98     change
                                                                                                                                                1992-98
--------------------------------------------------------------------------------------------------------------------------------------------------------
Age:
  Under 15 years............................         410         428         444         465         428         373         342        -8.3        -3.0
  15-24 years...............................       1,359       1,301       1,298       1,351       1,288       1,099       1,093        -0.6        -3.6
  25-34 years...............................       3,545       3,562       3,638       3,497       3,342       3,120       3,030        -2.9        -2.6
  35-44 years...............................       5,892       5,738       6,068       6,438       6,342       5,951       5,891        -1.0         0.0
  45-54 years...............................       7,575       7,856       8,968       9,327       9,448       9,589       9,880         3.0         4.5
  55-64 years...............................      11,429      11,561      12,843      13,266      13,220      13,753      14,140         2.8         3.6
  65-74 years...............................      16,530      17,147      18,832      18,640      19,550      21,472      21,712         1.1         4.6
  75 years or older.........................      10,443      11,065      12,571      13,072      14,605      17,405      18,694         7.4        10.2

Sex:
  Male......................................      30,401      31,430      34,434      35,221      36,878      39,021      40,100         2.8         4.7
  Female....................................      26,782      27,228      30,228      30,835      31,345      33,741      34,682         2.8         4.4

Race:
  Asian.....................................       1,317       1,441       1,684       1,509       1,570       1,415       1,531         8.2         2.5
  African-American..........................      16,621      17,115      18,675      19,162      19,790      20,451      21,145         3.4         4.1
  White.....................................      37,606      38,080      41,597      41,251      42,359      46,611      47,806         2.6         4.1
  Native American...........................         774         660         749       1,001       1,109         771       1,133        47.0         6.6
  Other/unknown.............................         865       1,362       1,957       3,133       3,395       3,514       3,167        -9.9         4.1

Ethnicity:
  Non-Hispanic..............................       1,302       1,400       1,980      45,103      59,796      64,188      66,085         3.0        92.4
  Hispanic..................................         133         142         186       5,379       7,281       7,327       7,816         6.7        97.2
  Unknown...................................      55,748      57,116      62,496      15,574       1,146       1,247         881       -29.4       -49.9

Primary diagnosis:
  Diabetes..................................      21,292      21,751      25,289      27,679      29,486      31,962      33,359         4.4         7.8
  Glomerulonephritis........................       6,535       6,565       7,161       7,267       7,361       7,078       6,933        -2.1         1.0
  Hypertension..............................      17,685      17,447      19,755      17,677      17,947      19,601      20,297         3.6         2.3
  Cystic/hereditary disease.................       2,247       2,236       2,359       2,479       2,313       2,256       2,242        -0.6         0.0
  Interstitial nephritis....................       2,532       2,314       2,646       2,918       2,870       2,784       2,925         5.1         2.4
  Other.....................................       3,388       3,551       3,876       4,802       5,072       5,488       5,501         0.2         8.4
  Unknown...................................       2,623       2,393       2,459       2,446       2,645       2,787       2,991         7.3         2.2
  Not reported..............................         881       2,401       1,117         788         529         806         534       -33.8        -8.0
                                             -----------------------------------------------------------------------------------------------------------
    Total number of new enrollees...........      57,183      58,658      64,662      66,056      68,223      72,762      74,782         2.8         4.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Office of Clinical Standards and Quality.

rate of growth in program participation is in people over age
75, at 10.2 percent, followed by people of ages 65-74 with a
growth rate of 4.6 percent. The largest rate of growth in
primary causes of people entering ESRD treatment was diabetes.
People with diabetes frequently have multiple health problems,
making treatment for renal failure more difficult.
    The rates of growth in older and sicker patients entering
treatment for ESRD indicate a shift in physician practice
patterns. In the past, most of these people would not have
entered dialysis treatment because their age and severity of
illness made successful treatment for renal failure less
likely. Although the reasons that physicians have begun
treating older and sicker patients are not precisely known, it
is clear that these practice patterns have resulted, and will
continue to result, in steady growth in the number of patients
enrolling in Medicare's ESRD Program.
    ESRD is invariably fatal without treatment. Treatment for
the disease takes two forms: transplantation and dialysis.
Although the capability to perform transplants had existed
since the 1950s, problems with rejection of transplanted organs
limited its application as a treatment for renal failure. The
1983 introduction of a powerful and effective immunosuppressive
drug, cyclosporin, resulted in a dramatic increase in the
number of transplants being performed and the success rate of
transplantation.
    Table 2-27 indicates that a total of 13,272 kidney
transplants were performed in Medicare-certified U.S. hospitals
in 1998. Despite the significant increases in the number and
success of kidney transplants, transplantation is not the
treatment of choice for all ESRD patients. A chronic, severe
shortage of kidneys available for transplantation now limits
the number of patients who can receive transplants. Even absent
a shortage of organs, some patients are not suitable candidates
for transplants because of their age, severity of illness, or
other complicating conditions. Finally, some ESRD patients do
not want an organ transplant.
    For all of these reasons, dialysis is likely to remain the
primary treatment for ESRD. Dialysis is an artificial method of
performing the kidney's function of filtering blood to remove
waste products. There are two types of dialysis: hemodialysis
and peritoneal dialysis. In hemodialysis, still the most common
form of dialysis, blood is removed from the body, filtered and
cleansed through a dialyzer, sometimes called an artificial
kidney machine, before being returned to the body. There are
three types of peritoneal dialysis. Intermittent peritoneal
dialysis and continuous cycling peritoneal dialysis (CCPD)
requires the use of a machine while continuous ambulatory
peritoneal dialysis does not require the use of a machine.
Under peritoneal dialysis, filtering takes place inside the
body by inserting dialysate fluid through a permanent surgical
opening in the peritoneum (abdominal cavity). Toxins filter
into the dialysate fluid and are then drained from the body
through the surgical opening. Hemodialysis is usually performed
three times a week, Intermittent peritoneal dialysis is
performed once or twice a week, while continuous ambulatory
peritoneal dialysis and CCPD require daily exchanges of
dialysate fluid.

          TABLE 2-27.--TOTAL KIDNEY TRANSPLANTS PERFORMED IN MEDICARE-CERTIFIED U.S. HOSPITALS, 1979-98
----------------------------------------------------------------------------------------------------------------
                                                                          Living donor         Cadaveric donor
                     Calendar year                          Total    -------------------------------------------
                                                         transplants    Number    Percent     Number    Percent
----------------------------------------------------------------------------------------------------------------
1979...................................................        4,189      1,186         28      3,003         72
1980...................................................        4,697      1,275         27      3,422         73
1981...................................................        4,883      1,458         30      3,425         70
1982...................................................        5,358      1,677         31      3,681         69
1983...................................................        6,112      1,784         29      4,328         71
1984...................................................        6,968      1,704         24      5,364         76
1985...................................................        7,695      1,876         24      5,819         76
1986...................................................        8,976      1,887         21      7,089         79
1987...................................................        8,967      1,907         21      7,060         79
1988...................................................        8,932      1,816         20      7,116         80
1989...................................................        8,899      1,893         21      7,006         78
1990...................................................        9,796      2,091         21      7,705         79
1991...................................................       10,026      2,382         24      7,644         76
1992...................................................       10,115      2,536         25      7,579         75
1993...................................................       10,934      2,828         26      8,106         74
1994...................................................       11,312      3,000         26      8,312         73
1995...................................................       11,902      3,416         29      8,426         71
1996...................................................       12,198      3,084         25      8,495         70
1997...................................................       12,427      3,210         26      8,512         68
1998...................................................       13,272      3,453         26      8,752         70
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Office of Clinical Standards and Quality.

                             Reimbursement

    Medicare reimbursement for facility-based dialysis services
provided by hospital-based and independent facilities are paid
at prospectively determined rates for each dialysis treatment
session. The rate, referred to as a composite rate, is derived
from area wage differences and audited cost data adjusted for
the national proportion of patients dialyzing at home versus in
a facility. Adjustments are made to the composite rate for
hospital-based dialysis facilities to reflect higher overhead
costs.
    Beneficiaries electing home dialysis may choose either to
receive dialysis equipment, supplies, and support services
directly from the facility with which the beneficiary is
associated (method I) or to make independent arrangements for
equipment, supplies, and support services (method II). Under
method I, the equipment, supplies, and support services are
included in the facility's composite rate. Under method II,
payments are made on the basis of reasonable charges and
limited to 100 percent of the median hospital composite rate,
except for patients on CCPD, in which case the limit is 130
percent of the median hospital composite rate.
    Typically, neither the composite rate nor the reasonable
charge payment for method II is routinely updated. To the
extent that kidney transplantation services are inpatient
hospital services, they are subject to the Medicare PPS. There
is no specific update policy for reasonable costs of kidney
acquisition, and 100 percent of reasonable costs is reimbursed.
However, the composite rate for renal dialysis was updated in
the Medicare Balanced Budget Refinement Act (BBRA) of 1999
(Public Law 106-113). The act increased the composite rate by
1.2 percent above the revised composite rate that was in effect
in 1999. In fiscal year 2000, the composite rate is $132 for
hospitals and $128 for freestanding facilities, following an
additional increase of 1.2 percent in the rates in effect in
1999.

                            MEDICARE+CHOICE

    Medicare has a longstanding history of offering its
beneficiaries an alternative to the traditional fee-for-service
program, beginning with private health plans contracts in the
1970s and the Medicare Risk Contract Program in the 1980s.
Then, in 1997, Congress passed BBA 1997 (Public Law 105-33),
replacing the Risk Contract Program with the new
Medicare+Choice (M+C) Program. The M+C Program established new
rules for beneficiary and plan participation, along with a new
payment methodology. In addition to controlling costs, the M+C
Program was also designed to expand health plans to markets
where access to managed care plans was limited or nonexistent
and to offer new types of health plans. Most recently, Congress
enacted legislation in order to address some of the issues
arising from the BBA changes. BBRA 1999 (Public Law 106-33)
changed the M+C Program in an effort to make it easier for
Medicare beneficiaries and plans to participate in the program.
    By March 2000, M+C plans were available to about 72 percent
of the 39 million Medicare beneficiaries, and about 16 percent
of them chose to enroll in one of over 260 available M+C plans.
The rapid growth rate of Medicare managed care enrollment in
the 1990s has leveled off since the implementation of the M+C
Program, and there was even a small decline in enrollment in
2000. Despite this recent trend, the Congressional Budget
Office (CBO) projects that M+C enrollment will almost double by
2010, covering 31 percent of the Medicare population.
    In order to increase enrollment in Medicare managed care
and to allow beneficiaries to better meet their health care
needs, the M+C Program offers a diverse assortment of managed
care plans. However achieving the goals of the M+C Program has
been difficult, in part because the goal to control Medicare
spending may have dampened interest by managed care entities in
developing new markets, adding plan options, and in maintaining
their current markets (see appendix E for further information
about the M+C Program).

