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


 
                              23.  MEDICARE

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

                              Table 23-1.  FEDERAL RESOURCES IN SUPPORT OF MEDICARE                             
                                            (In millions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                               Estimate                         
               Function 570                   1997   -----------------------------------------------------------
                                             Actual     1998      1999      2000      2001      2002      2003  
----------------------------------------------------------------------------------------------------------------
Spending:                                                                                                       
  Discretionary Budget Authority..........     2,623     2,724     2,648     2,640     2,627     2,609     2,652
  Mandatory Outlays:                                                                                            
    Existing law..........................   187,441   195,383   204,691   214,249   230,075   232,504   253,450
    Proposed legislation..................  ........  ........       -79       -33      -152      -257      -326
----------------------------------------------------------------------------------------------------------------

  ----------------------------------------------------------------------
  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 $207 billion in 1999 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. Medicare was 
expanded in 1972 to address a similar problem of access to insurance for 
people with disabilities. Through Medicare, the Federal Government 
created one insurance pool for all of the elderly and eligibile disabled 
individuals while subsidizing some of the costs, thus making insurance 
much more affordable for almost all elderly Americans and for certain 
people with disabilities.
  Medicare has very successfully expanded access to quality care for the 
elderly and people with disabilities. Still, even though the Balanced 
Budget Act (BAA) of 1997 improved Medicare's financial outlook for the 
near future, its trust funds face financing challenges as the Nation 
moves into the 21st Century. Along with legislative proposals discussed 
elsewhere in the budget, the Health Care Financing Administration 
(HCFA), which runs Medicare, is working to improve Medicare through its 
regulatory authority and demonstration programs.
  The Department of Health and Human Services (HHS), which houses HCFA, 
is the Federal Government's lead agency for health programs. HHS' 
Strategic Plan states the agency mission as: ``to enhance the health and 
well-being of Americans by providing for effective health and human 
services and by fostering strong, sustained advances in the sciences 
underlying medicine, public health, and social services.''
  Medicare supports HHS' first, second, third, and fourth strategic 
goals, as described in Chapter 22, ``Health.''

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 care 
related to a hospital

[[Page 220]]

stay, 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 age 65 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.
  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); home health care; physical and occupational therapy; speech 
pathology services; and outpatient mental health services. Part B also 
covers kidney dialysis and other services 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 prospective payment, an established fee schedule, or reasonable 
costs. About 87 percent of Medicare beneficiaries now opt for fee-for-
service coverage.
  Alternatively, beneficiaries can enroll in a Medicare managed care 
plan, and the 13 percent who do are concentrated in several geographic 
areas. Generally, enrollees receive care from a network of providers, 
although Medicare managed care plans may 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. As of June 1997, 67 percent of all Medicare beneficiaries 
lived in a county served by at least one Medicare managed care plan.
  Due to the BBA, Medicare managed care (renamed ``Medicare+Choice'' or 
Part C) will provide new health plan options for Medicare beneficiaries, 
including provider-sponsored organizations (PSOs) and preferred provider 
organizations (PPOs). Part C also will feature improved beneficiary 
information and will be fully operational by January 1, 1999.

Successes

  Medicare has dramatically increased access to health care for the 
elderly--from slightly over 50 percent of the elderly in 1966 to almost 
100 percent today.
  According to the Physician Payment Review Commission's latest report, 
96 percent of Medicare beneficiaries reported no trouble obtaining care. 
Further, less than 1 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.
  Medicare also gives beneficiaries an attractive choice of managed care 
plans. Today, managed care is a major, and growing, part of Medicare. As 
of December 1, 1997, over 5.2 million beneficiaries have enrolled in 307 
Medicare managed care plans. During the 12-month period ending December 
1, 1997, enrollment in the capitated managed care plans called ``risk 
contracts'' grew by 27 percent. Managed care plans can 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, nursing homes, and durable medical equipment suppliers, 
Medicare is increasing its efforts to root out fraud and abuse. Recent 
legislation provides mandatory Federal funds and greater 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.

