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 lon