[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Program Descriptions]
[Section 2. Medicare]
[From the U.S. Government Printing Office, www.gpo.gov]


[1998 Green Book] SECTION 2. MEDICARE

                               CONTENTS

Overview
Eligibility and Coverage
  Aged
  Disabled
  Number of Beneficiaries
Benefits and Beneficiary Cost Sharing
  Part A
  Part B
Financing
  Hospital Insurance Trust Fund--Income
  Supplementary Medical Insurance Trust Fund--Income
  Financial Status of Hospital Insurance Trust Fund
  Financial Status of Supplementary Medical Insurance Trust 
            Fund
  Comparison of Medicare Lifetime Benefits with Beneficiary 
            Contributions
Part A Services--Coverage and Payments
  Inpatient Hospital Services
  Skilled Nursing Facility Services
  Home Health Services
  Hospice Services
Part B Services--Coverage and Payments
  Physicians Services
  Services of Nonphysician Practitioners
  Clinical Laboratory Services
  Durable Medical Equipment and Prosthetics and Orthotics
  Hospital Outpatient Department Services
  Ambulatory Surgical Center Services
  Other Part B Services
End-Stage Renal Disease Services
  Coverage
  Reimbursement
Private Health Plans in Medicare
  Plan Options and Rules for Enrollment Before the Balanced 
            Budget Act of 1997
  Trends in Plan Availability and Enrollment
  Plan Options and Rules for Enrollment in Medicare+ Choice
  Payments to Plans Through 1997
  Medicare+Choice Payments to Plans
  County Payment Rates, 1997-2003
  Adjusted Community Rate (ACR)
  Required Noncovered Services
  Additional Benefits and Premiums in the Medicare Risk Program
  Beneficiary Protections
  Plan Standards
  Demonstrations Authorized by the Balanced Budget Act
Selected Issues
  Utilization and Quality Control Peer Review Organizations
  Secondary Payer
  Supplementing Medicare Coverage
  Qualified Medicare Beneficiaries (QMBs)
Legislative History, 1980-97
CBO Savings and Revenue Estimates for Budget Reconciliation 
        Acts, 1981-93
Medicare Historical Data
References

                                OVERVIEW

    Medicare is a nationwide health insurance program for the 
aged and certain disabled persons. The program consists of two 
parts--part A; hospital insurance and part B, supplementary 
medical insurance. Total program outlays were $194.2 billion in 
fiscal year 1996. Net outlays after deduction of beneficiary 
premiums were $174.2 billion.

                                Coverage

    Almost all persons over age 65 are automatically entitled 
to Medicare part A. Part A also provides coverage, after a 24-
month waiting period, for persons under age 65 who are 
receiving Social Security cash benefits on the basis of 
disability. Most persons who need a kidney transplant or renal 
dialysis may also be covered, regardless of age. In fiscal year 
1997, part A covered an estimated 38.1 million aged and 
disabled persons (including those with chronic kidney disease).
    Medicare part B is voluntary. All persons over age 65 and 
all persons enrolled in part A may enroll in part B by paying a 
monthly premium--$43.80 in 1997 and 1998. In fiscal year 1997, 
part B covered an estimated 36.5 million aged and disabled 
persons.

                                Benefits

    Part A provides coverage for inpatient hospital services, 
up to 100 days of posthospital skilled nursing facility (SNF) 
care, home health services, and hospice care. Patients must pay 
a deductible ($760 in 1997 and $764 in 1998) each time their 
hospital admission begins a benefit period. (A benefit period 
begins when a patient enters a hospital and ends when she has 
not been in a hospital or SNF for 60 days.) Medicare pays the 
remaining costs for the first 60 days of hospital care. The 
limited number of beneficiaries requiring care beyond 60 days 
are subject to additional charges. Patients requiring SNF care 
are subject to a daily coinsurance charge for days 21-100 ($95 
in 1997 and $95.50 in 1998). There are no cost-sharing charges 
for home health care and limited charges for hospice care.
    Part B provides coverage for physicians' services, 
laboratory services, durable medical equipment, outpatient 
hospital services, and other medical services. The program 
generally pays 80 percent of Medicare's fee schedule or other 
approved amount after the beneficiary has met the annual $100 
deductible. The beneficiary is liable for the remaining 20 
percent.

                         Payments for Services

    Taken together, spending for inpatient hospital and 
physicians' and related services accounts for close to 70 
percent of Medicare benefit payments. Medicare makes payments 
for inpatient hospital services under a prospective payment 
system (PPS); a predetermined rate is paid for each inpatient 
stay based on the patient's admitting diagnosis. Payment for 
physicians' services is made on the basis of a fee schedule. 
Specific payment rules are also used for other services.

                             Administration

    Medicare is administered by the Health Care Financing 
Administration (HCFA) within the Department of Health and Human 
Services (DHHS). Much of the day-to-day work of reviewing 
claims and making payments is done by intermediaries (for part 
A) and carriers (for part B). These are generally commercial 
insurers or Blue Cross Blue Shield plans.

                               Financing

    Medicare part A is financed primarily through the hospital 
insurance (HI) payroll tax levied on current workers and their 
employers. Employers and employees each pay a tax of 1.45 
percent on all earnings. The self-employed pay a single tax of 
2.9 percent on earnings.
    Part B is financed through a combination of monthly 
premiums levied on program beneficiaries and Federal general 
revenues. In 1997 and 1998, the premium is $43.80. Beneficiary 
premiums have generally represented about 25 percent of part B 
costs; Federal general revenues (that is, tax dollars) account 
for the remaining 75 percent.

                            Federal Outlays

    Total program outlays were $194.2 billion in fiscal year 
1996. Net outlays (that is, net of premiums beneficiaries pay 
for enrollment, largely for part B) were $174.2 billion.
    Tables 2-1, 2-2, and 2-3 provide historical spending and 
coverage data for Medicare. Table 2-4 provides State-by-State 
information for fiscal year 1996.

                              TABLE 2-1.--MEDICARE OUTLAYS, FISCAL YEARS 1967-2007                              
                                            [In millions of dollars]                                            
----------------------------------------------------------------------------------------------------------------
                                                                                                        Percent 
                                                                        Total     Medicare     Net      increase
                  Fiscal year                     Part A     Part B    Medicare   premium    Medicare    (over  
                                                                       outlays    offsets    outlays     prior  
                                                                                                         year)  
----------------------------------------------------------------------------------------------------------------
1967..........................................     $2,597       $798     $3,395     ($647)     $2,748  .........
1968..........................................      3,815      1,532      5,347      (698)      4,649       69.2
1969..........................................      4,758      1,840      6,598      (903)      5,695       22.5
1970..........................................      4,953      2,196      7,149      (936)      6,213        9.1
1971..........................................      5,592      2,283      7,875    (1,253)      6,622        6.6
1972..........................................      6,276      2,544      8,820    (1,340)      7,480       13.0
1973..........................................      6,842      2,637      9,479    (1,427)      8,052        7.6
1974..........................................      8,065      3,283     11,348    (1,708)      9,640       19.7
1975..........................................     10,612      4,170     14,782    (1,907)     12,875       33.6
1976..........................................     12,579      5,200     17,779    (1,945)     15,834       23.0
TQ............................................      3,404      1,401      4,805      (541)      4,264         NA
1977..........................................     15,207      6,342     21,549    (2,204)     19,345         NA
1978..........................................     17,862      7,350     25,212    (2,443)     22,769       17.7
1979..........................................     20,343      8,805     29,148    (2,653)     26,495       16.4
1980..........................................     24,288     10,746     35,034    (2,945)     32,089       21.1
1981..........................................     29,248     13,240     42,488    (3,340)     39,148       22.0
1982..........................................     34,864     15,559     50,423    (3,856)     46,567       19.0
1983..........................................     38,551     18,317     56,868    (4,253)     52,615       13.0
1984..........................................     42,295     20,374     62,669    (4,942)     57,727        9.7
1985..........................................     48,667     22,730     71,397    (5,562)     65,835       14.0
1986..........................................     49,685     26,217     75,902    (5,739)     70,163        6.6
1987..........................................     50,803     30,837     81,640    (6,520)     75,120        7.1
1988..........................................     52,730     34,947     87,677    (8,798)     78,879        5.0
1989..........................................     58,238     38,316     96,554   (11,590)     84,964        7.7
1990..........................................     66,687     43,022    109,709   (11,607)     98,102       15.5
1991..........................................     70,742     47,021    117,763   (12,174)    105,589        7.6
1992..........................................     81,971     50,285    132,256   (13,232)    119,024       12.7
1993..........................................     91,604     54,254    145,858   (15,305)    130,553        9.7
1994..........................................    102,770     59,724    162,494   (17,747)    144,747       10.9
1995..........................................    114,883     65,213    180,096   (20,241)    159,855       10.4
1996..........................................    125,300     68,946    194,246   (20,088)    174,158        8.9
1997 \1\......................................      136.1       72.7      208.8     (20.2)      188.6        8.3
1998 \1\......................................      141.1       79.6      220.7     (21.2)      199.5        5.8
1999 \1\......................................      144.6       88.8      233.4     (23.4)      210.0        5.3
2000 \1\......................................      147.9       98.4      246.3     (25.8)      220.4        5.0
2001 \1\......................................      156.7      112.8      269.5     (28.6)      241.0        9.3
2002 \1\......................................      157.9      121.0      278.9     (31.8)      247.1        2.5
2003 \1\......................................      168.6      138.5      307.0     (35.5)      271.6        9.9
2004 \1\......................................      178.8      154.3      333.1     (39.8)      293.4        8.0
2005 \1\......................................      195.6      174.2      369.8     (44.2)      325.6       11.0
2006 \1\......................................      200.7      182.8      383.5     (48.7)      334.8        2.8
2007 \1\......................................      219.8      207.7      427.5     (53.5)      374.0       11.7
----------------------------------------------------------------------------------------------------------------
\1\ CBO projections (excludes discretionary spending; in billions of dollars).                                  
                                                                                                                