[[Page 221]]

Spending and Enrollment

  Net Medicare outlays will rise by an estimated 30 percent from 1998 to 
2003--from $194.2 billion to $252 billion.\1\ Part A outlays will grow 
by an estimated 23 percent over the period--from $130.3 billion to $160 
billion--or an average of 4.2 percent a year. Part B outlays will grow 
by an estimated 44 percent--from $63.8 billion to $92 billion--or an 
average of 7.6 percent a year.
---------------------------------------------------------------------------
  \1\ These figures cover Federal spending on Medicare benefits, but do 
not include spending financed by beneficiaries' premium payments or 
administrative costs.
---------------------------------------------------------------------------
  Medicare is consuming a growing share of the budget. 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 2003, 
assuming no changes in current law, Federal spending on Medicare 
benefits will total an estimated $252 billion, or almost 13 percent of 
all Federal outlays.
  Medicare enrollment will grow slowly until 2010, then explode as the 
baby boom generation begins to reach age 65. From 1995 to 2010, 
enrollment will grow at an estimated average annual rate of 1.5 percent, 
from 37.6 million enrollees in 1995 to 46.9 million in 2010. But after 
2010, average annual growth will almost double, with enrollment reaching 
an estimated 61.3 million in 2020.

The Two Trust Funds

  HI Trust Fund: As noted earlier in this chapter, 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 began drawing down 
the Trust Fund's accounts to help finance Part A spending. Prior to the 
BBA, the Government's actuaries predicted that the HI Trust Fund would 
become insolvent in 2001. The BBA, however, ensured the solvency of the 
Trust Fund for another nine years--until 2010.
  Medicare Part A still faces a longer-term financing challenge. Since 
current benefits are paid by current workers, Medicare costs associated 
with the retirement of the baby boomers, starting in 2010, will be borne 
by the relatively small number of people born after the baby boom. As a 
result, only 2.2 workers will be available to support each beneficiary 
in 2030--compared to today's four workers per beneficiary. The President 
plans to work with Congress and the Medicare Commission to develop a 
long-term solution to this financing challenge.

   SMI Trust Fund: The SMI Trust Fund receives about 75 percent of its 
income from general Federal revenues and about 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.

Demonstrations and Regulations

  HCFA also conducts demonstration programs to determine the efficacy of 
new service delivery or payment approaches. For example, Phase II of the 
Social Health Maintenance Organization demonstration project is testing 
alternative mechanisms for adjusting the managed care capitated payment, 
including the beneficiary's functional status. In another demonstration 
project, Centers of Excellence, HCFA has experimented with bundled 
payments for hospital and physician costs for selected procedures 
performed at certain high-quality facilities.
  Through its regulatory authority, HCFA continually improves Medicare. 
For example, HCFA has finalized regulations specifying additional 
standards that home health agencies must meet to participate in 
Medicare, including securing surety bonds, and it expects to issue 
similar regulations for durable medical equipment suppliers this year. 
By reducing the amount of fraud and abuse in the program, the 
Administration is making important changes to strengthen Medicare.

Performance Plan

  HCFA has developed a comprehensive set of performance goals to measure 
its progress in ensuring that Medicare beneficiaries receive the highest 
quality health care. HCFA's 22 performance goals relate to quality 
assurance, access to care for the elderly and disabled,

[[Page 222]]

administrative efficiency, and a reduction in fraud and abuse--four 
areas critical to the administration of Medicare.
  For example, HCFA's 1999 goals include:
  Increasing the percentage of Medicare beneficiaries who 
          receive a mammogram once every two years from 49 percent in 
          1994 to 59 percent in 1999 and 60 percent in 2000;
  Increasing the number of Medicare beneficiaries receiving 
          vaccinations for influenza from 41 percent in 1995 to 59 
          percent;
  Reducing the payment error rate under Medicare's fee-for-
          service program from 14 percent in 1996 to 13 percent, with a 
          five-year goal of 10 percent;
  Continuing to shift Medicare contractors' nine different 
          claims processing systems to one Part A and one Part B 
          standard system (by the end of 1999, HCFA will have one Part A 
          system and two Part B systems, with the final Part B 
          transition coming later); and
  Ensuring that no significant interruptions to Medicare claims 
          payments occur because information systems under HCFA's 
          control were not year 2000 compliant. For systems not under 
          HCFA's direct control, HCFA will continue to work with its 
          Medicare contractor community and perform oversight activities 
          directing them to achieve and verify compliance. HCFA will 
          again seek legislative changes to increase its control over 
          contractor systems.