[Federal Register Volume 69, Number 174 (Thursday, September 9, 2004)]
[Notices]
[Pages 54674-54684]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-20412]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

[CMS-8020-N]
RIN: 0938-AN18


Medicare Program; Medicare Part B Monthly Actuarial Rates, 
Premium Rate, and Annual Deductible Beginning January 1, 2005

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Notice.

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SUMMARY: In accordance with section 1839 of the Social Security Act 
(the Act), this notice announces the monthly actuarial rates for aged 
(age 65 and over) and disabled (under age 65) enrollees for the Part B 
account in the Medicare Supplementary Medical Insurance (SMI) trust 
fund for 2005. It also announces the monthly Part B premium to be paid 
by enrollees during 2005. The monthly actuarial rates for 2005 are 
$156.40 for aged enrollees and $191.80 for disabled enrollees. The 
monthly Part B premium rate for 2005 is $78.20. (The 2004 premium rate 
was $66.60.) The 2005 Part B premium is equal to 50 percent of the 
monthly actuarial rate for aged enrollees, or about 25 percent of Part 
B costs for aged enrollees.

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    Section 629 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (Pub. L. 108-173, also known informally as 
the Medicare Modernization Act, or MMA) requires that the Part B 
deductible be indexed beginning in 2006. In addition, under the 
statute, the 2005 deductible is set at $110.00, an increase of $10 from 
2004. The inflation factor to be used beginning in 2006 and each year 
thereafter is the annual percentage increase in the Part B actuarial 
rate for enrollees age 65 and over. Since the Part B deductible is 
directly related to the increase in the aged actuarial rate, the 
announcement of the Part B deductible is included in this notice. The 
Part B deductible for 2005 is $110.00.

DATES: Effective January 1, 2005.

FOR FURTHER INFORMATION CONTACT: John D. Shatto, (410) 786-0706.

SUPPLEMENTARY INFORMATION:

