    [Budget of the United States Government]
    [III. Creating a Better Government]
    [13. Medicare]
    [From the U.S. Government Publishing Office, www.gpo.gov]

                                  13.  MEDICARE

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                                  Table 13-1.  Federal Resources in Support of Medicare
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                   Estimate
                   Function 570                   2000   -----------------------------------------------------------
                                                 Actual     2001      2002      2003      2004      2005      2006
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    Spending:
      Discretionary Budget Authority..........     2,998     3,352     3,466     3,549     3,631     3,714     3,800
      Mandatory Outlays:
        Existing law..........................   194,115   216,002   226,448   238,575   252,231   270,784   279,426
        Proposed legislation..................  ........  ........  ........  ........  ........     8,300    12,800
    ----------------------------------------------------------------------------------------------------------------

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      Created by the Social Security Amendments of 1965, and expanded in
    1972, Medicare is a nationwide health insurance program for the elderly
    and certain people with disabilities. The program will spend an
    estimated $226 billion in 2002 on mandatory benefits (net of beneficiary
    premiums) and administrative costs.
      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
    expanded access to quality care for the elderly and people with
    disabilities. With rapid changes in the health care industry, however,
    Medicare's approach to health care coverage has become increasingly
    dated. Medicare's benefits have significant gaps, including the lack of
    a prescription drug benefit. Medicare provides fewer coverage options
    for many beneficiaries than are enjoyed by employees of large private
    firms and the Federal Government. As a result, many beneficiaries do not
    have access to innovative disease management programs for their chronic
    illnesses, or to coverage options that would help them limit their out-
    of-pocket costs. In addition, Medicare has an enormous and growing long-
    term financing gap.

    Medicare Benefits

      In contrast to the integrated health insurance plans that provide
    coverage for most non-elderly Americans today, Medicare's structure
    continues to reflect the historical division of health insurance into a
    ``hospital'' component and a ``physician'' component that existed at the
    time the program was created. Medicare has two parts: (1) Hospital
    Insurance (Part A) and (2) Supplementary Medical Insurance (Part B).
      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.

    [[Page 106]]

      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 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.

    Public vs. Private Health Care Coverage

      Beneficiaries can choose the coverage they prefer among a limited set
    of options. Under the traditional fee-for-service option, beneficiaries
    can go to most providers in the country. Medicare pays providers
    primarily based on prospective payment, an established fee schedule, or
    reasonable costs. About 84 percent of Medicare beneficiaries now opt for
    fee-for-service coverage.
      Alternatively, beneficiaries can enroll in a Medicare+Choice plan.
    Generally, enrollees receive care from a network of providers. Most
    managed care plans receive a monthly, per-enrollee capitated payment
    that covers the cost of Part A and B services. The Administration will
    focus on expanding opportunities for beneficiaries to access a wider
    array of plans, including Preferred Provider Organizations and plans
    that offer a point of service benefit, allowing beneficiaries to receive
    certain services from non-network providers.

    Spending and Enrollment

      Federal spending on Medicare benefits will rise by an estimated
    average annual rate of 5.4 percent from 2002 to 2006, from $226 billion
    to $279 billion. Part A benefit outlays will grow by an estimated 23
    percent over the period--from $140 billion to $172 billion, or an
    average of 5.3 percent a year. Part B outlays will grow by an estimated
    23 percent--from $85 billion to $106 billion, or an average of 5.7
    percent a year. These figures cover net Federal spending on Medicare
    benefits, and do not include spending financed by beneficiaries' premium
    payments.
      Medicare enrollment will grow slowly until 2011, then rapidly increase
    as the baby boom generation begins to reach age 65 in 2011. From 1995 to
    2011, enrollment will grow at an estimated average annual rate of 1.5
    percent, from 37.4 million enrollees in 1995 to 46.9 million in 2011.
    After 2011, average annual growth will grow at a faster rate, with
    enrollment reaching more than 69 million in 2025.

    The Two Trust Funds and Solvency

      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. 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 Medicare Trustees recently
    reported that the HI Trust Fund depletion date improved slightly from
    last year's report (from 2025 to 2029) but HI spending will begin to
    exceed tax receipts by 2016. In addition, the Medicare Trustees reported
    that the HI Trust Fund is in worse long-term financial shape than the
    Social Security Trust Fund. 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.