Note.--Totals may not add due to rounding. TQ = transitional quarter.                                           
                                                                                                                
Source: Office of the President, 1997.                                                                          


                    TABLE 2-2.--NUMBER OF AGED AND DISABLED ELIGIBLE ENROLLEES AND BENEFICIARIES, AND AVERAGE MEDICARE BENEFIT PAYMENTS PER ENROLLEE, SELECTED YEARS 1975-99                    
                                                                                  [Beneficiaries in thousands]                                                                                  
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                                       Projected
                                                                                                                                                                  Average    Average    average 
                                                       1975      1980      1985      1990      1994      1995       1996        1997        1998        1999       annual     annual     annual 
                    Fiscal year                      (actual)  (actual)  (actual)  (actual)  (actual)  (actual)  (est.) \1\  (est.) \1\  (est.) \1\  (est.) \1\    growth     growth     growth 
                                                                                                                                                                  1975-85    1985-95    1995-99 
                                                                                                                                                                 (percent)  (percent)  (percent)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                       Part A                                                                                                                                                                   
                                                                                                                                                                                                
Persons enrolled (monthly average):                                                                                                                                                             
    Aged...........................................    21,795    24,571    27,121    30,050    32,233    32,650     32,925      33,114      33,312      33,521         2.2        1.9        0.7
    Disabled.......................................     2,047     2,967     2,943     3,313     4,181     4,489      4,750       5,003       5,249       5,504         3.7        4.3        5.2
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................    23,842    27,538    30,064    33,363    36,414    37,139     37,675      38,117      38,561      39,025         2.3        2.1        1.2
                                                    ============================================================================================================================================
Beneficiaries receiving reimbursed services:                                                                                                                                                    
    Aged...........................................     4,906     5,943     6,168     6,314     7,010     7,080      7,170       7,250       7,340       7,430         2.3        1.4        1.2
    Disabled.......................................       456       721       672       675       862       920        975       1,035       1.090       1,150         4.0        3.2        5.7
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................     5,362     6,664     6,840     6,989     7,872     8,000      8,145       8,285       8,430       8,580         2.5        1.6        1.8
                                                    ============================================================================================================================================
Average annual benefit per person enrolled: \2\ \3\                                                                                                                                             
    Aged...........................................      $432      $853    $1,563    $1,947    $2,794    $3,078     $3,323      $3,616      $3,876      $4,151        13.7        7.0        7.8
    Disabled.......................................       460       948     1,809     2,176     2,700     2,874      3,054       3,256       3,442       3,638        14.7        4.7        6.1
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................       434       863     1,587     1,970     2,783     3,053      3,289       3,569       3,817       4,079        13.8        6.8        7.5
                                                    ============================================================================================================================================
                       Part B                                                                                                                                                                   
                                                                                                                                                                                                
Persons enrolled (average):                                                                                                                                                                     
    Aged...........................................    21,504    24,422    27,049    29,426    31,335    31,622     31,891      32,177      32,361      32,547         2.3        1.6        0.7
    Disabled.......................................     1,835     2,698     2,672     2,907     3,638     3,874      4,087       4,304       4,545       4,780         3.8        3.8        5.4
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................    23,339    27,120    29,721    32,333    34,973    35,496     35,978      36,481      36,906      37,327         2.4        1.8        1.3
                                                    ============================================================================================================================================
Beneficiaries receiving reimbursed services:                                                                                                                                                    
    Aged...........................................    11,311    16,034    20,199    23,820    26,118    26,681     27,044      27,544      27,952      28,332         6.0        2.8        1.5
    Disabled.......................................       797     1,669     1,933     2,184     2,867     3,093      3,289       3,503       3,733       3,962         9.3        4.8        6.4
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................    12,108    17,703    22,132    26,004    28,985    29,774     30,333      31,047      31,685      32,294         6.2        3.0        2.1
                                                    ============================================================================================================================================
Average annual benefit per person enrolled: \2\                                                                                                                                                 
    Aged...........................................      $153      $348      $705    $1,250    $1,601    $1,728     $1,797      $2,011      $2,197      $2,410        16.5        9.4        8.7
    Disabled.......................................       259       610     1,022     1,603     2,154     2,282      2,408       2,370       2,500       2,657        14.7        8.4        3.9
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................       161       374       734     1,282     1,658     1,788      1,867       2,054       2,234       2,441        16.4        9.3       8.1 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Represents projections of current law. Does not include legislative proposals.    \2\ Does not include administrative cost.    \3\ Includes part A catastrophic benefits in fiscal year     
  1990.                                                                                                                                                                                         
                                                                                                                                                                                                
Source: Health Care Financing Administration, Division of Budget.                                                                                                                               


                                             TABLE 2-3.--BENEFIT PAYMENTS BY SERVICE UNDER MEDICARE PART A AND PART B, SELECTED FISCAL YEARS 1975-98                                            
                                                                                      [Dollars in millions]                                                                                     
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  1975               1980               1985               1990                1995           1998 (est.) \1\         Average annual growth     
                                           ---------------------------------------------------------------------------------------------------------------------            (percent)           
                                                                                                                                                                --------------------------------
                                            Percent   Amount  Percent   Amount   Percent   Amount    Percent   Amount    Percent   Amount    Percent    Amount    1975-85    1985-95    1995-98 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                  Part A                                                                                                                                                                        
                                                                                                                                                                                                
Inpatient hospital services...............     70.5   $9,947     67.4   $22,860     65.0   $45,218      55.3   $59,285      49.4   $87,441      47.6   $109,299       16.3        6.8        7.7
Skilled nursing facility services.........      1.9      273      1.2       392      0.8       550       2.6     2,821       5.1     9,104       6.0     13,779        7.3       32.4       14.8
Home health services......................      0.9      133      1.5       524      2.7     1,908       3.1     3,297       8.5    14,995       9.5     21,879       30.5       22.9       13.4
Hospice services..........................        0        0        0         0        0        34       0.3       318       1.0     1,854       1.0      2,214         NA       49.2        6.1
                                           -----------------------------------------------------------------------------------------------------------------------------------------------------
    Total benefit payments................     73.3   10,353     70.1    23,776     68.6    47,710      61.3    65,721      64.1   113,394      64.1    147,171       16.5        9.0        9.1
                                           =====================================================================================================================================================
                  Part B                                                                                                                                                                        
                                                                                                                                                                                                
