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 Private Health Plans in Medicare Plan Options and Rules for Enrollment Before the Balanced Budget Act of 1997 Trends in Plan Availability and Enrollment Plan Options and Rules for Enrollment in Medicare+ Choice Payments to Plans Through 1997 Medicare+Choice Payments to Plans County Payment Rates, 1997-2003 Adjusted Community Rate (ACR) Required Noncovered Services Additional Benefits and Premiums in the Medicare Risk Program Beneficiary Protections Plan Standards Demonstrations Authorized by the Balanced Budget Act Selected Issues Utilization and Quality Control Peer Review Organizations Secondary Payer Supplementing Medicare Coverage Qualified Medicare Beneficiaries (QMBs) Legislative History, 1980-97 CBO Savings and Revenue Estimates for Budget Reconciliation Acts, 1981-93 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 and part B, supplementary medical insurance. Total program outlays were $194.2 billion in fiscal year 1996. Net outlays after deduction of beneficiary premiums were $174.2 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 1997, part A covered an estimated 38.1 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--$43.80 in 1997 and 1998. In fiscal year 1997, part B covered an estimated 36.5 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, home health services, and hospice care. Patients must pay a deductible ($760 in 1997 and $764 in 1998) 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 ($95 in 1997 and $95.50 in 1998). 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, outpatient hospital 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 benefit payments. 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 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 hospital insurance (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 1997 and 1998, the premium is $43.80. Beneficiary premiums have generally represented about 25 percent of part B costs; Federal general revenues (that is, tax dollars) account for the remaining 75 percent. Federal Outlays Total program outlays were $194.2 billion in fiscal year 1996. Net outlays (that is, net of premiums beneficiaries pay for enrollment, largely for part B) were $174.2 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 1996. TABLE 2-1.--MEDICARE OUTLAYS, FISCAL YEARS 1967-2007 [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 ......... 1968.......................................... 3,815 1,532 5,347 (698) 4,649 69.2 1969.......................................... 4,758 1,840 6,598 (903) 5,695 22.5 1970.......................................... 4,953 2,196 7,149 (936) 6,213 9.1 1971.......................................... 5,592 2,283 7,875 (1,253) 6,622 6.6 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.......................................... 125,300 68,946 194,246 (20,088) 174,158 8.9 1997 \1\...................................... 136.1 72.7 208.8 (20.2) 188.6 8.3 1998 \1\...................................... 141.1 79.6 220.7 (21.2) 199.5 5.8 1999 \1\...................................... 144.6 88.8 233.4 (23.4) 210.0 5.3 2000 \1\...................................... 147.9 98.4 246.3 (25.8) 220.4 5.0 2001 \1\...................................... 156.7 112.8 269.5 (28.6) 241.0 9.3 2002 \1\...................................... 157.9 121.0 278.9 (31.8) 247.1 2.5 2003 \1\...................................... 168.6 138.5 307.0 (35.5) 271.6 9.9 2004 \1\...................................... 178.8 154.3 333.1 (39.8) 293.4 8.0 2005 \1\...................................... 195.6 174.2 369.8 (44.2) 325.6 11.0 2006 \1\...................................... 200.7 182.8 383.5 (48.7) 334.8 2.8 2007 \1\...................................... 219.8 207.7 427.5 (53.5) 374.0 11.7 ---------------------------------------------------------------------------------------------------------------- \1\ CBO projections (excludes discretionary spending; in billions of dollars). Note.--Totals may not add due to rounding. TQ = transitional quarter. Source: Office of the President, 1997. 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 1994 1995 1996 1997 1998 1999 annual annual annual Fiscal year (actual) (actual) (actual) (actual) (actual) (actual) (est.) \1\ (est.) \1\ (est.) \1\ (est.) \1\ growth growth growth 1975-85 1985-95 1995-99 (percent) (percent) (percent) ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Part A Persons enrolled (monthly average): Aged........................................... 21,795 24,571 27,121 30,050 32,233 32,650 32,925 33,114 33,312 33,521 2.2 1.9 0.7 Disabled....................................... 2,047 2,967 2,943 3,313 4,181 4,489 4,750 5,003 5,249 5,504 3.7 4.3 5.2 -------------------------------------------------------------------------------------------------------------------------------------------- Total...................................... 23,842 27,538 30,064 33,363 36,414 37,139 37,675 38,117 38,561 39,025 2.3 2.1 1.2 ============================================================================================================================================ Beneficiaries receiving reimbursed services: Aged........................................... 4,906 5,943 6,168 6,314 7,010 7,080 7,170 7,250 7,340 7,430 2.3 1.4 1.2 Disabled....................................... 456 721 672 675 862 920 975 1,035 1.090 1,150 4.0 3.2 5.7 -------------------------------------------------------------------------------------------------------------------------------------------- Total...................................... 5,362 6,664 6,840 6,989 7,872 8,000 8,145 8,285 8,430 8,580 2.5 1.6 1.8 ============================================================================================================================================ Average annual benefit per person enrolled: \2\ \3\ Aged........................................... $432 $853 $1,563 $1,947 $2,794 $3,078 $3,323 $3,616 $3,876 $4,151 13.7 7.0 7.8 Disabled....................................... 460 948 1,809 2,176 2,700 2,874 3,054 3,256 3,442 3,638 14.7 4.7 6.1 -------------------------------------------------------------------------------------------------------------------------------------------- Total...................................... 434 863 1,587 1,970 2,783 3,053 3,289 3,569 3,817 4,079 13.8 6.8 7.5 ============================================================================================================================================ Part B Persons enrolled (average): Aged........................................... 21,504 24,422 27,049 29,426 31,335 31,622 31,891 32,177 32,361 32,547 2.3 1.6 0.7 Disabled....................................... 1,835 2,698 2,672 2,907 3,638 3,874 4,087 4,304 4,545 4,780 3.8 3.8 5.4 -------------------------------------------------------------------------------------------------------------------------------------------- Total...................................... 23,339 27,120 29,721 32,333 34,973 35,496 35,978 36,481 36,906 37,327 2.4 1.8 1.3 ============================================================================================================================================ Beneficiaries receiving reimbursed services: Aged........................................... 11,311 16,034 20,199 23,820 26,118 26,681 27,044 27,544 27,952 28,332 6.0 2.8 1.5 Disabled....................................... 797 1,669 1,933 2,184 2,867 3,093 3,289 3,503 3,733 3,962 9.3 4.8 6.4 -------------------------------------------------------------------------------------------------------------------------------------------- Total...................................... 12,108 17,703 22,132 26,004 28,985 29,774 30,333 31,047 31,685 32,294 6.2 3.0 2.1 ============================================================================================================================================ Average annual benefit per person enrolled: \2\ Aged........................................... $153 $348 $705 $1,250 $1,601 $1,728 $1,797 $2,011 $2,197 $2,410 16.5 9.4 8.7 Disabled....................................... 259 610 1,022 1,603 2,154 2,282 2,408 2,370 2,500 2,657 14.7 8.4 3.9 -------------------------------------------------------------------------------------------------------------------------------------------- Total...................................... 161 374 734 1,282 1,658 1,788 1,867 2,054 2,234 2,441 16.4 9.3 8.1 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ \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. TABLE 2-3.--BENEFIT PAYMENTS BY SERVICE UNDER MEDICARE PART A AND PART B, SELECTED FISCAL YEARS 1975-98 [Dollars in millions] ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 1975 1980 1985 1990 1995 1998 (est.) \1\ Average annual growth --------------------------------------------------------------------------------------------------------------------- (percent) -------------------------------- Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount 1975-85 1985-95 1995-98 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Part A Inpatient hospital services............... 70.5 $9,947 67.4 $22,860 65.0 $45,218 55.3 $59,285 49.4 $87,441 47.6 $109,299 16.3 6.8 7.7 Skilled nursing facility services......... 1.9 273 1.2 392 0.8 550 2.6 2,821 5.1 9,104 6.0 13,779 7.3 32.4 14.8 Home health services...................... 0.9 133 1.5 524 2.7 1,908 3.1 3,297 8.5 14,995 9.5 21,879 30.5 22.9 13.4 Hospice services.......................... 0 0 0 0 0 34 0.3 318 1.0 1,854 1.0 2,214 NA 49.2 6.1 ----------------------------------------------------------------------------------------------------------------------------------------------------- Total benefit payments................ 73.3 10,353 70.1 23,776 68.6 47,710 61.3 65,721 64.1 113,394 64.1 147,171 16.5 9.0 9.1 ===================================================================================================================================================== Part B Physician services \2\.................... 21.7 3,067 23.0 7,813 24.1 16,788 27.0 28,922 22.8 40,376 20.2 46,325 18.5 9.2 4.7 Outpatient services....................... 3.7 529 5.3 1,803 5.6 3,917 7.8 8,365 8.2 14,576 8.7 19,902 22.2 14.0 10.9 Other medical and health services......... 1.2 169 1.6 528 1.6 1,103 3.9 4,165 4.8 8,530 7.1 16,229 20.6 22.7 23.9 ----------------------------------------------------------------------------------------------------------------------------------------------------- Total benefit payments................ 26.7 3,765 29.9 10,144 31.4 21,808 38.7 41,452 35.9 63,482 35.9 82,456 19.2 11.3 9.1 ===================================================================================================================================================== Total parts A and B............... 100.0 14,118 100.0 33,920 100.0 69,518 100.0 107,173 100.0 176,876 100.0 229,627 17.3 9.8 9.1 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ \1\ Represents law in effect prior to enactment of the Balanced Budget Act of 1997. \2\ Includes other services. NA--Not available. Note.--Totals may not add due to rounding. Source: Health Care Financing Administration, Division of Budget. TABLE 2-4.--MEDICARE ESTIMATED BENEFIT PAYMENTS BY STATE, FISCAL YEAR 1996 ---------------------------------------------------------------------------------------------------------------- Medicare Estimated estimated HI and/or SMI benefit State benefit Medicare payments per payments \1\ enrollment \2\ enrollee ---------------------------------------------------------------------------------------------------------------- Alabama......................................................... $3,349,478 650,941 $5,146 Alaska.......................................................... 155,548 35,281 4,409 Arizona......................................................... 2,949,642 613,992 4,804 Arkansas........................................................ 1,749,406 426,645 4,100 California...................................................... 21,688,154 3,690,130 5,877 Colorado........................................................ 2,021,955 432,283 4,677 Connecticut..................................................... 2,810,930 506,169 5,553 Delaware........................................................ 474,232 103,216 4,595 District of Columbia............................................ 1,206,754 77,271 15,617 Florida......................................................... 16,046,099 2,654,681 6,044 Georgia......................................................... 4,444,248 848,854 5,236 Hawaii.......................................................... 612,461 152,948 4,004 Idaho........................................................... 522,788 152,673 3,424 Illinois........................................................ 7,792,373 1,623,430 4,800 Indiana......................................................... 3,770,224 829,586 4,545 Iowa............................................................ 1,641,893 475,130 3,456 Kansas.......................................................... 1,630,982 385,357 4,232 Kentucky........................................................ 2,610,256 595,583 4,383 Louisiana....................................................... 3,937,599 585,918 6,720 Maine........................................................... 791,042 205,132 3,856 Maryland........................................................ 3,005,428 609,601 4,930 Massachusetts................................................... 5,884,023 942,272 6,245 Michigan........................................................ 6,565,577 1,360,512 4,826 Minnesota....................................................... 2,593,008 635,709 4,079 Mississippi..................................................... 2,016,230 401,697 5,019 Missouri........................................................ 4,122,022 838,377 4,917 Montana......................................................... 469,724 131,847 3,563 Nebraska........................................................ 933,547 250,284 3,730 Nevada.......................................................... 1,003,697 202,347 4,960 New Hampshire................................................... 652,613 159,275 4,097 New Jersey...................................................... 5,958,095 1,177,159 5,061 New Mexico...................................................... 799,360 215,930 3,702 New York........................................................ 14,860,448 2,653,492 5,600 North Carolina.................................................. 4,688,836 1,048,981 4,470 North Dakota.................................................... 438,228 103,170 4,248 Ohio............................................................ 7,870,293 1,676,437 4,695 Oklahoma........................................................ 2,471,759 491,628 5,028 Oregon.......................................................... 1,801,354 472,197 3,815 Pennsylvania.................................................... 11,468,028 2,077,870 5,519 Rhode Island.................................................... 866,931 169,186 5,124 South Carolina.................................................. 2,144,121 520,408 4,120 South Dakota.................................................... 446,865 117,421 3,806 Tennessee....................................................... 4,486,558 783,385 5,728 Texas........................................................... 12,732,603 2,116,951 6,015 Utah............................................................ 812,811 191,387 4,247 Vermont......................................................... 306,150 84,454 3,625 Virginia........................................................ 3,277,225 833,145 3,934 Washington...................................................... 2,826,104 698,966 4,043 West Virginia................................................... 1,372,605 331,343 4,143 Wisconsin....................................................... 2,909,048 766,625 3,795 Wyoming......................................................... 197,719 61,465 3,217 Puerto Rico..................................................... 952,913 489,944 1,945 All other areas................................................. 36,142 321,269 112 ----------------------------------------------- Total all areas............................................. 191,176,132 37,979,904 5,034 ---------------------------------------------------------------------------------------------------------------- \1\ In thousands of dollars. \2\ As of September 30, 1996. Note.--Benefit payments for all areas represent actual Department of Treasury (DOT) disbursements. Distribution of benefit payments by State is based on a methodology which considered actual payments to HMOs and estimated payments for other providers of Medicare services. Estimated payments were determined by applying the relative weight of each State's share of total fee-for-service provider payments for fiscal year 1996 to the DOT disbursements net of managed care payments. Source: Health Care Financing Administration. 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 1997 monthly premium is $311 ($187 for persons who have at least 30 quarters of covered employment). The 1998 monthly premium is $309 ($170 for persons who have at least 30 quarters of covered employment). 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 1997 and 1998 premium is $43.80 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 1996, 32.9 million aged and 4.8 million disabled had protection under part A. Of those, 7.2 million aged and 1.0 million disabled actually received reimbursed services. In fiscal year 1996, 31.9 million aged and 4.1 million disabled were enrolled in part B. About 27.0 million of the aged and 3.3 million of the disabled actually received reimbursed services (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 ($760 in calendar year 1997; $764 in 1998). 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 ($190 in calendar year 1997; $191 in 1998) 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 ($380 in calendar year 1997; $382 in 1998) is imposed for each reserve day. Skilled nursing facility care.--SNF care is up to 100 days (following hospitalization) in a skilled nursing facility 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 ($95 in calendar year 1997; $95.50 in 1998) 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 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 (that is, postinstitutional visits) and during a home health spell of illness. The transfer will be phased in over 6 years, between 1998 and 2003, with the Secretary transferring one-sixth of the aggregate expenditures associated with transferred visits in 1998; 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.--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 are also required. Specified preventive services.--These services include a screening mammography once every 2 years for persons over age 65 and at specified intervals for the disabled; and effective January 1, 1998 annual mammograms for all women over age 40. A screening pap smear (and, effective January 1, 1998, a screening pelvic exam) is authorized once every 3 years, except for women who are at a high risk of developing cervical cancer. Effective January 1, 1998, coverage is provided for specified colorectal screening procedures. Effective July 1, 1998, coverage is authorized for diabetes self-management training services and bone mass measurements for high-risk persons. Prostate cancer screenings are covered beginning January 1, 2000. Drugs and vaccines.--Generally Medicare does not pay for outpatient prescription drugs or biologicals. Part B pays for immunosuppressive drugs for 30 months following an organ transplant (extended to 36 months after 1997), erythropoietin for treatment of anemia for persons with chronic kidney failure, and certain specified 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, the Balanced Budget Act of 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. TABLE 2-5.--PART A AND PART B DEDUCTIBLE, COINSURANCE AND PREMIUMS, \1\ 1966-98 -------------------------------------------------------------------------------------------------------------------------------------------------------- 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\) ......... ........ NA $50 7/66 $3.00 1967.......................... 40 10 (\7\) $5.00 ......... ........ NA 50 ......... 3.00 1968.......................... 40 10 $20 5.00 ......... ........ NA 50 4/68 4.00 1969.......................... 44 11 22 5.50 ......... ........ NA 50 ......... 4.00 1970.......................... 52 13 26 6.50 ......... ........ NA 50 7/70 5.30 1971.......................... 