                            SELECTED ISSUES

       Utilization and Quality Control Peer Review Organizations

    The Medicare Utilization and Quality Control Peer Review
Organization (PRO) Program was established by Congress under
the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA,
Public Law 97-35). Building on the former Professional
Standards Review Organizations, the new PROs were charged by
the 1982 law with reviewing services furnished to Medicare
beneficiaries to determine if the services met professionally
recognized standards of care, were medically necessary, and
delivered in the most appropriate setting. Major changes were
made to the PRO Program by the Social Security Act Amendments
of 1983 (Public Law 98-21) and subsequent budget reconciliation
acts. Most PRO review is focused on inpatient hospital care.
However, there is limited PRO review of ambulatory surgery,
postacute care, and services received from Medicare health
maintenance organizations (HMOs).
    There are currently 53 PRO areas, incorporating the 50
States and the territories. Organizations eligible to become
PROs include physician-sponsored and physician-access
organizations. In limited circumstances, Medicare fiscal
intermediaries may also be eligible. Physician-sponsored
organizations are composed of a substantial number of licensed
physicians practicing in the PRO review area (for example, a
medical society); physician access organizations are those
which have available to them sufficient numbers of licensed
physicians so that adequate review of medical services can be
assured. Such organizations obtain PRO contracts from the
Secretary of the U.S. Department of Health and Human Services
(DHHS) through a competitive proposal process. Each
organization's proposal is evaluated by HCFA for technical
merit using specific criteria that are quantitatively valued.
Priority is given to physician-sponsored organizations in the
evaluation process. Effective October 1, 1999, all 53 PROs are
operating under the sixth round of contracts (also referred to
as the ``sixth scope of work'').
    In general, each PRO has a medical director and a staff of
nurse reviewers (usually registered nurses), data technicians,
and other support staff. In addition, each PRO has a board of
directors, comprised of physicians and, generally,
representatives from the State medical society, hospital
association, and State medical specialty societies. The Omnibus
Budget Reconciliation Act of 1986 (Public Law 99-509) requires
each board to have a consumer representative. Because the board
is usually consulted before a case is referred by the PRO to
the DHHS inspector general for sanction, it assumes a major
role in the PRO review process. Each PRO also has physician
advisors who are consulted on cases in which there is a
question regarding the nurse reviewer's referral. Only
physician advisors can make initial determinations about
services furnished or proposed to be furnished by another
physician.
    PROs are paid by Medicare on a cost basis for their work.
Outlays for PROs in fiscal year 1998 and in fiscal year 1999
totaled $221.6 million and $213.4 million, respectively, with
fiscal year 2000 outlays projected to be $484.9 million.
Spending varies considerably from year to year depending on
where the PROs are in their contract cycles. HCFA has indicated
that actual outlays for fiscal year 2000 may be considerably
lower than their current projection. Currently HCFA uses an
allocation of 80 percent from the Medicare Hospital Insurance
(HI) Trust Fund and 20 percent from the Supplementary Medical
Insurance (SMI) Trust Fund to finance PRO activity.
    The PRO review process combines both utilization and
quality review. In conducting utilization review, the PRO
determines whether the services provided to a Medicare patient
were necessary, reasonable, and appropriate to the setting in
which they were provided. Although some utilization review is
done on a prospective basis, the bulk of the reviews are done
retrospectively. When a PRO determines that the services
provided were unnecessary or inappropriate (or both), it issues
a payment denial notice. The providers, the physicians, and the
patient are given an opportunity to request reconsideration of
the determination.
    The PRO checks for indications of poor quality of care as
it is conducting utilization review. If a PRO reviewer detects
a possible problem, further inquiry is made into the case. If
it is determined that the care was of poor quality, the PRO
must take steps to correct the problem. Specific sanctions are
required if the PRO determines that the care was grossly
substandard or if the PRO has found that the provider or the
physician has a pattern of substandard care. In addition, under
section 9403 of COBRA (Public Law 99-272), as amended by Public
Law 101-239, authority exists for the PROs to deny payments for
substandard quality care. This provision, however, has never
been used.
    Each of the contracts between DHHS and the PROs must
contain certain similar elements outlined in a document known
as the Scope of Work. Under the third and previous scopes of
work, PRO review was centered on case-by-case examinations of
individual medical records, selected primarily on a sample
basis. This approach to medical review was criticized by the
Institute of Medicine and others as being costly,
confrontational, and ineffective. The fourth scope of work
incorporated a new review strategy called the Health Care
Quality Improvement Initiative. PROs were required to use
explicit, more nationally uniform criteria to examine patterns
of care and outcomes using detailed clinical information on
providers and patients. Instead of focusing on unusual
deficiencies in care, the PROs were instructed to focus on
persistent differences between actual indications of care and
outcomes from those patterns of care and outcomes considered
achievable. HCFA believed that this approach would encourage a
continual improvement of medical practice in a way that would
be viewed by physicians and providers as educational and not
adversarial.
    The fifth scope of work similarly emphasized continuous
quality improvement. Sample case reviews, other than those
mandated by law (such as those relating to hospital notices of
noncoverage and to beneficiary complaints) are no longer
required. Instead, each PRO is required to conduct 4-18 quality
improvement projects each year, depending on the size of their
beneficiary populations.
    The sixth scope of work includes national and local quality
improvement projects which address clinical priorities that are
designed to improve the health status of Medicare
beneficiaries. The intent is to increase the PRO's experience
in collaborating with providers, practitioners, plans,
purchasers, and beneficiaries to improve quality of care, test
quality indicators and intervention strategies. One more
controversial task has also been included in this most recent
scope of work. PROs will implement a Payment Error Prevention
Program to identify incorrect payments that result from billing
errors. This is a cooperative program and does not include
punitive actions. In the first year of the contract, PROs will
implement review activities to identify unnecessary admissions
and miscoded diagnosis-related group (DRG) assignments.

                            Secondary Payer

    Generally, Medicare is the ``primary payer,'' that is, it
pays health claims first, with an individual's private or other
public health insurance filling in some or all of Medicare's
coverage gaps. However, in certain cases, the individual's
other coverage pays first, while Medicare is the secondary
payer. This phenomenon is referred to as the Medicare Secondary
Payer Program.
    An employer (with 20 or more employees) is required to
offer workers age 65 and older (and workers' spouses age 65 and
older) the same group health insurance coverage as is made
available to other employees. Workers have the option of
accepting or rejecting the employer's coverage. If the worker
accepts the coverage, the employer's plan is primary for the
worker and/or spouse who is over age 65; Medicare becomes the
secondary payer. Employers may not offer a plan that
circumvents this provision.
    Similarly, a group health plan, offered by a large employer
with 100 or more employees, is the primary payer for employees
or their dependents who are on the Medicare Disability Program.
The provision applies only to persons covered under the group
health plan because the employee (generally the spouse of the
disabled person) is in ``current employment status'' (i.e., is
an employee or is treated as an employee by the employer).
    Secondary payer provisions also apply to ESRD individuals
with employer group health plans (regardless of employer size).
Prior to enactment of BBA 1997, the group health plan was the
primary payer for 18 months for persons who became eligible for
Medicare ESRD benefits. The employer's role as primary payer
was limited to a maximum of 21 months (18 months plus the usual
3-month waiting period for Medicare ESRD coverage). The BBA
extended the application of the secondary payer provisions for
the ESRD population from 18 to 30 months. This applies to items
and services furnished on or after August 5, 1997 for periods
beginning on or after February 5, 1997.
    Medicare is also the secondary payer when payment has been
made, or can reasonably be expected to be made, under workers'
compensation, automobile medical liability, all forms of no-
fault insurance, and all forms of liability insurance.
    The law authorizes a data match program which is intended
to identify potential secondary payer situations. Medicare
beneficiaries are matched against data contained in Social
Security Administration and Internal Revenue Service files to
identify cases in which a working beneficiary (or working
spouse) may have employer-based health insurance coverage.
Cases of previous incorrect Medicare payments are identified
and recoveries are attempted. The BBA clarifies that recoveries
can be initiated up to 3 years after the date the service was
furnished. Further, recoveries may be made from third-party
administrators except where such administrators cannot recover
amounts from the employer or group health plan.
    Table 2-28 shows savings attributable to these Medicare
secondary payer provisions. In fiscal year 1998, combined
Medicare part A and B savings are estimated at $3.4 billion.

TABLE 2-28.--MEDICARE SAVINGS ATTRIBUTABLE TO SECONDARY PAYER PROVISIONS BY TYPE OF PROVISION, FISCAL YEARS 1988-
                                                       98
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                    End-stage
          Year and Medicare part             Workers'     Working     renal    Automobile  Disability    Total
                                           compensation     aged     disease
----------------------------------------------------------------------------------------------------------------
1988:
  Part A.................................       $110.1      $786.7      $88.4      $149.6      $275.5   $1,410.3
  Part B.................................         18.1       313.8       20.2        22.3        93.5      467.9
                                          ----------------------------------------------------------------------
    Total................................        128.2     1,100.5      108.6       171.9       369.0    1,878.2
                                          ======================================================================
1989:
  Part A.................................         99.4       867.7       75.0       179.6       399.3    1,621.0
  Part B.................................         27.5       337.1       25.1        28.2       137.0      554.9
                                          ----------------------------------------------------------------------
    Total................................        126.9     1,204.8      100.1       207.8       536.3    2,175.9
                                          ======================================================================
1990:
  Part A.................................        120.9       981.6      144.1       220.1       498.4    1,965.1
  Part B.................................         21.6       325.8       21.5        26.4       123.2      518.5
                                          ----------------------------------------------------------------------
    Total................................        142.5     1,307.4      165.6       246.5       621.6    2,483.6
                                          ======================================================================
1991:
  Part A.................................        107.4       932.7      144.9       235.6       526.6    1,947.2
  Part B.................................         21.2       417.5       40.2        26.6       186.2      691.7
                                          ----------------------------------------------------------------------
    Total................................        128.6     1,350.2      185.1       262.2       712.8    2,638.9
                                          ======================================================================
1992:
  Part A.................................        118.9     1,044.9      140.8       233.9       600.9    2,139.4
  Part B.................................         17.3       398.3       37.4        34.5       182.9      670.4
                                          ----------------------------------------------------------------------
    Total................................        136.2     1,443.2      178.2       268.4       783.8    2,809.8
                                          ======================================================================
1993:
  Part A.................................        100.4     1,073.1      133.6       239.6       657.8    2,204.5
  Part B.................................         11.3       392.2       32.8        28.9       192.3      657.5
                                          ----------------------------------------------------------------------
    Total................................        111.7     1,465.3      166.4       268.5       850.1    2,862.0
                                          ======================================================================
1994:
  Part A.................................         96.5     1,101.1      130.2       265.9       682.3    2,276.0
  Part B.................................         13.0       398.1       31.8        32.7       211.8      687.4
                                          ----------------------------------------------------------------------
    Total................................        109.5     1,499.2      162.0       298.6       894.1    2,963.4
                                          ======================================================================
1995:
  Part A.................................        107.0     1,068.0      142.0       295.5       728.9    2,341.4
  Part B.................................         10.5       360.3       39.0        40.2       215.5      665.5
                                          ----------------------------------------------------------------------
    Total................................        117.5     1,428.3      181.0       335.7       944.4    3,006.9
                                          ======================================================================
1996:
  Part A.................................         93.6     1,062.5      133.4       335.0       728.5    2,353.0
  Part B.................................         11.1       295.1       34.3        50.1       196.4      586.9
                                          ----------------------------------------------------------------------
    Total................................        104.7     1,357.6      167.6       385.0       924.9    2,939.9
                                          ======================================================================
1997:
  Part A.................................         99.7     1,046.5      114.3       366.8       697.5    2,324.9
  Part B.................................         11.8       276.4       32.4        63.7       178.9      563.2
                                          ----------------------------------------------------------------------
    Total................................        111.5     1,322.9      146.7       430.6       876.3    2,888.0
                                          ======================================================================
1998:
  Part A.................................         96.7     1,303.0      108.1       219.2       810.8    2,683.9
  Part B.................................         11.6       364.3       35.0        28.0       238.4      707.7
                                          ----------------------------------------------------------------------
    Total................................        108.3     1,667.3      143.1       247.1     1,049.3    3,391.6
                                          ======================================================================
----------------------------------------------------------------------------------------------------------------
Note.--Totals may not add due to rounding.

Source: Health Care Financing Administration, Bureau of Program Operations.

                    Supplementing Medicare Coverage

    Most beneficiaries depend on some form of private or public
coverage to supplement their Medicare coverage. In 1996, only
about 11.3 percent of beneficiaries relied solely on the
traditional fee-for-service Medicare Program for protection
against the costs of care; an additional 8.0 percent were
enrolled in managed care organizations.
    The majority of the Medicare population (62.5 percent in
1996) have private supplemental coverage. This private
insurance protection may be obtained through a current or
former employer (29.9 percent had such coverage in 1996). It
may also be obtained through an individually-purchased policy,
commonly referred to as a ``Medigap'' policy (28.4 percent had
these plans in 1996). Some persons have both (4.2 percent in
1996). In addition, a smaller percentage (about 16.5 percent in
1996) have Medicaid coverage; a small group (1.7 percent in
1996) have supplemental coverage from one of a variety of other
public sources (such as the military) (table 2-29).