Physician services \2\....................     21.7    3,067     23.0     7,813     24.1    16,788      27.0    28,922      22.8    40,376      20.2     46,325       18.5        9.2        4.7
Outpatient services.......................      3.7      529      5.3     1,803      5.6     3,917       7.8     8,365       8.2    14,576       8.7     19,902       22.2       14.0       10.9
Other medical and health services.........      1.2      169      1.6       528      1.6     1,103       3.9     4,165       4.8     8,530       7.1     16,229       20.6       22.7       23.9
                                           -----------------------------------------------------------------------------------------------------------------------------------------------------
    Total benefit payments................     26.7    3,765     29.9    10,144     31.4    21,808      38.7    41,452      35.9    63,482      35.9     82,456       19.2       11.3        9.1
                                           =====================================================================================================================================================
        Total parts A and B...............    100.0   14,118    100.0    33,920    100.0    69,518     100.0   107,173     100.0   176,876     100.0    229,627       17.3        9.8        9.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Represents law in effect prior to enactment of the Balanced Budget Act of 1997.    \2\ Includes other services.                                                                             
                                                                                                                                                                                                
NA--Not available.                                                                                                                                                                              
                                                                                                                                                                                                
Note.--Totals may not add due to rounding.                                                                                                                                                      
                                                                                                                                                                                                
Source: Health Care Financing Administration, Division of Budget.                                                                                                                               


                   TABLE 2-4.--MEDICARE ESTIMATED BENEFIT PAYMENTS BY STATE, FISCAL YEAR 1996                   
----------------------------------------------------------------------------------------------------------------
                                                                     Medicare                        Estimated  
                                                                     estimated     HI and/or SMI      benefit   
                              State                                   benefit        Medicare      payments per 
                                                                   payments \1\   enrollment \2\     enrollee   
----------------------------------------------------------------------------------------------------------------
Alabama.........................................................      $3,349,478         650,941          $5,146
Alaska..........................................................         155,548          35,281           4,409
Arizona.........................................................       2,949,642         613,992           4,804
Arkansas........................................................       1,749,406         426,645           4,100
California......................................................      21,688,154       3,690,130           5,877
Colorado........................................................       2,021,955         432,283           4,677
Connecticut.....................................................       2,810,930         506,169           5,553
Delaware........................................................         474,232         103,216           4,595
District of Columbia............................................       1,206,754          77,271          15,617
Florida.........................................................      16,046,099       2,654,681           6,044
Georgia.........................................................       4,444,248         848,854           5,236
Hawaii..........................................................         612,461         152,948           4,004
Idaho...........................................................         522,788         152,673           3,424
Illinois........................................................       7,792,373       1,623,430           4,800
Indiana.........................................................       3,770,224         829,586           4,545
Iowa............................................................       1,641,893         475,130           3,456
Kansas..........................................................       1,630,982         385,357           4,232
Kentucky........................................................       2,610,256         595,583           4,383
Louisiana.......................................................       3,937,599         585,918           6,720
Maine...........................................................         791,042         205,132           3,856
Maryland........................................................       3,005,428         609,601           4,930
Massachusetts...................................................       5,884,023         942,272           6,245
Michigan........................................................       6,565,577       1,360,512           4,826
Minnesota.......................................................       2,593,008         635,709           4,079
Mississippi.....................................................       2,016,230         401,697           5,019
Missouri........................................................       4,122,022         838,377           4,917
Montana.........................................................         469,724         131,847           3,563
Nebraska........................................................         933,547         250,284           3,730
Nevada..........................................................       1,003,697         202,347           4,960
New Hampshire...................................................         652,613         159,275           4,097
New Jersey......................................................       5,958,095       1,177,159           5,061
New Mexico......................................................         799,360         215,930           3,702
New York........................................................      14,860,448       2,653,492           5,600
North Carolina..................................................       4,688,836       1,048,981           4,470
North Dakota....................................................         438,228         103,170           4,248
Ohio............................................................       7,870,293       1,676,437           4,695
Oklahoma........................................................       2,471,759         491,628           5,028
Oregon..........................................................       1,801,354         472,197           3,815
Pennsylvania....................................................      11,468,028       2,077,870           5,519
Rhode Island....................................................         866,931         169,186           5,124
South Carolina..................................................       2,144,121         520,408           4,120
South Dakota....................................................         446,865         117,421           3,806
Tennessee.......................................................       4,486,558         783,385           5,728
Texas...........................................................      12,732,603       2,116,951           6,015
Utah............................................................         812,811         191,387           4,247
Vermont.........................................................         306,150          84,454           3,625
Virginia........................................................       3,277,225         833,145           3,934
Washington......................................................       2,826,104         698,966           4,043
West Virginia...................................................       1,372,605         331,343           4,143
Wisconsin.......................................................       2,909,048         766,625           3,795
Wyoming.........................................................         197,719          61,465           3,217
Puerto Rico.....................................................         952,913         489,944           1,945
All other areas.................................................          36,142         321,269             112
                                                                 -----------------------------------------------
    Total all areas.............................................     191,176,132      37,979,904           5,034
----------------------------------------------------------------------------------------------------------------
\1\ In thousands of dollars.                                                                                    
\2\ As of September 30, 1996.                                                                                   
                                                                                                                
Note.--Benefit payments for all areas represent actual Department of Treasury (DOT) disbursements. Distribution 
  of benefit payments by State is based on a methodology which considered actual payments to HMOs and estimated 
  payments for other providers of Medicare services. Estimated payments were determined by applying the relative
  weight of each State's share of total fee-for-service provider payments for fiscal year 1996 to the DOT       
  disbursements net of managed care payments.                                                                   
                                                                                                                
Source: Health Care Financing Administration.                                                                   

                        ELIGIBILITY AND COVERAGE

                                  Aged

Part A
    Most Americans age 65 or older are automatically entitled 
to protection under part A. These individuals (or their 
spouses) established entitlement during their working careers 
by paying the HI payroll tax on earnings covered by either the 
Social Security or Railroad Retirement Systems.
    The HI tax was extended to Federal employment with respect 
to wages paid on or after January 1, 1983. Beginning January 1, 
1983, Federal employment is included in determining eligibility 
for protection under Medicare part A. A transitional provision 
allows individuals who were in the employ of the Federal 
Government both before and during January 1, 1983, to have 
their prior Federal employment considered as employment for 
purposes of providing Medicare coverage. Employees of State and 
local governments, hired after March 31, 1986, are also liable 
for the HI tax.
    Persons age 65 or older who are not automatically entitled 
to part A may obtain coverage, providing they pay the full 
actuarial cost. The 1997 monthly premium is $311 ($187 for 
persons who have at least 30 quarters of covered employment). 
The 1998 monthly premium is $309 ($170 for persons who have at 
least 30 quarters of covered employment).
Part B
    Part B of Medicare is voluntary. All persons age 65 or 
older (even those not entitled to part A) may elect to enroll 
in the SMI Program by paying the monthly premium. The 1997 and 
1998 premium is $43.80 per month. Persons who voluntarily 
enroll in part A are required to enroll in part B.

                                Disabled

Part A
    Part A also covers, after a 2-year waiting period, people 
under age 65 who are either receiving monthly Social Security 
benefits on the basis of disability or receiving payments as 
disabled Railroad Retirement System annuitants. (Dependents of 
the disabled are not eligible.) In addition, most people who 
need a kidney transplant or renal dialysis because of chronic 
kidney disease are entitled to benefits under part A regardless 
of age.
Part B
    Persons eligible for part A by virtue of disability or 
chronic kidney disease may also elect to enroll in part B.