60 15 30 7.50 ......... ........ NA 50 7/71 5.60 1972.......................... 68 17 34 8.50 ......... ........ NA 50 7/72 5.80 1973.......................... 72 18 36 9.00 7/73 $33 NA 60 \8\ 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 ......... 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 ......... 113 NA 75 ......... 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.......................... \9\ 560 NA NA \10\ 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 -------------------------------------------------------------------------------------------------------------------------------------------------------- \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\ For August 1973 the premium was $6.10. \9\ In 1989, the HI deductible was applied on an annual basis, not a benefit period basis (unlike the other years). \10\ In 1989, the SNF 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 and thereafter, $900 per year. Source: Health Care Financing Administration, Office of the Actuary. FINANCING The Medicare Hospital Insurance Trust Fund (HI) finances services covered under Medicare part A. The Supplementary Medical Insurance Trust Fund (SMI) 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 $106.9 billion (88.3 percent) of the total $121.1 billion in income for fiscal year 1996. 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 $68,400 in 1998 continues to apply under Social Security. Table 2-6 shows the history of the contribution rates and maximum taxable earnings base for the HI Programs. Other income The following are additional sources of income to the HI fund: 1. Railroad retirement account transfers.--In fiscal year 1996, $401 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 1996, $419 million was transferred to HI on this basis. TABLE 2-6.--CURRENT LAW SOCIAL SECURITY PAYROLL TAX RATES FOR EMPLOYERS AND EMPLOYEES AND TAXABLE EARNINGS BASES, 1977-98 ---------------------------------------------------------------------------------------------------------------- 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 0 1,812.50 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\ none no limit 1995...................................................... 6.20 1.45 7.65 none no limit 1996...................................................... 6.20 1.45 7.65 none no limit 1997...................................................... 6.20 1.45 7.65 none no limit 1998...................................................... 6.20 1.45 7.65 none 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 indexing provision entirely 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 ($311 in 1997; for persons who have at least 30 quarters of covered employment, $187 in 1997). This accounted for an estimated $1,107 million of financing in fiscal year 1996. 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 Health and Human Services. 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-57 deemed wage credits; and (2) adjustments as deemed necessary to any previously transferred amounts representing HI taxes on noncontributory wage credits. In fiscal year 1996, this adjustment, including the quinquennial adjustment, was $2.3 billion. 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 $4.1 billion in fiscal year 1996. 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 $10.5 billion in fiscal year 1996. 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 years 1997 and 1998 is $43.80. 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 (that is, cost-of-living adjustments or COLAs). 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 on which the Social Security COLA is based. Since the early 1980s, Congress has regularly voted to set part B premiums at a level to cover 25 percent of program costs, in effect overriding the COLA limitation. The 25-percent provisions first became effective January 1, 1984. General revenues covered the remaining 75 percent of part B program costs. Congress took this general approach again in OBRA 1990. However, OBRA 1990 set specific dollar figures, rather than a percentage, in law for 1991-95. These dollar figures reflected the Congressional Budget Office's (CBO) estimates of what 25 percent of program costs would be over the 5-year period. Program costs grew at a slower rate than anticipated, in part due to subsequent legislative changes. As a result, the 1995 premium of $46.10 covered an estimated 31.5 percent of program costs. OBRA 1993 extended the policy of setting the part B premium at a level to cover 25 percent of program costs for 1996-98. As was the case prior to 1991, a percentage rather than a fixed dollar figure was used. As a result, the 1996 premium was $42.50, a full $3.60 less than the 1995 premium. The 1997 and 1998 premiums are $43.80. The Balanced Budget Act of 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 1997 Trustees' Report on the operation of the trust fund. The Trustees' Report also included projections. However, the Congress subsequently passed the Balanced Budget Act of 1997 which substantially changed the expected operations of the fund. Tables 2-7, 2-8, and 2-9 show preliminary projections for the 1997-2007 period made following the enactment of the Balanced Budget Act. The 1997 Trustees' Report (Board of Trustees, Hospital Trust Fund, 1997) stated that the program failed to meet both short-range and long-range tests of financial adequacy. Disbursements began to exceed income in 1995. Under the trustee's 1997 intermediate assumptions, the fund would have become insolvent in 2001. The Trustees' Report had projected that the fund's shortfall would be $23.4 billion at the end of calendar 2001. The shortfall would continue to build each year, rising to $429.8 billion at the end of fiscal year 2006 and $471.6 billion at the end of calendar year 2006. The projections included in the 1997 Trustees' Reports have been substantially modified as a result of the enactment of the Balanced Budget Act (table 2-9). This legislation provides for the transfer of a portion of home health spending (currently the fastest growing part A expenditure) from part A to part B. It also includes additional provisions designed to stem the growth in part A expenditures. These provisions include the implementation of prospective payment systems for home health services and skilled nursing facility services and limits on the increases in hospital payments. When the Balanced Budget Act of 1997 was enacted, CBO projected that the insolvency date would be postponed from 2001 to fiscal year 2007. Subsequently, the administration estimated that the year of exhaustion would be 2010 (see table 2-9). Despite short-term improvements, the fund still faces insolvency. Beginning in fiscal year 1996, HI costs began to rise faster than income. The CBO expects this trend to continue, though at a somewhat slower pace as the result of the Balanced Budget Act of 1997. The administration projects that income will still slightly exceed costs over the short term and costs will again exceed income after 2007. Historically, the shortfall has been primarily attributable to the increase in hospital payments which have accounted for over 65 percent of HI benefit payments. 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 1996, there were 3.9 workers for every beneficiary; in 2030 there will only be an estimated 2.3. TABLE 2-7.--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED FISCAL YEARS 1970-2007 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Income Disbursements Trust fund ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Income Payments Fiscal year \1\ from Railroad Reimbursement Premiums for Interest Net Fund at Payroll taxation retirement for uninsured from military and other Total Benefits Administrative Total increase end of taxes of account persons voluntary wage income \2\ income payments \3\ expenses \4\ disbursements in fund year benefits transfers enrollees credits ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Historical data (in millions of dollars): 1970....................... $4,785 ........ $64 $617 ......... $11 $137 $5,614 $4,804 $149 $4,953 $661 $2,677 1975....................... 11,291 ........ 132 481 $6 48 609 12,568 10,353 259 10,612 1,956 9,870 1980....................... 23,244 ........ 244 697 17 141 1,072 25,415 23,790 497 24,288 1,127 14,490 1985....................... 46,490 ........ 371 766 38 86 3,182 50,933 47,841 813 48,654 \5\ 4,103 21,277 1986....................... 53,020 ........ 364 566 40 \6\ -714 3,167 56,442 49,018 667 49,685 \7\ 17,370 38,648 1987....................... 57,820 ........ 368 447 40 94 3,982 62,751 49,967 836 50,803 11,949 50,596 1988....................... 61,901 ........ 364 475 42 80 5,148 68,010 52,022 707 52,730 15,281 65,877 1989....................... 67,527 ........ 379 515 42 86 6,567 75,116 57,433 805 58,238 16,878 82,755 1990....................... 70,655 ........ 367 413 113 107 7,908 79,563 65,912 774 66,687 12,876 95,631 1991....................... 74,655 ........ 352 605 367 \8\ -1,011 8,969 83,938 68,705 934 69,638 14,299 109,930 1992....................... 80,978 ........ 374 621 484 86 10,133 92,677 80,784 1,191 81,974 10,703 120,633 1993....................... 83,147 ........ 400 367 622 81 \9\ 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 3 10,496 121,135 124,188 1,229 125,317 -4,182 125,338 Preliminary projections made following enactment of the Balanced Budget Act of 1997 (in billions of dollars): 1997....................... ........ ........ .......... ............. ......... .......... .......... 128.8 ............ .............. 138.1 -9.3 116.0 1998....................... ........ ........ .......... ............. ......... .......... .......... 125.6 ............ .............. 131.5 -5.9 110.1 1999....................... ........ ........ .......... ............. ......... .......... .......... 129.3 ............ .............. 131.5 -2.2 107.9 2000....................... ........ ........ .......... ............. ......... .......... .......... 137.6 ............ .............. 134.3 3.3 111.2 2001....................... ........ ........ .......... ............. ......... .......... .......... 146.0 ............ .............. 139.3 6.7 117.9 2002....................... ........ ........ .......... ............. ......... .......... .......... 155.4 ............ .............. 146.8 8.6 126.5 2003....................... ........ ........ .......... ............. ......... .......... .......... 165.5 ............ .............. 156.8 8.7 135.2 2004....................... ........ ........ .......... ............. ......... .......... .......... 173.8 ............ .............. 166.9 6.9 142.1 2005....................... ........ ........ .......... ............. ......... .......... .......... 183.6 ............ .............. 177.2 6.3 148.4 2006....................... ........ ........ .......... ............. ......... .......... .......... 191.4 ............ .............. 188.2 3.2 151.6 2007....................... ........ ........ .......... ............. ......... .......... .......... 200.9 ............ .............. 200.5 0.4 152.1 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ \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. \5\ Includes repayment of loan principal from the OASI Trust Fund of $1,824 million. \6\ Includes the lump-sum general revenue adjustment of -$805 million, as provided for by section 151 of Public Law 98-21. \7\ Includes repayment of loan principal from the OASI Trust Fund of $10,613 million. \8\ Includes the lump-sum general revenue adjustment of -$1,100 million, as provided for by section 151 of Public Law 98-21. \9\ Includes $1,805 million transfer from the SMI catastrophic coverage reserve fund, as provided for by Public Law 102-394. Note.--Fiscal years 1997-2007 reflect estimated operations of fund under present law with effects of the Balanced Budget Act of 1997 on the basis of the midsession review of the fiscal year 1998 budget assumptions. Source: Board of Trustees, Federal Hospital Insurance Trust Fund (1997) and Social Security Administration unpublished tables. TABLE 2-8.--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED CALENDAR YEARS 1970-2007 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Income Disbursements Trust fund ---------------------------------------------------------------------------------------------------------------------------------------------------------------- Income Payments Calendar year from Railroad Reimbursement Premiums for Interest Net Fund at Payroll taxation retirement for uninsured from military and other Total Benefits Administrative Total increase end of taxes of account persons voluntary wage income \1\ income payments \2\ expenses \3\ disbursements in fund year benefits transfers enrollees credits ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Historical data (in millions of dollars): 1970....................... $4,881 ........ $66 $863 ......... $11 $158 $5,979 $5,124 $157 $5,281 $698 $3,202 1975....................... 11,502 ........ 138 621 $7 48 664 12,980 11,315 266 11,581 1,399 10,517 1980....................... 23,848 ........ 244 697 18 141 1,149 26,097 25,064 512 25,577 521 13,749 1985....................... 47,576 ........ 371 766 41 \4\ -719 3,362 51,397 47,580 834 48,414 \5\ 4,808 20,499 1986....................... 54,583 ........ 364 566 43 91 3,619 59,267 49,758 664 50,422 \6\ 19,458 39,957 1987....................... 58,648 ........ 368 447 38 94 4,469 64,064 49,496 793 50,289 13,775 53,732 1988....................... 62,449 ........ 364 475 41 80 5,830 69,239 52,517 815 53,331 15,908 69,640 1989....................... 68,369 ........ 379 515 55 86 7,317 76,721 60,011 792 60,803 15,918 85,558 1990....................... 72,013 ........ 367 413 122 \7\ -993 8,451 80,372 66,239 758 66,997 13,375 98,933 1991....................... 77,851 ........ 352 605 432 89 9,510 88,839 71,549 1,021 72,570 16,269 115,202 1992....................... 81,745 ........ 374 621 522 86 10,487 93,836 83,895 1,121 85,015 8,821 124,022 1993....................... 84,133 ........ 400 367 675 81 \8\ 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 \9\ 2,293 10,222 124,603 128,632 1,297 129,929 -5,325 124,942 Preliminary projections made following enactment of the Balanced Budget Act of 1997 (in billions of dollars): 1997....................... ......... ........ .......... ............. ......... ......... .......... 129.1 ............ .............. 138.2 -9.1 115.8 1998....................... ......... ........ .......... ............. ......... ......... .......... 124.5 ............ .............. 128.2 -3.7 112.1 1999....................... ......... ........ .......... ............. ......... ......... .......... 131.1 ............ .............. 131.4 -0.3 111.8 2000....................... ......... ........ .......... ............. ......... ......... .......... 139.6 ............ .............. 134.6 5.0 116.8 2001....................... ......... ........ .......... ............. ......... ......... .......... 148.8 ............ .............. 140.2 8.6 125.5 2002....................... ......... ........ .......... ............. ......... ......... .......... 158.1 ............ .............. 148.1 10.0 135.4 2003....................... ......... ........ .......... ............. ......... ......... .......... 169.5 ............ .............. 158.2 11.3 146.8 2004....................... ......... ........ .......... ............. ......... ......... .......... 177.8 ............ .............. 168.4 9.5 156.2 2005....................... ......... ........ .......... ............. ......... ......... .......... 186.7 ............ .............. 178.8 7.9 164.2 2006....................... ......... ........ .......... ............. ......... ......... .......... 195.7 ............ .............. 190.0 5.7 169.9 2007....................... ......... ........ .......... ............. ......... ......... .......... 205.7 ............ .............. 203.3 2.3 172.2 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ \1\ 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. \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. \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 OASI Trust Fund of $1,824 million. \6\ Includes repayments of loan principal from the OASI Trust Fund of $10,613 million. \7\ Includes the lump-sum general revenue adjustment of -$1,100 million, as provided for by section 151 of Public Law 98-21. \8\ Includes $1,805 million transfer from the SMI catastrophic coverage reserve fund, as provided for by Public Law 102-394. \9\ Includes the lump-sum general revenue adjustment of -$2,366 million provided for by section 151 of Public Law 98-21. Note.--Fiscal years 1997-2007 reflect estimated operations of the fund under present law with effects of the Balanced Budget Act of 1997 on the basis of the midsession review of the fiscal year 1998 budget assumptions. Source: Board of Trustees, Federal Hospital Insurance Trust Fund (1997) and Social Security Administration, unpublished tables. TABLE 2-9.--PROJECTIONS MADE FOLLOWING PASSAGE OF THE BALANCED BUDGET ACT OF 1997 FOR THE HOSPITAL INSURANCE TRUST FUND OF INCOME AND OUTLAYS, FISCAL YEARS 1997-2007, UNDER CBO AND ADMINISTRATION ASSUMPTIONS [In billions of dollars] -------------------------------------------------------------------------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -------------------------------------------------------------------------------------------------------------------------------------------------------- CBO projections: Income........................................ $127.7 $131.0 $136.5 $142.3 $147.9 $154.2 $160.6 $166.9 $173.6 $180.4 $187.2 Outlays....................................... 137.4 142.3 145.9 149.3 158.2 159.4 170.1 180.4 197.3 202.4 221.6 ------------------------------------------------------------------------------------------------------- Net increase in fund........................ -9.7 -11.3 -9.4 -7.0 -10.3 -5.2 -9.5 -13.6 -23.7 -22.1 -34.4 ------------------------------------------------------------------------------------------------------- Balance at end of year..................... 115.6 104.3 94.9 87.9 77.6 72.4 62.9 49.3 25.7 3.6 -30.8 ======================================================================================================= Administration projections: Income........................................ 128.8 125.6 129.3 137.6 146.0 155.4 165.5 173.8 183.6 191.4 200.9 Outlays....................................... 138.1 131.5 131.5 134.3 139.3 146.8 156.8 166.9 177.2 188.2 200.5 ------------------------------------------------------------------------------------------------------- Net increase in fund........................ -9.3 -5.9 -2.2 3.3 6.7 8.6 8.7 6.9 6.3 3.2 0.4 ------------------------------------------------------------------------------------------------------- Balance at end of year..................... 116.0 110.1 107.9 111.2 117.9 126.5 135.2 142.1 148.4 151.6 152.1 -------------------------------------------------------------------------------------------------------------------------------------------------------- Source: Congressional Budget Office, August 1997, and Social Security Administration, October 1997, unpublished tables. The combination of expenditure and demographic factors is also reflected in the increasing size of the HI Program relative to other sectors of the economy. According to the 1997 Trustees' Report, the program's cost is expected to rise from 1.7 percent of gross domestic product (GDP) in 1996 to about 5 percent of GDP in 2070. This estimate was made prior to enactment of the Balanced Budget Act of 1997. 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 1997 Trustees' Report (Board of Trustees, Federal Hospital Insurance Trust Fund, 1997). 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. CBO has estimated (based on the 1996 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 (that is, 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. Three groups of persons are shown-- persons who reach 65 as of 1985, 1995, and 2005. All estimates, which were made prior to the enactment of the Balanced Budget Act of 1997, are dependent on uncertain projections of future health spending. 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 29 percent of the expected value of lifetime Medicare benefits. For men retiring in 1995, contributions represent about 37 percent of benefits; for those retiring in 2005, contributions represent about 41 percent. Contributions through HI payroll taxes increases 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. Conversely, contributions through SMI premiums relative to SMI benefits decline because, under the law in effect prior to the Balanced Budget Act of 1997, after 1998 annual premium increases were limited by the percentage increase in the Social Security COLA (see table 2-11). TABLE 2-10.