TABLE 2-29.--SUPPLEMENTARY HEALTH INSURANCE FOR THE MEDICARE POPULATION,
                                  1996
------------------------------------------------------------------------
                                                      Number     Persons
                  Type of coverage                      of        (in
                                                     Persons    percent)
------------------------------------------------------------------------
Medicare only.....................................    7,609.0       19.3
     Fee-for-service population...................    4,462.3       11.3
     Managed care population......................    3,146.7        8.0
 Medigap..........................................   11,180.4       28.4
 Employer-sponsored coverage......................   11,768.3       29.9
 Both private types...............................    1,667.9        4.2
 Medicaid, total..................................    6,494.1       16.5
    Full coverage.................................    3,268.6        8.3
    Qualified Medicare beneficiaries..............    2,925.7        7.4
    Specified low-income Medicare beneficiaries...      299.9        0.8
Other.............................................      665.4        1.7
                                                   ---------------------
       Total......................................   39,385.1     100.0
------------------------------------------------------------------------
Source: Eppig, et al., 1997.

 Medigap
     Medigap policies offer coverage for Medicare's deductibles
and coinsurance and for some services not covered by Medicare.
Premiums vary widely by type of coverage, geographic location
and whether premiums are community-rated or based on a
beneficiary age. The Omnibus Budget Reconciliation Act of 1990
provided for a standardization of Medigap policies; the
intention was to enable consumers to better understand policy
choices and to prevent marketing abuses. Implementing
regulations generally limit the number of different types of
Medigap plans that can be sold in a State to no more than 10
standard benefit plans, known as ``plan A'' to ``plan J.'' The
standardized plan A covers a core benefits package. Each of the
other nine includes the core package plus a different
combination of additional benefits. Only plan H, plan I, and
plan J offer some drug coverage. Beneficiaries who purchased
policies prior to the standardization requirement may renew
these policies; however, policies issued after July 1992 must
be one of the 10 standard plans.
    The law contains certain requirements which guarantee the
ability of beneficiaries to enroll in Medigap plans under
certain specified conditions. These guaranteed issue
provisions, which are outlined below, were significantly
expanded by the Balanced Budget Act of 1997.
    Six-month open enrollment.--Federal law establishes an open
enrollment period for the aged. All insurers offering Medigap
policies are required to offer open enrollment for 6 months
from the date a person first enrolls in part B (generally when
the enrollee turns 65). During this time an insurer cannot deny
the issuance, or discriminate in the pricing of a policy
because of an individual's medical history, health status, or
claims experience This requirement is known as guaranteed open
enrollment.
    There is no guaranteed open enrollment period for the
nonaged disabled population. However, when a disabled person
turns 65, that individual has the same open enrollment
guarantee as other aged persons.
    Guaranteed issue.--The law guarantees issuance of specified
Medigap policies (without an exclusion based on a preexisting
condition) for certain persons whose previous supplementary
coverage was terminated. Guaranteed issue also applies to
certain persons who elect to try out an M+C plan but
subsequently disenroll from such plan. In these cases, the
insurer is prohibited from discriminating in the pricing of the
Medigap policy on the basis of the individual's health status,
claims experience, receipt of health care or medical condition.
In general, this right must be exercised within 63 days of
termination of other enrollment. In the case of terminating M+C
plans, beneficiaries may elect to obtain the Medigap policy
within 63 days of the notice of termination (rather than within
63 days of the actual termination date).
    Certain requirements enable persons whose previous
supplementary coverage was terminated to obtain Medigap
coverage. These provisions may be particularly important to
persons whose HMO terminates its participation in the M+C
Program.
    The following groups of persons whose coverage is
involuntarily terminated are guaranteed issue of any Medigap
plan A, B, C, or F that is sold to new enrollees by Medigap
issuers in the State:
 1. An individual enrolled under an employee benefits plan that
        provides benefits supplementing Medicare and the plan
        terminates or ceases to provide such benefits;
 2. A person enrolled with an M+C organization whose enrollment
        is discontinued because the plan's certification is
        terminated or the organization no longer provides the
        plan in the individual's service area; the individual
        moves outside of the entity's service area; or the
        individual elects termination due to cause; and
 3. An individual enrolled under a Medigap policy if enrollment
        ceases because: (i) of the bankruptcy or insolvency of
        issuer and there is no provision under State law for
        continuation of such coverage; (ii) the issuer violates
        a material provision; or (iii) the issuer materially
        misrepresented the policy's provisions.
    Guaranteed issue protections also extend to certain persons
who elect to try out one of the options available under the M+C
Program. An individual is guaranteed issuance of the Medigap
policy in which he or she was previously enrolled if the
individual terminated enrollment in a Medigap policy, enrolled
in an M+C organization or similar entity, and terminated such
enrollment within 12 months. (If the same policy is no longer
sold by the insurer, the individual is guaranteed issuance of
Medigap plans A, B, C, or F.) The guarantee only applies if the
individual was never previously enrolled in an M+C or similar
plan.
    One group of persons are guaranteed issuance of any Medigap
policy sold in the State. These are persons who, when they
first become entitled to Medicare at age 65, enroll in an M+C
plan and disenroll from such plan within 12 months.
    Preexisting condition exclusions.--At the time insurers
sell a Medigap policy, they are generally permitted to limit or
exclude coverage for services related to a preexisting health
condition; such preexisting condition exclusions cannot be
imposed for more than 6 months. However, preexisting
limitations may not be imposed in the following cases:
 1. During the first 6-month open enrollment period, if on the
        date of application, the individual had health
        insurance coverage meeting the definition of
        ``creditable coverage'' under the Health Insurance
        Portability and Accountability Act.
 2. An individual who has met the preexisting condition
        limitation in one Medigap policy. The individual does
        not have to meet the requirement under a new policy for
        previously covered benefits; however, an insurer could
        impose exclusions for newly covered benefits (for
        example, for prescription drugs if not covered under
        the previous policy).
 3. Any individual who falls into one of the qualifying events
        categories discussed above under ``Guaranteed Issue.''
        These include persons whose previous coverage was
        involuntarily terminated or persons who elect to try
        out Medicare+Choice.
    The prohibition applies to persons who had coverage under a
prior policy for at least 6 months. If the individual has less
than 6 months prior coverage, the policy must reduce the
preexisting exclusion by the amount of the prior coverage.
     The Balanced Budget Act (BBA) provides for high deductible
Medigap plans. Specifically, it added 2 plan types to the list
of 10 standard Medigap plans. These offer the benefit package
of either plan F or plan J, except for the high deductible
feature. The high deductible was set at $1,500 in 1998 and
1999. In subsequent years, it is increased by the Consumer
Price Index (CPI). The beneficiary would be responsible for
expenses up to this amount. The 2000 deductible is $1,530.
 Employer-based policies
     In 1996, employer-based policies covered 34 percent of
Medicare beneficiaries. Employer-based plans are typically more
comprehensive than Medigap plans. Generally they are defined
benefit plans which may overlap significantly with Medicare
benefits. As a result, employers use a variety of approaches to
coordinate their plans with Medicare (which is the primary
payer for retirees). The costs of coverage are generally shared
by the employer and retiree.
     In recent years, the percentage of employers offering
retiree health coverage for their Medicare retirees has
dropped. Between 1993 and 1999, the number of large firms (with
500 or more employees) offering such coverage dropped from 40
percent to 28 percent (Foster Higgins, 1999).
     In addition, many other employers are pursuing strategies
to lower their liabilities for retiree health costs. Some
employers are moving toward a defined contribution model for
retiree health benefits. Others are using Medicare risk plans
and other managed care organizations to deliver services to
their retirees.
Impact of supplemental insurance on Medicare spending
    Medicare cost-sharing requirements are intended, in part,
to encourage cost-conscious utilization. Insurance that
supplements Medicare by covering deductibles and coinsurance
removes these incentives. Many analyses have addressed how
supplemental insurance affects beneficiaries' use of Medicare-
covered services and the cost of those services to Medicare.
Typically, these studies have estimated that Medicare spending
for beneficiaries with supplemental coverage are one-quarter to
one-third higher, on average, than expenditures for
beneficiaries without such coverage.
    A Physician Payment Review Commission analysis (Physician
Payment Review Commission, 1997) of the Medicare Current
Beneficiary Survey found a similar effect: Medicare
expenditures for beneficiaries covered by supplemental
insurance were about 30-percent higher than they were for those
without such coverage. Subsequent analysis showed that the
effect of secondary coverage on Medicare expenditures differs,
depending on the source of coverage. Expenditures for
beneficiaries having Medicare only are less than 75 percent of
those for beneficiaries with Medigap. Spending for
beneficiaries with employer-provided benefits average only
about 10 percent less (chart 2-1).

  CHART 2-1. COMPARISON OF PROJECTED PER CAPITA SPENDING FOR AVERAGE
       BENEFICIARIES, BY TYPE OF SUPPLEMENTAL INSURANCE AND YEAR
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>

    Note._These spending levels represent the expected
differences in outlays after other factors have been taken into
account.

    Source: Physician Payment Review Commission analysis of
data from the 1993 and 1995 Medicare Current Beneficiary
Survey. The sample size for 1993 was 11,285 and the sample size
for 1995 was 13,261.