                        Number of Beneficiaries

    In fiscal year 1996, 32.9 million aged and 4.8 million 
disabled had protection under part A. Of those, 7.2 million 
aged and 1.0 million disabled actually received reimbursed 
services. In fiscal year 1996, 31.9 million aged and 4.1 
million disabled were enrolled in part B. About 27.0 million of 
the aged and 3.3 million of the disabled actually received 
reimbursed services (table 2-2).

                 BENEFITS AND BENEFICIARY COST SHARING

                                 Part A

    Part A coverage includes:
    Inpatient hospital care.--The first 60 days of inpatient 
hospital services in a benefit period are subject to a 
deductible ($760 in calendar year 1997; $764 in 1998). A 
benefit period begins when a patient enters a hospital and ends 
when he has not been in a hospital or SNF for 60 days. For days 
61-90 in a benefit period, a coinsurance amount ($190 in 
calendar year 1997; $191 in 1998) is imposed. When more than 90 
days are required in a benefit period, a patient may elect to 
draw upon a 60-day lifetime reserve. A coinsurance amount ($380 
in calendar year 1997; $382 in 1998) is imposed for each 
reserve day.
    Skilled nursing facility care.--SNF care is up to 100 days 
(following hospitalization) in a skilled nursing facility for 
persons in need of continued skilled nursing care and/or 
skilled rehabilitation services on a daily basis. After the 
first 20 days, there is a daily coinsurance ($95 in calendar 
year 1997; $95.50 in 1998) amount.
    Home health care.--Home health visits are provided to 
persons who need skilled nursing care on an intermittent basis, 
or physical therapy, or speech therapy. The Balanced Budget Act 
of 1997 gradually transfers from part A to part B home health 
visits that are not part of the first 100 visits following a 
beneficiary's stay in a hospital or SNF (that is, 
postinstitutional visits) and during a home health spell of 
illness. The transfer will be phased in over 6 years, between 
1998 and 2003, with the Secretary transferring one-sixth of the 
aggregate expenditures associated with transferred visits in 
1998; two-sixths in 1999; three-sixths in 2000; four-sixths in 
2001; five-sixths in 2002; and six-sixths in 2003. Beginning 
January 1, 2003, part A will cover only postinstitutional home 
health services for up to 100 visits during a home health spell 
of illness, except for those persons with part A coverage only, 
who will be covered for services without regard to the 
postinstitutional limitation.
    Hospice care.--Hospice care services are provided to 
terminally ill Medicare beneficiaries with a life expectancy of 
6 months or less for two 90-day periods, followed by an 
unlimited number of 60-day periods. The medical director or 
physician member of the hospice interdisciplinary team must 
recertify, at the beginning of 60-day periods, that the 
beneficiary is terminally ill.

                                 Part B

    Part B of Medicare generally pays 80 percent of the 
approved amount (fee schedule, reasonable charge, or reasonable 
cost) for covered services in excess of an annual deductible 
($100). Services covered include:
    Doctor's services.--This category includes surgery, 
consultation, and home, office and institutional visits. 
Certain limitations apply for services rendered by dentists, 
podiatrists, and chiropractors and for the treatment of mental 
illness.
    Other medical and health services.--Laboratory and other 
diagnostic tests, x-ray and other radiation therapy, outpatient 
hospital services, rural health clinic services, DME, home 
dialysis supplies and equipment, artificial devices (other than 
dental), physical and speech therapy, and ambulance services 
are also required.
    Specified preventive services.--These services include a 
screening mammography once every 2 years for persons over age 
65 and at specified intervals for the disabled; and effective 
January 1, 1998 annual mammograms for all women over age 40. A 
screening pap smear (and, effective January 1, 1998, a 
screening pelvic exam) is authorized once every 3 years, except 
for women who are at a high risk of developing cervical cancer. 
Effective January 1, 1998, coverage is provided for specified 
colorectal screening procedures. Effective July 1, 1998, 
coverage is authorized for diabetes self-management training 
services and bone mass measurements for high-risk persons. 
Prostate cancer screenings are covered beginning January 1, 
2000.
    Drugs and vaccines.--Generally Medicare does not pay for 
outpatient prescription drugs or biologicals. Part B pays for 
immunosuppressive drugs for 30 months following an organ 
transplant (extended to 36 months after 1997), erythropoietin 
for treatment of anemia for persons with chronic kidney 
failure, and certain specified oral cancer drugs. The program 
also covers flu shots, pneumococcal pneumonia vaccines, and 
hepatitis B vaccines for those at risk.
    Home health services.--Home services include an unlimited 
number of medically necessary home health visits for persons 
not covered under part A. The 20-percent coinsurance and $100 
deductible do not apply for such benefits. As noted above, the 
Balanced Budget Act of 1997 gradually transfers some home 
health costs from part A to part B, beginning in 1998.
    Table 2-5 illustrates the deductible, coinsurance and 
premium amounts for both part A and part B services from the 
inception of Medicare.

                                     TABLE 2-5.--PART A AND PART B DEDUCTIBLE, COINSURANCE AND PREMIUMS, \1\ 1966-98                                    
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                         Inpatient hospital \2\                               HI monthly premium \6\                     SMI premium    
                               ------------------------------------------     Skilled    -------------------------------            --------------------
                                                           60 lifetime        nursing                                                                   
         Calendar year           First 60    61st-90th     reserve days   facility 21st-                                     SMI                        
                                   days         day       (nonrenewable)     100th day    Effective    Full     Reduced  deductible  Effective   Amount 
                                deductible  coinsurance  coinsurance per    coinsurance      date     amount    amount                  date            
                                            per day \3\      day \4\        per day \5\                                                                 
--------------------------------------------------------------------------------------------------------------------------------------------------------
1966..........................        $40           $10            (\7\)           (\7\)  .........  ........        NA        $50        7/66     $3.00
1967..........................         40            10            (\7\)           $5.00  .........  ........        NA         50   .........      3.00
1968..........................         40            10              $20            5.00  .........  ........        NA         50        4/68      4.00
1969..........................         44            11               22            5.50  .........  ........        NA         50   .........      4.00
1970..........................         52            13               26            6.50  .........  ........        NA         50        7/70      5.30
1971..........................         60            15               30            7.50  .........  ........        NA         50        7/71      5.60
1972..........................         68            17               34            8.50  .........  ........        NA         50        7/72      5.80
1973..........................         72            18               36            9.00       7/73       $33        NA         60    \8\ 9/73      6.30
1974..........................         84            21               42           10.50       7/74        36        NA         60        7/74      6.70
1975..........................         92            23               46           11.50       7/75        40        NA         60   .........      6.70
1976..........................        104            26               52           13.00       7/76        45        NA         60        7/76      7.20
1977..........................        124            31               62           15.50       7/77        54        NA         60        7/77      7.70
1978..........................        144            36               72           18.00       7/78        63        NA         60        7/78      8.20
1979..........................        160            40               80           20.00       7/79        69        NA         60        7/79      8.70
1980..........................        180            45               90           22.50       7/80        78        NA         60        7/80      9.60
1981..........................        204            51              102           25.50       7/81        89        NA         60        7/81     11.00
1982..........................        260            65              130           32.50       7/82       113        NA         75        7/82     12.20
1983..........................        304            76              152           38.00  .........       113        NA         75   .........     12.20
1984..........................        356            89              178           44.50       1/84       155        NA         75        1/84     14.60
1985..........................        400           100              200           50.00       1/85       174        NA         75        1/85     15.50
1986..........................        492           123              246           61.50       1/86       214        NA         75        1/86     15.50
1987..........................        520           130              260           65.00       1/87       226        NA         75        1/87     17.90
1988..........................        540           135              270           67.50       1/88       234        NA         75        1/88     24.80
1989..........................    \9\ 560            NA               NA      \10\ 25.50       1/89       156        NA         75        1/89     31.90
1990..........................        592           148              296           74.00       1/90       175        NA         75        1/90     28.60
1991..........................        628           157              314           78.50       1/91       177        NA        100        1/91     29.90
1992..........................        652           163              326           81.50       1/92       192        NA        100        1/92     31.80
1993..........................        676           169              338           84.50       1/93       221        NA        100        1/93     36.60
1994..........................        696           174              348           87.00       1/94       245       184        100        1/94     41.10
1995..........................        716           179              358           89.50       1/95       261       183        100        1/95     46.10
1996..........................        736           184              368           92.00       1/96       289       188        100        1/96     42.50
1997..........................        760           190              380           95.00       1/97       311       187        100        1/97     43.80
1998..........................        764           191              382           95.50       1/98       309       170        100        1/98     43.80
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For services furnished on or after January 1, 1982, the coinsurance amounts are based on the inpatient hospital deductible for the year in which the
  services were furnished. For services furnished prior to January 1, 1982, the coinsurance amounts are based on the inpatient hospital deductible      
  applicable for the year in which the individual's benefit period began.                                                                               
\2\ For care in psychiatric hospital there is a 190-day lifetime limit.                                                                                 
\3\ Always equal to one-fourth of inpatient hospital deductible through 1988 and for 1990 and later; eliminated for 1989.                               
\4\ Always equal to one-half of inpatient hospital deductible through 1988 and for 1990 and later; eliminated for 1989.                                 
\5\ Always equal to one-third of inpatient hospital deductible through 1988 and for 1990 and later. For 1989 it was equal to 20 percent of estimated    
  Medicare covered average cost per day.                                                                                                                
\6\ Not applicable prior to July 1973. Applies to aged individuals who are not fully insured, and to certain disabled individuals who have exhausted    
  other entitlement. The reduced amount is available to aged individuals who are not fully insured but who have, or whose spouse has or had, at least 30
  quarters of coverage under title II of the Social Security Act. The reduced amount is 75 percent of the full amount in 1994, 70 percent in 1995, 65   
  percent in 1996, 60 percent in 1997, and 55 percent in 1998 and thereafter.                                                                           
\7\ Not covered.                                                                                                                                        
\8\ For August 1973 the premium was $6.10.                                                                                                              
\9\ In 1989, the HI deductible was applied on an annual basis, not a benefit period basis (unlike the other years).                                     
\10\ In 1989, the SNF coinsurance was on days 1-8 of the 150 days allowed annually; for the other years it is on days 21-100 of 100 days allowed per    
  benefit period.                                                                                                                                       
                                                                                                                                                        