--OPERATIONS OF THE SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND (CASH BASIS), SELECTED FISCAL YEARS 1970-96 [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 -------------------------------------------------------------------------------------------------------------------------------------------------------- Historical data: 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 -------------------------------------------------------------------------------------------------------------------------------------------------------- \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. Source: Board of Trustees, Federal Supplementary Medical Insurance Trust Fund (1997). 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.................... 31.6 50.4 66.2 Supplementary medical insurance....... 24.3 17.8 11.5 ----------------------------- Medicare total.................... 28.9 37.3 41.0 ============================= Self-insured women who earned average wages: Hospital insurance.................... 26.0 42.7 56.9 Supplementary medical insurance....... 24.5 16.9 11.8 ----------------------------- Medicare total.................... 25.5 31.8 36.0 ------------------------------------------------------------------------ Note.--Contributions include employers' and employees' hospital insurance (HI) payroll taxes, interest, and supplementary medical insurance (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. 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 (that is the net transfer or subsidy value) is estimated at $32,222 for men and $41,355 for women who retired in 1985. For those retiring in 1995, the value is estimated at $51,813 for men and $68,777 for women. CBO projects that values will continue to increase in the future, reaching $71,868 for men and $91,594 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..................... $45,305 $82,599 $121,898 Contributions................ 13,083 30,787 50,030 -------------------------------------- Net transfer............. 32,222 51,813 71,868 ====================================== Self-insured women who earned average wages Benefits..................... 55,483 100,862 143,036 Contributions................ 14,128 32,084 51,442 -------------------------------------- Net transfer............. 41,355 68,777 91,594 ------------------------------------------------------------------------ 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. For 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 CPI-U was used to get constant 1995 dollars. Source: Congressional Budget Office. 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 over 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 payments, outlier payments, and payments for inpatient dialysis provided to end-stage renal disease beneficiaries. Certain categories of hospital expenses are not included in the PPS rates and are reimbursed in some other way, including direct medical education costs and capital-related costs. Certain facilities receive special treatment under PPS, particularly certain types of isolated or essential hospitals in rural areas, including regional referral centers (RRCs), sole community hospitals (SCHs), 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 1995 data on the utilization of inpatient hospital services by type of enrollee and type of hospital. 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 a skilled nursing facility certified to participate in Medicare. A spell of illness is that period which begins when a beneficiary is furnished TABLE 2-13.--USE OF INPATIENT HOSPITAL SERVICES BY MEDICARE ENROLLEES, BY TYPE OF ENROLLEE AND TYPE OF HOSPITAL, CALENDAR YEAR 1995 \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............. 12,474 336 86,041 6.9 2,317 $76,519 $6,134 $2,061 Short stay.............. 11,260 303 72,124 6.4 1,942 69,261 6,151 1,865 Long stay............... 1,214 33 13,917 11.5 375 7,258 5,979 195 Psychiatric........... 302 8 2,688 8.9 72 937 3,103 25 All other............. 912 25 11,229 12.3 302 6,321 6,931 170 Aged: All hospitals............. 10,610 324 73,165 6.9 2,235 65,980 6,219 2,015 Short stay.............. 9,848 301 63,695 6.5 1,945 60,572 6,151 1,850 Long stay............... 762 23 9,470 12.4 289 5,408 7,097 165 Psychiatric........... 90 3 902 10.0 28 342 3,800 10 All other............. 672 21 2,295 3.4 70 5,066 7,539 155 Disabled: All hospitals............. 1,864 424 12,876 6.9 2,931 10,539 5,654 2,399 Short stay.............. 1,412 321 8,429 6.0 1,919 8,689 6,154 1,978 Long stay............... 452 103 4,447 9.8 1,012 1,850 4,093 421 Psychiatric........... 213 48 1,787 8.4 407 596 2,798 136 All other............. 239 54 2,660 11.1 605 1,254 5,247 285 ---------------------------------------------------------------------------------------------------------------- \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, Bureau of Management and Strategy. 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 a 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 a 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 Medicare has reimbursed the great bulk of skilled nursing facility (SNF) care on a retrospective cost-based basis. This has meant that SNFs have been paid after services were delivered for the reasonable costs (as defined by program) they incurred for the care they provided. For these purposes, the costs SNFs incurred for providing services to beneficiaries were divided into three major categories: (1) routine service costs--nursing, room and board, administrative, and other overhead costs; (2) ancillary services, such as therapy services, laboratory, radiology procedures, supplies and other equipment; and (3) capital-related costs, including net depreciation expense, taxes, lease and rental payments, improvements that extend the life of or increase productivity of assets, net interest expense, and so forth. Routine costs have been subject to national average per diem limits, adjusted to reflect differences in wage levels from area to area. Ancillary service and capital costs have been paid on the basis of reasonable costs and neither have been subject to limits. Beginning July 1, 1998, the Balanced Budget Act of 1997 phases in a prospective payment system for SNFs that will pay a Federal per diem rate for covered SNF services. Covered services will include part A SNF as well as all services for which payment may be made under part B during the period when the beneficiary is provided covered SNF care (excluding, however, physician services, certain nurse practitioner and physician assistant services, certified nurse-midwife services, qualified psychologist services, services of a certified registered nurse anesthetist, certain dialysis services and drugs, and in 1998 only, the transportation costs of electrocardiogram equipment). The Federal per diem payment will cover routine service costs, ancillary costs, and capital-related costs, but will not include costs associated with approved educational activities. The actual per diem rate received by a facility will include adjustments for case mix based on a resident classification system established by the Secretary to account for relative resource utilization of different patient types. The labor- related portion of the rate will also include budget-neutral adjustments to reflect the relative levels of wages and wage- related cost for the geographic area in which the facility is located. The resident classification system used by the Secretary for the new SNF prospective payment system is expected to be similar to that developed under a Health Care Financing Administration demonstration known as resource utilization groups (RUGs)-III. Under RUGs-III, classification is based on residents' clinical conditions; extent of services needed, such as nursing care, rehabilitation, respiratory/ventilator care of tube feedings; and functional status, such as the amount of support needed to eat or toilet. This new system pays, for example, three times more for bedridden, severely ill patients needing a variety of therapies than for ambulatory patients who need only posthospital monitoring and surgical wound treatment. For a beneficiary residing in a SNF (or a part of a facility that includes a SNF) but no longer eligible for part A SNF care, payments for part B covered services will have to be made to the facility whether or not the item or service was furnished by the facility, by others under arrangement, or under any other contracting or consulting arrangement. This requirement is often referred to as the ``consolidated billing'' provision of the new law. Payment for part B items and services must include a code identifying the items or services delivered. In addition, bills submitted by physicians must include the SNFs provider number. Growth in payments For the past several years, SNF care has been one of Medicare's fastest growing benefits. SNF spending in calendar year 1990 stood at $2.5 billion; by calendar year 1996 it had increased to $11.7 billion, for an average annual growth rate of 29 percent (see table 2-14). Because spending for SNF care has been growing at a faster rate than other benefits, both its share of total Medicare spending as well as its share of total part A expenditures have increased significantly, actually doubling during this same period. Table 2-14 presents historical SNF spending data on a calendar year basis. Table 2-15 shows that since 1990 the number of Medicare beneficiaries receiving SNF care grew from 638,000 to 1,145,000 in 1996 or by 79.5 percent; the number of covered days grew from 25.1 million to 40.2 million or by 60 percent. Payment per day, however, tripled, increasing by 198 percent during the period, and reached $292 per day. TABLE 2-14.--ESTIMATED MEDICARE PAYMENTS FOR SKILLED NURSING FACILITY CARE BY TYPE OF SERVICE, 1983-96 \1\ ------------------------------------------------------------------------ Payments (in Percent billions) change \2\ ------------------------------------------------------------------------ Calendar year: 1983...................................... $0.5 ........... 1984...................................... 0.6 6.9 1985...................................... 0.6 2.9 1986...................................... 0.6 0.2 1987...................................... 0.6 8.8 1988...................................... 0.9 47.1 1989...................................... 3.5 275.7 1990...................................... 2.5 -29.0 1991...................................... 2.9 18.4 1992...................................... 4.5 55.3 1993...................................... 6.5 44.4 1994...................................... 8.4 29.2 1995 \1\.................................. 10.4 23.8 1996 \1\.................................. 11.7 12.5 ------------------------------------------------------------------------ \1\ Estimated. \2\ Rounding in payments may not reflect actual change. Note.--Payments reported here are incurred expenditures, net of beneficiary copayments. Source: Health Care Financing Administration, Office of the Actuary, and Prospective Payment Assessment Commission (1995, 1996). TABLE 2-15.--MEDICARE SKILLED NURSING FACILITY UTILIZATION AND PAYMENTS PER PERSON SERVED, 1983-96 ---------------------------------------------------------------------------------------------------------------- People served Days Payment per day ----------------------------------------------------------------- Calendar year Number Per Number Per 1,000 (in person Amount Percent enrollees millions) served change ---------------------------------------------------------------------------------------------------------------- 1983.......................................... 265,000 9 9.3 35.1 $56 ......... 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.......................................... 1,110,000 30 39.8 35.1 267 18.1 1996 \1\...................................... 1,145,000 30 40.2 35.1 242 9.3 ---------------------------------------------------------------------------------------------------------------- \1\ Estimated. Source: Health Care Financing Administration, Office of the Actuary. Tables 2-14 and 2-15 also show that SNF utilization and spending first began to increase significantly in 1988 and 1989. These increases can be traced to significant changes that occurred in the benefit at that time. First HCFA issued new coverage guidelines that became effective early in 1988. The guidelines provided SNFs a great deal more information than had previously existed about criteria that must be met for a beneficiary to receive Medicare coverage. 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 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. Table 2-14 shows that spending for SNF care decreased by 29 percent between 1989 and 1990, but did not drop back to 1988 levels. 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 the repeal of MCCA. This trend is reflected in data showing a 65- percent increase, from 8,638 to 14,219, in facilities participating in Medicare between 1989 and 1996. As noted above, large average annual rates of growth in Medicare SNF spending can be explained not only by increases in volume of services covered, but also by significant increases in reimbursements per day of care. Prospective Payment Assessment Commission analysis has shown that Medicare reimbursement policies may explain this increase. While routine care costs are subject to per diem limits, ancillary services are not. Higher ancillary service use, therefore, results in greater Medicare payments. In addition, a SNF may claim high ancillary service use as a justification for an exemption from routine service cost limits, thereby increasing those payments. In 1990, charges for physical, occupational, speech, and respiratory therapy services were approximately 15 percent of total Medicare SNF charges. By 1994, these services represented over 30 percent of charges. Although final payments for therapy and other ancillary services are based on costs rather than charges, these estimates reveal the relative importance of these services in the overall growth of Medicare Program payments for SNF services. This growth is expected to be controlled in the future by the new SNF prospective payment system mandated by the Balanced Budget Act of 1997. Home Health Services Coverage Both parts A and B of Medicare cover home health visits for persons who need skilled nursing care on an intermittent basis or physical therapy or speech therapy. Persons must also be homebound and under the care of a physician who establishes and periodically reviews a plan of care for the patient. While a beneficiary cannot become eligible for home health on the basis of needing only occupational therapy, this need can continue eligibility for home health care coverage, even if intermittent skilled nursing care or physical or speech therapy are no longer needed. Medicare's home health benefit is intended to serve beneficiaries needing acute medical care that must be provided by skilled health care personnel, and was never envisioned as providing coverage for the nonmedical supportive care and personal care assistance needed by chronically impaired persons. If beneficiaries meet the required eligibility criteria, they become entitled to an unlimited number of home health visits. Home health visits are not subject to deductibles or coinsurance. For beneficiaries meeting the qualifying criteria, Medicare's home health benefit covers the following services: --Part-time or intermittent nursing care provided by or under the supervision of a registered nurse; --Physical or occupational therapy or speech-language pathology services; --Medical social services; --Part-time or intermittent services of a home health aide who has successfully completed a training program approved by the Secretary; --Medical supplies (excluding drugs and biologicals) and durable medical equipment; --Medical services provided by an intern or resident in training under an approved training program with which the agency may be affiliated; and --Certain other outpatient services which involve the use of equipment that cannot readily be made available in the beneficiary's home. In 1989, as a result of an agreement reached in a class action lawsuit, Duggan v. Bowen, HCFA published new manual instructions that clarified the criteria which must be met for Medicare coverage of home health services. The coverage guidelines, for example, specify that to meet the requirement of needing ``intermittent'' skilled nursing care, an individual must have a medically predictable recurring need for skilled nursing services. This need can be met in most instances if the individual requires these services at least once every 60 days. The guidelines further provide that a service is not considered a skilled nursing service merely because it is performed by or under the direct supervision of a licensed nurse; instead the inherent complexity of the service, the condition of the patient, and accepted standards of medical and nursing practice must be considered. Skilled nursing services may be justified for such purposes as treatment of illness or injury; observation and assessment of a patient's condition when only the specialized skills of a medical professional can determine a patient's status; management and evaluation of a patient care plan to ensure that essential nonskilled care is achieving its purpose; and teaching and training activities for the patient and the patient's family or care givers. The Balanced Budget Act included several provisions which clarified coverage criteria for home health care: --Persons will no longer be able to qualify for Medicare's home health benefit on the basis of needing skilled nursing care for venipuncture for the purpose of obtaining a blood sample. --Effective for services furnished on or after October 1, 1997, the Medicare statute includes definitions for part-time and intermittent skilled nursing and home health aide services. For purposes of receiving skilled nursing and home health aide services, ``part-time or intermittent'' is defined as skilled nursing and home health aide services furnished any number of days per week as long as they were furnished (combined) less than 8 hours each day and 28 or fewer hours each week (or, subject to review on a case-by-case basis as to the need for care, less than 8 hours each day and 35 or fewer hours per week). For purposes of qualifying for Medicare's home health benefit because of a need for intermittent skilled nursing care, ``intermittent'' is defined as skilled nursing care that is either provided or needed on fewer than 7 days each week, or less than 8 hours of each day for periods of 21 days or less (with extensions in exceptional circumstances when the need for additional care is finite and predictable). --The Secretary of Health and Human Services is required to conduct a study on the criteria that should be applied for determining whether an individual should be considered homebound for purposes of qualifying for Medicare's home health benefit. The criteria should include the extent and circumstances under which a person may be absent from the home but nonetheless qualify. The Secretary is required to report to Congress by October 1, 1998, and make specific recommendations on such criteria. --Effective for services furnished on or after October 1, 1997, the Secretary is required to establish normative guidelines for the frequency and duration of home health services. Payments will be denied for visits that exceed the normative standards. The Secretary is also authorized to establish a process for notifying a physician when the number of home health visits furnished according to a prescription or certification of the physician significantly exceeds the threshold normative guidelines. The Secretary may adjust the thresholds to reflect demonstrated differences in the need for home health services among different beneficiaries. Reimbursement Home health care agencies have been reimbursed on the basis of reasonable costs, up to specified limits. Cost limits are determined separately for each type of covered home health service (skilled nursing care, physical therapy, speech pathology, occupational therapy, medical social services, and home health aide), and according to whether an agency is located in an urban or rural area. Cost limits, however, have been applied to aggregate agency expenditures; that