    [Economic Outlook, Highlights from FY 1994 to FY 2001, FY 2002 Baseline Projections]
    [III. Major Functions of the Federal Government]
    [13.  Medicare]
    [From the U.S. Government Printing Office, www.gpo.gov]

    [[Page 159]]

                                  13.  MEDICARE

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                                  Table 13-1.  Federal Resources in Support of Medicare
                                              (Dollar amounts in millions)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                            Percent
                                    Function 570                                     1993        2001       Change:
                                                                                    Actual     Estimate    1993-2001
    ----------------------------------------------------------------------------------------------------------------
    Spending:
      Discretionary budget authority............................................      2,829       3,372         19%
      Mandatory outlays.........................................................    127,903     218,820         71%
    ----------------------------------------------------------------------------------------------------------------

      ----------------------------------------------------------------------
      At the beginning of the Clinton-Gore Administration, Medicare was
    projected to become insolvent in 1999. Throughout the past eight years,
    the Administration proposed and secured important legislation and took
    appropriate administrative actions that strengthened the Medicare
    program and modernized it for the 21st Century. The Administration's
    stewardship of Medicare has resulted in the longest Medicare Trust Fund
    solvency in a quarter century, extending the life of the Medicare Trust
    Fund by a total of 26 years and offering beneficiary premiums that are
    nearly 20 percent lower today than projected in 1993.

    Plan to Restructure Medicare

      The Administration also proposed a new and comprehensive plan to
    strengthen and modernize Medicare for the 21st Century. The
    Administration's plan prepares the program for its upcoming health,
    demographic, and financing challenges. This initiative would: (1) make
    Medicare more competitive and efficient; (2) modernize and reform
    Medicare's benefits, including the provision of a long-overdue voluntary
    prescription drug benefit and cost-sharing protections for preventive
    benefits; and, (3) dedicate part of the non-Medicare/Social Security
    surplus to the program to extend the life of the Medicare Trust Fund as
    an alternative to beneficiary cuts or further provider reductions.

      Make Medicare More Competitive and Efficient: The Administration's
    proposal would make the traditional fee-for-service program more
    competitive through the use of market-oriented purchasing and quality
    improvement tools to improve care and constrain costs. It would provide
    new or broader authority for competitive pricing within the existing
    Medicare program, incentives for beneficiaries to use physicians who
    provide high quality care at reasonable costs, coordinated care for
    beneficiaries with chronic illnesses, and other best-practice private
    sector purchasing mechanisms. The President's competitive defined
    benefit proposal would, for the first time, inject true price
    competition among managed care plans into Medicare, which make it easier
    for beneficiaries to make informed choices about their plan options and,
    over time, save money for both beneficiaries and the program.
      Modernize Medicare's Benefits: The President's initiative would also
    modernize Medicare's benefit structure by adding a long-overdue
    voluntary outpatient prescription drug benefit. The Administration's
    proposal offers a broad-based benefit through the Medicare program. A
    broad-based benefit ensures that all Medicare beneficiaries receive a
    standard, affordable drug benefit and is the only means by which to
    provide effective assistance. This historic drug benefit has no
    deductible and pays for half of the beneficiary's drug costs from the
    first prescription filled each year up to $5,000 in spending when fully
    phased-in.

    [[Page 160]]

     This benefit also ensures that beneficiaries' liability for drug cost
    sharing is limited to $4,000. The benefit provides beneficiaries with a
    price discount similar to that offered by many employer-sponsored plans
    for each prescription purchased--even after the $5,000 limit is reached.
    The Administration's plan ensures low-income beneficiaries assistance
    with cost-sharing. The Administration estimates the costs of this
    benefit at $253 billion over 10 years.
      Extend the Life of the Trust Fund: While the President's Medicare plan
    would strengthen the program and make it more competitive and efficient,
    no amount of policy-sound savings would be sufficient to address the
    fact that the elderly population will double from almost 40 million
    today to 80 million over the next three decades. The President's
    proposal would take the Hospital Insurance (HI) Trust Fund off-budget,
    ensuring that its surpluses are not used for any other purposes and,
    therefore, will be used for debt reduction. The proposal would transfer
    the $115 billion of interest savings due to the resulting debt reduction
    to the HI Trust Fund to ensure that it remains solvent until at least
    2030.
      Without new financing, excessive and unsupportable provider payment
    cuts or beneficiary cost sharing increases would be needed. Protecting
    the Medicare surplus for Medicare is necessary in order to maintain
    solvency of the Trust Fund into the future.