NA--Not available.                                                                                                                                      
                                                                                                                                                        
Note.--In addition to the deductible and coinsurance amounts shown in the table, the first three pints of blood are not reimbursed by Medicare.         
  Currently there is no deductible or coinsurance on home health benefits. From January 1973 to June 30, 1982, there was a $60 annual deductible and    
  prior to July 1, 1981, benefits were limited to 100 visits per benefit period under part A and 100 visits per calendar year under part B. Special     
  limits apply to certain benefits: (1) Outpatient physician services for mental illness; 50 percent of approved charges, up to a maximum of $250 in    
  benefits per year; July 1, 1966, through December 31, 1987; $450 in benefits per year, January 1, 1988, through December 31, 1988; $1,100 in benefits 
  per year, January 1, 1989, through December 31, 1989; beginning January 1, 1990, the limit was removed; (2) physical and occupational therapy services
  furnished by physical therapists in independent practice: maximum annual approved charges July 1, 1973 through December 31, 1981, $80 per year;       
  January 1, 1982 through December 31, 1982, $400 per year; January 1, 1983 through December 31, 1989, $500 per year; January 1, 1990 through December  
  31, 1993, $750 per year; and January 1, 1994 and thereafter, $900 per year.                                                                           
                                                                                                                                                        
Source: Health Care Financing Administration, Office of the Actuary.                                                                                    

                               FINANCING

    The Medicare Hospital Insurance Trust Fund (HI) finances 
services covered under Medicare part A. The Supplementary 
Medical Insurance Trust Fund (SMI) finances services covered 
under Medicare part B. The trust funds are maintained by the 
Department of the Treasury. Each trust fund is actually an 
accounting mechanism; there is no actual transfer of money into 
and out of the fund. Income to each trust fund is credited to 
the fund in the form of interest-bearing government securities. 
The securities represent obligations that the government has 
issued to itself. Expenditures for services and administrative 
costs are recorded against the fund.

                 Hospital Insurance Trust Fund--Income

    The primary source of income to the HI fund is HI payroll 
taxes. This source accounted for $106.9 billion (88.3 percent) 
of the total $121.1 billion in income for fiscal year 1996. 
Additional income sources include premiums paid by voluntary 
enrollees, government credits, interest on Federal securities, 
and taxation of a portion of Social Security benefits.
Payroll taxes
    The HI Trust Fund is financed primarily through Social 
Security payroll tax contributions paid by employees and 
employers. Each pays a tax of 1.45 percent on all earnings in 
covered employment. The self-employed pay 2.9 percent. Prior to 
1994, there was an upper limit on earnings subject to the tax. 
An upper limit of $68,400 in 1998 continues to apply under 
Social Security. Table 2-6 shows the history of the 
contribution rates and maximum taxable earnings base for the HI 
Programs.
Other income
    The following are additional sources of income to the HI 
fund:
 1. Railroad retirement account transfers.--In fiscal year 
        1996, $401 million was transferred from the railroad 
        retirement fund. This is the estimated amount that 
        would have been in the fund if railroad employment had 
        always been covered under the Social Security Act.
 2. Reimbursements for uninsured persons.--HI benefits are 
        provided to certain uninsured persons who turned 65 
        before 1968. Persons who turned 65 after 1967 but 
        before 1974 are covered under transitional provisions. 
        Similar transitional entitlement applies to Federal 
        employees who retire before earning sufficient quarters 
        of Medicare-qualified Federal employment provided they 
        were employed before and during January 1983. Payments 
        for these persons are made initially from the HI Trust 
        Fund, with reimbursement from the general fund of the 
        Treasury for the costs, including administrative 
        expenses, of the payments. In fiscal year 1996, $419 
        million was transferred to HI on this basis.

   TABLE 2-6.--CURRENT LAW SOCIAL SECURITY PAYROLL TAX RATES FOR EMPLOYERS AND EMPLOYEES AND TAXABLE EARNINGS   
                                                 BASES, 1977-98                                                 
----------------------------------------------------------------------------------------------------------------
                                                            Employee and employer rates,                        
                                                                   each (percent)         HI taxable            
                       Calendar year                       ------------------------------  earnings   Maximum HI
                                                              OASDI              OASDHI      base         tax   
                                                            combined     HI     combined                        
----------------------------------------------------------------------------------------------------------------
1977......................................................      4.95      0.90      5.85     $16,500     $148.50
1978......................................................      5.05      1.10      6.05      17,700      194.70
1979......................................................      5.08      1.05      6.13      22,900      240.45
1980......................................................      5.08      1.05      6.13      25,900      271.95
1981......................................................      5.35      1.30      6.65      29,700      386.10
1982......................................................      5.40      1.30      6.70      32,400      421.20
1983......................................................      5.40      1.30      6.70      35,700      464.10
1984......................................................      5.70      1.30      7.00      37,800      491.40
1985......................................................      5.70      1.35      7.05      39,600      534.60
1986......................................................      5.70      1.45      7.15      42,000      609.00
1987......................................................      5.70      1.45      7.15      43,800      635.10
1988......................................................      6.06      1.45      7.51      45,000      652.50
1989......................................................      6.06      1.45      7.51      48,000      696.00
1990......................................................      6.20      1.45      7.65      51,300      743.85
1991......................................................      6.20      1.45      7.65  \1\ 125,00            
                                                                                                   0    1,812.50
1992......................................................      6.20      1.45      7.65     130,200    1,887.90
1993......................................................      6.20      1.45      7.65     135,000    1,957.50
1994......................................................      6.20      1.45      7.65    \2\ none    no limit
1995......................................................      6.20      1.45      7.65        none    no limit
1996......................................................      6.20      1.45      7.65        none    no limit
1997......................................................      6.20      1.45      7.65        none    no limit
1998......................................................      6.20      1.45      7.65        none    no limit
----------------------------------------------------------------------------------------------------------------
\1\ Prior to 1991, the upper limit on tax earnings was the same as for Social Security. The Omnibus Budget      
  Reconciliation Act of 1990 raised the limit in 1991 to $125,000. Under automatic indexing provisions, the     
  maximum was increased to $130,200 in 1992 and $135,000 in 1993.                                               
\2\ The Omnibus Budget Reconciliation Act of 1993 eliminated the indexing provision entirely beginning in 1994. 
                                                                                                                