is, an aggregate cost limit is set for each agency that equals the limit for each type of service multiplied by the number of visits of each type provided by the agency. The Balanced Budget Act reduces the per visit cost limits from 112 percent of the mean labor-related and nonlabor per visit cost to 105 percent of the national median of labor- related and nonlabor costs for freestanding home health agencies, effective for cost-reporting periods beginning October 1, 1997 (in effect, delaying the cycle for updating the limits). In addition, home health agencies, for cost-reporting periods beginning on or after October 1, 1997, will be paid the lesser of: (1) their actual costs (that is, allowable reasonable costs); (2) the per visit limits, reduced to 105 percent of the national median, applied in the aggregate; or (3) a new blended agency-specific per beneficiary annual limit applied to the agency's unduplicated census count of patients. The blended per beneficiary limit will be based 75 percent on an agency's own costs per beneficiary and 25 percent on the average cost per beneficiary for agencies in the same census region (adjusted for differences in labor costs). These costs will be calculated from cost reports for cost-reporting periods ending in fiscal year 1994, recognizing 98 percent of reasonable costs for that period and updating them by the home health market basket. The costs associated with nonroutine medical supplies would be included in this calculation. For new providers and those providers without a 12-month cost-reporting period ending in fiscal year 1994, the per beneficiary limit will equal the median of these limits (or the Secretary's best estimates) applied to home health agencies. Home health agencies that have altered their corporate structure or name will not be considered new providers for these purposes. For beneficiaries using more than one home health agency, the per beneficiary limitation will be prorated among the agencies. The Secretary is required to establish the per visit limits in effect for fiscal year 1998 by January 1, 1998, and the per beneficiary limits by April 1, 1998. For subsequent fiscal years (beginning October 1), the Secretary will be required to establish limits by the prior August 1. Prospective payment for home health care Beginning October 1, 1999, the Secretary is required to establish a prospective payment system (PPS) for home health and implement the system. All services covered and paid on a reasonable cost basis at the time of enactment of the Balanced Budget Act including medical supplies, must be paid on a prospective basis. For the new prospective system, the Secretary will consider an appropriate unit of service and the number, type, and duration of visits provided within that unit, potential changes in the mix of services provided within that unit and their cost, and a general system design that provides for continued access to quality services. In implementing the system, the Secretary can provide for a transition of not longer than 4 years during which a portion of the payment will be based on agency-specific costs, but only if aggregate payments are not greater than they would have been if a transition had not occurred. Under the new system, the Secretary will compute a standard prospective payment amount (or amounts) that will initially be based on the most current audited cost report data available to the Secretary. For fiscal year 2000, payment amounts under the prospective system must be computed in such a way that total payments will equal amounts that would have been paid had the system not been in effect, but will also reflect a 15-percent reduction in cost limits and per beneficiary limits in effect September 30, 1999. To assure savings from this reduction, the Secretary will be required to reduce cost limits and per beneficiary limits in effect September 30, 1999, by 15 percent, even if the Secretary is not prepared to implement the new system on October 1. The payment amount for a unit of home health service will be adjusted by a case-mix adjustor factor established by the Secretary to explain a significant amount of the variation in the cost of different units of service. The labor-related portion of the payment amount will be adjusted by an area wage adjustment factor that reflects the relative level of wages and wage-related costs in a particular geographic area as compared to the national average. Claims for home health services furnished on or after October 1, 1998, will have to contain an appropriate identifier for the physician prescribing home health services or certifying the need for care. Claims will also be required to include information on the length of time of a service unit, as measured in 15-minute increments. The categories of services for which time information must be included on a claim are skilled nursing care; physical and occupational therapy and speech-language pathology; medical social services; and home health aide services. In order for home health services to be considered covered care, home health care agencies will be required to submit claims for all services, and all payments will have to be made to a home health agency without regard to whether the item or service was furnished by the agency, by others under arrangement, or under any other contacting or consulting arrangement. Transfer of some home health payments to part B Under current law, both parts A and B of Medicare cover home health. Neither part of the program applies deductibles or coinsurance to covered visits, and beneficiaries are entitled to an unlimited number of visits as long as they meet eligibility criteria. Section 1833(d) of Medicare law prohibits payments under part B for covered services to the extent that individuals are also covered under part A for the same services. As a result, the comparatively few persons who have no part A coverage are the only beneficiaries for whom payments have been made under part B. The Balanced Budget Act 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 (that is, postinstitutional visits) and during a home health spell of illness. The transfer will be phased in over a period of 6 years, between 1998 and 2003, with the Secretary transferring one- sixth of the aggregate expenditures associated with transferred visits in 1998 and an additional one-sixth each year thereafter until fully implemented in 2003. Beginning January 1, 2003, part A 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. The increase in the part B premium attributable to transferred expenditures will be phased in over a period of 7 years, between 1998 and 2004. For 1998, the part B premium will be increased by one-seventh of the extra costs due to the transfer; for 1999, the part B premium will be increased by two-sevenths of the extra costs; for 2000, three-sevenths; for 2001, four-sevenths; for 2002, five-sevenths; for 2003, six- sevenths; and for 2004, the total of the extra costs due to the transfer. Postinstitutional home health services are defined for these purposes as services furnished to a Medicare beneficiary: (1) after an inpatient hospital or rural primary care hospital stay of at least 3 consecutive days, initiated within 14 days after discharge; or (2) after a stay in a SNF, initiated within 14 days after discharge. Home health spell of illness is defined as the period beginning when a patient first receives postinstitutional home health services and ending when the beneficiary had not received inpatient hospital, SNF, or home health services for 60 days. Claims administration for transferred visits will continue to be done by part A fiscal intermediaries. In related Medicaid provisions, States will receive allotments to cover under their Medicaid Programs that portion of the Medicare part B premium attributable to the transfer of visits to part B for Medicare beneficiaries with incomes between 135 and 175 percent of poverty. The Federal Government will pay 100 percent of these costs, just so long as a State does not exceed its allotment. (See Specified Low-Income Beneficiaries, below.) The Balanced Budget Act also includes a provision requiring the Secretary, not later than October 1, 1997, to report to the Commerce, Ways and Means, and Finance Committees on an estimate of Medicare home health outlays under parts A and B during each of fiscal years 1998-2002. Not later than the end of each of the years 1999-2002, the Secretary is also required to submit a report that compares actual outlays with estimated outlays. If the Secretary finds for a fiscal year that actual outlays were greater than estimated outlays, the report is also required to include recommendations regarding beneficiary copayments or such other methods as will reduce the growth in outlays for Medicare home health services. Growth in payments For the past several years, the home health benefit has been Medicare's fastest growing benefit. As table 2-16 indicates, spending for home health began to increase in 1989 when the total stood at $2.5 billion. By 1996, spending had increased to $18.1 billion, for an average annual rate of growth of 33 percent. Because spending for home health has been growing at a faster rate than other benefits, its share of total net Medicare spending has also increased. Almost all home health claims have been paid out of the Medicare Part A Hospital Insurance Trust Fund, but beginning with fiscal year 1998, this will change as explained above. TABLE 2-16.--MEDICARE PAYMENTS FOR HOME HEALTH, 1983-96 \1\ ------------------------------------------------------------------------ Payments Calendar year (in Percent billions) change \2\ ------------------------------------------------------------------------ 1983.......................................... $1.6 NA 1984.......................................... 1.8 17.5 1985.......................................... 1.9 4.0 1986.......................................... 1.9 -0.5 1987.......................................... 1.9 -1.2 1988.......................................... 2.0 8.3 1989.......................................... 2.5 23.3 1990.......................................... 3.9 53.2 1991.......................................... 5.6 43.6 1992.......................................... 7.9 41.1 1993.......................................... 10.3 30.4 1994.......................................... 13.3 30.1 1995.......................................... 16.2 21.8 1996 \3\...................................... 18.1 11.7 ------------------------------------------------------------------------ \1\ Includes both part A and part B expenditures. \2\ Rounding in payments may not reflect actual change. \3\ Estimated. NA--Not applicable. Note.--Payments reported here are incurred expenditures rather than outlays. Source: Health Care Financing Administration, Office of the Actuary and Prospective Payment Assessment Commission (1995, 1996). Table 2-17 shows that most of the growth in home health spending has been the result of an increasing volume of services being covered under the program, both in terms of increasing numbers of users and an increasing number of covered visits per user. The number of persons served per 1,000 enrollees increased from 50 in 1989 to 99 in 1996, an increase of 98 percent over the period. Average number of visits per person served increased from 27 in 1989 to 76 in 1996, an increase of 181 percent. Increasing per-visit costs for home health services have accounted for comparatively little spending growth. Payments per visit increased at a relatively low rate, from $54 per visit in 1989 to $62 in 1996, a 14.8-percent increase for the period. Some portion of growth in the volume of covered visits may represent a delayed response to an increasing need for skilled home care resulting from incentives, contained within Medicare's hospital prospective payment system, to discharge patients more quickly to their homes. During early years of hospital prospective payment, HCFA had in place medical review and claims processing policies that had resulted in high denial rates for home health care. These policies were relaxed by 1989. In addition, the 1989 revised home health guidelines are believed to have liberalized coverage policies, increasing the number of allowed visits per week and duration of eligibility. Furthermore, the revised guidelines may have opened the door to eligibility for persons who have ongoing medical problems that require personal care assistance associated more with long-term care rather than acute care. Other factors that explain growth in spending include aging of the population, technological advances that have made possible a level of care in the home that previously was only available in hospitals and other institutions, and increased supply of services because of the expanding number of agencies participating in Medicare (9,939 in 1996 compared to 5,686 in 1989). TABLE 2-17.--MEDICARE HOME HEALTH CARE UTILIZATION AND PAYMENTS PER VISIT, 1983-96 ---------------------------------------------------------------------------------------------------------------- People served Visits ------------------------------------------------------- Calendar year of service Number Per Payment Percent Number Per 1,000 (in Per 1,000 person per visit change \1\ enrollees millions) enrollees served ---------------------------------------------------------------------------------------------------------------- 1983.............................. 1,318,000 45 36.9 1,234 28 $43 NA 1984.............................. 1,498,000 50 40.4 1,330 27 46 7.3 1985.............................. 1,549,000 50 39.4 1,274 25 49 6.5 1986.............................. 1,571,000 50 38.0 1,204 24 50 3.4 1987.............................. 1,544,000 48 35.6 1,104 23 53 5.2 1988.............................. 1,582,000 48 37.1 1,130 23 55 3.8 1989.............................. 1,685,000 50 46.2 1,379 27 54 -0.9 1990.............................. 1,940,000 57 69.5 2,038 36 56 2.2 1991.............................. 2,223,000 64 100.2 2,875 45 56 -1.8 1992.............................. 2,523,000 72 134.9 3,863 54 58 3.8 1993.............................. 2,868,000 80 169.1 4,742 59 61 4.1 1994.............................. 3,175,000 87 220.7 6,090 70 60 -0.3 1995.............................. 3,570,000 96 266.4 7,158 75 61 0.7 1996 \2\.......................... 3,735,000 99 285.7 7,578 76 62 3.8 ---------------------------------------------------------------------------------------------------------------- \1\ Rounding in payments may not reflect actual change. \2\ Estimated. NA--Not applicable. Source: Health Care Financing Administration, Office of the Actuary and Prospective Payment Assessment Commission (1995, 1996). Hospice Services Coverage and benefits Medicare covers hospice care, in lieu of most other Medicare benefits, for terminally ill beneficiaries. Hospice care emphasizes palliative medical care, that is, relief from pain, and supportive social and counseling services for the terminally ill and their families. Services are provided primarily in the patient's home. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Public Law 97-248, first authorized Medicare part A coverage for hospice care (for the period November 1, 1983 to October 1, 1986); in 1986, Congress made the hospice benefit a permanent part of the Medicare Program, effective April 7, 1986. For a person to be considered terminally ill and eligible for Medicare's hospice benefit, the beneficiary's attending physician and the medical director of the hospice (or physician member of the hospice team) must certify that the individual has a life expectancy of 6 months or less. As a result of an amendment in the Balanced Budget Act, persons electing hospice are covered for two 90-day periods, followed by an unlimited number of 60-day periods. The medical director or physician member of the hospice team must recertify at the beginning of each new election period that the beneficiary is terminally ill. Services must be provided under a written plan of care established and periodically reviewed by the individual's attending physician and by the medical director of the hospice. Covered hospice services include the following: (1) nursing care provided by or under the supervision of a registered nurse; (2) physical or occupational therapy or speech-language pathology services; (3) medical social services; (4) services of a home health aide who has successfully completed a training program approved by the Secretary of DHHS; (5) homemaker services; (6) medical supplies (including drugs and biologicals) and the use of medical appliances; (7) physician services; (8) short-term inpatient care (including both respite care and procedures necessary for pain control and acute and chronic symptom management); (9) counseling, including dietary counseling, for care of the terminally ill beneficiary and for adjustment to the patient's death (bereavement counseling is not a reimbursable service); and (10) any other item or service which is specified in a patient's plan of care and which Medicare may pay for (effective April 1, 1998). Medicare's hospice benefit is intended to be principally an in-home benefit. For this reason, Medicare law prescribes that respite care, or relief for the primary care giver of the terminally ill patient, may be provided only on an intermittent, nonroutine, and occasional basis and may not be provided consecutively over longer than 5 days. In addition, the aggregate number of inpatient care days provided in any 12- month period to Medicare beneficiaries electing hospice care can not exceed 20 percent of the total number of days of hospice coverage provided to these persons. Only two covered hospice services--outpatient drugs or biologicals and respite care--are subject to coinsurance. Outpatient drugs and biologicals are subject to a coinsurance amount that approximates 5 percent of the cost of the drug to the hospice program, except that the amount may not exceed $5 per prescription. For respite care, coinsurance equals 5 percent of program payments for respite, but may not exceed Medicare's inpatient hospital deductible during a hospice coinsurance period (defined as the period when hospice election is not broken by more than 14 days). Covered services must be provided by a Medicare-certified hospice. Certified hospices must be either public agencies or private organizations primarily engaged in providing covered hospice services and must make services available on a 24-hour basis, in individuals' homes, on an outpatient basis, and on a short-term inpatient basis. Hospices must routinely directly provide substantially all of the following ``core'' services: nursing care, medical social services, and counseling services. The remaining hospice services may be provided either directly by the hospice or under arrangements with others. If services are provided through arrangements with other providers, the hospice must maintain professional management responsibility for all such services, regardless of the facility in which the services are furnished. The hospice program must also have an interdisciplinary group of personnel which includes at least one registered professional nurse and one social worker employed by the hospice; one physician employed by or under contract with the hospice; plus at least one pastoral or other counselor. Reimbursement In implementing Medicare's hospice benefit, HCFA established a prospective payment methodology. Under this methodology, hospices are paid one of four prospectively determined rates, which correspond to four different levels of care, for each day a Medicare beneficiary is under the care of the hospice. Reimbursement will thus vary by the length of the patient's period in the hospice program as well as by the characteristics of the services (intensity and site) furnished to the beneficiary. The four rate categories for reimbursing hospices are: 1. Routine home care day.--Routine home care day is a day on which an individual is at home and is not receiving continuous home care. The routine home care rate is paid for every day a patient is at home and under the care of the hospice regardless of the volume or intensity of the services provided on any given day as long as less than 8 hours of care are provided. This rate is $95.77 for services provided between October 1, 1997 and September 30, 1998. 2. Continuous home care day.