I. Background

    Part B is the voluntary portion of the Medicare program that pays 
all or part of the costs for physicians' services, outpatient hospital 
services, certain home health services, services furnished by rural 
health clinics, ambulatory surgical centers, comprehensive outpatient 
rehabilitation facilities, and certain other medical and health 
services not covered by hospital insurance (HI, or Medicare Part A). 
Medicare Part B is available to individuals who are entitled to HI, as 
well as to U.S. residents who have attained age 65 and are citizens, 
and aliens who were lawfully admitted for permanent residence and have 
resided in the United States for 5 consecutive years. Part B requires 
enrollment and payment of monthly premiums, as provided for in 42 CFR 
part 407, subpart B, and part 408, respectively. The difference between 
the premiums paid by all enrollees and total incurred costs is met from 
the general revenues of the Federal Government.
    The Secretary of the Department of Health and Human Services (the 
Secretary) is required by section 1839 of the Social Security Act (the 
Act) to issue two annual notices relating to Part B.
    One notice announces two amounts that, according to actuarial 
estimates, will equal, respectively, one-half the expected average 
monthly cost of Part B for each aged enrollee (age 65 or over) and one-
half the expected average monthly cost of Part B for each disabled 
enrollee (under age 65) during the year beginning the following 
January. These amounts are called ``monthly actuarial rates.'' Also 
included in this notice, beginning this year, is the announcement of 
the Part B deductible to be paid by enrollees for the year beginning 
the following January.
    The second notice announces the monthly Part B premium rate to be 
paid by aged and disabled enrollees for the year beginning the 
following January. (Although the costs to the program per disabled 
enrollee are different than for the aged, the statute provides that 
they pay the same premium amount.) Beginning with the passage of 
section 203 of the Social Security Amendments of 1972 (Pub. L. 92-603), 
the premium rate, which was determined on a fiscal year basis, was 
limited to the lesser of the actuarial rate for aged enrollees, or the 
current monthly premium rate increased by the same percentage as the 
most recent general increase in monthly Title II social security 
benefits.
    However, the passage of section 124 of the Tax Equity and Fiscal 
Responsibility Act of 1982 (TEFRA) (Pub. L. 97-248) suspended this 
premium determination process. Section 124 of TEFRA changed the premium 
basis to 50 percent of the monthly actuarial rate for aged enrollees 
(that is, 25 percent of program costs for aged enrollees). Section 606 
of the Social Security Amendments of 1983 (Pub. L. 98-21), section 2302 
of the Deficit Reduction Act of 1984 (DEFRA '84) (Pub. L. 98-369), 
section 9313 of the Consolidated Omnibus Budget Reconciliation Act of 
1985 (COBRA '85) (Pub. L. 99-272), section 4080 of the Omnibus Budget 
Reconciliation Act of 1987 (OBRA '87) (Pub. L. 100-203), and section 
6301 of the Omnibus Budget Reconciliation Act of 1989 (OBRA '89) (Pub. 
L. 101-239) extended the provision that the premium be based on 50 
percent of the monthly actuarial rate for aged enrollees (that is, 25 
percent of program costs for aged enrollees). This extension expired at 
the end of 1990.
    The premium rate for 1991 through 1995 was legislated by section 
1839(e)(1)(B) of the Act, as added by section 4301 of the Omnibus 
Budget Reconciliation Act of 1990 (OBRA '90) (Pub. L. 101-508). In 
January 1996, the premium determination basis would have reverted to 
the method established by the 1972 Social Security Act Amendments. 
However, section 13571 of the Omnibus Budget Reconciliation Act of 1993 
(OBRA '93) (Pub. L. 103-66) changed the premium basis to 50 percent of 
the monthly actuarial rate for aged enrollees (that is, 25 percent of 
program costs for aged enrollees) for 1996 through 1998.
    Section 4571 of the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-
33) permanently extended the provision that the premium be based on 50 
percent of the monthly actuarial rate for aged enrollees (that is, 25 
percent of program costs for aged enrollees).
    The BBA included a further provision affecting the calculation of 
the Part B actuarial rates and premiums for 1998 through 2003. Section 
4611 of the BBA modified the home health benefit payable under Part A 
for individuals enrolled in Part B. Under this section, expenditures 
for home health services not considered ``post-institutional'' are 
payable under Part B rather than Part A, beginning in 1998. However, 
section 4611(e)(1) of the BBA required that there be a transition from 
1998 through 2002 for the aggregate amount of the expenditures 
transferred from Part A to Part B. Section 4611(e)(2) of the BBA also 
provided a specific yearly proportion for the transferred funds. The 
proportions were \1/6\, for 1998, \1/3\ for 1999, \1/2\ for 2000, \2/3\ 
for 2001, and \5/6\ for 2002. For the purpose of determining the 
correct amount of financing from general revenues of the Federal 
Government, it was necessary to include only these transitional amounts 
in the monthly actuarial rates for both aged and disabled enrollees, 
rather than the total cost of the home health services being 
transferred. Accordingly, the actuarial rates shown in this 
announcement for CY 2002 in tables 3 and 4 reflect the net transitional 
cost only.
    Section 4611(e)(3) of the BBA also specified, for the purpose of 
determining the premium, that the monthly actuarial rate for enrollees 
age 65 and over be computed as though the transition would occur for 
1998 through 2003 and that \1/7\ of the cost be transferred in 1998, 
\2/7\ in 1999, \3/7\ in 2000, \4/7\ in 2001, \5/7\ in 2002, and \6/7\ 
in 2003. Therefore, the transition period for incorporating this home 
health transfer into the premium was 7 years while the transition 
period for including these services in the actuarial rate was 6 years.
    Section 1933(c) of the Act, as added by section 4732(c) of the BBA, 
required the Secretary to allocate money from the Part B trust fund to 
the State Medicaid programs for the purpose of providing Medicare Part 
B premium assistance from 1998 through 2002 for the low-income Medicaid 
beneficiaries who qualify under section 1933. This allocation, while 
not a benefit expenditure, was an expenditure of the trust fund and was 
included in calculating the Part B actuarial rates through 2002. For 
2003 and 2004, the expenditure was made from the trust fund because the 
allocation was temporarily extended. However, because the extension 
occurred after the