Source: Health Care Financing Administration.                                                                   

 3. Premiums from voluntary enrollees.--Certain persons not 
        eligible for HI protection either on an insured basis 
        or on the uninsured basis described above may obtain 
        protection by enrolling in the program and paying a 
        monthly premium ($311 in 1997; for persons who have at 
        least 30 quarters of covered employment, $187 in 1997). 
        This accounted for an estimated $1,107 million of 
        financing in fiscal year 1996.
 4. Payments for military wage credits.--Sections 217(g) and 
        229(b) of the Social Security Act, prior to 
        modification by the Social Security Amendments of 1983, 
        authorized annual reimbursement from the general fund 
        of the Treasury to the HI Trust Fund for costs arising 
        from the granting of deemed wage credits for military 
        service prior to 1957, according to quinquennial 
        determinations made by the Secretary of Health and 
        Human Services. These sections, as modified by the 
        Social Security Amendments of 1983, provided for a 
        lump-sum transfer in 1983 for costs arising from such 
        wage credits. In addition, the lump-sum transfer 
        included combined employer-employee HI taxes on the 
        noncontributory wage credits for military service after 
        1965 and before 1984. After 1983, HI taxes on military 
        wage credits are credited to the fund on July 1 of each 
        year. The Social Security Amendments of 1983 also 
        provided for: (1) quinquennial adjustments to the lump-
        sum amount transferred in 1983 for costs arising from 
        pre-57 deemed wage credits; and (2) adjustments as 
        deemed necessary to any previously transferred amounts 
        representing HI taxes on noncontributory wage credits. 
        In fiscal year 1996, this adjustment, including the 
        quinquennial adjustment, was $2.3 billion.
 5. Tax on Social Security benefits.--Beginning in 1994, the 
        trust fund acquired an additional funding source. The 
        Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) 
        increased the maximum amount of Social Security 
        benefits subject to income tax from 50 to 85 percent 
        and provided that the additional revenues would be 
        credited to the HI Trust Fund. Revenue from this source 
        totaled $4.1 billion in fiscal year 1996.
 6. Interest.--The remaining income to the trust fund consists 
        almost entirely of interest on the investments of the 
        trust fund. Interest amounted to an estimated $10.5 
        billion in fiscal year 1996.

           Supplementary Medical Insurance Trust Fund--Income

    Part B is financed from premiums paid by the aged, disabled 
and chronic renal disease enrollees and from general revenues. 
The premium rate is derived annually based on the projected 
costs of the program for the coming year. The monthly premium 
amount in calendar years 1997 and 1998 is $43.80.
    When the program first went into effect in July 1966, the 
part B monthly premium was set at a level to finance one-half 
of part B program costs. Legislation enacted in 1972 limited 
the annual percentage increase in the premium to the same 
percentage by which Social Security benefits were adjusted for 
changes in cost of living (that is, cost-of-living adjustments 
or COLAs). Under this formula, revenues from premiums soon 
dropped from 50 to below 25 percent of program costs because 
part B program costs increased much faster than inflation as 
measured by the Consumer Price Index on which the Social 
Security COLA is based.
    Since the early 1980s, Congress has regularly voted to set 
part B premiums at a level to cover 25 percent of program 
costs, in effect overriding the COLA limitation. The 25-percent 
provisions first became effective January 1, 1984. General 
revenues covered the remaining 75 percent of part B program 
costs. Congress took this general approach again in OBRA 1990. 
However, OBRA 1990 set specific dollar figures, rather than a 
percentage, in law for 1991-95. These dollar figures reflected 
the Congressional Budget Office's (CBO) estimates of what 25 
percent of program costs would be over the 5-year period. 
Program costs grew at a slower rate than anticipated, in part 
due to subsequent legislative changes. As a result, the 1995 
premium of $46.10 covered an estimated 31.5 percent of program 
costs.
    OBRA 1993 extended the policy of setting the part B premium 
at a level to cover 25 percent of program costs for 1996-98. As 
was the case prior to 1991, a percentage rather than a fixed 
dollar figure was used. As a result, the 1996 premium was 
$42.50, a full $3.60 less than the 1995 premium. The 1997 and 
1998 premiums are $43.80. The Balanced Budget Act of 1997 
permanently sets the part B premium equal to 25 percent of 
program costs.

           Financial Status of Hospital Insurance Trust Fund

    The Hospital Insurance Trust Fund balance is dependent on 
total income to the HI Trust Fund exceeding total outlays from 
the fund. Tables 2-7 and 2-8 show historical information from 
the 1997 Trustees' Report on the operation of the trust fund. 
The Trustees' Report also included projections. However, the 
Congress subsequently passed the Balanced Budget Act of 1997 
which substantially changed the expected operations of the 
fund. Tables 2-7, 2-8, and 2-9 show preliminary projections for 
the 1997-2007 period made following the enactment of the 
Balanced Budget Act.
    The 1997 Trustees' Report (Board of Trustees, Hospital 
Trust Fund, 1997) stated that the program failed to meet both 
short-range and long-range tests of financial adequacy. 
Disbursements began to exceed income in 1995. Under the 
trustee's 1997 intermediate assumptions, the fund would have 
become insolvent in 2001. The Trustees' Report had projected 
that the fund's shortfall would be $23.4 billion at the end of 
calendar 2001. The shortfall would continue to build each year, 
rising to $429.8 billion at the end of fiscal year 2006 and 
$471.6 billion at the end of calendar year 2006.
     The projections included in the 1997 Trustees' Reports 
have been substantially modified as a result of the enactment 
of the Balanced Budget Act (table 2-9). This legislation 
provides for the transfer of a portion of home health spending 
(currently the fastest growing part A expenditure) from part A 
to part B. It also includes additional provisions designed to 
stem the growth in part A expenditures. These provisions 
include the implementation of prospective payment systems for 
home health services and skilled nursing facility services and 
limits on the increases in hospital payments. When the Balanced 
Budget Act of 1997 was enacted, CBO projected that the 
insolvency date would be postponed from 2001 to fiscal year 
2007. Subsequently, the administration estimated that the year 
of exhaustion would be 2010 (see table 2-9).
     Despite short-term improvements, the fund still faces 
insolvency. Beginning in fiscal year 1996, HI costs began to 
rise faster than income. The CBO expects this trend to 
continue, though at a somewhat slower pace as the result of the 
Balanced Budget Act of 1997. The administration projects that 
income will still slightly exceed costs over the short term and 
costs will again exceed income after 2007. Historically, the 
shortfall has been primarily attributable to the increase in 
hospital payments which have accounted for over 65 percent of 
HI benefit payments.
    Beginning in 2011, the program will begin to experience the 
impact of major demographic changes. First, baby boomers 
(persons born between 1946 and 1964) begin turning age 65. 
Second, there will be a shift in the number of covered workers 
supporting each HI enrollee. In 1996, there were 3.9 workers 
for every beneficiary; in 2030 there will only be an estimated 
2.3.