    Higher utilization among beneficiaries with supplemental
insurance translates into increased Medicare costs because
Medicare is the primary payer for those services. The Medicare
Current Beneficiary Survey analysis found that per capita
expenditures for Medicare beneficiaries with Medigap insurance
were from $1,000 to $1,400 higher than those for beneficiaries
with Medicare only. Per capita spending for beneficiaries with
employer-provided supplements were from $700 to $900 higher
than those for beneficiaries with no supplemental coverage.
    These results reflect the difference in spending by source
of insurance, once other factors have been considered. High
service use among beneficiaries with secondary insurance
appears to be a consequence of having such insurance,
presumably reflecting the reduced financial burden associated
with using additional services.
Medicaid
    Some low-income aged and disabled Medicare beneficiaries
are also eligible for full or partial coverage under Medicaid.
Persons entitled to full Medicaid protection generally have all
of their health care expenses met by a combination of Medicare
and Medicaid. For these ``dual eligibles'' Medicare pays first
for services both programs cover. Medicaid picks up Medicare
cost-sharing charges and provides protection against the costs
of services generally not covered by Medicare. Of particular
importance for this population is coverage for prescription
drugs and long-term care services.
    Several population groups are entitled to more limited
Medicaid protection. These include qualified Medicare
beneficiaries (QMBs), specified low-income Medicare
beneficiaries (SLMBs), and certain qualified individuals.
Persons meeting the qualifications for coverage under one of
these categories, but not otherwise eligible for Medicaid, are
not entitled to the regular Medicaid benefits package. Instead,
they are entitled to have Medicaid make specified payments in
their behalf.
    Qualified Medicare beneficiaries.--State Medicaid Programs
are required to make Medicare cost-sharing assistance available
to QMBs. A QMB is an aged or disabled Medicare beneficiary who
has: (1) income at or below the Federal poverty line ($8,592
for a single, $11,496 for a couple in 2000, including the $20
per month disregard); and (2) resources below 200 percent of
the resources limit set for the Supplemental Security Income
(SSI) Program (the QMB resource limits are $4,000 for an
individual and $6,000 for a couple). Certain items, such as an
individual's home and household goods, are excluded from the
calculation.
    Persons meeting the QMB definition are entitled to Medicare
part A. Included is the relatively small group of aged persons
who are not automatically entitled to part A coverage, but who
have bought part A protection by paying a monthly premium. Not
included are working disabled persons who have exhausted
Medicare part A entitlement but who have extended their
coverage by payment of a monthly premium.
    Medicaid is required to pay Medicare premiums and cost-
sharing charges for the QMB population as follows: (1) part B
monthly premiums; (2) part A monthly premiums paid by the
limited number of persons not automatically entitled to part A
protection; (3) coinsurance and deductibles under part A and
part B including the Medicare hospital deductible, the part B
deductible, and the parts A and B coinsurance; and (4)
coinsurance and deductibles that M+C plans charge their
enrollees.
Payment of QMB benefits
    States are required to pay part A and part B premiums in
full for the QMB population. They are also required to pay the
requisite deductibles and coinsurance, though the actual amount
of the payment may vary. State Medicaid Programs frequently
have lower payment rates for services than those applicable
under Medicare. Federal law permits States to either: (1) pay
the full Medicare deductible and coinsurance amounts; or (2)
only pay those amounts to the extent that the Medicare provider
or supplier has not received the full Medicaid rate for the
service.
    All States have buy-in agreements with the Secretary that
allow them to enroll their QMB population in part B. Some
States have also elected to include payment of part A premiums
under their buy-in agreements. Payment of premiums under a buy-
in agreement is advantageous to the State because premiums paid
through this method are not subject to delayed enrollment
penalties which might otherwise be applicable in the case of
delayed enrollment or reenrollment.
    The buy-in agreements for the QMB population are in
addition to the traditional buy-in agreements that States have
for other population groups. Under these traditional buy-in
agreements, States enroll in Medicare part B persons who are
eligible for both Medicare and Medicaid. As a minimum, States
may limit buy-in coverage to persons receiving cash assistance;
alternatively, they may add some or all categories of other
persons who are eligible for both programs.
    Specified low-income Medicare beneficiaries.--States are
also required to pay Medicare part B premiums for SLMBs. These
are persons meeting the QMB criteria except that their income
is slightly over the QMB limit. The SLMB income limit is 120
percent of the Federal poverty line. In 2000 this is $10,260
for a single and $13,740 for a couple (including the $20 per
month disregard). Medicaid protection is limited to payment of
the Medicare part B premiums, unless the beneficiary is
otherwise eligible for Medicaid.
    Qualifying individuals.--BBA 1997 required State Medicaid
Programs, effective January 1, 1998 through December 31, 2002,
to pay part B premiums for beneficiaries with incomes up to 135
percent of poverty. These persons are referred to as QI-1s. For
Medicare beneficiaries with incomes between 135 and 175 percent
of poverty, State Medicaid Programs are required to cover that
portion of the Medicare part B premium attributable to the
transfer of home health visits from part A to part B. These
persons are referred to as QI-2s.
     The Federal Government will pay 100 percent of the costs
associated with expanding Medicare part B premium assistance
from 120 to 135 percent of poverty, as well as the extra
premium cost attributable to the home health transfer for
persons with incomes between 135 and 175 percent of poverty. To
cover these costs, the Secretary is required to provide for
allocations to States based on the sum of: (1) a State's number
of Medicare beneficiaries with incomes between 135 and 175
percent of poverty, and (2) twice the number of Medicare
beneficiaries with incomes between 120 and 135 percent of
poverty, relative to the sum for all eligible States. Total
amounts available for allocations are $200 million for fiscal
year 1998, $250 million for fiscal year 1999, $300 million for
fiscal year 2000, $350 million for fiscal year 2001, and $400
million for fiscal year 2002. The Federal matching rate for
each participating State will be 100 percent up to the State's
allocation. If a State exceeds its allocation, the matching
rate on the excess is zero. Payments are to be made from
Medicare part B for the costs of this program.
    Qualified disabled and working individuals (QDWIs).--
Medicaid is authorized to provide partial protection against
Medicare part A premiums for QDWIs. QDWIs are persons who were
previously entitled to Medicare on the basis of a disability,
who lost their entitlement based on earnings from work, but who
continue to have the disabling condition. Medicaid is required
to pay the Medicare part A premium for such persons if their
incomes are below 200 percent of the Federal poverty line,
their resources are below 200 percent of the SSI limit, and
they are not otherwise eligible for Medicaid. States are
permitted to impose a premium, based on a sliding scale, for
individuals between 150 and 200 percent of poverty.
Data
    As of July 1998, Medicare reported that there were 331,924
Medicare part A beneficiaries for whom QMB payments for part A
premiums were being made. As of the same date, States reported
a total of 5,109,228 part B buy-ins of which 2,421,298 were
separately identified as QMBs and 272,565 were separately
identified as SLMBs (table 2-30). However, these numbers are
low due to reporting problems. The QMB and SLMB numbers include
persons who were eligible for the full Medicaid benefit
package. No QMB-only or SLMB-only number is available.
Nationwide there were 18 QDWIs in May 1997; this information is
not broken down by State.

 TABLE 2-30.--NUMBER OF QUALIFIED MEDICARE BENEFICIARIES, SPECIFIED LOW-INCOME MEDICARE BENFICIARIES, AND STATE
                                          BUY-INS BY JURISDICTION, 1998
----------------------------------------------------------------------------------------------------------------
                                                                           Part B buy-                  Part B
                            State                             Part A QMBs      ins      Part B QMBs     SLMBs
----------------------------------------------------------------------------------------------------------------
Alabama.....................................................        3,315      121,990       30,575        8,649
Alaska......................................................          584        7,093            0           16
Arizona.....................................................          451       51,141       32,763        1,944
Arkansas....................................................        3,708       78,514       20,966        4,792
California..................................................       94,202      776,832      377,822       10,774
Colorado....................................................          512       52,175       11,930            0
Connecticut.................................................        2,465       51,335       40,737        3,961
Delaware....................................................          462        8,900        1,938          514
District of Columbia........................................        1,152       14,582          390        1,599
Florida.....................................................       41,860      313,744      199,721       16,584
Georgia.....................................................        6,181      171,047       47,531       10,631
Hawaii......................................................        4,783       19,226        4,434          147
Idaho.......................................................          250       14,909        8,473          864
Illinois....................................................        3,401      145,976      111,933       13,928
Indiana.....................................................        1,739       81,184       52,626       11,585
Iowa........................................................        1,176       49,844       34,802        7,033
Kansas......................................................          635       39,008       15,064        1,675
Kentucky....................................................        3,242      106,537       29,826        8,029
Louisiana...................................................        5,132      115,031       26,461        4,519
Maine.......................................................           14       33,006       14,128        2,715
Maryland....................................................        6,387       61,669       43,784        2,154
Massachusetts...............................................       14,885      138,796      116,511       11,465
Michigan....................................................        6,387      135,769       40,969       15,115
Minnesota...................................................        3,766       57,559       14,871        3,354
Mississippi.................................................        6,814      106,336       68,307        5,169
Missouri....................................................          666       81,841       60,047        7,615
Montana.....................................................          426       11,882        9,188        1,472
Nebraska....................................................            1       18,029        7,727          785
Nevada......................................................        1,047       17,191       12,590        1,839
New Hampshire...............................................           25        6,295        1,411            0
New Jersey..................................................        7,420      137,598       88,668       15,065
New Mexico..................................................          496       34,411        7,914        2,427
New York....................................................          253      363,331      169,511        1,187
North Carolina..............................................       11,254      210,388       45,553       10,195
North Dakota................................................            6        5,612        1,394          388
Ohio........................................................        6,389      180,172       72,377        7,333
Oklahoma....................................................        4,373       63,142       55,936        6,858
Oregon......................................................           40       51,392       27,329        3,697
Pennsylvania................................................       15,903      179,295      113,357       10,595
Rhode Island................................................          744       17,729        1,540            8
South Carolina..............................................        1,793      104,111       85,020        5,729
South Dakota................................................          759       12,791        4,508        1,388
Tennessee...................................................        7,642      171,653       73,825        2,219
Texas.......................................................       42,979      339,648       96,543       18,763
Utah........................................................          140       14,900       10,147        1,474
Vermont.....................................................          218       13,197        3,330        1,829
Virginia....................................................        2,939      108,427       42,957        6,450
Washington..................................................        5,144       89,419       26,461        6,478
West Virginia...............................................        3,560       43,019       38,503        3,911
Wisconsin...................................................        4,021       74,429       16,880        6,896
Wyoming.....................................................          196        5,963        2,020          747
Outlying areas..............................................            0        1,160            1            0
                                                             ---------------------------------------------------
      Total.................................................      331,924    5,109,228    2,421,298     272,565
----------------------------------------------------------------------------------------------------------------
Note.--Total part B buy-ins include part B QMBs, part B SLMBs, and QI-1s (not separately broken out).

 Source: Health Care Financing Administration, Office of Information Services.

                      LEGISLATIVE HISTORY, 1980-99

    This section summarizes major Medicare legislation enacted
into law since 1996. Previous editions of the Green Book review
legislation enacted before 1996.
    The summary highlights major provisions; it is not a
comprehensive list of all Medicare amendments. Included are
provisions which had a significant budget impact, changed
program benefits, modified beneficiary cost sharing, or
involved major program reforms. Provisions involving policy
changes are mentioned the first time they are incorporated in
legislation, but not necessarily every time a modification is
made. The descriptions include either the initial effective
date of the provision or, in the case of budget savings
provisions, the fiscal years for which cuts were specified.

Health Insurance Portability and Accountability Act of 1996, Public Law
                                 104-1

     Added new criminal health care fraud provisions,
strengthened existing civil and criminal fraud and abuse
provisions and provided funding for new antifraud programs
(generally effective on enactment or January 1, 1997).

          Balanced Budget Act (BBA) of 1997, Public Law 105-33

Hospitals
     Froze PPS hospital and PPS-exempt hospitals and units and
limited updates for fiscal years 1999-2002. Established a PPS
for inpatient rehabilitation hospitals, effective beginning in
fiscal year 2001. Rebased capital payment rates and provided
for additional reductions over the fiscal year 1997-2002
period. Reduced the indirect medical education payment from the
current 7.7 percent to 5.5 percent by fiscal year 2001 and
reformed direct graduate medical education payments (generally
effective on enactment or October 1, 1997).
 Skilled nursing facilities
     Provided for a phase in of a PPS that will pay a Federal
per-diem rate for covered SNF services (generally effective
July 1, 1998).
Home health
     Provided for the establishment of a PPS for home health
services. Provided for a reduction in per-visit cost limits
prior to the implementation of the PPS, clarified the
definitions of part-time and intermittent care, and provided
for a study of the definition of homebound. Provided for the
transfer of some home health costs from part A to part B
(prospective payment effective October 1, 1999, reduction in
cost limits effective on enactment, definition clarification
effective October 1, 1997, and transfer of costs effective
January 1, 1998).
 Hospice
     Reduced the hospice payment update for each of fiscal
years 1998-2002, and clarified the definition of hospice care
(generally effective on enactment).
Physicians
     Provided for use of a single conversion factor; replaced
the volume performance standard with the sustainable growth
rate; provided for phased-in implementation of resource-based
practice expenses; and permitted use of private contracts under
specified conditions (generally effective January 1, 1998).
 Hospital outpatient departments
     Extended reductions in payments for outpatient hospital
services paid on the basis of costs through December 1999 and
established a PPS for hospital outpatient departments (OPDs)
for covered services beginning in 1999 (generally effective on
enactment).
Other providers
     Froze payments for laboratory services for fiscal years
1998-2002; provided for establishment of a fee schedule in 2000
for payment for ambulance services (generally effective on
enactment).
 Beneficiary payments
     Permanently set the part B premium at 25 percent of
program costs and expanded the premium assistance beginning in
1998 available under the Specified Low-Income Medicare
Beneficiary (SLMB) Program (effective on enactment).
 Prevention initiatives
     Authorized coverage for annual mammograms for all women
over 40. Added coverage for screening pelvic exams, prostate
cancer screening tests, colorectal cancer screening tests,
diabetes self-management training services, and bone mass
measurements for certain high-risk persons (generally effective
in 1998, except prostate cancer screening effective 2000).
 Supplementary coverage
     Provided for guaranteed issuance of specified Medigap
policies without a preexisting condition exclusion for certain
continuously enrolled aged individuals (effective July 1,
1998).
 Competitive bidding
     Provided for competitive bidding demonstrations for
furnishing part B services (not including physicians services)
(effective on enactment).
Commissions
     Established a 17-member National Advisory Commission on
the Future of Medicare (with appointments to be made by
December 1, 1997). Established the Medicare Payment Advisory
Commission replacing the Prospective Payment Assessment
Commission and the Physician Payment Review Commission (with
appointments to be made by September 30, 1997).
 Medicare+Choice
     Established a new part C of Medicare called
Medicare+Choice (M+C). This program is built on the existing
Medicare Risk Contract Program which enabled beneficiaries to
enroll, where available, in health maintenance organizations
(HMOs) that contracted with the Medicare Program. The M+C
Program expands, beginning in 1999, the private plan options
that could contract with Medicare to other types of managed
care organizations (for example, preferred provider
organizations and provider-sponsored organizations), private
fee-for-service plans, and, on a limited demonstration basis,
high deductible plans (called medical savings account plans)
offered in conjunction with medical savings accounts (effective
on enactment).