--A continuous home care day is a day on which an individual receives hospice care consisting predominantly of nursing care on a continuous basis at home. Home health aide or homemaker services or both may also be provided on a continuous basis. Continuous home care is furnished only during brief periods of crisis and only as necessary to maintain the terminally ill patient at home. Home care must be provided for a period of at least 8 hours before it would be considered to fall within the category of continuous home care. Payment for continuous home care will vary depending on the number of hours of continuous services provided. Currently this rate is $558.99 for 24 hours or $23.29 per hour. 3. Inpatient respite care day.--An inpatient respite care day is one on which the individual who has elected hospice care receives care in an approved facility on a short- term (not more than 5 days at a time) basis for the respite of his caretakers. Currently this rate is $99.07. 4. General inpatient care day.--A general inpatient care day is one on which an individual receives general inpatient care in an inpatient facility for pain control or acute or chronic symptom management which cannot be managed in other settings. Care may be provided in a hospital, skilled nursing facility, or inpatient unit of a freestanding hospice. Currently this rate is $426.05. To reflect differences in wage levels from area to area, each of these four payment rates is adjusted by the hospital area wage index used by Medicare for adjusting payments to hospitals, skilled nursing facilities, and home health agencies. HCFA separates each of the national payment rates for hospice care into components which reflect the estimated proportion of the rate attributable to wage and nonwage costs. The wage component of each rate is then adjusted by the index applicable to the area in which the hospice is located. The Omnibus Budget Reconciliation Act (OBRA) of 1989 required that the payment rates be increased by the hospital market basket percentage increase each fiscal year. OBRA 1993, however, reduced the updates for the prospective rates as follows: for fiscal year 1994, the hospital market basket percentage increase minus 2.0 percentage points; for fiscal years 1995 and 1996, the hospital market basket minus 1.5 percentage points; and for fiscal year 1997, market basket minus 0.5 percentage points. The Balanced Budget Act of 1997 reduces the hospice payment update to market basket minus 1 percentage point for each of fiscal years 1998-2002. Medicare law requires that payments to a hospice for care furnished over the period of a year be limited to a ``cap amount.'' The cap amount is applied on an aggregate rather than a case-by-case basis. Therefore, each individual hospice's cap amount is calculated by multiplying the yearly cap amount by the number of Medicare beneficiaries who received hospice care from the hospice during the cap period. Medicare defines a cap year as the period from November 1 through October 31 of the following year. The cap amount for the period November 1, 1996 through October 31, 1997, is $14,394. Cap amounts are updated annually by the percentage change in the medical care component of the Consumer Price Index (CPI-U) for Urban Consumers. Hospice program data Table 2-18 shows that the number of hospices participating in Medicare has grown from 553 in 1988 to 2,090 in 1996. Table 2-19 indicates that spending for the benefit has increased signifi- TABLE 2-18.--NUMBER OF HOSPICES BY PROVIDER TYPE WITH PERCENTAGE OF TOTAL, 1988-96 ---------------------------------------------------------------------------------------------------------------- Month and year Provider type ----------------------------------------------------------------------- 7/88 7/89 5/90 9/91 1/92 5/93 8/94 6/95 10/96 ---------------------------------------------------------------------------------------------------------------- Freestanding............................ 191 220 260 394 404 499 608 656 762 Hospital based.......................... 138 182 221 282 291 341 401 447 507 Skilled nursing facility based.......... 11 13 12 10 10 10 12 18 21 Home health agency based................ 213 286 313 325 334 438 583 674 800 ----------------------------------------------------------------------- Total............................... 553 701 806 1,011 1,039 1,288 1,604 1,795 2,090 ---------------------------------------------------------------------------------------------------------------- Source: Health Care Financing Administration, Bureau of Program Operations. TABLE 2-19.--SELECTED MEASURES OF MEDICARE HOSPICE CARE, FISCAL YEARS 1988-95 [By claim approved] -------------------------------------------------------------------------------------------------------------------------------------------------------- Fiscal year Measure ------------------------------------------------------------------------------------------ 1988 1989 1990 1991 1992 1993 1994 1995 -------------------------------------------------------------------------------------------------------------------------------------------------------- Cash outlays by provider type: Freestanding............................................. $52.1 $87.1 $130.7 $219.2 $444.2 $620.4 $724.2 $977.1 Hospital based........................................... 13.5 33.0 57.0 92.0 168.0 205.3 226.1 319.3 Skilled nursing facility based........................... 4.8 5.9 7.6 8.6 17.1 22.6 17.7 26.0 Home health agency based................................. 47.8 79.3 113.5 125.7 224.3 303.7 348.7 508.1 ------------------------------------------------------------------------------------------ Total................................................ 118.4 205.4 308.8 445.4 853.6 1,151.9 1,316.7 1,830.5 ========================================================================================== Cash outlays by care type: Routine home care........................................ 95.7 175.2 262.8 376.6 720.0 1,004.9 1,158.6 1,611.6 Continuous home care..................................... 2.5 2.6 3.1 3.9 10.4 12.2 14.5 25.6 Inpatient respite care................................... 0.3 0.6 0.9 1.3 2.5 2.6 2.7 4.4 General inpatient care................................... 18.9 25.5 39.6 59.7 114.0 125.5 134.1 179.1 Physicians............................................... 0.9 1.4 2.4 3.9 6.7 6.7 6.8 9.8 ------------------------------------------------------------------------------------------ Total................................................ 118.4 205.4 308.8 445.4 853.6 1,151.9 1,316.7 1,830.5 ========================================================================================== Average dollar amount per beneficiary: Freestanding............................................. 2,837 3,436 4,237 4,121 5,668 6,085 6,355 6,451 Hospital based........................................... 3,129 3,217 3,832 4,234 5,296 5,361 5,631 5,740 Skilled nursing facility based........................... 3,247 3,260 3,231 4,198 5,538 5,344 5,426 6,079 Home health agency based................................. 2,965 3,395 3,994 3,993 5,169 5,239 5,408 5,509 ------------------------------------------------------------------------------------------ Total................................................ 2,935 3,378 4,037 4,108 5,452 5,681 5,935 8,049 ========================================================================================== Number of beneficiaries: Freestanding............................................. 18,396 25,351 30,861 53,184 78,374 102,283 113,959 151,466 Hospital based........................................... 4,315 10,269 14,870 21,717 31,734 38,295 40,156 55,631 Skilled nursing facility based........................... 1,494 1,818 2,353 2,040 3,084 4,221 3,262 4,272 Home health agency based................................. 16,151 23,364 28,407 31,472 43,391 57,969 64,472 91,238 ------------------------------------------------------------------------------------------ Total................................................ 40,356 60,802 76,491 108,413 156,583 202,768 221,849 302,608 ========================================================================================== Average number of days a beneficiary elects hospice care: Freestanding............................................. 39.26 48.40 52.41 46.15 59.11 62.0 63.7 62.9 Hospital based........................................... 37.70 41.24 45.85 44.19 54.57 53.8 55.4 56.7 Skilled nursing facility based........................... 31.05 37.10 34.51 37.59 44.45 42.7 45.5 49.3 Home health agency based................................. 35.26 43.14 46.46 42.45 52.59 52.2 53.3 63.8 ------------------------------------------------------------------------------------------ Total \1\............................................ 37.19 44.83 48.38 44.52 56.09 57.2 58.9 68.3 ========================================================================================== Number of units by care type: Routine home care--days.................................. 1,460,414 2,677,170 3,600,407 4,667,703 8,564,904 11,324,524 12,699,617 17,257,734 Continuous home care--hours.............................. 154,989 160,056 166,039 199,309 442,968 565,903 654,667 1,129,697 Inpatient respite care--days............................. 4,223 8,398 12,573 14,867 28,495 27,887 28,769 45,932 General inpatient care--days............................. 58,346 83,750 117,989 161,211 297,190 303,245 299,823 418,093 Physicians--procedures................................... 19,257 24,442 39,587 53,491 111,716 115,560 110,790 165,066 -------------------------------------------------------------------------------------------------------------------------------------------------------- \1\ Weighted by the number of beneficiaries in each hospice type. Note.--Totals may not add due to rounding. Source: Health Care Financing Administration. cantly, rising from $118.4 million in fiscal year 1988 to $1.8 billion in fiscal year 1995. The number of beneficiaries electing Medicare's hospice benefit has increased from about 40,000 in fiscal year 1988 to almost 303,000 in fiscal year 1995. The average number of days a beneficiary spends in hospice care has risen from 37 to 68 days during this period, and the average amount spent per beneficiary has increased from $2,935 to $8,049. The vast majority of care paid for by the program is routine home care. PART B SERVICES--COVERAGE AND PAYMENTS Physicians Services Medicare pays for physicians services on the basis of a fee schedule which went into effect in 1992. The fee schedule assigns relative values to services. Relative values reflect three factors: physician work (time, skill, and intensity involved in the service), practice expenses, and malpractice costs. These relative values are adjusted for geographic variations in the costs of practicing medicine. Geographically- adjusted relative values are then converted into a dollar payment amount by a dollar figure known as the conversion factor. In 1997, there are three conversion factors--one for surgical services, one for primary care services, and one for other services. The conversion factors in 1997 are $40.96 for surgical services, $35.77 for primary care services, and $33.85 for other services (for a further discussion of physician payment issues, see appendix E). The conversion factors have been updated each year by a formula called the default formula. However, Congress may elect to reduce the update that would otherwise apply. The default formula has been based on two factors: (1) inflation as measured by the Medicare economic index (MEI); and (2) a comparison of actual physician spending in a base period compared to an expenditure goal known as the Medicare volume performance standard (MVPS). Specifically, the update has been equal to the MEI, plus or minus the difference between the MVPS for the second preceding fiscal year and actual expenditures for that year. (Thus fiscal year 1995 data were used in determining the calendar year 1997 update.) However, regardless of actual performance during the base period, there has been a limit on the actual reduction (but not increase). The Balanced Budget Act of 1997 specified that there will be a single conversion factor beginning in 1998. The 1998 amount--$36.69 is the 1997 primary care conversion factor, updated to 1998 by the average of the three separate updates that would occur in the absence of the legislation. Beginning in fiscal year 1998, the MVPS is replaced with a cumulative ``sustainable growth rate'' based on real GDP growth. The 1998 rate is 1.5 percent. This new target will begin affecting updates in 1999. An upper limit is placed on allowable fee increases--3 percentage points above inflation. The lower limit on decreases is changed from inflation minus 5 percentage points to inflation minus 7 percentage points. Anesthesiologists are paid under a separate fee schedule which uses base and time units. A separate conversion factor ($16.68 in 1997) applies. The Balanced Budget Act of 1997 specifies that beginning in 1998, the conversion factor equals 46 percent of the single conversion factor, except as adjusted for changes in work, practice expense, or malpractice relative value units. The 1998 factor is $16.88. Medicare payments are made for physicians' services after the annual deductible requirement of $100 has been satisfied. Payment is set at 80 percent of the fee schedule with beneficiaries responsible for the remaining 20 percent, which is referred to as coinsurance. Medicare payment is made either on an ``assigned'' or ``unassigned'' basis. By accepting assignment, physicians agree to take the Medicare fee schedule amount as payment in full. Thus, if assignment is accepted, beneficiaries are not liable for any out-of-pocket costs other than standard deductible and coinsurance payments. In contrast, if assignment is not accepted, beneficiaries may be liable for charges in excess of the Medicare approved charge, subject to limits. This procedure is known as balance billing. Medicare's Participating Physician Program was established to provide beneficiaries with the opportunity to select physicians (designated as ``participating physicians'') who have agreed to accept assignment on all services provided during a 12-month period. Nonparticipating physicians continue to be able to accept or refuse assignment on a claim-by-claim basis. There are a number of incentives for physicians to become participating physicians, the chief of which is that the fee schedule payment amount for nonparticipating physicians is only 95 percent of the recognized amount paid to participating physicians. Additional incentives include more rapid claims payment and widespread distribution of participating physician directories. Nonparticipating physicians may not charge more than 115 percent of Medicare's allowed amount for any service. Medicare's allowed amount for nonparticipating physicians is set at 95 percent of that for participating physicians. Thus, nonparticipating physicians are only able to bill 9.25 percent (115 percent times 95 percent) over the approved amount for participating physicians. Services of Nonphysician Practitioners The physician fee schedule is also used for calculating payments made for certain services provided by nonphysician practitioners. Physician assistants and nurse practitioners Currently, separate payments are made for physician assistant services, when provided under the supervision of a physician: (1) in a hospital, skilled nursing or nursing facility; (2) as an assistant at surgery; or (3) in a rural area designated as a health manpower shortage area. Payments equal a percentage of what would be paid if the services were performed by a physician, namely 65 percent of the fee schedule amount for services performed as an assistant-at-surgery, 75 percent for other hospital services, and 85 percent for other services, including services ``incident to'' physicians services. Currently, separate payments are made for nurse practitioner services, provided in collaboration with a physician, which are furnished in a nursing facility. Payments equal 85 percent of the physician fee schedule amount. Nurse practitioners and clinical nurse specialists are paid directly for services provided in collaboration with a physician in a rural area. Payments equal 75 percent of the physician fee schedule amount for services furnished in a hospital and 85 percent of the fee schedule amount for other services. The Balanced Budget Act of 1997 removes the restriction on settings for these practitioners, effective January 1, 1998. Payment for services can only be made if no facility or other provider charges are paid in connection with the service. Payment will equal 80 percent of the lesser of either the actual charge or 85 percent of the fee schedule amount for the same service if provided by a physician. For assistant-at- surgery services, payment will equal 80 percent of the lesser of either the actual charge or 85 percent of the amount that would have been recognized for a physician serving as an assistant-at-surgery. The physician assistant may be in an independent contractor relationship with the physician. Certified nurse midwife services Certified nurse midwife services are paid at 65 percent of the physician fee schedule amount. Certified registered nurse anesthetists (CRNAs) CRNAs are paid under the same fee schedule used for anesthesiologists (see above). Payments for services furnished by an anesthesia care team composed of an anesthesiologist and a CRNA are capped at a percentage of the amount that would be paid if the anesthesiologist were practicing alone. The percentage is 105 percent in 1997 and 100 percent in 1998 and thereafter. The payments are evenly split between each practitioner. Clinical psychologists and clinical social workers Diagnostic and therapeutic services provided by clinical psychologists are paid under the physician fee schedule. Payments for services provided by clinical social workers are equal to 75 percent of the amount allowed for clinical psychologists. Some services are subject to the psychiatric services limitation which limits Medicare payments for some services to 50 percent of incurred expenses. Physical or occupational therapists Payments for physical or occupational therapists in independent practice are made under the physician fee schedule, subject to an annual limit of $900 per patient in billed charges for each type of therapist. Beginning in 1999, BBA places a $1,500 per patient limit on all physical therapy services and a separate $1,500 limit on all occupational therapy services. The limits do not apply to services provided by hospitals. Clinical Laboratory Services Medicare provides coverage for diagnostic clinical laboratory services. These services may be provided by an independent laboratory, a physician's office laboratory, or a hospital laboratory to outpatients. Since 1984, Medicare has paid for clinical laboratory services on the basis of a fee schedule. Fee schedules have been established on a carrier service area basis. The law set the initial payment amount for services performed in physicians' offices or independent laboratories at the 60th percentile of the prevailing charge established for the fee screen year beginning July 1, 1984. Similarly, the initial fee schedule payment amount for services provided by hospital-based laboratories serving hospital outpatients was set at the 62d percentile of the prevailing charge level. Subsequent amendments to the payment rules limited application of the hospital fee schedule to ``qualified hospitals.'' A qualified hospital is a sole community hospital (as that term is used for payment purposes under Medicare's hospital prospective payment system) which provides some clinical diagnostic tests 24 hours a day in order to serve a hospital emergency room which is available to provide services 24 hours a day, 7 days a week. The fee schedule payment amounts have been increased periodically since 1984 to account for inflation. The updates have generally occurred on January 1 of each year. Allowable increases in 1991, 1992, and 1993 were limited to 2 percent per year. There were no increases in 1994 and 1995. The increase in 1996 was 2.9 percent. The increase in 1997 is 2.7 percent. The Balanced Budget Act of 1997 freezes the fee schedule for the 1998-2002 period. Beginning in 1988, the law established national ceilings on payment amounts. Initially the ceiling was set at 115 percent of the median for all fee schedules for that test. This percentage has been lowered several times. In 1997, the ceiling is 76 percent of the median. The Balanced Budget Act sets the ceiling at 74 percent of the median beginning in 1998. As of January 1, 1998, HCFA is eliminating the use of old codes for certain automated panel/profile tests and replacing them with revised codes. The Balanced Budget Act of 1997 makes several changes with respect to the administration of the lab benefit. It requires the Secretary to divide