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

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                                  22.  MEDICARE

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                                  Table 22-1.  Federal Resources in Support of Medicare
                                                (In millions of dollars)
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                                                                                   Estimate
                   Function 570                   1999   -----------------------------------------------------------
                                                 Actual     2000      2001      2002      2003      2004      2005
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    Spending:
      Discretionary Budget Authority..........     2,803     3,067     2,977     2,977     3,012     3,087     3,156
      Mandatory Outlays:
        Existing law..........................   187,694   199,475   218,251   223,676   241,888   255,403   277,452
        Proposed legislation..................  ........  ........      -690     2,610    -2,730     6,543     6,075
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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 $218 billion in 2001 on mandatory benefits (net of beneficiary
    premiums) 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).
       Approximately 35 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 eligible 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, but at an increasing cost. The
    Balanced Budget Act (BBA) of 1997 improved Medicare's financial outlook
    for the near future, yet its trust funds face financing challenges as
    the Nation moves into the 21st Century. The Balanced Budget Refinement
    Act (BBRA) of 1999 corrected some of the unintended consequences of the
    BBA. Along with legislative proposals discussed elsewhere in the budget,
    the Health Care Financing Administration (HCFA), which runs Medicare, is
    working to reform and modernize the Medicare program.

    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. Part A reimburses
    providers for the inpatient hospital, skilled nursing facility, home
    health care related to a hospital 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 94 percent of those enrolled in Part A
    have chosen to enroll in Part B. Enrollees pay monthly

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    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; 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 83 percent of Medicare beneficiaries now opt for fee-for-service
    coverage.
       Alternatively, beneficiaries can enroll in a Medicare+Choice plan,
    and the 17 percent who do are concentrated in several geographic areas.
    Generally, enrollees receive care from a network of providers, although
    Medicare+Choice plans may offer a point-of-service benefit, allowing
    beneficiaries to receive certain services from non-network providers.
    Medicare+Choice provides beneficiaries access to additional kinds of
    managed care plans, including Provider Sponsored Organizations and
    Preferred Provider Organizations. Most managed care plans receive a
    monthly, per-enrollee capitated payment that covers the cost of Part A
    and B services. At the start of 2000, 69 percent of all Medicare
    beneficiaries lived in a county served by at least one Medicare managed
    care plan.

    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 a recent Medicare Payment Advisory
    Commission report, 97 percent of Medicare fee-for-service beneficiaries
    (94 percent for managed care) reported no trouble obtaining care.
    Further, 88 percent of fee-for-service Medicare beneficiaries (92
    percent for managed care) reported having a physician or physician's
    office as a usual source of care. Medicare beneficiaries have access to
    the most up-to-date medical technology and procedures.
       Under the BBA and other recent legislation, Medicare beneficiaries
    now have expanded access to many important preventive care services
    including mammographies, prostate and colorectal cancer screening, bone
    mass measurements and diabetes self-management services. These benefits
    will help prevent or reduce the complications of disease for millions of
    beneficiaries.
       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. In 1996, in the first ever comprehensive audit of
    the Medicare program, the Medicare error rate was an estimated 14
    percent of all Medicare fee-for-service payments, or about $23.2
    billion. In 1998, the error rate fell to an estimated 7.1 percent, or
    about $12.6 billion.

    Spending and Enrollment

       Federal spending on Medicare benefits will rise by an estimated
    average annual rate of 7.1 percent from 2001 to 2005--from $240 billion
    to $309 billion. \1\ Part A outlays will grow by an estimated 28 percent
    over the period--from $140 billion to $179 billion--or an average of 6.7
    percent a year. Part B outlays will grow by an estimated 30 percent--
    from $100 billion to $130 billion--or an average of 7.5 percent a year.
    ---------------------------------------------------------------------------
      \1\ These figures cover gross Federal spending on Medicare benefits,
    and do not include spending financed by beneficiaries' premium payments
    or administrative costs.
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       Medicare enrollment will grow slowly until 2010, then rapidly
    increase as the baby

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    boom generation begins to reach age 65 in 2011. From 1995 to 2010,
    enrollment will grow at an estimated average annual rate of 1.4 percent,
    from 37.4 million enrollees in 1995 to 46.3 million in 2010. But after
    2010, average annual growth will more than double, with enrollment
    reaching an estimated 61.0 million in 2020.