    Balanced Budget Refinement Act (BBRA) of 1999 (Incorporated in
      Consolidated Appropriations Act of 1999, Public Law 106-113)

Prospective payment system hospitals
    Froze the indirect medical education adjustment at 6.5
percent through fiscal year 2000, reduced the adjustment to
6.25 percent in fiscal year 2001 and to 5.5 percent in fiscal
year 2002 and subsequent years. Froze the reduction in the DSH
adjustment to 3 percent in fiscal year 2001; changed the
reduction to 4 percent in fiscal year 2002. Changed the
methodology for Medicare's direct graduate medical education
payments to teaching hospitals to incorporate a national
average amount calculated using fiscal year 1997 hospital-
specific per-resident amounts. Increased the number of years
that would count as an initial period for child neurology
residency training programs. Provided for the reclassification
of certain counties and areas for the purposes of Medicare
reimbursement.
PPS-exempt hospitals
    Adjusted the labor-related portion of the 75-percent cap to
reflect the wage differences in the hospitals' area relative to
the national average. Increased the amount of continuous bonus
payments to eligible long-term care and psychiatric providers
from 1 percent to 1.5 percent for cost reporting periods
beginning on or after October 1, 2000 and before September 30,
2001 and to 2 percent for cost reporting periods beginning on
or after October 1, 2001 and before September 30, 2002.
Required the Secretary to report on a discharge-based PPS for
long-term care hospitals which would be implemented in a budget
neutral fashion for cost reporting periods beginning on or
after October 1, 2002. Required the Secretary to report on a
per-diem-based PPS for psychiatric hospitals which would be
implemented in a budget neutral fashion for cost reporting
periods beginning on or after October 1, 2002. Required the
Secretary base the PPS for inpatient rehabilitation hospitals
on discharges and incorporate functional related groups as the
basis for payment adjustments.
Rural providers
    Permitted reclassification of certain urban hospitals as
rural hospitals. Updated existing criteria used to designate
outlying rural counties as part of metropolitan statistical
areas for the purposes of Medicare's hospital PPS. Changed
certain requirements pertaining to Medicare's Critical Access
Hospital Program. Extended the Medicare dependent hospital
classification through fiscal year 2006. Permitted certain sole
community hospitals to receive Medicare payments based on their
hospital specific fiscal year 1996 costs. Increased the target
amount for SCHs by the full market basket amount for discharges
occurring in fiscal year 2001.
Skilled nursing facilities
    Increased, from April 1, 2000, until October 1, 2000, per-
diem payments by 20 percent for 15 resource utilization groups
(RUGs) under the PPS. Permitted payment under the Federal PPS
rate for agencies for which it is more advantageous than under
the transition rates. Provided for payment beyond the
designated PPS rate for ambulance services for dialysis
patients and for specific chemotherapy items and services,
radioisotope services, and prosthetic devices. Until October 1,
2001, fixed PPS per-diem rates at 50 percent of the facility-
specific rate and 50 percent of the Federal rate for facilities
in which 60 percent of the patients are immunocompromised.
Home health agencies
    Delayed the 15-percent reduction in home health payments
until 12 months after implementation of the PPS but, within 6
months of implementation, required the Secretary to assess the
need for any reductions. Increased per-beneficiary limits by 2
percent for older agencies; excluded DME from consolidated
billing, and provided $10 per beneficiary to offset HHA costs
for collecting outcome and assessment information set (OASIS)
data.
Hospice
    Increased payment rates otherwise in effect under the
hospice PPS for fiscal year 2001 by 0.5 percent and for fiscal
year 2002 by 0.75 percent, provided that these increases are
not to be included in the base on which subsequent increases
will be computed.
Physicians
    Made technical changes to limit oscillations in the annual
update to the conversion factor beginning in 2001 and provided
that the sustainable growth rate is calculated on a calendar
year basis. Required the Secretary, in determining practice
expense relative values, to establish by regulation a process
under which the Secretary would accept for use and would use,
to the maximum extent practicable and consistent with sound
data practices, data collected by outside organizations and
entities.
Hospital outpatient departments
    Made seven major changes to Medicare payments under the
hospital OPD PPS: (1) required the Secretary of the U.S.
Department of Health and Human Services (DHHS) to provide
payments (within specified limits, and on a budget neutral
basis) over and above PPS payments for certain high cost
(``outlier'') patients; (2) as a transition to the PPS, for 2-3
years, on a budget neutral basis, required the Secretary of
DHHS to provide ``passthrough payments'' to hospital OPDs above
and beyond PPS payments for costs of certain ``current
innovative'' and ``new, high cost'' devices, drugs, and
biologicals; (3) limited the cost range of items or services
that are included in any one PPS category and required the
Secretary to review the PPS groups and amounts annually and to
update them as necessary; (4) as a transition to the PPS,
through 2003, limited the reduction in Medicare payments
individual hospitals experience due to the PPS; (5) provided
special payments until 2004 for small, rural hospitals to
ensure that they receive no less under the outpatient PPS than
they would have received under the prior system and provided
the same protection permanently for cancer hospitals; (6)
limited beneficiary copayments for outpatient care to no more
than the amount of the beneficiary deductible for inpatient
care; and (7) required that the pre-PPS payment base used as
the budget neutrality benchmark for the PPS include beneficiary
coinsurance amounts as paid under the pre-PPS system (i.e., 20
percent of hospital charges).
Therapy services
    Suspended for 2 years (2001 and 2002) application of the
caps on physical therapy and occupational therapy services.
Pap smears
    Set the minimum payment for the test component of a Pap
smear at $14.60.
Immunosuppressive drugs
    Extended the 36-month limit on coverage of
immunosuppressive drugs for persons exhausting their coverage
in 2000-2004. Set the increase for persons exhausting benefits
in 2000 at 8 months, and limited total expenditures to $150
million over the 5 years.
Studies
    Required a number of studies including a Medicare Payment
Advisory Commission comprehensive study of the regulatory
burdens placed on all classes of providers under fee-for-
service Medicare and the associated costs. Required GAO to
conduct a study of Medigap policies.
Medicare+Choice
    Contained several provisions designed to facilitate the
implementation of M+C. Changed the phase in of the new risk
adjustment payment methodology based on health status to a
blend of 10 percent new health status method/90 percent old
demographic method in 2000 and 2001, and not more than 20
percent health status in 2002. Provided for payment of a new
entry bonus of 5 percent of the monthly M+C payment rate in the
first 12 months and 3 percent in the subsequent 12 months to
organizations that offer a plan in a payment area without an
M+C plan since 1997, or in an area where all organizations
announced withdrawal as of January 1, 2000. Reduced the
exclusion period from 5 years to 2 years for organizations
seeking to reenter the M+C Program after withdrawing. Allowed
organizations to vary premiums, benefits, and cost sharing
across individuals enrolled in the plan so long as these are
uniform within segments comprising one or more M+C payment
areas. Provided for submission of adjusted community rates by
July 1 instead of May 1. Provided that the aggregate amount of
user fees collected would be based on the number of M+C
beneficiaries in plans compared to the total number of
beneficiaries.
    Delayed implementation of the Medicare+Choice Competitive
Bidding Demonstration Project.

CBO SAVINGS AND REVENUE ESTIMATES FOR BUDGET RECONCILIATION AND RELATED
                             ACTS, 1981-99

    Table 2-31 shows estimates of savings and revenue increases
for budget reconciliation legislation enacted from 1981 to 1997
and spending increases enacted in 1999. These estimates were
made at the time of enactment by the Congressional Budget
Office (CBO). It should be noted that the estimates are
compared with the CBO budget baseline in effect at the time.
The savings from the various reconciliation bills cannot be
added together.

                        MEDICARE HISTORICAL DATA

    Tables 2-32 through 2-41 present detailed historical data
on the Medicare Program. Tables 2-32, 2-33, and 2-34 present
detailed enrollment data. Table 2-35 describes the percentage
of enrollees participating in a State buy-in agreement. Tables
2-36 and 2-37 show the distribution of Medicare payments by
type of coverage and by type of service. Tables 2-38 and 2-39
show the number of persons served and the average reimbursement
per person served and per enrollee. Table 2-40 shows the
utilization of short stay hospital services. Table 2-41 shows
the number of participating institutions and organizations.

            TABLE 2-31.--MEDICARE SAVINGS ESTIMATES, 1981-99
                        [In billions of dollars]
------------------------------------------------------------------------
                       Legislative act                          Savings
------------------------------------------------------------------------
Omnibus Budget Reconciliation Act of 1981:
    Spending reductions for fiscal years 1982-84.............       $4.3
Tax Equity and Fiscal Responsibility Act of 1982:
    Spending reductions for fiscal years 1983-87.............       23.1
Social Security Amendments of 1983:
    Spending reductions for fiscal years 1983-88.............        0.2
    Revenue increases for fiscal years 1983-88...............       11.5
Deficit Reduction Act of 1984:
    Spending reductions for fiscal years 1984-87.............        6.1
Consolidated Omnibus Budget Reconciliation Act of 1985:
    Spending reductions for fiscal years 1986-81.............       12.6
Omnibus Budget Reconciliation Act of 1986:
    Spending reductions for fiscal years 1987-89.............        1.0
Omnibus Budget Reconciliation Act of 1987:
    Spending reductions for fiscal years 1988-90.............        9.8
Omnibus Budget Reconciliation Act of 1989:
    Spending reductions for fiscal years 1990-94.............       10.9
Omnibus Budget Reconciliation Act of 1990:
    Spending reductions for fiscal years 1991-95.............       43.1
    Revenue increases for fiscal years 1991-95...............       26.9
Omnibus Budget Reconciliation Act of 1993:
    Spending reductions for fiscal years 1994-98.............       55.8
    Revenue increases for fiscal years 1994-98...............       53.8
Health Insurance Portability and Accountability Act of 1996:
    Spending reductions for fiscal years 1996-2002...........        3.0
Balanced Budget Act of 1997:
    Spending reductions for fiscal years 1998-2002...........      116.4
    Spending reductions for fiscal years 1998-2007...........      393.8
Balanced Budget Refinement Act of 1999:
    Spending increases for fiscal years 2000-2004............      -15.0
    Spending increases for fiscal years 2004-9...............     -25.1
------------------------------------------------------------------------
Note.--Savings relative to baseline at time of enactment. Figures cannot
  be summed.

 Source: Committee on Ways and Means, (1998); Congressional Budget
  Office.