[[Page 54676]]

financing was determined, the allocation was not included in the 
calculation of the financing rates.
    As determined according to section 1839(a)(3) of the Act and 
section 4611(e)(3) of the BBA, the premium rate for 2005 is $78.20.
    A further provision affecting the calculation of the Part B premium 
is section 1839(f) of the Act, as amended by section 211 of the 
Medicare Catastrophic Coverage Act of 1988 (MCCA '88) (Pub. L. 100-
360). (The Medicare Catastrophic Coverage Repeal Act of 1989 (Pub. L. 
101-234) did not repeal the revisions to section 1839(f) made by MCCA 
`88.) Section 1839(f), referred to as the hold-harmless provision, 
provides that if an individual is entitled to benefits under section 
202 or 223 of the Act (the Old-Age and Survivors Insurance Benefit and 
the Disability Insurance Benefit, respectively) and has the Part B 
premiums deducted from these benefit payments, the premium increase 
will be reduced, if necessary, to avoid causing a decrease in the 
individual's net monthly payment. This decrease in payment occurs if 
the increase in the individual's social security benefit due to the 
cost-of-living adjustment under section 215(i) of the Act is less than 
the increase in the premium. Specifically, the reduction in the premium 
amount applies if the individual is entitled to benefits under section 
202 or 223 of the Act for November and December of a particular year 
and the individual's Part B premiums for December and the following 
January are deducted from the respective month's section 202 or 223 
benefits.
    A check for benefits under section 202 or 223 of the Act is 
received in the month following the month for which the benefits are 
due. The Part B premium that is deducted from a particular check is the 
Part B payment for the month in which the check is received. Therefore, 
a benefit check for November is not received until December, but has 
December's Part B premium deducted from it.
    Generally, if a beneficiary qualifies for hold-harmless protection-
that is, if the beneficiary was in current payment status for November 
and December of the previous year--the reduced premium for the 
individual for that January and for each of the succeeding 11 months 
for which he or she is entitled to benefits, under section 202 or 203 
of the Act, is the greater of the following:
    (1) The monthly premium for January reduced as necessary to make 
the December monthly benefits, after the deduction of the Part B 
premium for January, at least equal to the preceding November's monthly 
benefits, after the deduction of the Part B premium for December; or
    (2) The monthly premium for that individual for that December.
    In determining the premium limitations under section 1839(f) of the 
Act, the monthly benefits to which an individual is entitled under 
section 202 or 223 of the Act do not include retroactive adjustments or 
payments and deductions on account of work. Also, once the monthly 
premium amount is established under section 1839(f) of the Act, it will 
not be changed during the year even if there are retroactive 
adjustments or payments and deductions on account of work that apply to 
the individual's monthly benefits.
    Individuals who have enrolled in Part B late or who have reenrolled 
after the termination of a coverage period are subject to an increased 
premium under section 1839(b) of the Act. The increase is a percentage 
of the premium and is based on the new premium rate before any 
reductions under section 1839(f) are made.

II. Notice of Medicare Part B Monthly Actuarial Rates, Monthly Premium 
Rate, and Annual Deductible

    The Medicare Part B monthly actuarial rates applicable for 2005 are 
$156.40 for enrollees age 65 and over, and $191.80 for disabled 
enrollees under age 65. Section III of this notice presents the 
actuarial assumptions and bases from which these rates are derived. The 
Part B monthly premium rate will be $78.20 during 2005. The Part B 
deductible for 2005 is $110.00.

III. Statement of Actuarial Assumptions and Bases Employed in 
Determining the Monthly Actuarial Rates and the Monthly Premium Rate 
for Part B Beginning January 2005

A. Actuarial Status of the Part B Account in the Supplementary Medical 
Insurance Trust Fund

    Under the statute, the starting point for determining the monthly 
premium is the amount that would be necessary to finance Part B on an 
incurred basis. This is the amount of income that would be sufficient 
to pay for services furnished during that year (including associated 
administrative costs) even though payment for some of these services 
will not be made until after the close of the year. The portion of 
income required to cover benefits not paid until after the close of the 
year is added to the trust fund and used when needed.
    The rates are established prospectively and are, therefore, subject 
to projection error. Additionally, legislation enacted after the 
financing was established, but effective for the period in which the 
financing is set, may affect program costs. As a result, the income to 
the program may not equal incurred costs. Therefore, trust fund assets 
must be maintained at a level that is adequate to cover a moderate 
degree of variation between actual and projected costs, and the amount 
of incurred, but unpaid, expenses. Numerous factors determine what 
level of assets is appropriate to cover a moderate degree of variation 
between actual and projected costs. The two most important of these 
factors are: (1) the difference from prior years between the actual 
performance of the program and estimates made at the time financing was 
established, and (2) the expected relationship between incurred and 
cash expenditures. Both factors are analyzed on an ongoing basis, as 
the trends vary over time.
    Table 1 summarizes the estimated actuarial status of the trust fund 
as of the end of the financing period for 2003 and 2004.