the country into no more than five regions and designate a single carrier for each region to process lab claims (excluding those for services provided to inpatients of hospitals and skilled nursing facilities) no later than July 1, 1999. The allocation of claims to a particular carrier would be based on whether the carrier serves the geographic area where the specimen is collected or other method selected by the Secretary. The requirement will not apply to those physicians office labs that the Secretary determines would be unduly burdened by the application of billing responsibilities with respect to more than one carrier. The Balanced Budget Act also requires the Secretary, by January 1, 1999, to adopt uniform coverage, administration, and payment policies for lab tests using a negotiated rulemaking process. The policies would be designed to eliminate variation among carriers and to simplify administrative requirements. The use of interim regional policies are permitted in cases where a uniform national policy has not been established. Payment for clinical laboratory services (except for those provided by a rural health clinic) may only be made on the basis of assignment. The law specifically applies the assignment requirement to clinical laboratory services provided in physicians' offices. Payment for clinical laboratory services equals 100 percent of the fee schedule amount; no beneficiary cost sharing is imposed. Laboratories must meet the requirements of the Clinical Laboratory Improvement Amendments of 1988. This legislation, which focused on the quality and reliability of medical tests, expanded Federal oversight to virtually all laboratories in the country, including physician office laboratories. Durable Medical Equipment and Prosthetics and Orthotics Medicare covers a wide variety of durable medical equipment (DME). Medicare law specifies that DME includes, but is not limited to, iron lungs, oxygen tents, hospital beds, and wheelchairs used in a patient's home. A patient's home can include an institution, such as a home for the aged, so long as the institution is not a hospital or skilled nursing facility. Health Care Financing Administration (HCFA) guidelines implementing the law provide a definition for DME that allows additional items to be covered. The guidelines define DME as equipment which: (1) can withstand repeated use; (2) is primarily and customarily used to serve a medical purpose; (3) generally is not useful to a person in the absence of an illness or injury; and (4) is appropriate for use in the home. Each of these requirements must be met before an item can be considered covered DME. Medicare also covers related supplies that are necessary for the effective use of DME; such supplies include drugs and biologicals which must be put directly into equipment in order for it to achieve its therapeutic benefit or to assure its proper functioning. With these definitions, HCFA has issued coverage guidelines for numerous DME items. Medicare law defines prosthetic devices as items that replace all or part of an internal body organ (including colostomy bags and intraocular lenses) and prosthetics and orthotics such as leg, arm, back and neck braces, and artificial legs, arms and eyes. Program guidelines give additional examples of covered prosthetic devices. These include cardiac pacemakers, breast prostheses for postmastectomy patients, and a urinary collection and retention system that replaces bladder function. Examples of prosthetics and orthotics include rigid and semirigid back braces, special corsets, and terminal limb devices, such as artificial hands and hooks. Reimbursement for durable medical equipment Medicare pays for DME on the basis of a fee schedule originally enacted in the Omnibus Budget Reconciliation Act (OBRA) of 1987 and modified on several occasions since then. Prior to OBRA 1987, reimbursement for DME was generally made on the basis of reasonable charges. The fee schedule first became effective January 1, 1989. Under the DME fee schedule, reimbursement is the lesser of either 80 percent of the actual charge for the item or the fee schedule amount. Covered DME items are classified into five groups for determining the fee schedule amounts: (1) inexpensive or other routinely purchased durable medical equipment (defined as equipment costing less than $150 or which is purchased at least 75 percent of the time); (2) items requiring frequent and substantial servicing; (3) customized items (defined as equipment constructed or modified substantially to meet the needs of an individual patient); (4) other items of durable medical equipment (frequently referred to as the ``capped rental'' category); and (5) oxygen and oxygen equipment. In general, the fee schedules establish national payment limits for DME. The limits have floors and ceilings. The floor is equal to 85 percent of the weighted median of local payment amounts and the ceiling is equal to 100 percent of the weighted median of local payment amounts. Prosthetics and orthotics are also paid according to a fee schedule that is based on principles similar to the DME fee schedule. The fee schedule establishes regional payment limits for covered items. The payment limits have floors and ceilings. The floor is equal to 90 percent of the weighted average of regional payment amounts; the ceiling is 120 percent. Fee schedule amounts are updated annually by the Consumer Price Index for all Urban Consumers. The Balanced Budget Act freezes payments for DME at the 1997 level for 1998-2002. It limits the update for prosthetics and orthotics to 1 percent for those years. In addition, under the Balanced Budget Act, payments for oxygen are reduced in 1998 to 75 percent of the 1997 payment limits. Beginning in fiscal year 1999 and continuing through subsequent years, oxygen payments are limited to 70 percent of the 1997 levels. The Secretary is also authorized to establish separate classes of oxygen and oxygen equipment and establish separate national monthly payment limits for each class, as long as expenditures are neither more nor less than what would have been made without the separate classes. In addition, the Secretary is required to establish service standards for home oxygen providers. The General Accounting Office is required to submit a report to Congress, including recommendations for legislation, by February 1999 regarding beneficiary access to home oxygen equipment. The Balanced Budget Act of 1997 also permits the Secretary to establish fee schedules for certain items of medical equipment which are currently paid on a reasonable charge basis. Medicare payments for DME are intended to pay for items which are reasonable and medically necessary. Upgraded or deluxe items of DME purchased or rented for a beneficiary's convenience or other purposes do not meet these criteria. A beneficiary who wants an upgraded item must purchase it from the supplier and then seek Medicare reimbursement. The reimbursement will be based on the amount paid for the kind of item normally used to meet the intended purpose. The Balanced Budget Act authorizes (but does not require) the Secretary to publish regulations allowing reimbursement for upgraded DME. The regulations must include consumer protection safeguards and a determination of fair market prices for upgraded items of DME. If the regulations are released, a beneficiary could rent or purchase an upgraded item and Medicare would pay the supplier the standard fee for the item; the beneficiary would be responsible for paying the additional cost of the upgrade. The supplier's charge for the upgraded item could not exceed the established fee schedule amount (if any). Table 2-20 shows total Medicare allowed payment amounts in calendar year 1995 for DME, prosthetics and orthotics, and other covered items that are not paid according to the fee schedule, as well as non-DME items that are paid according to the fee schedule. TABLE 2-20.--ALLOWED AMOUNTS FOR DURABLE MEDICAL EQUIPMENT, PROSTHETICS, ORTHOTICS, AND CERTAIN OTHER ITEMS, CALENDAR YEAR 1994 [In millions of dollars] ------------------------------------------------------------------------ Allowed Category amounts ------------------------------------------------------------------------ Inexpensive/routinely purchased \1\.......................... $367.0 Items with frequent maintenance \2\.......................... 71.4 Customized items \3\......................................... 0.2 Capped rental \4\............................................ 886.1 Oxygen \5\................................................... 1,654.9 Prosthetics/orthotics \6\.................................... 802.6 Other \7\.................................................... 922.0 ---------- Total.................................................. 4,704.2 ------------------------------------------------------------------------ \1\ Inexpensive defined as equipment for which the purchase price does not exceed $150. Routinely purchased defined as equipment that is acquired 75 percent of the time by purchase. These items include commode chairs, electric heat pads, bed rails, and blood glucose monitors. \2\ Paid on a rental basis until medical necessity ends; includes such items as ventilators and continuous and intermittent positive breathing machines. \3\ Includes such items as wheelchairs adapted specifically for an individual. Payment based on individual determination. \4\ Items of DME on a monthly rental basis not to exceed a period of continuous use of 15 months. Includes such items as hospital beds and wheelchairs. \5\ Payment for oxygen and oxygen equipment based on a monthly rate per beneficiary. Payment not made for purchased equipment except where installment payments continue. \6\ These items include covered prosthetic and orthotic devices (except for items included in the categories ``customized items'' and ``items requiring frequent maintenance,'' and transcutaneous electrical nerve stimulators, parenteral/enteral nutritional supplies and equipment, and intraocular lenses). \7\ This category includes other covered items, such as enteral formulae and enteral medical supplies, that are not paid according to the fee schedules. It also includes non-DME items that are paid according to the DME fee schedule, such as surgical dressings. Source: Health Care Financing Administration, Bureau of Data Management and Strategy. Data from the part B Medicare Annual Data System. Administration of the fee schedule Consolidation of administration.--On June 18, 1992, the Health Care Financing Administration (HCFA) published a final rule regarding DME claims payments. The rule established four regional carriers to process all claims for DME and prosthetics and orthotics. HCFA argued that, as a result of this consolidation, greater efficiency in claims processing would be achieved, and variance in coverage policy and utilization parameters would be greatly reduced. In addition, the rule also required that the responsibility for processing claims for beneficiaries residing within each regional area would fall to the regional carrier for that area. This change was made in order to eliminate ``carrier shopping,'' that is, filing claims in those carrier areas that have higher payment rates. Overused items.--OBRA 1990 required the Secretary to develop a list of DME items frequently subject to unnecessary utilization; the list must include seat-lift mechanisms; transcutaneous electrical nerve stimulators (TENS); and motorized scooters. Carriers are directed to determine, in advance, whether payment will be made for items on the Secretary's list. DME suppliers must obtain carriers' approval before providing items on the list to Medicare beneficiaries. Certificates of medical necessity.--All DME must be prescribed by a physician in order to be reimbursed by Medicare. Instead of a physician's prescription, carriers may require the physician to submit a certificate of medical necessity to document that an item is reasonable and medically necessary. OBRA 1990 prohibited DME suppliers from distributing completed or partially completed certificates and established penalties for suppliers who knowingly and willfully distribute forms in violation of the prohibition. The purpose of this provision was to prohibit DME suppliers from directly marketing items to Medicare beneficiaries by providing them with completed certificates that could then be submitted to their physicians. It was hoped that requiring physicians to complete the certificates would encourage them to take a more active role in considering their patients' needs for DME, while simultaneously reducing suppliers' ability to influence DME acquisition. The Social Security Amendments of 1994 modified this prohibition to allow suppliers to distribute forms to physicians or beneficiaries with some limited information such as the supplier's identification number, a description of the item, or payment information. Inherent reasonableness.--The Secretary is permitted to increase or decrease Medicare payments in cases where the payment amount is ``grossly excessive or grossly deficient and not inherently reasonable.'' The Secretary's authority to make these payment adjustments is generally referred to as ``inherent reasonableness authority.'' In order to make a payment adjustment, the Secretary must demonstrate that the payment meets several criteria of inherent reasonableness specified by law. In addition, the Secretary must publish a notice in the Federal Register outlining his proposal to reduce or increase payment amounts, the proposed methodology for adjusting the payment amount, and the potential impact of the payment adjustment. The Secretary is also required to meet with representatives of the affected suppliers, to provide a 60-day public comment period, and to publish a final determination in the Federal Register. The final determination must include an explanation of the factors and data the Secretary took into consideration in making the determination. According to HCFA, the Secretary rarely uses inherent reasonableness authority because the requirements are too stringent and the notice requirements too burdensome. Competitive bidding Investigations have shown that Medicare pays higher prices for certain medical supplies than those paid by other health care insurers and other government agencies, including the Department of Veterans Affairs (VA). In order to lower payments, the Secretary currently must initiate the inherent reasonableness process or rely on congressional legislation. Thus, critics suggested granting the Secretary the authority to engage in a competitive bidding arrangement similar to the one used by the VA. The Balanced Budget Act provided such authority on a limited basis by authorizing not more than five 3-year competitive bidding demonstration projects. Within established competitive acquisition areas, providers of part B services (excluding physician services) will compete for contracts to supply items or services. At least one of the projects must include oxygen and oxygen equipment. The Secretary may limit the number of suppliers within an area to that number necessary to meet the projected demand for items and services covered under the contract. The Secretary will evaluate the effect of these projects on Medicare payments, access, quality, and diversity of product selection and report these evaluations annually to Congress. All projects must terminate by December 31, 2002. Requirements for participation in Medicare The Social Security Amendments of 1994 established requirements for suppliers of medical equipment. Some of the requirements codified regulations proposed by HCFA in 1992. In order to be paid under Medicare, suppliers must be issued a supplier number. To obtain this number, the supplier must receive and fill orders from its own inventory or inventory in other companies with which it has contracted. Suppliers must also deliver Medicare covered items to beneficiaries, honor any warranties, answer any questions or complaints, maintain and repair rental items, and accept returns of substandard or unsuitable items. The law further required that the supplier must comply with all State and Federal regulations, must maintain an appropriate physical plant, and must have proof of insurance coverage. The Secretary is not permitted, except under specific circumstances, to issue multiple supplier numbers to one supplier. The law also addressed marketing and sales activities of suppliers. Except under specified conditions, a supplier is prohibited from making unsolicited telephone calls to Medicare beneficiaries to sell them equipment. If such a sale is made, the supplier will not be paid by Medicare and costs paid by the beneficiary must be refunded by the supplier. Penalties were established for suppliers that violate this provision. Hospital Outpatient Department Services Medicare hospital outpatient department (OPD) services are reimbursed under Medicare part B. Services provided in outpatient hospital settings and included in expenditure data for this service setting are: emergency room services, clinic, laboratory, radiology, pharmacy, physical therapy, ambulance, operating room services, end-stage renal disease services, durable medical equipment, and other services such as computer axial tomography and blood. Services rendered by physicians in OPD settings are not included in these expenditure data. Prior to 1983, hospital outpatient services, excluding physicians' services, were paid for on a reasonable cost basis. Some services, such as emergency services, are still reimbursed on a reasonable cost basis. However, Congress has enacted a number of provisions that have altered the ways hospital OPDs are paid for many of their services and has placed limits on payments for others. For example, outpatient dialysis services are paid on the basis of a fixed composite rate; clinical laboratory services are paid on the basis of a fee schedule; x- ray services are subject to a limit on payments; and ambulatory surgical facility fees for surgeries performed in hospital outpatient departments are based on a weighted average of the hospital's costs and the prevailing fee that would be paid to a freestanding ambulatory surgical facility in the area. The aggregate payment to hospital OPDs and hospital- operated ambulatory surgical centers (ASCs) for covered ASC procedures is equal to the lesser of the following two amounts: (1) the lower of the hospital's reasonable costs or customary charges less deductibles and coinsurance; or (2) the amount determined based on a blend of the lower of the hospital's reasonable costs or customary charges, less deductibles and coinsurance, and the amount that would be paid to a freestanding ASC in the same area for the same procedures. For cost-reporting periods beginning on or after January 1, 1991, the hospital cost portion and the ASC cost portion are 42 and 58 percent, respectively. Payments for services delivered in hospital OPDs were $12.9 billion in calendar year 1995. Payments to hospital OPDs constituted approximately 20 percent of all Medicare part B payments in 1995 and about 8 percent of total parts A and B Medicare payments. Table 2-21 provides information on the number of part B enrollees, covered charges, aggregated reimbursements and reimbursements per enrollee for hospital outpatient services from 1974 to 1995. Table 2-22 shows the percent distribution of Medicare hospital OPD charges, by type of service, for 1995. The law provides for a reduction in payment for services paid on a cost-related basis, other than capital costs, by 5.8 percent of the recognized costs for payments. The Balanced Budget Act of 1997 extends the reduction through cost-reporting periods, occurring through January 1, 2000. The reduction also applies to cost portions of blended payment limits for ambulatory surgery and radiology services. The Balanced Budget Act also extends the reduction in reimbursement for capital costs for OPDs by 10 percent for cost-reporting periods occurring through January 2000. Sole community hospitals and rural primary care hospitals are exempt from these reductions. The Balanced Budget Act requires the Secretary to establish a prospective payment system for covered OPD services furnished beginning in 1999. The Secretary is required to develop a classification system for covered OPD services, such that services within each group are comparable clinically and with respect to the use of resources. The Secretary is also required to establish relative payment rates for covered OPD services using 1996 hospital claims and cost report data, and to determine projections of the frequency of use of each service or group of services in 1999. In addition, she must determine a wage adjustment factor to adjust for relative geographic differences in labor and labor-related cost that must be applied in a budget-neutral manner and establish other adjustments as necessary, including adjustments to account for variations in coinsurance payments for procedures with similar resource costs, and to ensure equitable payments under the system. Finally, the Secretary must develop a method for controlling unnecessary increases in the volume of covered OPD services. TABLE 2-21.