                                          TABLE 2-32.--NUMBER OF MEDICARE ENROLLEES BY TYPE OF COVERAGE AND TYPE OF ENTITLEMENT, SELECTED YEARS 1968-98
                                                                                         [In thousands]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Year                                                             Average annual rate of
                                              ------------------------------------------------------------------------------------------------------------------------      growth (percent)
       Type of entitlement and coverage                                                                                                                               --------------------------
                                                 1968      1975      1980      1982      1984      1986      1988      1990      1995      1996      1997      1998    1968-75  1975-85  1985-98
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total:
  HI \1\ and/or SMI \2\......................    19,821    24,959    28,478    29,494    30,456    31,750    32,980    34,203    37,535    38,064    38,445    38,825      3.3      2.2      1.9
Total HI:                                        19,770    24,640    28,067    29,069    29,996    31,216    32,413    33,719    37,135    37,662    38,052    38,432      3.2      2.2      1.9
  HI only....................................     1,016     1,054     1,079     1,082     1,040     1,160     1,363     1,574     1,850     1,925     1,985     2,044      0.5      0.4      5.3
  Total SMI..................................    18,805    23,905    27,400    28,412    29,416    30,590    31,617    32,629    35,685    36,140    36,460    36,781      3.5      2.3      1.7
  SMI only...................................        51       318       411       425       460       534       567       484       400       402       393       393     29.9      4.5     -1.9
Aged:
  HI and/or SMI..............................    19,821    22,790    25,515    26,540    27,571    28,791    29,879    30,948    33,142    33,424    33,630    33,802      2.0      2.1      1.5
  Total HI...................................    19,770    22,472    25,104    26,115    27,112    28,257    29,312    30,464    32,742    33,022    33,237    33,410      1.8      2.1      1.6
  HI only....................................     1,016       845       835       833       807       928     1,098     1,263     1,000     1,440     1,466     1,494     -2.6      0.2      4.7
  Total SMI..................................    18,805    21,945    24,680    25,707    26,765    27,863    28,780    29,686    31,742    31,984    32,164    32,308      2.2      2.2      1.4
  SMI only...................................        51       318       411       425       459       534       567       484       400       402       393       392     29.9      4.5     -1.9
All disabled:
  HI and/or SMI..............................     (\4\)     2,168     2,963     2,954     2,884     2,959     3,102     3,255     4,393     4,640     4,815     5,023       NA      3.0      4.7
  Total HI...................................     (\4\)     2,168     2,963     2,954     2,884     2,959     3,101     3,255     4,393     4,640     4,815     5,023       NA      3.0      4.7
  HI only....................................     (\4\)       209       244       249       233       232       265       311       451       485       519       551       NA      0.9      7.6
  Total SMI..................................     (\4\)     1,959     2,719     2,759     2,682     2,727     2,837     2,943     3,942     4,155     4,296     4,472       NA      3.2      4.4
  SMI only \3\...............................     (\4\)        NA        NA        NA        NA        NA        NA        NA        NA        NA        NA        NA       NA       NA       NA
End-stage renal disease only:
  HI and/or SMI..............................     (\4\)        13        28        27        30        39        53        65        71        73        75        77       NA      9.1      7.9
  Total HI...................................     (\4\)        13        28        27        30        39        53        65        71        73        75        77       NA      9.1      7.9
  HI only....................................     (\4\)         1         1         2         2         3         4         6         8         8         9        10       NA      7.2     14.4
  Total SMI..................................     (\4\)        12        27        26        28        36        49        59        63        65        66        67       NA      9.2      7.2
  SMI only \3\...............................     (\4\)        NA        NA        NA        NA        NA        NA        NA        NA        NA        NA        NA       NA       NA      NA
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Hospital insurance.
\2\ Supplementary medical insurance.
\3\ Disabled and end-stage renal disease only must have HI to be eligible for SMI coverage.
\4\ Medicare disability entitlement began in 1973.

 NA--Not available.

 Source: Health Care Financing Administration.

                                                 TABLE 2-33.--GROWTH IN NUMBER OF AGED MEDICARE ENROLLEES BY SEX AND AGE, SELECTED YEARS 1968-98
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                    Year                                         Average annual growth                 Enrollees
                                                              --------------------------------------------------------------------------------       rate (percent)                   as percent
                                                                                                                                              --------------------------- Total aged   of total
                         Sex and age                                                                                                                                      population     aged
                                                                 1968      1975      1980      1990      1995      1996      1997      1998    1968-75  1975-84  1986-98   1998 \1\   population
                                                                                                                                                                                         1998
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
All persons..................................................    19,496    22,548    25,515    30,948    33,142    33,424    33,630    33,802      2.1      2.3      1.3     34,401         98.3
  65-69......................................................     6,551     7,642     8,459     9,695     9,517     9,445     9,317     9,184      2.2      1.6      0.0      9,593         95.7
  70-74......................................................     5,458     5,950     6,756     7,951     8,756     8,745     8,737     8,725      1.2      2.3      1.2      8,802         99.1
  75-79......................................................     3,935     4,313     4,809     6,058     6,563     6,749     6,932     7,055      1.3      2.4     2.08      7,218         97.7
  80-84......................................................     2,249     2,793     3,081     3,957     4,470     4,554     4,619     4,707      3.1      2.2      2.4      4,734         99.4
  85 and older...............................................     1,303     1,850     2,410     3,286     3,837     3,930     4,025     4,130      5.1      4.6      2.9      4,054        101.9
Males........................................................     8,177     9,201    10,268    12,416    13,434    13,583    13,701    13,806      1.7      2.0      1.5     14,199         97.2
  65-69......................................................     2,944     3,420     3,788     4,352     4,348     4,332     4,284     4,234      2.2      1.6      0.3      4,393         96.4
  70-74......................................................     2,322     2,504     2,841     3,406     3,791     3,796     3,808     3,819      1.1      2.4      1.4      3,857         99.0
  75-79......................................................     1,596     1,669     1,854     2,382     2,642     2,730     2,816     2,876      0.6      2.4      2.4      2,997         96.0
  80-84......................................................       864     1,005     1,062     1,369     1,593     1,636     1,670     1,717      2.2      1.6      2.9      1,764         97.3
  85 and older...............................................       450       604       722       906     1,060     1,090     1,122     1,159      4.3      3.1      2.9      1,188         97.6
Females......................................................    11,319    13,347    15,247    18,532    19,708    19,841    19,929    19,996      2.4      2.4      1.2     20,203         99.0
  65-69......................................................     3,606     4,222     4,671     5,343     5,169     5,113     5,032     4,950      2.3      1.5      0.2      5,201         95.2
  70-74......................................................     3,136     3,446     3,914     4,545     4,964     4,949     4,928     4,906      1.4      2.3      1.0      4,945         99.2
  75-79......................................................     2,338     2,644     2,954     3,676     3,921     4,019     4,116     4,179      1.8      2.4      1.7      4,221         99.0
  75-84......................................................     1,386     1,788     2,019     2,588     2,877     2,919     2,949     2,989      3.7      2.4      2.1      2,970        100.6
  85 and older...............................................       853     1,246     1,689     2,380     2,777     2,840     2,903     2,972      5.6      5.3      2.9      2,866       103.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ U.S. residents only.

 Source: Health Care Financing Administration, Bureau of Data Management and Strategy; and U.S. Department of Commerce, U.S. Census Bureau.

  TABLE 2-34.--GROWTH IN NUMBER OF DISABLED MEDICARE ENROLLEES WITH HOSPITAL INSURANCE COVERAGE BY TYPE OF ENTITLEMENT AND AGE, SELECTED YEARS 1975-98
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Year                                          Average annual percent growth
                                     ------------------------------------------------------------------------------------              rate
     Type of entitlement and age                                                                                         -------------------------------
                                         1975        1980        1990        1995        1996        1997        1998      1975-84   1984-94    1984-98
--------------------------------------------------------------------------------------------------------------------------------------------------------
All disabled persons................   2,058,424   2,425,231   3,254,983   4,393,287   4,640,180   4,814,782   5,022,811       3.8        3.7        4.0
    Under age 35....................     238,070     193,392     483,262     587,709     587,160     570,264     558,417       5.6        4.0        2.6
    35-44...........................     251,142     258,374     654,953     973,328   1,030,456   1,057,583   1,093,962       5.9        8.0        7.0
    45-54...........................     508,345     572,823     741,193   1,187,993   1,291,453   1,373,326   1,453,356       1.6        6.4        6.7
    55-64...........................   1,060,967   1,400,642   1,375,575   1,644,257   1,731,111   1,813,609   1,917,076       3.8        0.5        1.8
All disabled workers................   1,638,662   2,396,897   2,579,097   3,602,559   3,828,220   3,987,130   4,180,635       3.9        3.8        4.3
    Under age 35....................     100,439     184,619     257,760     357,794     357,442     343,052     333,963       7.5        6.0        4.0
    35-44...........................     164,439     253,186     482,071     769,071     819,512     840,790     872,918       6.5        9.4        8.2
    45-54...........................     426,451     565,846     612,692   1,023,616   1,120,184   1,195,960   1,269,628       1.4        6.7        7.1
    55-64...........................     947,333   1,393,246   1,226,574   1,452,078   1,531,082   1,607,328   1,704,126       3.9        0.3        1.7
Adults disabled as children.........     324,864     409,072     542,416     609,081     621,620     632,300     642,579       3.9        2.6        2.4
    Under age 35....................     151,708     173,684     208,901     213,973     213,456     210,936     208,220       2.1        1.4        0.8
    35-44...........................      84,508     105,092     158,725     189,108     195,185     200,758     204,694       4.6        3.8        3.5
    45-54...........................      71,484      80,381     107,092     132,484     137,704     142,839     148,336       2.3        3.9        3.9
    55-64...........................      45,164      49,910      67,698      73,516      75,275      77,766      81,329       3.2        1.9        2.2
Widows and widowers.................      83,771     110,785      68,793     111,121     117,028     120,137     122,203       0.2        1.9        2.6
    Under 55........................       7,446       7,577       5,615      12,420      13,014      13,198      13,162      -5.2        9.5        7.8
    55-64...........................      76,325     103,208      63,178      98,701     104,014     106,939     109,041       0.6        1.3        2.2
End-stage renal disease only........      11,127      28,334      64,677      70,526      73,312      75,215      77,394      11.5        8.7        7.1
    Under age 35....................       3,729       8,773      16,601      15,942      16,262      16,276      16,234      10.5        5.6        4.2
    35-44...........................       2,187       5,188      14,157      15,149      15,759      16,034      16,350      10.9       10.3        8.0
    45-54...........................       2,966       6,977      15,794      19,473      20,551      21,328      22,230       9.7       10.4        8.8
    55-64...........................       2,245       7,396      18,125      19,962      20,740      21,576      22,580      15.4        9.1       7.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration.

TABLE 2-35.--NUMBER AND PERCENTAGE OF INDIVIDUALS ENROLLED IN SUPPLEMENTARY MEDICAL INSURANCE UNDER STATE BUY-IN
         AGREEMENTS BY TYPE OF BENEFICIARY AND BY YEAR OR 1998 AREA OF RESIDENCE, SELECTED YEARS 1968-98
----------------------------------------------------------------------------------------------------------------
                                                       All persons              Aged               Disabled
                                                  --------------------------------------------------------------
          Year or area of residence \1\                        Percent              Percent              Percent
                                                   Number in   of SMI   Number in   of SMI   Number in   of SMI
                                                   thousands  enrolled  thousands  enrolled  thousands  enrolled
----------------------------------------------------------------------------------------------------------------
Year:
    1968.........................................      1,648       8.8      1,648       8.8         NA        NA
    1975.........................................      2,846      12.0      2,483      11.4        363      18.7
    1980.........................................      2,954      10.9      2,449      10.0        504      18.9
    1985.........................................      2,670       9.0      2,164       8.0        505      19.2
    1990.........................................      3,604      11.0      2,714       9.1        890      30.2
    1995.........................................      4,895      13.7      3,369      10.6      1,526      38.7
    1996.........................................      5,001      13.1      3,404      10.6      1,597      38.4
    1997.........................................      5,089      13.2      3,445      10.7      1,644      38.3
    1998.........................................      5,109      13.2      3,492      10.8      1,775      39.7
Area of residence: \1\
    Alabama......................................        122      18.2         86      16.4         34      41.5
    Alaska.......................................          7      18.4          4      14.8          2      50.0
    Arizona......................................         51       7.8         31       6.0         15      30.0
    Arkansas.....................................         79      18.2         58      16.7         22      41.5
    California...................................        777      20.5        561      17.9        204      63.6
    Colorado.....................................         52      11.5         32       9.0         17      42.5
    Connecticut..................................         51      10.0         31       7.1         19      51.4
    Delaware.....................................          9       8.3          4       4.6          3      33.3
    District of Columbia.........................         15      19.7         11      17.5          4      57.1
    Florida......................................        314      11.4        211       9.0         77      42.3
    Georgia......................................        171      19.3        119      17.5         48      45.3
    Guam and Virgin Islands \2\..................          1       5.3          1       9.1          0       6.3
    Hawaii.......................................         19      11.9         14      10.8          4      44.4
    Idaho........................................         15       9.4          8       6.2          5      41.7
    Illinois.....................................        146       9.0         89       6.4         54      37.8
    Indiana......................................         81       9.6         53       7.5         29      34.9
    Iowa.........................................         50      10.5         33       7.8         18      48.6
    Kansas.......................................         39      10.0         24       7.1         12      41.4
    Kentucky.....................................        107      17.5         67      14.3         35      42.2
    Louisiana....................................        115      19.3         80      17.1         35      44.9
    Maine........................................         33      15.6         18      10.6         12      57.1
    Maryland.....................................         62       9.9         44       8.5         19      38.8
    Massachusetts................................        139      14.6         83      10.6         49      59.0
    Michigan.....................................        136       9.9         75       6.5         53      37.6
    Minnesota....................................         58       9.0         35       6.3         26      53.1
    Mississippi..................................        106      25.8         77      24.4         30      51.7
    Missouri.....................................         82       9.6         48       6.7         28      34.1
    Montana......................................         12       9.0          7       6.3          5      38.5
    Nebraska.....................................         18       7.1          9       4.1          8      44.4
    Nevada.......................................         17       7.6         10       6.1          5      33.3
    New Hampshire................................          6       3.6          3       2.2          3      23.1
    New Jersey...................................        138      11.6         92       9.0         39      42.4
    New Mexico...................................         34      15.1         22      12.6          9      40.9
    New York.....................................        363      13.6        232      10.5        105      42.7
    North Carolina...............................        210      19.2        138      16.1         56      47.9
    North Dakota.................................          6       5.8          4       4.3          2      25.0
    Ohio.........................................        180      10.7        119       8.3         54      32.5
    Oklahoma.....................................         63      12.6         45      10.8         17      38.6
    Oregon.......................................         51      10.6         29       7.1         16      42.1
    Pennsylvania.................................        179       8.6        105       5.8         64      38.8
    Puerto Rico..................................          0       0.0          0       0.0          0       0.0
    Rhode Island.................................         18      10.6         10       7.0          6      40.0
    South Carolina...............................        104      19.0         69      16.6         31      48.4
    South Dakota.................................         13      11.0          9       8.8          4      44.4
    Tennessee....................................        172      21.3        104      16.4         52      55.3
    Texas........................................        340      15.5        252      14.1         75      41.4
    Utah.........................................         15       7.6          8       5.0          6      40.0
    Vermont......................................         13      14.9          8      11.4          5      62.5
    Virginia.....................................        108      12.5         74      10.8         34      40.5
    Washington...................................         89      12.4         46       7.8         29      49.2
    West Virginia................................         43      12.9         26       9.7         16      34.0
    Wisconsin....................................         74       9.5         45       6.8         31      45.6
    Wyoming......................................          6       9.4          3       5.8          2      40.0
                                                  --------------------------------------------------------------
        United States............................      4,892      12.9      3,367      10.7      1,525      41.7
        All areas................................      5,109      13.2      3,369      10.6      1,526     41.0
----------------------------------------------------------------------------------------------------------------
\1\ State of residence is not necessarily State that bought coverage.
\2\ Data for these areas combined to prevent disclosure of confidential information.

