[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)                                            
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                                                                            Estimate                            
            Function 570                1996   -----------------------------------------------------------------
                                       Actual      1997       1998       1999       2000       2001       2002  
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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.

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   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.
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   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.
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   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 

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$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.