 Table 1.--Estimated Actuarial Status of the Part B Account in the Supplementary Medical Insurance Trust Fund as
                                       of the End of the Financing Period
                                            [In millions of dollars]
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                                                                                                    Assets less
                     Financing period ending                          Assets        Liabilities     liabilities
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Dec. 31, 2003...................................................         $23,953          $7,322         $16,631
Dec. 31, 2004...................................................          20,327           7,414          12,913
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[[Page 54677]]

B. Monthly Actuarial Rate for Enrollees Age 65 and Older

    The monthly actuarial rate for enrollees age 65 and older is one-
half of the sum of monthly amounts for (1) the projected cost of 
benefits, and (2) administrative expenses for each enrollee age 65 and 
older, after adjustments to this sum to allow for interest earnings on 
assets in the trust fund and an adequate contingency margin. The 
contingency margin is an amount appropriate to provide for a moderate 
degree of variation between actual and projected costs and to amortize 
any surplus or unfunded liabilities.
    The monthly actuarial rate for enrollees age 65 and older for 2005 
is determined by first establishing per-enrollee cost by type of 
service from program data through 2003 and then projecting these costs 
for subsequent years. The projection factors used for financing periods 
from January 1, 2002 through December 31, 2005 are shown in table 2.
    As indicated in table 3, the projected monthly rate required to pay 
for one-half of the total of benefits and administrative costs for 
enrollees age 65 and over for 2005 is $152.25. The monthly actuarial 
rate of $156.40 also provides an adjustment of -$2.00 for interest 
earnings and $6.15 for a contingency margin. Based on current 
estimates, the assets are not sufficient to cover the amount of 
incurred, but unpaid, expenses and to provide for a moderate degree of 
variation between actual and projected costs. Thus, a positive 
contingency margin is needed to increase assets to a more appropriate 
level. This situation has arisen primarily due to the enactment of (1) 
the Consolidated Appropriations Resolution (Pub. L. 108-7) in February 
2003, and (2) the Medicare Modernization Act (Pub. L. 108-173) in 
December 2003. Each of these two legislative packages was enacted after 
the establishment of the Part B premium (for 2003 and 2004, 
respectively). Because each act raised Part B expenditures subsequent 
to the setting of the premium, total Part B revenues from premiums and 
general fund transfers have been inadequate to cover total costs. As a 
consequence, the assets of the Part B account in the Supplementary 
Medical Insurance trust fund have been drawn on to cover the shortfall, 
and the remaining level of assets is inadequate for contingency 
purposes.
    The contingency margin included in establishing the 2005 actuarial 
rate and beneficiary premiums takes a first step towards restoring the 
assets to an adequate level. In an effort to balance the financial 
integrity of the Part B account with the increase in the Part B 
premium, the financing rates for 2005 are set to increase the asset 
level in the Part B account about halfway towards the fully adequate 
level, with the expectation that future financing rates will need to 
include contingency margins to fully restore the assets.

C. Monthly Actuarial Rate for Disabled Enrollees

    Disabled enrollees are those persons under age 65 who are enrolled 
in Part B because of entitlement to disability benefits for more than 
24 months or because of entitlement to Medicare under the end-stage 
renal disease (ESRD) program. Projected monthly costs for disabled 
enrollees (other than those with ESRD) are prepared in a fashion 
parallel to the projection for the aged using appropriate actuarial 
assumptions (see table 2). Costs for the ESRD program are projected 
differently because of the different nature of services offered by the 
program.
    As shown in table 4, the projected monthly rate required to pay for 
one-half of the total of benefits and administrative costs for disabled 
enrollees for 2005 is $175.13. The monthly actuarial rate of $191.80 
also provides an adjustment of -$2.13 for interest earnings and $18.80 
for a contingency margin. Based on current estimates, the assets 
associated with the disabled Medicare beneficiaries are not sufficient 
to cover the amount of incurred, but unpaid, expenses and to provide 
for a moderate degree of variation between actual and projected costs. 
Thus, a positive contingency margin is needed to increase assets to a 
more appropriate level.