    [[Page 107]]

      Comprehensive Measure of Medicare Solvency: Currently, there is no
    comprehensive measure of Medicare's solvency that takes into account SMI
    finances, as well as HI. This seriously underestimates the magnitude of
    the Medicare financial problem. The Medicare Trustees acknowledged this
    disconnect in their 2001 Trustees report. They stated that: ``Although
    this report focuses on the financial status of the HI Trust Fund, it is
    important to recognize the financial challenges facing the Medicare
    program as a whole and the need for integrated solutions.''
      As the Trustees report begins to show, on a combined basis Medicare
    spending will grow from 2.2 percent of GDP in 2000 to 4.5 percent in
    2030 and 8.5 percent in 2075. Sources of dedicated Medicare financing
    will rise at a slower rate, from 1.8 percent of GDP in 2000, to 2.2
    percent in 2030, and 2.5 percent in 2075. The gap in Medicare financing
    will therefore grow from 0.4 percent of GDP in 2000 to six percent of
    GDP in 2075. The Administration will work to establish a comprehensive
    measurement of solvency in order to assess the overall financial outlook
    of the Medicare program.

    Previous Medicare Reform Legislation

       The Balanced Budget Act (BBA) of 1997 improved Medicare's financial
    outlook temporarily, while the Balanced Budget Refinement Act (BBRA) of
    1999 corrected some of the unintended consequences of the BBA. The
    Beneficiary Improvement and Protection Act (BIPA) of 2000 added
    preventive benefits health care benefits, reduced beneficiary cost
    sharing, while also reducing some provider payments. Despite this
    legislative activity, the Medicare program requires additional reform to
    address its poor financial condition, and the inadequate benefits
    package, among other problems. The Administration will work with
    Congress to further modernize Medicare and integrate prescription drug
    coverage, while also strengthening the Medicare+Choice program.

    Budget Implementation

      Medicare Reform: Many improvements in Medicare's outdated structure
    are needed to increase the quality of care for seniors and the disabled,
    to streamline the burdensome and inflexible bureaucratic controls, and
    to improve the program's financing. The budget devotes $153 billion over
    10 years for Medicare modernization, including providing for a
    prescription drug benefit for all Medicare beneficiaries (see Table 13-
    2).
      The President plans to reform Medicare based on the following
    principles:
      Medicare should be modernized, to provide better coverage
              options, streamlined regulations, and higher quality of care.
      Medicare should assure that all seniors have affordable access
              to prescription drug coverage, as part of a modernized
              Medicare program.
      Medicare should provide better options for protection against
              high out-of-pocket expenses, particularly for low-income
              seniors.
      Medicare should have greater overall financial security,
              including an accurate measure of the financial status of the
              program as a whole, without raising payroll tax rates.

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                             Table 13-2.  Immediate Helping Hand and Medicare Modernization
                                            (Outlays in billions of dollars)
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                                                                  Estimate                                  Total
                                     -------------------------------------------------------------------------------
                                                                                                        2002-  2002-
                                      2001  2002  2003  2004  2005  2006  2007  2008  2009  2010  2011   2006   2011
    ----------------------------------------------------------------------------------------------------------------
    Immediate Helping Hand and           3    11    13    15    13    13    13    16    17    20    24    64    153
     Medicare Modernization.........
    ----------------------------------------------------------------------------------------------------------------

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    [[Page 108]]

      Reforming the Health Care Financing Administration (HCFA): HCFA faces
    the formidable challenge of modernizing its administrative
    infrastructure, meeting pressing statutory deadlines for program changes
    from the BBA, the BBRA, the BIPA, and the Health Insurance Portability
    and Accountability Act, and perhaps most importantly, the need to be
    highly responsive to its customers. HCFA management reform is an
    Administration priority. HCFA will undertake a major effort to modernize
    and streamline its operations to more effectively manage current
    programs and implement new legislation. The Administration will also
    examine more fundamental change in HCFA's mission and structure as part
    of this effort.
       In addition, HCFA will also work to protect the integrity of
    Medicare's payment systems without imposing burdensome new requirements
    on providers. Previous legislation authorizes 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 2000, the error rate
    was 6.8 percent, or $11.9 billion. The 2002 goal is to reduce the error
    rate to five percent.

       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 2002 goals include:
       increasing the percentage of female Medicare beneficiaries
              who receive a mammogram once every two years from 45 percent
              in 1998 to 52 percent in 2002;
       decreasing the one-year mortality rate among Medicare
              beneficiaries hospitalized for heart attacks from 31.2 percent
              in 1995 to 27.4 percent in 2002;
       reducing the prevalence of pressure ulcers (bed sores) in
              nursing homes from 9.8 percent in 2000 to 9.5 percent in 2002.
              Absence of pressure ulcers are a good indicator of quality of
              care provided by nursing home; and
       increasing the percentage of Medicare beneficiaries age 65
              and over receiving vaccinations for influenza from 59 percent
              in 1994 to 73 percent in 2002, and those receiving a lifetime
              pneumococcal vaccination from 25 percent in 1994 to 65 percent
              in 2002.