[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]


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                              13.  MEDICARE

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

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 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

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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

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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.
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