[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)
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                                                                               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
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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.