 NA--Not available.

 Source: Health Care Financing Administration, Office of Strategic Planning.

 TABLE 2-36.--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE AND TYPE OF SERVICE, CALENDAR YEARS
                                                     1995-98
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                               Amount and distribution of payments for enrollees
                             -----------------------------------------------------------------------------------
Type of coverage and type of          1995                 1996                 1997                 1998
           service           -----------------------------------------------------------------------------------
                                Amount    Percent    Amount    Percent    Amount    Percent    Amount    Percent
----------------------------------------------------------------------------------------------------------------
Hospital insurance..........    $116,176    100.0    $128,457    100.0    $137,592    100.0    $133,244    100.0
  Inpatient.................      81,984     70.6      85,756     66.8      88,498     64.3      87,029     65.3
  Skilled nursing facility..       9,236      8.0      11,101      8.6      12,995      9.4      13,487     10.1
  Home health agency........      16,373     14.1      17,825     13.9      17,680     12.8      11,789      8.8
  Hospice...................       1,883      1.6       1,997      1.6       2,082      1.5       2,180      1.6
  Managed care..............       6,701      5.8      11,777      9.2      16,338     11.9      18,759     14.1
Supplementary medical             64,972     35.9      68,598     37.9      72,757     40.2      76,673     42.3
 insurance..................
  Physicians fee schedule         31,660     17.5      31,631     17.5      31,901     17.6      32,456     17.9
   \1\......................
  Durable medical equipment.       3,689      2.0       3,826      2.1       4,237      2.3       4,033      2.2
  Carrier laboratory........       2,807      1.5       2,550      1.4       2,386      1.3       2,088      1.2
  Other carrier.............       4,530      2.5       5,059      2.8       5,582      3.1       5,937      3.3
  Outpatient hospital.......       8,663      4.8       8,691      4.8       9,455      5.2       8,844      4.9
  Home health agency........         236      0.1         262      0.1         261      0.1         166      0.1
  Intermediary laboratory...       1,448      0.8       1,311      0.7       1,447      0.8       1,476      0.8
  Other intermediary........       5,329      2.9       5,711      3.2       6,527      3.6       6,334      3.5
  Managed care..............       6,610      3.6       9,558      5.3      10,962      6.1      15,338      8.5
                             -----------------------------------------------------------------------------------
    Total payments..........     181,148    100.0     197,055    100.0     210,349    100.0     209,917   100.0
----------------------------------------------------------------------------------------------------------------
\1\ Includes other services.

 Note.--See table 2-3 for historical fiscal year data.

 Source: Health Care Financing Administration, Office of the Actuary.

    TABLE 2-37.--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE, TYPE OF SERVICE, AND TYPE OF
                                          ENROLLEE, CALENDAR YEAR 1998
----------------------------------------------------------------------------------------------------------------
                                                                    Type of enrollee
                                      --------------------------------------------------------------------------
                                            All enrollees                 Aged                   Disabled
     Type of coverage and service     --------------------------------------------------------------------------
                                         Amount                   Amount                   Amount
                                          (in      Percentage      (in      Percentage      (in      Percentage
                                       millions)  distribution  millions)  distribution  millions)  distribution
----------------------------------------------------------------------------------------------------------------
Hospital insurance...................   $133,244       100.0     $117,066       100.0      $16,178       100.0
  Inpatient..........................     87,029        65.3       73,945        63.2       13,084        80.9
  Skilled nursing facility...........     13,487        10.1       12,825        11.0          662         4.1
  Home health agency.................     11,789         8.8       10,659         9.1        1,130         7.0
  Hospice............................      2,180         1.6        2,071         1.8          109         0.7
  Managed care.......................     18,759        14.1       17,566        15.0        1,193         7.4
Supplementary medical insurance......     76,673       100.0       65,882       100.0       10,791       100.0
  Physicians fee schedule............     32,456        42.3       28,491        43.2        3,966        36.8
  Durable medical equipment..........      4,033         5.3        3,299         5.0          734         6.8
  Carrier laboratory.................      2,088         2.7        1,794         2.7          294         2.7
  Other carrier......................      5,937         7.7        5,136         7.8          801         7.4
  Outpatient hospital................      8,844        11.5        7,501        11.4        1,343        12.4
  Home health agency.................        166         0.2          166         0.3            0         0.0
  Intermediary laboratory............      1,476         1.9        1,181         1.8          296         2.7
  Other intermediary.................      6,334         8.3        3,989         6.1        2,346        21.7
  Managed care.......................     15,338        20.0       14,326        21.7        1,012         9.4
                                      --------------------------------------------------------------------------
    Total payments...................    209,917       100.0      182,948       100.0       26,969      100.0
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Office of the Actuary.

 TABLE 2-38.--PERSONS ENROLLED AND PERSONS SERVED UNDER MEDICARE, AND PROGRAM PAYMENTS, BY TYPE OF COVERAGE AND SERVICE, SELECTED CALENDAR YEARS 1967-97
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Year                                Average annual rate of
                                                               ---------------------------------------------------------------           change
                 Type of coverage and service                                                                                 --------------------------
                                                                  1967      1980      1990      1994       1996       1997     1967-83  1983-97  1967-97
--------------------------------------------------------------------------------------------------------------------------------------------------------

                                                               ----------------------------Number of enrollees (in thousands)---------------------------
                                                               -----------------------------------------------------------------------------------------
Hospital insurance and/or supplementary medical insurance.....    19,521    28,478    34,213    36,950     38,093      38,465      2.7      1.9      2.4
    Hospital insurance........................................    19,494    28,067    33,731    36,542     37,677      38,059      2.6      2.0      2.3
    Supplementary medical insurance...........................    17,893    27,400    32,636    35,179     36,165      36,479      3.1      1.8      2.5
                                                               -----------------------------------------------------------------------------------------
                                                                                       Number of persons served (in thousands) \1\
                                                               -----------------------------------------------------------------------------------------
Hospital insurance............................................     3,960     6,752     7,036     7,886      8,175       8,118      4.0      0.7      2.5
    Inpatient hospital services...............................     3,601     6,672     6,543     6,938      6,941       6,887      4.4     -0.3      2.3
    Skilled nursing facility services.........................       354       257       638     1,063      1,373       1,503     -1.8     14.3      5.1
    Home health agency services...............................       126       726     1,936     3,152      3,493       3,458     15.8      7.7     12.1
Supplementary medical insurance...............................     6,523    17,822    26,951    29,912     29,981      29,620      7.1      3.3      5.4
    Physician and other medical services......................     6,415    17,258    26,350    29,222     29,332      28,961      7.0      3.3      5.3
    Outpatient services \2\...................................     1,511     7,538    15,511    18,945     20,305      20,543     11.9      6.5      9.4
    Home health agency services...............................       118       327        38        37         44          48    -10.5      7.0     -3.1
                                                               -----------------------------------------------------------------------------------------
        Total.................................................     7,154    18,031    27,099    30,087     30,195      29,847      6.5      3.2      5.0
                                                               =========================================================================================
                                                                                             Rate per thousand enrollees \3\
                                                               -----------------------------------------------------------------------------------------
Hospital insurance............................................       203       241       209       234        243         241      1.3     -0.3      0.6
    Inpatient hospital services...............................       185       238       194       206        206         205      1.7     -1.3      0.4
    Skilled nursing facility services.........................        18         9        19        32         41          45     -4.3     13.2      3.2
    Home health agency services...............................         6        26        57        94        104         103     12.8      6.6     10.0
Supplementary medical insurance...............................       365       650       826       926        931         920      3.9      2.4      3.2
    Physician and other medical services......................       359       630       807       905        911         899      3.8      2.5      3.2
    Outpatient services \2\...................................        84       275       475       586        630         638      8.5      5.6      7.2
    Home health agency services...............................         7        12         1         1          1           1    -13.2      6.1     -5.0
                                                               -----------------------------------------------------------------------------------------
        Total.................................................       366       633       792       883        886         876      3.7      2.2      3.1
                                                               =========================================================================================
                                                                                        Program payments (in millions of dollars)
                                                               -----------------------------------------------------------------------------------------
Hospital insurance............................................    $2,967   $23,119   $62,347   $94,205   $107,949  \4\ $114,3     16.9      9.2     13.4
                                                                                                                           27
    Inpatient hospital services...............................     2,667    22,297    56,716    75,715     79,911      84,563     17.4      7.1     12.7
    Skilled nursing facility services.........................       274       344     1,971     5,954      9,486      11,237      2.8     28.6     13.7
    Home health agency services...............................        26       478     3,660    12,537     16,546      16,487     28.1     21.1     25.9
Supplementary medical insurance...............................     1,272    10,494    39,072    52,343     59,114      61,096     17.6     10.3     14.3
    Physician and other medical services......................     1,217     8,358    30,222    38,490     42,510      43,621     16.3      9.3     13.1
    Outpatient services \2\...................................        38     1,962     8,773    13,696     16,387      17,256     32.5     13.2     24.2
    Home health agency services...............................        17       175        78       157        216         219      3.4     16.8      9.2
                                                               -----------------------------------------------------------------------------------------
        Total.................................................     4,239    33,613   101,419   146,549    167,062     175,423     17.2      9.6     13.7
                                                               =========================================================================================
                                                                                           Program payments per person served
                                                               -----------------------------------------------------------------------------------------
Hospital insurance............................................       749     3,424     8,861    11,945     13,205      14,082     12.4      8.5     10.6
    Inpatient hospital services...............................       741     3,342     8,688    10,913     11,513      12,279     12.4      7.5     10.2
    Skilled nursing facility services.........................       774     1,339     3,089     5,603      6,909       7,476      4.7     12.5      8.1
    Home health agency services...............................       206       658     1,690     3,977      4,737       4,768     10.6     12.5     11.4
Supplementary medical insurance...............................       195       589     1,450     1,750      1,972       2,063      9.9      6.8      8.5
    Physician and other medical services......................       190       484     1,147     1,317      1,449       1,506      8.7      5.8      7.4
    Outpatient services \2\...................................        25       260       566       723        807         840     18.5      6.3     12.9
    Home health agency services...............................       144       535     2,053     4,267      4,909       4,588     15.5      9.3     12.7
                                                               -----------------------------------------------------------------------------------------
        Total.................................................       593     1,864     3,743     4,871      5,533       5,877     10.0      6.1      8.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Does not reflect beneficiaries who received covered services but for whom no program payments were reported during the year. Detail does not add to
  totals by type of service because one person may have used several types of services.
\2\ Prior to April 1, 1968, outpatient hospital services were covered by health insurance and supplementary medical insurance. All outpatient hospital
  services for 1967 are shown as supplementary medical insurance services for purposes of comparison.
\3\ Beginning with 1994, the utilization rates per 1,000 enrollees do not reflect managed care enrollment; that is, Medicare enrollees in managed care
  plans are not included in the denominator used to calculate the utilization rates.
\4\ Includes $2.0 billion for hospice services, not shown separately.