--MEDICARE HOSPITAL OUTPATIENT CHARGES AND REIMBURSEMENTS BY TYPE OF ENROLLMENT AND YEAR SERVICE INCURRED, SELECTED YEARS 1974-95 ---------------------------------------------------------------------------------------------------------------- Number of Program payments SMI \1\ Covered -------------------------------------- Type of enrollment and year of service enrollees charges in in thousands Amount in Per Percent of thousands thousands enrollee charges ---------------------------------------------------------------------------------------------------------------- All beneficiaries: 1974....................................... 23,166,570 $535,296 $323,383 $14 60.4 1976....................................... 24,614,402 974,708 630,323 26 64.7 1978....................................... 26,074,085 1,384,067 923,658 35 66.7 1980....................................... 27,399,658 2,076,396 1,441,986 52 69.4 1982....................................... 28,412,282 3,164,530 2,203,260 78 69.6 1983....................................... 28,974,535 3,813,118 2,661,394 92 69.8 1984....................................... 29,415,397 5,129,210 3,387,146 115 66.0 1985....................................... 29,988,763 6,480,777 4,082,303 136 63.0 1986....................................... 30,589,728 8,115,976 4,881,605 160 60.1 1987....................................... 31,169,960 9,794,832 5,690,786 183 58.2 1988....................................... 31,617,082 11,833,919 6,371,704 202 53.8 1989....................................... 32,098,770 14,195,252 7,160,586 223 50.4 1990....................................... 32,635,800 18,346,471 8,171,088 250 44.5 1991....................................... 33,239,840 22,016,673 8,612,320 259 39.1 1992....................................... 33,956,460 26,799,501 9,941,391 293 37.1 1993....................................... 34,642,500 32,026,576 10,938,545 315 34.2 1994....................................... 35,178,600 36,323,649 11,813,522 336 32.6 1995 \2\................................... 31,806,740 40,476,180 12,933,358 407 31.9 ---------------------------------------------------------------------------------------------------------------- Average annual rate of growth: 1974-95.................................... 1.5 22.9 19.2 17.4 ---- 1974-83.................................... 2.5 24.4 26.4 23.3 ---- 1984-95.................................... 0.7 20.7 13.0 12.2 ---- ================================================================================================================ Aged: 1974....................................... 21,421,545 394,680 220,742 10 55.9 1976....................................... 22,445,911 704,569 432,971 19 61.5 1978....................................... 23,530,893 1,005,467 648,249 28 64.5 1980....................................... 24,680,432 1,517,183 1,030,896 42 69.9 1982....................................... 25,706,792 2,402,462 1,645,064 64 68.5 1983....................................... 26,292,124 2,995,784 2,066,207 79 69.0 1984....................................... 26,764,150 4,122,859 2,679,571 100 65.0 1985....................................... 27,310,894 5,210,762 3,211,744 118 61.6 1986....................................... 27,862,737 6,529,273 3,809,992 137 58.4 1987....................................... 28,382,203 7,859,038 4,522,841 159 56.4 1988....................................... 28,780,154 9,790,273 5,098,546 177 52.1 1989....................................... 29,216,027 11,855,127 5,767,589 197 48.7 1990....................................... 29,691,180 15,384,510 6,563,454 221 42.7 1991....................................... 30,183,480 18,460,835 6,842,329 227 37.1 1992....................................... 30,722,080 22,253,657 7,741,774 252 34.8 1993....................................... 31,162,480 26,556,415 8,522,089 273 32.1 1994....................................... 31,443,800 29,768,892 9,116,610 290 30.6 1995 \2\................................... 28,020,760 33,110,441 9,900,199 353 29.9 ---------------------------------------------------------------------------------------------------------------- Average annual rate of growth: 1974-95.................................... 1.3 23.5 19.9 18.5 ---- 1974-83.................................... 2.3 25.3 28.2 25.8 ---- 1984-95.................................... 0.4 20.9 12.6 12.1 ---- ================================================================================================================ Disabled: 1974....................................... 1,745,019 140,617 102,641 59 73.0 1976....................................... 2,168,467 270,139 197,352 91 73.1 1978....................................... 2,543,162 378,600 275,409 108 72.7 1980....................................... 2,719,226 559,213 411,090 152 73.5 1982....................................... 2,705,490 762,068 558,195 206 73.2 1983....................................... 2,682,411 817,335 595,187 222 72.8 1984....................................... 2,651,247 1,006,351 707,575 267 70.3 1985....................................... 2,677,869 1,270,015 870,560 325 68.5 1986....................................... 2,726,991 1,586,703 1,071,613 393 67.5 1987....................................... 2,787,757 1,773,664 1,167,945 417 65.8 1988....................................... 2,836,928 2,043,646 1,273,158 449 62.3 1989....................................... 2,882,743 2,340,124 1,392,897 483 59.5 1990....................................... 2,944,620 2,961,961 1,607,634 546 54.3 1991....................................... 3,056,360 3,555,838 1,769,991 579 49.8 1992....................................... 3,234,380 4,545,843 2,199,617 680 48.4 1993....................................... 3,480,020 5,470,161 2,416,456 694 44.2 1994....................................... 3,734,800 6,463,757 2,696,912 722 41.7 1995 \2\................................... 3,785,980 7,465,739 3,033,158 801 40.6 ---------------------------------------------------------------------------------------------------------------- Average annual rate of growth: 1974-95.................................... 3.8 20.8 17.5 13.2 ---- 1974-83.................................... 4.9 21.6 21.6 15.9 ---- 1984-95.................................... 3.3 20.0 14.1 10.5 ---- ---------------------------------------------------------------------------------------------------------------- \1\ 1974 is the first full year of coverage for disabled beneficiaries under Medicare; SMI = supplementary medical insurance. \2\ Beginning in 1995, the utilization rates per 1,000 enrollees do not reflect managed care enrollment; that is, Medicare enrollees in managed care plans are not included in the denominator used to calculate the utilization rates. Note.--Numbers may not add to totals because of rounding. Hospital outpatient services include clinics or hospital-based renal dialysis facility services, and surgical facility or hospital-based ambulatory surgical center services provided to hospital outpatient. Source: Health Care Financing Administration, Bureau of Data Management and Strategy. Data from the Medicare Decision Support System; data developed by the Office of Research and Demonstrations. The Secretary is authorized to periodically review and revise the groups, relative payment weights, wages, and other adjustments to take into account changes in medical practice, medical technology, the addition of new services, new cost data, and other relevant information. Any adjustments made by the Secretary must be made in a budget-neutral manner. If the Secretary determines that the volume of services increased beyond amounts established through those methodologies, the Secretary is authorized to adjust the update to the conversion factor in a subsequent year. TABLE 2-22.--PERCENT DISTRIBUTION OF HOSPITAL OUTPATIENT CHARGES UNDER MEDICARE BY TYPE OF SERVICE, 1995 ------------------------------------------------------------------------ Percent of Service category charges ------------------------------------------------------------------------ Radiology.................................................. 20.5 Laboratory................................................. 13.0 Operating room............................................. 11.4 End-stage renal disease.................................... 7.9 Pharmacy................................................... 6.2 Emergency room............................................. 3.2 Clinic..................................................... 1.7 Physical therapy........................................... 2.5 Medical supplies........................................... 9.3 All other \1\.............................................. 20.4 ------------------------------------------------------------------------ \1\ Includes computerized axial tomography, durable medical equipment, and blood. Source: Health Care Financing Administration, Bureau of Data Management and Strategy; Data from the Medicare Decision Support System. A hospital may bill a beneficiary for the coinsurance amount owed for the outpatient services provided. The beneficiary coinsurance is based on 20 percent of the hospital's submitted charges for the outpatient service, whereas Medicare usually pays based on the blend of the hospital's costs and the amount paid in other settings for the same service. As a result, the amount the beneficiary pays in coinsurance does not equal 20 percent of the program's allowable payment. On average, beneficiaries pay 37 percent of the total payment. The Balanced Budget Act provides for a new method for determining beneficiary coinsurance beginning in 1999. Hospital OPD coinsurance payments are limited to 20 percent of the national median of the charges for the service (or services within the group) furnished in 1996 updated to 1999 using the Secretary's estimate of charge growth. The Secretary is required to develop rules for the establishment of a coinsurance payment amount for a covered OPD service not furnished during 1996, based on its classification within a group of such services. In addition, the Balanced Budget Act provides for the entire fee schedule amount (program payments plus beneficiary coinsurance payments) to be updated by the market basket increase minus 1 percentage point for years 2000 through 2002, and by the market basket percentage increase in subsequent years. Beneficiary coinsurance payments are to be subtracted from the fee schedule amount to determine Medicare Program payments. Over time, beneficiary cost sharing will move closer to the 20 percent of Medicare's recognized amount applicable for most part B services. The Secretary must establish a procedure under which a hospital, before the beginning of a year (starting with 1999), can elect to reduce the coinsurance payment for some or all covered OPD services to an amount that is not less than 20 percent of the total amount (Medicare Program plus beneficiary coinsurance payment) for the service involved, adjusted for relative differences in labor costs and other factors. A reduced coinsurance payment can not be further reduced or increased during the year involved, and hospitals can disseminate information on the reduction of coinsurance amounts. Ambulatory Surgical Center Services Medicare reimburses ambulatory surgical centers (ASCs) for performing surgical procedures on an ambulatory basis. ASCs are paid a prospectively determined rate for use of an operating room associated with covered surgical procedures. Excluded are the physicians charge for professional services performed and other medical items and services (for example, durable medical equipment for the patient's home use) for which separate payment is authorized under Medicare. Participating ASCs are paid 80 percent of the prospectively determined rate for facility services, adjusted for regional wage variations. The rate is intended to represent HCFA's estimate of a fair payment, taking into account the costs incurred by ASCs generally in providing services that are furnished in connection with performing a surgical procedure. For payment purposes, ASC services are divided into nine groups, and the ASC facility payment for all procedures in each group is established at a single rate adjusted for geographic variation. The ASC payment groups for fiscal year 1998 range from $314 for a procedure in payment group one, to $928 for a procedure in payment group eight. Payment for group nine, allotted exclusively to extracorporeal shockwave lithotripsy services, was established and published in the Federal Register on December 31, 1991 (vol. 56, no. 251, 67666); however, a court decision in American Lithotripsy Society v. Sullivan, 785 F.Supp. 1034 (D.D.C. 1992), currently prohibits payment for these services under the ASC benefit. The Secretary is required to review and update standard overhead amounts annually. The ASC facility payment rates are required to result in substantially lower Medicare expenditures than would have been paid if the same procedure had been performed on an inpatient basis in a hospital. Medicare also requires that payment for insertion of an intraocular lens include an allowance that is reasonable and related to the cost of acquiring the class of lens involved. OBRA 1993 also reduced the amount of payment for an intraocular lens inserted during or subsequent to cataract surgery in an ASC on or after January 1, 1994 and before January 1, 1999, to $150. OBRA 1993 eliminated inflation updates in the payment amounts for ASCs for fiscal years 1994 and 1995. The Social Security Act Amendments of 1994 (Public Law 103-432) required the Secretary to survey, not later than January 1, 1995, and every 5 years thereafter, the actual audited costs incurred by ASCs, based on a representative sample of procedures and facilities. In addition, the 1994 legislation provides for an automatic application of an inflation adjustment during a fiscal year when the Secretary does not update ASC rates based on survey data of actual audited costs. The act also provides that ASC payment rates be increased by the percentage increase in the Consumer Price Index for Urban Consumers (CPI-U), as estimated by the Secretary for the 12-month period ending with the midpoint of the year involved, if the Secretary has not updated rates during a fiscal year, beginning with fiscal year 1996. The update for 1996 was 2.9 percent; the update for 1997 was 2.6 percent. The Balanced Budget Act sets the annual update for ASC fees at the CPI-U minus 2 percentage points for fiscal years 1998- 2002, specifying that the update cannot be less than zero. The update for fiscal year 1998 was 0.6 percent. In 1997, there were 2,433 ASCs, a 400-percent increase over the 485 facilities which were participating in Medicare in 1985. As shown in table 2-23, payments for ASC services totaled $688.9 million in 1996. Table 2-24 shows the top 10 procedures performed in ASCs in 1996. TABLE 2-23.--MEDICARE-CERTIFIED AMBULATORY SURGICAL CENTERS: UTILIZATION AND PROGRAM BENEFIT PAYMENTS FOR FACILITY SERVICES, 1993-96 ------------------------------------------------------------------------ Allowed Program Number of charges for payments for Year services ASC facility ASC facility services services ------------------------------------------------------------------------ 1993........................ 1,059,644 $625,005,465 $495,313,388 1994........................ 1,298,740 721,315,789 572,001,981 1995........................ 1,497,934 836,270,472 659,726,047 1996 \1\.................... 1,527,130 867,629,247 688,910,712 ------------------------------------------------------------------------ \1\ Short file, as of December 1996 (89 percent complete). Source: Health Care Financing Administration, Bureau of Data Management and Strategy. Data from part B Extract and Summary System. TABLE 2-24.--HIGH VOLUME PROCEDURES PERFORMED AT MEDICARE-CERTIFIED AMBULATORY SURGICAL CENTERS, 1996 ------------------------------------------------------------------------ Volume of Current procedural terminology Short descriptor Medicare code cases ------------------------------------------------------------------------ 66984......................... Remove cataract, insert lens. 525,520 66821......................... After cataract laser surgery. 165,281 43239......................... Upper GI endoscopy, biopsy... 78,391 45378......................... Diagnostic colonoscopy....... 59,972 45385......................... Colonoscopy, lesion removal.. 41,699 62289......................... Lumbar or caudal epidural.... 35,340 45380......................... Colonoscopy and biopsy....... 34,744 43235......................... Upper GI endoscopy, diagnosis 24,055 45384......................... Colonoscopy.................. 22,537 52000......................... Cystourethroscopy............ 19,048 ------------------------------------------------------------------------ Source: Health Care Financing Administration, Bureau of Data Management and Strategy. Data from the National Claims History Procedure Summary File. Other Part B Services Preventive services Screening mammograms.--In 1997, Medicare covered a screening mammography once every 2 years for persons over age 65. The program covers mammographies for the disabled according to the following schedule: age 35-39--one baseline screening; age 40-50--one every 2 years, except one every year for women at high risk; and age 50-64--one every year. The Balanced Budget Act authorizes coverage for annual mammograms for all women over age 40 beginning January 1, 1998. The deductible is waived for these services. Payment for a mammogram is based on the lesser of the actual charge, the amount established for the global procedure under Medicare's fee schedule, or the payment limit established for the procedure. The 1997 limit is $63.34; the 1998 limit is $64.73. Screening Pap smears; pelvic exams.--In 1997, a screening pap smear was authorized once every 3 years, except for women who were at a high risk of developing cervical cancer. Beginning in 1998, coverage is authorized every 3 years for screening pelvic exams; annual coverage is authorized for women at high risk. Payment is based on the clinical diagnostic laboratory fee schedule (see above). Prostate cancer screening tests.--The Balanced Budget Act authorizes coverage, beginning January 1, 2000, for an annual prostate cancer screening test for men over age 50. The test could consist of any (or all) of the following procedures: (1) a digital rectal exam; (2) a prostate-specific antigen blood test; and (3) after 2002, such other procedures as the Secretary finds appropriate for the purpose of early detection of prostate cancer. Colorectal screening.--The Balanced Budget Act authorizes coverage of and establishes frequency limits for colorectal cancer screening tests, effective January 1, 1998. A covered test is any of the following procedures furnished for the purpose of early detection of colorectal cancer: (1) screening fecal-occult blood test (for persons over 50, no more than annually); (2) screening flexible sigmoidoscopy (for persons over 50, no more than one every 4 years); (3) screening colonoscopy for high-risk individuals (limited to one every 2 years); and (4) such other procedures as the Secretary finds appropriate for the purpose of early detection of colorectal cancer. Payment limits are established for the tests. The Balanced Budget Act requires the Secretary, within 90 days of enactment, to publish a determination on the coverage of screening barium enema. The Secretary has determined that barium enema tests, as an alternative to either a screening flexible sigmoidoscopy or a screening colonoscopy, will be covered in accordance with the same screening parameters specified for those tests. Diabetes screening tests.