                                                  TABLE 2-7.--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED FISCAL YEARS 1970-2007                                                  
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Income                                                           Disbursements                       Trust fund      
                                ----------------------------------------------------------------------------------------------------------------------------------------------------------------
                                            Income                                          Payments                                                                                            
        Fiscal year \1\                      from     Railroad   Reimbursement   Premiums      for      Interest                                                              Net       Fund at 
                                  Payroll  taxation  retirement  for uninsured     from     military    and other    Total     Benefits    Administrative      Total       increase     end of  
                                   taxes      of       account      persons     voluntary     wage     income \2\   income   payments \3\   expenses \4\   disbursements    in fund      year   
                                           benefits   transfers                 enrollees    credits                                                                                            
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Historical data (in millions of dollars):                                                                                                                                                       
    1970.......................    $4,785  ........       $64          $617     .........         $11        $137    $5,614      $4,804          $149           $4,953          $661      $2,677
    1975.......................    11,291  ........       132           481           $6           48         609    12,568      10,353           259           10,612         1,956       9,870
    1980.......................    23,244  ........       244           697           17          141       1,072    25,415      23,790           497           24,288         1,127      14,490
    1985.......................    46,490  ........       371           766           38           86       3,182    50,933      47,841           813           48,654     \5\ 4,103      21,277
    1986.......................    53,020  ........       364           566           40     \6\ -714       3,167    56,442      49,018           667           49,685    \7\ 17,370      38,648
    1987.......................    57,820  ........       368           447           40           94       3,982    62,751      49,967           836           50,803        11,949      50,596
    1988.......................    61,901  ........       364           475           42           80       5,148    68,010      52,022           707           52,730        15,281      65,877
    1989.......................    67,527  ........       379           515           42           86       6,567    75,116      57,433           805           58,238        16,878      82,755
    1990.......................    70,655  ........       367           413          113          107       7,908    79,563      65,912           774           66,687        12,876      95,631
    1991.......................    74,655  ........       352           605          367   \8\ -1,011       8,969    83,938      68,705           934           69,638        14,299     109,930
    1992.......................    80,978  ........       374           621          484           86      10,133    92,677      80,784         1,191           81,974        10,703     120,633
    1993.......................    83,147  ........       400           367          622           81  \9\ 12,484    97,101      90,738           866           91,604         5,497     126,131
    1994.......................    92,028    $1,639       413           506          852           80      10,676   106,195     101,535         1,235          102,770         3,425     129,555
    1995.......................    98,053     3,913       396           462          998           61      10,963   114,847     113,583         1,300          114,883           -36     129,520
    1996.......................   106,934     4,069       401           419        1,107            3      10,496   121,135     124,188         1,229          125,317        -4,182     125,338
                                                                                                                                                                                                
Preliminary projections made following enactment of the Balanced Budget Act of 1997 (in billions of                                                                                             
 dollars):                                                                                                                                                                                      
    1997.......................  ........  ........  ..........  .............  .........  ..........  ..........     128.8  ............  ..............        138.1          -9.3       116.0
    1998.......................  ........  ........  ..........  .............  .........  ..........  ..........     125.6  ............  ..............        131.5          -5.9       110.1
    1999.......................  ........  ........  ..........  .............  .........  ..........  ..........     129.3  ............  ..............        131.5          -2.2       107.9
    2000.......................  ........  ........  ..........  .............  .........  ..........  ..........     137.6  ............  ..............        134.3           3.3       111.2
    2001.......................  ........  ........  ..........  .............  .........  ..........  ..........     146.0  ............  ..............        139.3           6.7       117.9
    2002.......................  ........  ........  ..........  .............  .........  ..........  ..........     155.4  ............  ..............        146.8           8.6       126.5
    2003.......................  ........  ........  ..........  .............  .........  ..........  ..........     165.5  ............  ..............        156.8           8.7       135.2
    2004.......................  ........  ........  ..........  .............  .........  ..........  ..........     173.8  ............  ..............        166.9           6.9       142.1
    2005.......................  ........  ........  ..........  .............  .........  ..........  ..........     183.6  ............  ..............        177.2           6.3       148.4
    2006.......................  ........  ........  ..........  .............  .........  ..........  ..........     191.4  ............  ..............        188.2           3.2       151.6
    2007.......................  ........  ........  ..........  .............  .........  ..........  ..........     200.9  ............  ..............        200.5           0.4       152.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Fiscal years 1970 and 1975 consist of the 12 months ending on June 30 of each year; fiscal years 1980 and later consist of the 12 months ending on September 30 of each year.               
\2\ Other income includes recoveries of amounts reimbursed from the trust fund which are not obligations of the trust fund and a small amount of miscellaneous income.                          
\3\ Includes costs of peer review organizations (beginning with the implementation of the prospective payment system on October 1, 1983).                                                       
\4\ Includes costs of experiments and demonstration projects.                                                                                                                                   
\5\ Includes repayment of loan principal from the OASI Trust Fund of $1,824 million.                                                                                                            
\6\ Includes the lump-sum general revenue adjustment of -$805 million, as provided for by section 151 of Public Law 98-21.                                                                      
\7\ Includes repayment of loan principal from the OASI Trust Fund of $10,613 million.                                                                                                           
\8\ Includes the lump-sum general revenue adjustment of -$1,100 million, as provided for by section 151 of Public Law 98-21.                                                                    
\9\ Includes $1,805 million transfer from the SMI catastrophic coverage reserve fund, as provided for by Public Law 102-394.                                                                    
                                                                                                                                                                                                
Note.--Fiscal years 1997-2007 reflect estimated operations of fund under present law with effects of the Balanced Budget Act of 1997 on the basis of the midsession review of the fiscal year   
  1998 budget assumptions.                                                                                                                                                                      
                                                                                                                                                                                                
Source: Board of Trustees, Federal Hospital Insurance Trust Fund (1997) and Social Security Administration unpublished tables.                                                                  


                                                 TABLE 2-8.--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED CALENDAR YEARS 1970-2007                                                 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Income                                                           Disbursements                       Trust fund      
                                ----------------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Income                                          Payments                                                                                           
         Calendar year                        from     Railroad   Reimbursement   Premiums     for      Interest                                                              Net       Fund at 
                                  Payroll   taxation  retirement  for uninsured     from     military   and other    Total     Benefits    Administrative      Total       increase     end of  
                                   taxes       of       account      persons     voluntary     wage    income \1\   income   payments \2\   expenses \3\   disbursements    in fund      year   
                                            benefits   transfers                 enrollees   credits                                                                                            
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Historical data (in millions of dollars):                                                                                                                                                       
    1970.......................     $4,881  ........       $66          $863     .........        $11        $158    $5,979      $5,124          $157           $5,281          $698      $3,202
    1975.......................     11,502  ........       138           621           $7          48         664    12,980      11,315           266           11,581         1,399      10,517
    1980.......................     23,848  ........       244           697           18         141       1,149    26,097      25,064           512           25,577           521      13,749
    1985.......................     47,576  ........       371           766           41    \4\ -719       3,362    51,397      47,580           834           48,414     \5\ 4,808      20,499
    1986.......................     54,583  ........       364           566           43          91       3,619    59,267      49,758           664           50,422    \6\ 19,458      39,957
    1987.......................     58,648  ........       368           447           38          94       4,469    64,064      49,496           793           50,289        13,775      53,732
    1988.......................     62,449  ........       364           475           41          80       5,830    69,239      52,517           815           53,331        15,908      69,640
    1989.......................     68,369  ........       379           515           55          86       7,317    76,721      60,011           792           60,803        15,918      85,558
    1990.......................     72,013  ........       367           413          122    \7\ -993       8,451    80,372      66,239           758           66,997        13,375      98,933
    1991.......................     77,851  ........       352           605          432          89       9,510    88,839      71,549         1,021           72,570        16,269     115,202
    1992.......................     81,745  ........       374           621          522          86      10,487    93,836      83,895         1,121           85,015         8,821     124,022
    1993.......................     84,133  ........       400           367          675          81  \8\ 12,531    98,187      93,487           904           94,391         3,796     127,818
    1994.......................     95,280    $1,639       413           506          907          80      10,745   109,570     103,282         1,263          104,545         5,025     132,844
    1995.......................     98,421     3,913       396           462          954          61      10,820   115,027     116,368         1,236          117,604        -2,577     130,267
    1996.......................    110,585     4,069       401           419        1,199   \9\ 2,293      10,222   124,603     128,632         1,297          129,929        -5,325     124,942
                                                                                                                                                                                                