Note.--Medicare Program represents fee-for-service payments only. Numbers may not add to totals because of rounding.

Source: Health Care Financing Administration.

  TABLE 2-39.--PERSONS SERVED AND PROGRAM PAYMENTS FOR MEDICARE BENEFICIARIES, BY DEMOGRAPHIC CHARACTERISTICS,
                                               CALENDAR YEAR 1997
----------------------------------------------------------------------------------------------------------------
                                                   Persons served \1\               Program payments
                                                  --------------------------------------------------------------
                                                                                           Average
            Demographic characteristic                                                      amount
                                                   Number in  Percent  Amount in  Percent    per    Per enrollee
                                                   thousands            millions            person       \2\
                                                                                            served
----------------------------------------------------------------------------------------------------------------
Sex:
    Male.........................................    12,113      40.6    $75,357     43.0   $6,221      $5,326
    Female.......................................    17,734      59.4    100,066     57.0    5,643       5,306
Age:
    Under 65 years...............................     4,129      13.8     25,798     14.7    6,247       5,735
    65-74 years..................................    12,771      42.8     59,687     34.0    4,674       3,953
    75-84 years..................................     9,428      31.6     61,708     35.2    6,545       6,267
    85 years or older............................     3,519      11.8     28,231     16.1    8,023       7,919
Race: \3\
    White........................................    25,801      86.4    145,050     82.7    5,622       5,165
    Nonwhite.....................................     2,550       8.5     21,447     12.2    8,409       4,509
Type of entitlement:
    Aged.........................................    26,130      87.5    151,655     86.5    5,804       5,319
    Disabled.....................................     3,717      12.5     23,768     13.5    6,395       5,284
MSA type \4\
    Urban........................................    21,549      72.2    134,200     76.5    6,228       5,694
    Rural........................................     7,956      26.7     40,142     22.9    5,048       4,648
                                                  --------------------------------------------------------------
        Total....................................    29,847     100.0    175,423    100.0    5,877       5,314
----------------------------------------------------------------------------------------------------------------
\1\ Does not reflect beneficiaries who received covered services but for whom no program payments were reported
  during the year.
\2\ Beginning with 1994, the utilization rates per 1,000 enrollees do not reflect managed care enrollment; that
  is, Medicare enrollees in managed care plans are not included in the denominator used to calculate the
  utilization rates.
\3\ Excludes unknown race.
\4\ Excludes outlying areas.

Note.--MSA is metropolitan statistical area. Numbers may not add to totals because of rounding.

Source: Health Care Financing Administration.

       TABLE 2-40.--USE OF SHORT-STAY HOSPITAL SERVICES BY MEDICARE EMPLOYEES BY YEAR AND 1997 DEMOGRAPHIC CHARACTERISTICS, SELECTED YEARS 1975-97
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Discharges              Total days of care                       Program payments
                                         Hospital  -----------------------------------------------------------------------------------------------------
    Calendar year, period, and 1994      insurance                                                                                      Per
            characteristic               enrollees   Number in  Per 1,000   Number in     Per     Per 1,000   Amount in     Per       covered      Per
                                            in       thousands  enrollees   thousands  discharge  enrollees   millions   discharge    day of    enrollee
                                         thousands                                                                                     care
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year:
    1975..............................      24,640       8,001        325      89,275       11.2      3,623      $9,748     $1,218        $109      $396
    1980..............................      28,067      10,279        366     109,175       10.6      3,890      22,099      2,150         202       787
    1982..............................      29,069      11,109        382     113,047       10.0      3,889      30,601      2,755         271     1,053
    1984..............................      29,996      10,896        363      96,485        8.9      3,217      38,500      3,533         399     1,284
    1985..............................      30,589      10,027        328      86,339        8.6      2,823      40,200      4,009         466     1,314
    1986..............................      31,216      10,044        322      86,910        8.7      2,784      41,781      4,160         481     1,338
    1987..............................      31,853      10,110        317      89,651        8.9      2,815      44,068      4,359         492     1,383
    1988..............................      32,483      10,256        316      90,873        8.9      2,798      46,879      4,571         516     1,443
    1989..............................      33,040      10,148        307      89,902        8.9      2,721      49,091      4,838         546     1,486
    1990..............................      33,719      10,522        312      92,735        8.8      2,750      53,708      5,104         579     1,593
    1991..............................      34,428      10,896        316      93,936        8.6      2,728      58,901      5,406         627     1,711
    1992..............................      35,154      11,111        316      92,900        8.4      2,643      64,976      5,848         699     1,848
    1993..............................      35,904      11,158        311      88,871        8.0      2,475      67,439      6,044         759     1,878
    1994..............................      36,543      11,471        314      85,734        7.5      2,346      70,623      6,157         824     1,933
    1995..............................      37,135      11,681        315      81,282        7.0      2,189      74,836      6,407         921     2,015
    1996 \1\..........................      33,301      11,796        354      77,193        6.5      2,318      78,546      6,953       1,018     2,359
    1997 \1\..........................      32,614      11,919        365      74,901        6.3      2,297      80,751      7,118       1,078     2,476
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual percentage change in period:
    1975-85...........................         2.2         4.8        2.4         1.0       -2.8       -1.5        18.7       14.2        17.6      15.8
    1985-95...........................         2.0        -1.3       -3.1        -1.2       -1.7       -3.1         6.3        5.7         7.5       4.2
    1975-97 \1\.......................         1.3         1.8        0.5        -0.8       -2.6       -2.1        10.1        8.4        11.0       8.7
========================================================================================================================================================
Age:
    Less than 65 years................       4,829       1,637        364      10,686        6.5      2,213      10,856      7,064       1,016     2,248
    65-69 years.......................       9,217       1,765        230      10,442        5.9      1,133      12,886      7,816       1,234     1,398
    70-74 years.......................       8,641       2,193        303      13,197        6.0      1,527      15,807      7,613       1,198     1,829
    75-79 years.......................       6,830       2,269        393      14,294        6.3      2,093      16,005      7,389       1,120     2,343
    80-84 years.......................       4,581       1,914        487      12,352        6.5      2,696      12,503      6,790       1,012     2,729
    85 years or older.................       3,960       2,141        610      13,930        6.5      3,518      12,694      6,118         911     3,206
Sex:
    Male..............................      16,383       5,208        371      32,652        6.3      1,993      37,436      7,619       1,147     2,285
    Female............................      21,676       6,712        361      42,249        6.3      1,949      43,315      6,736       1,025     1,998
Race: \2\
    White.............................      32,526      10,078        361      62,058        6.2      1,908      67,239      7,010       1,083     2,067
    All other.........................       5,349       1,766        388      12,347        7.0      2,308      12,993      7,739       1,052     2,429
Area of residence:
    Northeast.........................       6,807       2,496        367      21,858        8.8      3,211      19,812      7,938         906     2,911
    Midwest...........................       8,456       3,018        357      19,414        6.4      2,296      19,937      6,606       1,027     2,358
    South.............................      12,080       4,533        375      29,657        6.5      2,455      28,884      6,372         974     2,391
    West..............................       4,862       1,730        356       9,477        5.5      1,949      11,718      6,773       1,236     2,410
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Prior to 1996, data were obtained from the Annual Person Summary Record. Beginning in 1996, utilization rates are based on persons receiving fee-for-
  service care and total persons not enrolled in prepaid health plans.
\2\ Excludes unknown race.

Source: Health Care Financing Administration, Office of Strategic Planning.

   TABLE 2-41.--MEDICARE PARTICIPATING INSTITUTIONS AND ORGANIZATIONS,
                          1984, 1996, AND 1998
------------------------------------------------------------------------
                                                          Year
          Institution or organization          -------------------------
                                                    1984         1998
------------------------------------------------------------------------
Hospitals.....................................        6,675        6,116
  Short stay..................................        6,038        5,038
  Long stay...................................          637        1,078
Skilled nursing facilities....................        5,952       15,032
Home health agencies..........................        4,684        9,330
Laboratories registered under the Clinical               NA      166,817
 Laboratory Improvement Act...................
Outpatient physical therapy providers.........          791        2,890
Portable x-ray suppliers......................          269          659
Rural health clinics..........................          420        3,551
Comprehensive outpatient rehabilitation                  48          590
 facilities...................................
Ambulatory surgical centers...................          155        2,649
Hospices......................................          108        2,317
Facilities providing services to renal disease        1,335        3,581
 benefit......................................
  Hospital certified as both renal transplant           147          148
   and renal dialysis center..................
  Hospital certified as renal transplant                 16           87
   centers....................................
  Hospital dialysis facilities................          117           27
  Nonhospital renal dialysis facilities.......          645           NA
  Dialysis centers only.......................          359          319
  Inpatient care..............................           51           44
Hospital and skilled nursing facility beds:
  Hospitals...................................    1,144,000    1,012,000
    Short stay................................    1,023,000      891,000
    Long stay.................................      120,700      122,000
  Skilled nursing facilities..................      530,400     723,000
------------------------------------------------------------------------
NA--Not available.

Source: Health Care Financing Administration, Bureau of Data Management
  and Strategy.

                               REFERENCES

Board of Trustees, Federal Supplementary Medical Insurance
        Trust Fund. (2000, March 30). The 2000 Annual Report of
        the Board of Trustees of the Federal Supplementary
        Medical Insurance Trust Fund (U.S. House of
        Representatives Document 106-219). Washington, DC: U.S.
        Government Printing Office.
Board of Trustees, Federal Hospital Insurance Trust Fund.
        (2000, March 30). The 2000 Annual Report of the Board
        of Trustees of the Federal Hospital Insurance Trust
        Fund (U.S. House of Representatives Document 106-218).
        Washington, DC: U.S. Government Printing Office.
Committee on Ways and Means. (1998). 1998 Green book:
        Background material and data on programs within the
        jurisdiction of the Committee on Ways and Means (WMCP
        105-7). Washington, DC: U.S. Government Printing
        Office.
Eppig, F.J., & Chulis, G.S. (1997, Fall). Trends in Medicare
        supplementary insurance: 1992-96. Health Care Financing
        Review, 19(1).
Federal Register (1999, July 30). Medicare Program; Prospective
        Payment System and Consolidated Billing for Skilled
        Nursing Facilities--Update; Final Rule and Notice,
        64(146), 41644-701.
Federal Register (1998, January 7). Medicare Program;
        Application of Inherent Reasonableness to All Medicare
        Part B Services (Other than Physician Services). 63(4),
        687-90.
Foster Higgins Survey and Research Services. (1999). National
        Survey of Employer-Sponsored Health Plans. New York:
        Author.
Health Care Financing Administration. Health Care Financing
        Review. Medicare and Medicaid Statistical Supplement,
        1999.
Office of the President. (2000 and various years). Budget of
        the U.S. Government: Fiscal year 2001 (Historical
        Tables Volume). Washington, DC: U.S. Government
        Printing Office.
Physician Payment Review Commission. (1997). Annual report to
        Congress: 1997. Washington, DC: Author.