--The Balanced Budget Act specifies that, effective July 1, 1998, Medicare's covered benefits will include diabetes outpatient self-management training services. These services are defined as including educational and training services furnished to an individual with diabetes by a certified provider in an outpatient setting. They will be covered only if the physician who is managing the individual's diabetic condition certifies that the services are needed under a comprehensive plan of care to ensure therapy compliance or to provide the individual with necessary skills and knowledge (including skills related to the self- administration of injectable drugs) to participate in the management of their own condition. Certified providers for these purposes are defined as physicians or other individuals or entities that, in addition to providing diabetes outpatient self-management training services, provide other items or services reimbursed by Medicare. Providers must meet quality standards established by the Secretary. They are deemed to meet the Secretary's standards if they meet standards originally established by the National Diabetes Advisory Board and subsequently revised by organizations that participated in the establishment of standards of the Board, or if they are recognized by an organization representing persons with diabetes as meeting standards for furnishing such services. In addition, beginning January 1, 1998, Medicare will cover blood glucose monitors and testing strips for type I or type II diabetics (without regard to a person's use of insulin, as determined under standards established by the Secretary in consultation with appropriate organizations). The national payment limit for testing strips is reduced by 10 percent beginning in 1998. Bone mass measurements.--The Balanced Budget Act authorizes coverage, beginning July 1, 1998, for bone mass measurement for the following high risk persons: an estrogen- deficient woman at clinical risk for osteoporosis; an individual with vertebral abnormalities; an individual receiving long-term glucocorticoid steroid therapy; an individual with primary hyperparathyroidism; or an individual being monitored to assess osteoporosis drug therapy. The Secretary would be required to establish frequency limits. Drugs/vaccines Medicare generally does not cover outpatient prescription drugs. Despite the general limitation, Medicare law specifically authorizes coverage for the following drugs: --Immunosuppressive drugs.--Drugs used in immunosuppressive therapy (such as cyclosporin) during the first 30 months following a covered organ transplant. The coverage period is extended to 3 years beginning in 1998. --Erythropoietin (EPO).--EPO for the treatment of anemia for persons with chronic kidney failure. --Osteoporosis drugs.--Injectable drugs approved for the treatment of postmenopausal osteoporosis provided to an individual by a home health agency. A physician must certify that the individual suffered a bone fracture related to postmenopausal osteoporosis and that the individual is unable to self-administer the drug. --Oral cancer drugs.--Oral drugs used in cancer chemotherapy when identical to drugs which would be covered if not self-administered. The Balanced Budget Act also authorizes coverage, effective January 1, 1998, for oral antinausea drugs used as part of an anticancer chemotherapeutic regimen, subject to specified conditions. Generally, Medicare payment for drugs has been based on the lower of the estimated acquisition cost or the national average wholesale price. These provisions do not apply when payment is based on reasonable costs. Special limits apply in the case of erythropoietin; the limit is $10 per 1,000 units. Osteoporosis drugs can only be paid on the basis of reasonable costs. The Balanced Budget Act specifies that, effective January 1, 1998, in any case where payment is not made on a cost or prospective payment basis, the payment will equal 95 percent of the average wholesale price. The Secretary is authorized to pay a dispensing fee to pharmacies. Further, the Secretary is required to study the effect of this provision on average wholesale prices. Medicare also pays for influenza virus vaccines (flu shots), pneumococcal pneumonia vaccine, and hepatitis B vaccine for persons at risk of contracting hepatitis B. Cost-sharing charges do not apply for pneumococcal pneumonia or influenza virus vaccines; cost-sharing charges do apply for hepatitis B vaccines. Ambulance services Medicare pays for ambulance services provided certain conditions are met. The services must be medically necessary and other methods of transportation must be contraindicated. Ambulance services are currently paid on the basis of reasonable costs when such services are provided by a hospital; otherwise the payment is based on reasonable charge screens developed by individual carriers based on local billings (which may take a variety of forms). Based on these local billing methods, carriers develop screens for one or more of the following four main billing methods: (1) a single all inclusive charge reflecting all services, supplies, and mileage; (2) one charge reflecting all services and supplies, with separate charge for mileage; (3) one charge for all services and mileage, with separate charges for supplies; and (4) separate charges for services, mileage, and supplies. Within each broad payment method, additional distinctions are made based on whether the service is basic life support service or advanced life support, whether emergency or nonemergency transport was used, and whether specialized advanced life services were rendered. The Balanced Budget Act of 1997 specifies that the reasonable cost and charge limits will apply through 1999, with annual increases equal to the CPI minus 1 percentage point. A fee schedule will be implemented in 2000. The aggregate amount of payments in 2000 cannot exceed what would be paid if the interim reductions remained in effect in that year. Annual increases in subsequent years will equal the CPI increase, except that in 2001 and 2002 there will be a 1-percentage point reduction. The act specifies that coverage is provided for advanced life support services provided by paramedic intercept service providers in rural areas under contract with one or more volunteer ambulance services. END-STAGE RENAL DISEASE SERVICES Coverage The Medicare Program covers individuals who suffer from end-stage renal disease if they are: (1) fully insured for old age and survivor insurance benefits; (2) entitled to monthly Social Security benefits; or (3) spouses or dependents of individuals described in (1) or (2). Such persons must be medically determined to be suffering from end-stage renal disease and must file an application for benefits. In 1996, 8.4 percent of the population suffering from end-stage renal disease (ESRD) who needed renal dialysis and 11.6 percent who needed kidney transplants did not meet any of these requirements and thus were not eligible for Medicare renal benefits. Benefits for qualified end-stage renal disease beneficiaries include all part A and part B medical items and services. ESRD beneficiaries are automatically enrolled in the part B portion of Medicare and must pay the monthly premium for such protection. Table 2-25 shows estimates of expenditures, number of beneficiaries, and the average expenditure per person for all persons with ESRD (including the aged and disabled) from 1974 through 2002. Total projected program expenditures for the Medicare End-Stage Renal Disease Program for fiscal year 1998 are estimated at $11.0 billion. In fiscal year 1998, there are an estimated 287,169 beneficiaries, including successful transplant patients and persons entitled to Medicare on the basis of disability who also have ESRD. TABLE 2-25.--END-STAGE RENAL DISEASE MEDICARE BENEFICIARIES AND PROGRAM EXPENDITURES, 1974-2002 [Expenditures in millions of dollars] ------------------------------------------------------------------------ Expenditures HI Per person Fiscal year (HI & SMI) beneficiaries cost ------------------------------------------------------------------------ 1974.......................... $229 15,993 $4,319 1975.......................... 361 22,674 15,921 1976.......................... 512 28,941 17,691 1977.......................... 641 35,889 17,861 1978.......................... 800 43,482 18,398 1979.......................... 1,009 52,636 19,169 1980.......................... 1,245 54,725 22,750 1981.......................... 1,464 61,487 23,810 1982.......................... 1,640 69,267 23,676 1983.......................... 1,984 78,361 25,319 1984.......................... 2,325 87,609 26,538 1985.......................... 2,835 96,965 29,237 1986.......................... 3,165 106,568 29,699 1987.......................... 3,490 117,020 29,824 1988.......................... 3,998 128,075 31,216 1989.......................... 4,653 140,324 33,159 1990.......................... 5,251 154,575 33,971 1991.......................... 5,634 170,718 33,003 1992.......................... 6,433 186,729 34,451 1993.......................... 7,192 202,988 35,429 1994.......................... 7,877 220,359 35,747 1995.......................... 8,652 237,469 36,436 1996.......................... 9,560 254,157 37,614 1997.......................... 10,252 270,672 37,875 1998.......................... 11,008 287,169 38,334 1999.......................... 11,849 303,765 39,007 2000.......................... 12,795 320,593 39,909 2001.......................... 14,121 337,774 41,806 2002.......................... 15,606 355,387 43,914 ------------------------------------------------------------------------ Note.--Estimates for 1979-2001 are subject to revision by the Office of the Actuary, Office of Medicare and Medicaid Cost Estimates; projections for 1994-2001 are under the fiscal year 1996 budget assumptions. Source: Health Care Financing Administration, Office of the Actuary. When the ESRD Program was created, it was assumed that program enrollment would level out at about 90,000 enrollees by 1995. That mark was passed several years ago, and no indication exists that enrollment will stabilize soon. Table 2-26 shows that new enrollment for all Medicare beneficiaries receiving ESRD services grew at an average annual rate of 7.4 percent from 1989 to 1994. Most of the growth in program participation is attributable to growth in the numbers of elderly people receiving services and growth in the numbers of more seriously ill people entering treatment. Table 2-26 shows the greatest rate of growth in program participation is in people over age 75, at 12.0 percent, followed by people of ages 65-74 with a growth rate of 9.1 percent. The largest rate of growth in primary causes of people entering ESRD treatment was diabetes. People with diabetes frequently have multiple health problems, making treatment for renal failure more difficult. The rates of growth in older and sicker patients entering treatment for end-stage renal disease indicate a shift in physician practice patterns. In the past, most of these people would not have entered dialysis treatment because their age and severity of illness made successful treatment for renal failure less likely. Although the reasons that physicians have begun treating older and sicker patients are not precisely known, it is clear that these practice patterns have resulted, and will continue to result, in steady growth in the number of patients enrolling in Medicare's End-Stage Renal Disease Program. End-stage renal disease is invariably fatal without treatment. Treatment for the disease takes two forms: transplantation and dialysis. Although the capability to perform transplants had existed since the 1950s, problems with rejection of transplanted organs limited its application as a treatment for renal failure. The 1983 introduction of a powerful and effective immunosuppressive drug, cyclosporin, resulted in a dramatic increase in the number of transplants being performed and the success rate of transplantation. Table 2-27 indicates that the number of kidney transplants in 1995 was more than double the number performed in 1980. Despite the significant increases in the number and success of kidney transplants, transplantation is not the treatment of choice for all ESRD patients. A chronic, severe shortage of kidneys available for transplantation now limits the number of patients who can receive transplants. Even absent a shortage of organs, some patients are not suitable candidates for transplants because of their age, severity of illness, or other complicating conditions. Finally, some ESRD patients do not want an organ transplant. For all of these reasons, dialysis is likely to remain the primary treatment for end-stage renal disease. Dialysis is an artificial method of performing the kidney's function of filtering blood to remove waste products. There are two types of dialysis: hemodialysis and peritoneal dialysis. In hemodialysis, still the most common form of dialysis, blood is removed from the body, filtered and cleansed through a dialyzer, sometimes called an artificial kidney machine, before being returned to the body. There are three types TABLE 2-26.--MEDICARE END-STAGE RENAL DISEASE PROGRAM INCIDENCE BY AGE, SEX, RACE, AND PRIMARY DIAGNOSIS, 1989-94 -------------------------------------------------------------------------------------------------------------------------------------------------------- Average annual Percent Age, sex, race, and primary diagnosis 1989 1990 1991 1992 1993 1994 percent change change 1993-94 -------------------------------------------------------------------------------------------------------------------------------------------------------- Age: Under 15 years........................................ 417 462 465 419 444 437 0.9 -1.6 15-24 years........................................... 1,327 1,282 1,289 1,362 1,315 1,268 -0.9 -3.6 25-34 years........................................... 3,442 3,459 3,556 3,580 3,628 3,496 0.3 -3.6 35-44 years........................................... 4,718 5,174 5,590 5,954 5,825 5,986 4.9 2.8 45-54 years........................................... 5,947 6,275 6,859 7,642 8,019 8,756 8.0 9.2 55-64 years........................................... 9,230 9,973 10,796 11,430 11,631 12,426 6.1 6.8 65-74 years........................................... 11,554 12,964 14,499 16,007 16,542 17,851 9.1 7.9 75 years and over..................................... 6,845 7,765 8,932 10,275 10,813 12,046 12.0 11.4 Sex: Male.................................................. 23,569 25,708 27,958 30,251 31,289 33,259 7.1 6.3 Female................................................ 19,911 21,646 24,028 26,418 26,928 29,007 7.8 7.7 Race: Asian................................................. 831 1,032 1,117 1,266 1,318 1,456 11.9 10.5 Black................................................. 12,608 13,538 14,962 16,520 16,976 17,638 6.9 3.9 White................................................. 28,983 31,564 34,669 37,477 38,072 40,532 6.9 6.5 American Indian....................................... 540 580 633 792 618 689 5.0 11.5 Other/unknown......................................... 518 640 605 614 1,233 1,951 30.4 58.2 Primary diagnosis: Diabetes.............................................. 14,456 16,219 18,715 20,792 20,368 23,417 10.1 15.0 Glomerulonephritis.................................... 5,701 5,852 5,944 6,161 5,953 6,256 1.9 5.1 Hypertension.......................................... 12,408 13,544 15,014 16,831 15,839 17,705 7.4 11.8 Polycystic-kidney disease............................. 1,268 1,400 1,484 1,548 1,359 969 -5.2 -28.7 Interstitial nephritis................................ 1,389 1,397 1,538 1,569 1,392 1,585 2.7 13.9 Obstructive nephropathy............................... 980 945 1,019 1,091 960 944 -0.7 -1.7 Other................................................. 2,678 2,866 3,588 3,931 4,157 5,030 13.4 21.0 Unknown............................................... 2,506 2,481 2,760 3,018 2,594 2,453 -0.4 -5.4 Not reported.......................................... 2,094 2,650 1,924 1,728 5,595 3,907 13.3 -30.2 ----------------------------------------------------------------------------------------------- Total number of new enrollees....................... 43,480 47,354 51,986 56,669 58,217 62,266 7.4 7.0 -------------------------------------------------------------------------------------------------------------------------------------------------------- Source: Health Care Financing Administration, Bureau of Data Management and Strategy; data from the Program Management and Medical Information System, September 1996 update. TABLE 2-27.--TOTAL KIDNEY TRANSPLANTS PERFORMED IN MEDICARE-CERTIFIED U.S. HOSPITALS, 1979-95 ---------------------------------------------------------------------------------------------------------------- Living donor Cadaveric donor Calendar year Total ------------------------------------------- transplants Number Percent Number Percent ---------------------------------------------------------------------------------------------------------------- 1979................................................... 4,189 1,186 28 3,003 72 1980................................................... 4,697 1,275 27 3,422 73 1981................................................... 4,883 1,458 30 3,425 70 1982................................................... 5,358 1,677 31 3,681 69 1983................................................... 6,112 1,784 29 4,328 71 1984................................................... 6,968 1,704 24 5,364 76 1985................................................... 7,695 1,876 24 5,819 76 1986................................................... 8,976 1,887 21 7,089 79 1987................................................... 8,967 1,907 21 7,060 79 1988................................................... 8,932 1,816 20 7,116 80 1989................................................... 8,899 1,893 21 7,006 78 1990................................................... 9,796 2,091 21 7,705 79 1991................................................... 10,026 2,382 24 7,644 76 1992................................................... 10,115 2,536 25 7,579 75 1993................................................... 10,934 2,828 26 8,106 74 1994................................................... 11,312 3,000 26 8,312 73 1995................................................... 11,902 3,416 29 8,426 71 ---------------------------------------------------------------------------------------------------------------- Source: Health Care Financing Administration, Bureau of Data Management and Strategy. of peritoneal dialysis. Intermittent peritoneal dialysis (IPD) and continuous cycling peritoneal dialysis (CCDP) requires the use of a machine while continuous ambulatory peritoneal dialysis (CAPD) does not require the use of a machine. Under peritoneal dialysis, filtering takes place inside the body by inserting dialysate fluid through a permanent surgical opening in the peritoneum (abdominal cavity). Toxins filter into the dialysate fluid and are then drained from the body through the surgical opening. Hemodialysis is usually performed three times a week, IPD is performed once or twice a week, while CAPD and CCPD require daily exchanges of dialysate fluid. Reimbursement Medicare reimbursement for facility-based dialysis services provided by hospital-based and independent facilities are paid at prospectively determined rates for each dialysis treatment session. The rate, referred to as a composite rate, is derived from area wage differences and audited cost data adjusted for the national proportion of patients dialyzing at home versus in a facility. Adjustments are made to the composite rate for hospital-based dialysis facilities to reflect higher overhead costs. Beneficiaries electing home dialysis may choose either to receive dialysis equipment, supplies, and support services directly from the facility with which the beneficiary is associated (method I) or to make independent arrangements for equipment, supplies, and support services (method II). Under method I, the equipment, supplies, and support services are included in the facility's composite rate. Under method II, payments are made on the basis of reasonable charges and limited to 100 percent of the median hospital composite rate, except for patients on continuous cycling peritoneal dialysis, in which case the limit is 130 percent of the median hospital composite rate. Kidney transplantation services, to the extent they are inpatient hospital services, are subject to the prospective payment system. However, kidney acquisition costs are paid on a reasonable cost basis. The composite rate is not routinely updated, nor are method II reasonable charge payments. There is no specific update policy for reasonable costs of kidney acquisition; 100 percent of reasonable costs are reimbursed. In fiscal year 1998, the composite rate is $130 for hospitals and $126 for freestanding facilities.