D. Sensitivity Testing

    Several factors contribute to uncertainty about future trends in 
medical care costs. It is appropriate to test the adequacy of the rates 
using alternative assumptions. The results of those assumptions are 
shown in table 5. One set represents increases that are lower and, 
therefore, more optimistic than the current estimate. The other set 
represents increases that are higher and, therefore, more pessimistic 
than the current estimate. The values for the alternative assumptions 
were determined from a statistical analysis of the historical variation 
in the respective increase factors.
    Table 5 indicates that, under the assumptions used in preparing 
this report, the monthly actuarial rates would result in an excess of 
assets over liabilities of $21,802 million by the end of December 2005. 
This amounts to 14.0 percent of the estimated total incurred 
expenditures for the following year. Assumptions that are somewhat more 
pessimistic (and that therefore test the adequacy of the assets to 
accommodate projection errors) produce a surplus of $9,410 million by 
the end of December 2005, which amounts to 5.4 percent of the estimated 
total incurred expenditures for the following year. Under fairly 
optimistic assumptions, the monthly actuarial rates would result in a 
surplus of $33,315 million by the end of December 2005, or 23.7 percent 
of the estimated total incurred expenditures for the following year.

E. Premium Rate

    As determined by section 1839(a)(3) of the Act, the monthly premium 
rate for 2005, for both aged and disabled enrollees, is $78.20.

F. Deductible

    As specified by section 1833(b) of the Act, the annual deductible 
for 2005 is $110.00.

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IV. Regulatory Impact Analysis

    We have examined the impact of this notice as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review) and the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354). 
Executive Order 12866 directs agencies to assess all costs and benefits 
of available regulatory alternatives and, if regulation is necessary, 
to select regulatory approaches that maximize net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity).
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most hospitals and most other providers and suppliers are small 
entities, either by nonprofit status or by having revenues of $6 
million to $29 million in any 1-year (65 FR 69432). For purposes of the 
RFA, States and individuals are not considered to be small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. We have determined that 
this notice will not have a significant effect on a substantial number 
of small entities or on the operations of a substantial number of small 
rural hospitals. Therefore, we are not preparing analyses for either 
the RFA or section 1102(b) of the Act.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in expenditure in any 1 year by State, 
local, or tribal governments, in the aggregate, or by the private 
sector, of $110 million. This notice has no consequential effect on 
State, local, or tribal governments. We believe the private sector 
costs of this notice fall below this threshold as well.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct compliance costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. We have determined that this notice does not 
significantly affect the rights, roles, and responsibilities of States.
    This notice announces that the monthly actuarial rates applicable 
for 2005 are $156.40 for enrollees age 65 and over and $191.80 for 
disabled enrollees under age 65. It also announces that the monthly 
Part B premium rate for calendar year 2005 is $78.20 and that the Part 
B deductible for calendar year 2005 is $110.00. The Part B premium rate 
of $78.20 is 17.4 percent higher than the $66.60 premium rate for 2004. 
We estimate that this increase will cost the approximately 40 million 
Part B enrollees about $5.5 billion for 2005. Therefore, this notice is 
a major rule as defined in Title 5, United States Code, section 804(2) 
and is an economically significant rule under Executive Order 12866.
    In accordance with the provisions of Executive Order 12866, this 
notice was reviewed by the Office of Management and Budget.

V. Waiver of Proposed Notice

    The Medicare statute requires the publication of the monthly 
actuarial rates and the Part B premium amounts in September. We 
ordinarily use general notices, rather than notice and comment 
rulemaking procedures, to make such announcements. In doing so, we note 
that, under the Administrative Procedure Act, interpretive rules, 
general statements of policy, and rules of agency organization, 
procedure, or practice are excepted from the requirements of notice and 
comment rulemaking.
    We considered publishing a proposed notice to provide a period for 
public comment. However, we may waive that procedure if we find, for 
good cause, that prior notice and comment are impracticable, 
unnecessary, or contrary to the public interest. We find that the 
procedure for notice and comment is unnecessary because the formula 
used to calculate the Part B premium is statutorily directed, and we 
can exercise no discretion in applying that formula. Moreover, the 
statute establishes the time period for which the premium rates will 
apply, and delaying publication of the Part B premium rate such that it 
would not be published before that time would be contrary to the public 
interest. Therefore, we find good cause to waive publication of a 
proposed notice and solicitation of public comments.

(Section 1839 of the Social Security Act; 42 U.S.C. 1395r)

(Catalog of Federal Domestic Assistance Program No. 93.774, 
Medicare--Supplementary Medical Insurance)

    Dated: August 30, 2004.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services

    Dated: September 1, 2004.
Tommy G. Thompson,
Secretary.
[FR Doc. 04-20412 Filed 9-3-04; 5:00 pm]
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