    Legislative Successes

      During the last eight years the Administration advocated strongly for
    several pieces of crucial legislation that have been instrumental in
    making Medicare more efficient and extending its Trust Fund solvency
    through program reforms and increased program integrity efforts.

      The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993): The
    President proposed and later signed, on August 10, 1993, legislation
    that was the Administration's first step towards improving Medicare
    solvency. OBRA 1993 increased the percentage of Old-Age and Survivors
    and Disability Insurance benefits that are subject to the income tax,
    transferring the increased revenues to the Medicare HI Trust Fund. OBRA
    1993 also reduced the growth rates of Medicare payments to providers
    such as hospitals, skilled nursing facilities, and home health agencies.
      The Health Insurance Portability and Accountability Act of 1996
    (HIPAA):  The President also proposed and, on August 21, 1996, signed
    additional legislation, HIPAA, which created a new and stable source of
    funding to fight Medicare fraud and abuse. It provided mandatory funding
    to the Health Care Financing Administration (HCFA) for specified program
    integrity functions such as medical review and audit. It also provided
    mandatory funding for the Office of the Inspector General in the
    Department of Health and Human Services (HHS) and the Department of
    Justice for investigation and prosecution of fraudulent providers in the
    Medicare program. Since HIPAA's passage, nearly $1.6 billion in fraud
    and abuse savings has been returned to the Medicare Trust Fund.
    Moreover, the HCFA actuaries attribute some of the recent decreases in
    Medicare expenditures to certain efforts to combat fraud and abuse. The
    actuaries conclude that the Department of Justice investigations,
    subsequent indictments, and the possibility of triple damages may have
    prompted hospitals to reduce the incidence of ``up-coding'' (i.e.,
    excessive billing for hospital procedures) which has contributed to the
    increased solvency of the Medicare Trust Fund.
      HIPAA also provided the Administration with the authority to develop a
    single set of national standards for all health care providers and
    health plans that engage in electronic administrative and financial
    transactions to promote more cost-effective electronic claims processing
    and coordination of benefits. Implementation of this law will eliminate
    administratively burdensome, duplicative, and wasteful billing
    requirements for health care providers and insurers.

      The Balanced Budget Act of 1997 (BBA): In 1997, the Administration
    secured enactment of this legislation, which balanced the budget,
    modernized the Medicare program, and added at least 10 years to the life
    of the Medicare Trust Fund. The BBA included a series of structural
    reforms, bringing Medicare in line with the private sector and preparing
    it for the baby boom generation. These reforms included: 1) increased
    number of health plan

    [[Page 161]]

    options; 2) improved Medicare managed care payment methodology and
    informed beneficiary choice; 3) new prospective payment systems for
    skilled nursing facilties, home health, inpatient rehabilitation
    hospital, and hospital outpatient departments; and, 4) new private-
    sector purchasing tools such as competitive bidding for durable medical
    equipment.
      The BBA also made important changes to beneficiary services which
    include: 1) a waiver of cost-sharing for mammography services and the
    provision of annual screening mammograms for beneficiaries age 40 and
    over; 2) a diabetes self-management benefit; 3) Medicare coverage of
    colorectal screening and cervical cancer screening; 4) coverage of bone
    mass measurement tests to help women detect osteoporosis; and, 5)
    increased Medicare reimbursement rates for certain immunizations to
    protect seniors from pneumonia, influenza, and hepatitis.

      The Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of
    1999 (BBRA): After the BBA's enactment, it became clear that some of the
    payment reductions needed modification. The Administration worked to
    secure enactment of the BBRA, addressing the larger than intended cuts
    in payments to Medicare providers. Complementing the over 25 actions
    taken by the Administration to improve Medicare payment methodologies,
    the BBRA increased Medicare payments for hospitals, nursing homes, home
    health agencies, managed care plans, and other Medicare providers. The
    bill modified the hospital outpatient department prospective payment
    system by smoothing the transition for certain hospitals that are
    greatly affected by enactment of this system.
      In addition, the BBRA increased payments for rehabilitative therapy
    services, provided longer coverage of immunosuppressive drugs, and
    established limits on outpatient department coinsurance. The law altered
    HCFA's plan for risk adjustment for managed care plans by allowing for a
    five-year phase-in plan. The law also provided an entry bonus for
    managed care plans entering counties not previously served and for plans
    that had previously announced that they were withdrawing from certain
    counties.

