    [Budget of the U.S. Government]
    [VI. Investing in the Common Good: The Major Functions of the Federal Government]
    [23. Medicare]
    [From the U.S. Government Publishing Office, www.gpo.gov]

                                  23.  MEDICARE

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                                  Table 23-1.  FEDERAL RESOURCES IN SUPPORT OF MEDICARE
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Estimate
                Function 570                1996   -----------------------------------------------------------------
                                           Actual      1997       1998       1999       2000       2001       2002
    ----------------------------------------------------------------------------------------------------------------
    Spending:
      Discretionary Budget Authority...      2,939      2,598      2,755      2,751      2,728      2,727      2,728
      Mandatory Outlays:
        Existing law...................    171,272    191,556    208,641    228,211    248,760    271,089    295,065
        Proposed legislation...........  .........  .........     -4,310    -11,390    -22,150    -27,820    -34,550
    ----------------------------------------------------------------------------------------------------------------

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       Created by the Social Security Amendments of 1965 (and expanded in
    1972), Medicare is a Nation-wide health insurance program for the
    elderly and certain people with disabilities. The program, which will
    spend an estimated $211 billion in 1998 on benefits and administrative
    costs, consists of two complementary but distinct parts, each tied to a
    trust fund: (1) Hospital Insurance (Part A) and (2) Supplementary
    Medical Insurance (Part B).
       Over 30 years ago, Medicare was designed to address a serious,
    national problem in health care--the elderly often could not afford to
    buy health insurance, which was more expensive for them than for other
    Americans because they had higher health care costs. Through Medicare,
    the Federal Government created one insurance pool for all of the elderly
    while subsidizing some of the costs, thus making insurance much more
    affordable for almost all elderly Americans.
       Medicare has very successfully expanded access to quality care for
    the elderly. Its trust funds, however, face financing challenges as the
    Nation approaches the 21st Century. Along with legislative proposals
    discussed elsewhere in the budget, the Health Care Financing
    Administration (HCFA) is working to improve Medicare through its
    regulatory authority and demonstration programs.

    Part A

       Part A covers almost all Americans age 65 or older, and most persons
    who are disabled for 24 months or more and who are entitled to Social
    Security or Railroad Retirement benefits. People with end-stage renal
    disease (ESRD) also are eligible for Part A coverage. About 99 percent
    of Americans aged 65 or older are enrolled in Part A, along with an
    estimated 93 percent of ESRD patients. Part A reimburses providers for
    the inpatient hospital, skilled nursing facility, home health, and
    hospice services provided to beneficiaries. Part A's Hospital Insurance
    (HI) Trust Fund receives most of its income from the HI payroll tax--2.9
    percent of payroll, split evenly between employers and employees.

    Part B

       Part B coverage is optional, and it is available to almost all
    resident citizens 65 years of age or older and to people with
    disabilities who are entitled to Part A. About 96 percent of those
    enrolled in Part A have chosen to enroll in Part B. Enrollees pay
    monthly premiums that cover about 25 percent of Part B costs, while
    general taxpayer dollars subsidize the remaining costs. For most
    beneficiaries, the Government simply deducts the Part B premium from
    their monthly Social Security checks.

    [[Page 186]]

       Part B pays for medically necessary physician services; outpatient
    hospital services; diagnostic clinical laboratory tests; certain durable
    medical equipment (e.g., wheelchairs) and medical supplies (e.g.,
    oxygen); and physical and occupational therapy, speech pathology
    services, and outpatient mental health services. Part B also covers
    kidney dialysis and transplants for ESRD patients.

    Fee-for-Service vs. Managed Care

       Beneficiaries can choose the coverage they prefer.
       Under the ``traditional,'' fee-for-service option, beneficiaries can
    go to virtually any provider in the country. Medicare pays providers
    primarily based on either an established fee schedule or reasonable
    costs. About 90 percent of Medicare beneficiaries now opt for fee-for-
    service coverage.
       Alternatively, beneficiaries can enroll in a Medicare managed care
    plan, and the 10 percent who do are concentrated in a few geographic
    areas. Generally, enrollees receive care from a network of providers,
    although Medicare managed care plans are starting to offer a point-of-
    service benefit, allowing beneficiaries to receive certain services from
    non-network providers. Most managed care plans receive a monthly, per
    enrollee ``capitated'' payment that covers the cost of Part A and B
    services.

