[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.
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