      The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection
    Act of 2000 (BIPA): The Administration worked to secure enactment of the
    BIPA, which invests about $35 billion over five years in order to
    address some of the overly aggressive payment reductions resulting from
    the BBA of 1997 as well as other shortcomings in the Medicare program.
    The BIPA addressed the needs of health care providers by increasing
    Medicare reimbursement to hospitals, nursing homes, home health
    agencies, and other providers. The BIPA expanded the preventive benefits
    available to all Medicare beneficiaries including new nutrition therapy
    and glaucoma screening and ensured greater access to colon and cervical
    cancer screening. It reduced the cost-sharing that beneficiaries have to
    pay for hospital outpatient services; provided permanent coverage of
    drugs that help prevent the rejection of organ transplants; and
    facilitated the use of therapeutic adult day care services for persons
    with Alzheimer's disease. Finally, the BIPA established an improved
    coverage and appeals process for beneficiaries to ensure that they have
    access to the health care services they need.

    Administrative Actions

      In addition to securing important legislation, the Administration has
    used its administrative authority to improve and modernize the Medicare
    program. One of the major administrative efforts was Operation Restore
    Trust, which aimed to reduce Medicare fraud through provider and
    beneficiary awareness. Its Nursing Home Initiative, to improve the
    quality of care for Medicare beneficiaries residing in nursing homes,
    resulted in a major increase in enforcement actions. The Administration
    also launched efforts to increase beneficiaries' awareness of Medicaid's
    cost sharing assistance programs; long-term care options; and,
    preventive services including a major drive to increase the number of
    seniors receiving flu shots.
      Most significantly, the Administration took action to increase access
    to clinical trials for Medicare beneficiaries. Previously, Medicare did
    not pay for items and services related to clinical trials because of
    their experimental nature, i.e., their unknown benefits and potential
    risks to Medicare

    [[Page 162]]

    beneficiaries. The absence of Medicare coverage has been a contributing
    factor to these low participation rates by the elderly. On June 7, 2000,
    the President issued an Executive Memorandum directing the Medicare
    program to revise its payment policy and immediately begin to reimburse
    providers explicitly for the cost of routine patient care associated
    with participation in clinical trials. The President also directed HHS
    to take additional action to promote the participation of Medicare
    beneficiaries in clinical trials for all diseases, including: activities
    to increase beneficiary awareness of the new coverage option; actions to
    ensure that the information gained from important clinical trials is
    used to inform coverage decisions by properly structuring the trial; and
    reviewing the feasibility and advisability of other actions to promote
    research on issues of importance to Medicare beneficiaries.

    Medicare Management Reform

      In its 1999 Budget, the Administration introduced its management
    reform initiative to address the challenges facing HCFA. These
    challenges include modernizing its administrative infrastructure,
    meeting pressing statutory deadlines for program changes from BBA, BBRA,
    and HIPAA, and the need to be highly responsive to its customers. This
    initiative was designed to improve HCFA's management of the Medicare
    program through a continuing reform process by increasing HCFA's
    flexibility to operate as a prudent purchaser of health care while also
    increasing accountability. HCFA has evaluated its personnel needs and
    potential hiring flexibility, developed a long-term human resources
    strategic plan, increased accountability to constituencies, and
    implemented structural reforms to improve relationships between HCFA's
    central and regional offices and HHS. Additionally, the Administration
    transmitted to the Congress its contracting reform legislative proposal,
    which is designed to introduce competition into the Medicare contracting
    environment and allow HCFA to select contractors from a wider pool.
    Finally, the President's 2001 Budget also included a proposal to fund a
    contractor oversight initiative to ensure that contractors have
    appropriate controls in place. This initiative builds on HCFA's
    successes in guarding program integrity in the Medicare program.
      In summary, the Administration has taken important steps to ensure
    that the Medicare Trust Fund remains viable for coming generations
    through both legislative and administrative actions. The President has
    proposed a plan for the future of the program that is progressive and
    will modernize the program for the 21st Century. These changes are
    crucial to ensure that upcoming generations receive quality health care.