    Successes

       Medicare dramatically increased access to health care for the
    elderly--from slightly over half when the program began in 1966 to
    almost 100 percent today.
       Ninety-six percent of Medicare beneficiaries reported no trouble
    obtaining care in 1994. \1\ Further, less than one percent of
    beneficiaries reported trouble getting care because a physician would
    not accept Medicare patients. Medicare beneficiaries have access to the
    most up-to-date medical technology and procedures.
    ---------------------------------------------------------------------------
      \1\ Physician Payment Review Commission, 1996 Annual Report to
    Congress.
    ---------------------------------------------------------------------------
       Medicare also gives beneficiaries a choice of managed care plans.
    Today, managed care is a major, and growing, part of Medicare. As of
    December 1, 1996, over 4.7 million beneficiaries have enrolled in 336
    Medicare managed care plans. In 1995, enrollment in the capitated
    managed care plans called ``risk contracts'' grew by 36 percent, and by
    an annualized rate of 30 percent in the first six months of 1996.
    Managed care plans can potentially provide coordinated care that is
    focused on prevention and wellness.
       In addition, Medicare is working to protect the integrity of its
    payment systems. Building on the success of Operation Restore Trust, a
    five-State demonstration aimed at cutting fraud and abuse in home health
    agencies and nursing homes, Medicare is increasing its efforts to root
    out fraud and abuse. Recent legislation provided more Federal funds and
    authority to prevent inappropriate payments to fraudulent providers, and
    to seek out and prosecute providers who continue to defraud Medicare and
    other health care programs.

    Spending and Enrollment

       With no changes in law, net Medicare outlays will rise by an
    estimated 54 percent from 1997 to 2002--from $191.6 billion to $295.1
    billion. \2\ Net Medicare outlays will grow by an average of nine
    percent a year over this period. Part A outlays are larger than Part B
    outlays, and grow more slowly. Nevertheless, Part A outlays will grow by
    an estimated 46 percent over the period--from $135.1 billion to $197.7
    billion--or an average of 7.9 percent a year. Part B outlays will grow
    by an estimated 72 percent--from $55.9 billion to $96.4 billion--or an
    average of 11.5 percent a year.
    ---------------------------------------------------------------------------
      \2\ These figures cover Federal spending on Medicare benefits, but do
    not include spending financed by beneficiaries' premium payments or
    administrative costs.
    ---------------------------------------------------------------------------
       Medicare has consumed a growing share of the budget, and it will
    continue to under current law. In 1980, Federal spending on Medicare
    benefits was $31 billion, comprising 5.2 percent of all Federal outlays.
    In 1995, Federal spending on Medicare benefits was $156.6 billion, or
    just over 10 percent of all Federal outlays. By 2002, assuming no
    changes in current law, Federal spending on Medicare benefits will total
    an estimated

    [[Page 187]]

    $295.1 billion, or almost 16 percent of all Federal
    outlays.
       Medicare enrollment will grow slowly until 2010, then take off as the
    baby boom generation begins to reach age 65. From 1995 to 2010,
    enrollment will grow at an estimated average annual rate of 1.4 percent,
    from 37.6 million enrollees in 1995 to 46.4 million in 2010. But after
    2010, average annual growth will almost double, with enrollment reaching
    an estimated 78 million in 2030--one in five Americans.

    The Two Trust Funds

       HI Trust Fund: As discussed above, the HI Trust Fund is financed by a
    2.9 percent payroll tax, split evenly between employers and employees.
    In 1995, HI expenditures began to exceed the annual income to the Trust
    Fund and, as a result, Medicare is drawing down the Trust Fund's
    accounts to partially finance Part A spending. The Government's career
    actuaries predict that the HI Trust Fund would become insolvent in 2001
    in current law, but the President's proposals to strengthen the Trust
    Fund would push back the date into 2007. (For a detailed discussion of
    the proposals, see Chapter 1.)
       Beyond the impending insolvency, Medicare also faces a longer-term
    financing challenge. The baby boomers' retirement, starting in 2010,
    will cause Medicare spending to grow significantly. From 2010 to 2030,
    enrollment is expected to double while the workforce shrinks. As a
    result, only 2.2 workers will be available to support each beneficiary
    in 2030--compared to the current four workers per beneficiary. The
    President proposes to work with Congress on a bipartisan basis to
    develop a long-term solution to this financing challenge.

       SMI Trust Fund: The SMI Trust Fund receives 75 percent of its income
    from general Federal revenues, 25 percent from beneficiary premiums.
    Unlike HI, the SMI Trust Fund is really a trust fund in name only--the
    law lets the SMI Trust Fund tap directly into general revenues to ensure
    its annual solvency. Nonetheless, the trustees of the SMI Trust Fund
    noted in 1996 ``that program costs have been growing faster than the GDP
    and that this trend is expected to continue under present law.''

    Demonstrations

       HCFA also conducts demonstration programs to determine the efficacy
    of new service delivery or payment approaches. For instance, it is
    launching a Choices demonstration project to allow provider-sponsored
    organizations in certain areas to enroll Medicare beneficiaries. The
    plans will offer new benefit structures to beneficiaries. Another
    demonstration project, Centers of Excellence, has experimented with
    bundled payments for hospital and physician costs, for selected
    procedures performed at certain high-quality facilities.

    Regulations

       Through its regulatory authority, HCFA continually improves Medicare.
    In the last year, HCFA issued regulations to address concerns about the
    payment incentives that managed care plans offer to physicians that, in
    turn, may encourage physicians to deny services. Specifically, it barred
    health plans that contract with Medicare from limiting physicians'
    ability to discuss all appropriate treatment options with Medicare
    enrollees. In addition, the Administration is focusing more on patient
    health outcomes and giving information to consumers that should boost
    competition among health plans, generating higher-quality care and a
    more cost-effective Medicare program.