    The Two Trust Funds

       Hospital Insurance (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 Medicare Trustees
    currently project that the HI Trust Fund will remain solvent until 2015,
    mostly due to the BBA changes and improved efforts to combat fraud and
    abuse.
       Medicare Part A still faces a long-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 2.3 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 to develop a long-term solution to this
    financing challenge.

       Supplementary Medical Insurance (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.

    Balanced Budget Act Implementation

       HCFA continues to implement the many changes in Medicare payment
    methodologies and provider options that were mandated in the BBA and
    then modified in the BBRA. Although HCFA was forced to delay some
    provisions to enable a smooth transition of systems to the year 2000
    (Y2K) computer problem, the agency has issued major rules that implement
    the new Medicare + Choice program, PSO solvency standards, an interim
    payment system for home health services and a prospective payment system
    for skilled nursing facilities.

    A Plan to Strengthen HCFA's Management Capacity

       HCFA faces the formidable challenge of modernizing its administrative
    infrastructure, meeting pressing statutory deadlines for program change
    from the BBA, the BBRA and the Health Insurance Portability and
    Accountability Act, and perhaps most important, the need to be highly
    responsive to its customers. The budget continues initiatives first
    proposed in 2000 to increase HCFA's flexibility to operate as a prudent
    purchaser of health care while also increasing accountability, as
    discussed in Chapter 31, ``Improving Performance through Better
    Management''.

    Performance Plan

      HCFA has developed a set of performance goals to measure its progress
    in ensuring that Medicare beneficiaries receive the highest quality
    health care. HCFA's performance goals relate to four critical areas:
    quality assurance; access to care for the elderly and disabled;
    administrative efficiency; and, a reduction in fraud and abuse. HCFA's
    2001 goals include:
       Increasing the percentage of Medicare beneficiaries who
              receive a mammogram once every two years from 45 percent in
              1998 to 51 percent in 2001.
       Decreasing the one-year mortality rate among Medicare
              beneficiaries hospitalized for heart attacks from 31.4 percent
              in 1995 to 27.4 percent in 2001.
       Determining and reducing the prevalence of pressure ulcers
              (bed sores) in long-term care facilities. Pressures ulcers are
              a good indicator of the quality of care provided by nursing
              homes, a major concern of the Administration's Nursing Home
              Initiative. This goal is still developmental, and

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              HCFA is working to establish a baseline during 2000.
       Increasing the percentage of Medicare beneficiaries 65 and
              over receiving vaccinations for influenza from 59 percent in
              1994 to 72 percent in 2001 and those receiving lifetime
              pneumococcal vaccinations from 25 percent in 1994 to 55
              percent in 2001. This latter goal was developed to further
              address diseases that have resulted in more deaths per year
              than all other vaccine-preventable diseases combined, as HCFA
              has achieved and surpassed its 2000 flu immunization
              performance measure.
       Reducing the payment error rate under Medicare's fee-for-
              service program from 14 percent in 1996 to seven percent in
              the year 2000 and five percent by the year 2002, as noted
              above. The Administration has made great strides over the last
              few years to reduce improper Medicare payments to hospitals,
              doctors, and other health care providers.
       Sustaining the percentage of laboratories regulated under the
              Clinical Laboratory Improvement Amendment that are properly
              enrolled and participating in proficiency (accuracy) testing
              at 95 percent. HCFA will also sustain the current percentage
              of the total scores reported from laboratories enrolled in
              proficiency (accuracy) testing that contain no failures at 90
              percent.