Preliminary projections made following enactment of the Balanced Budget Act of 1997 (in billions of                                                                                             
 dollars):                                                                                                                                                                                      
    1997.......................  .........  ........  ..........  .............  .........  .........  ..........     129.1  ............  ..............        138.2          -9.1       115.8
    1998.......................  .........  ........  ..........  .............  .........  .........  ..........     124.5  ............  ..............        128.2          -3.7       112.1
    1999.......................  .........  ........  ..........  .............  .........  .........  ..........     131.1  ............  ..............        131.4          -0.3       111.8
    2000.......................  .........  ........  ..........  .............  .........  .........  ..........     139.6  ............  ..............        134.6           5.0       116.8
    2001.......................  .........  ........  ..........  .............  .........  .........  ..........     148.8  ............  ..............        140.2           8.6       125.5
    2002.......................  .........  ........  ..........  .............  .........  .........  ..........     158.1  ............  ..............        148.1          10.0       135.4
    2003.......................  .........  ........  ..........  .............  .........  .........  ..........     169.5  ............  ..............        158.2          11.3       146.8
    2004.......................  .........  ........  ..........  .............  .........  .........  ..........     177.8  ............  ..............        168.4           9.5       156.2
    2005.......................  .........  ........  ..........  .............  .........  .........  ..........     186.7  ............  ..............        178.8           7.9       164.2
    2006.......................  .........  ........  ..........  .............  .........  .........  ..........     195.7  ............  ..............        190.0           5.7       169.9
    2007.......................  .........  ........  ..........  .............  .........  .........  ..........     205.7  ............  ..............        203.3           2.3       172.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Other income includes recoveries of amounts reimbursed from the trust fund which are not obligations of the trust fund and a small amount of miscellaneous income.                          
\2\ Includes cost of peer review organizations (beginning with the implementation of the prospective payment system on October 1, 1983).                                                        
\3\ Includes costs of experiments and demonstration projects.                                                                                                                                   
\4\ Includes the lump-sum general revenue adjustment of -$805 million, as provided for by section 151 of Public Law 98-21.                                                                      
\5\ Includes repayment of loan principal from the OASI Trust Fund of $1,824 million.                                                                                                            
\6\ Includes repayments of loan principal from the OASI Trust Fund of $10,613 million.                                                                                                          
\7\ Includes the lump-sum general revenue adjustment of -$1,100 million, as provided for by section 151 of Public Law 98-21.                                                                    
\8\ Includes $1,805 million transfer from the SMI catastrophic coverage reserve fund, as provided for by Public Law 102-394.                                                                    
\9\ Includes the lump-sum general revenue adjustment of -$2,366 million provided for by section 151 of Public Law 98-21.                                                                        
                                                                                                                                                                                                
Note.--Fiscal years 1997-2007 reflect estimated operations of the fund under present law with effects of the Balanced Budget Act of 1997 on the basis of the midsession review of the fiscal    
  year 1998 budget assumptions.                                                                                                                                                                 
                                                                                                                                                                                                
Source: Board of Trustees, Federal Hospital Insurance Trust Fund (1997) and Social Security Administration, unpublished tables.                                                                 


  TABLE 2-9.--PROJECTIONS MADE FOLLOWING PASSAGE OF THE BALANCED BUDGET ACT OF 1997 FOR THE HOSPITAL INSURANCE TRUST FUND OF INCOME AND OUTLAYS, FISCAL 
                                                YEARS 1997-2007, UNDER CBO AND ADMINISTRATION ASSUMPTIONS                                               
                                                                [In billions of dollars]                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    1997     1998     1999     2000     2001     2002     2003      2004      2005      2006      2007  
--------------------------------------------------------------------------------------------------------------------------------------------------------
CBO projections:                                                                                                                                        
  Income........................................   $127.7   $131.0   $136.5   $142.3   $147.9   $154.2    $160.6    $166.9    $173.6    $180.4    $187.2
  Outlays.......................................    137.4    142.3    145.9    149.3    158.2    159.4     170.1     180.4     197.3     202.4     221.6
                                                 -------------------------------------------------------------------------------------------------------
    Net increase in fund........................     -9.7    -11.3     -9.4     -7.0    -10.3     -5.2      -9.5     -13.6     -23.7     -22.1     -34.4
                                                 -------------------------------------------------------------------------------------------------------
     Balance at end of year.....................    115.6    104.3     94.9     87.9     77.6     72.4      62.9      49.3      25.7       3.6     -30.8
                                                 =======================================================================================================
Administration projections:                                                                                                                             
  Income........................................    128.8    125.6    129.3    137.6    146.0    155.4     165.5     173.8     183.6     191.4     200.9
  Outlays.......................................    138.1    131.5    131.5    134.3    139.3    146.8     156.8     166.9     177.2     188.2     200.5
                                                 -------------------------------------------------------------------------------------------------------
    Net increase in fund........................     -9.3     -5.9     -2.2      3.3      6.7      8.6       8.7       6.9       6.3       3.2       0.4
                                                 -------------------------------------------------------------------------------------------------------
     Balance at end of year.....................    116.0    110.1    107.9    111.2    117.9    126.5     135.2     142.1     148.4     151.6    152.1 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office, August 1997, and Social Security Administration, October 1997, unpublished tables.                                 

    The combination of expenditure and demographic factors is 
also reflected in the increasing size of the HI Program 
relative to other sectors of the economy. According to the 1997 
Trustees' Report, the program's cost is expected to rise from 
1.7 percent of gross domestic product (GDP) in 1996 to about 5 
percent of GDP in 2070. This estimate was made prior to 
enactment of the Balanced Budget Act of 1997.

     Financial Status of Supplementary Medical Insurance Trust Fund

    Because the SMI Trust Fund is financed through beneficiary 
premiums and Federal general revenues, it does not face the 
prospect of depletion, as does the HI Trust Fund. However, the 
rising cost of the program is placing a burden on the trust 
fund, and by extension on beneficiaries (in the form of 
premiums) and Federal general revenues. Table 2-10 shows 
historical information from the 1997 Trustees' Report (Board of 
Trustees, Federal Hospital Insurance Trust Fund, 1997).

Comparison of Medicare Lifetime Benefits with Beneficiary Contributions

    Medicare beneficiaries typically get back considerably more 
in Medicare benefits than they contribute in payroll taxes and 
premiums over their lifetimes. CBO has estimated (based on the 
1996 Trustees' Report) the extent to which Medicare enrollees' 
contributions (through the HI payroll tax and the SMI premium) 
cover the expected value of their benefits under the program. 
Results are presented only for self-insured men and women (that 
is, those who obtain benefits on the basis of their own work 
history) who worked each year at an average wage from 1966 
until retirement at age 65. Three groups of persons are shown--
persons who reach 65 as of 1985, 1995, and 2005. All estimates, 
which were made prior to the enactment of the Balanced Budget 
Act of 1997, are dependent on uncertain projections of future 
health spending.
    For a self-insured man who worked continuously at an 
average wage from 1966 (when Medicare began) until retirement 
in 1985, the present discounted value of their contributions is 
about 29 percent of the expected value of lifetime Medicare 
benefits. For men retiring in 1995, contributions represent 
about 37 percent of benefits; for those retiring in 2005, 
contributions represent about 41 percent. Contributions through 
HI payroll taxes increases relative to HI benefits for later 
retirees because the HI payroll tax (which began in 1966) was 
paid for a greater proportion of their working years. 
Conversely, contributions through SMI premiums relative to SMI 
benefits decline because, under the law in effect prior to the 
Balanced Budget Act of 1997, after 1998 annual premium 
increases were limited by the percentage increase in the Social 
Security COLA (see table 2-11).

                  TABLE 2-10.--OPERATIONS OF THE SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND (CASH BASIS), SELECTED FISCAL YEARS 1970-96                 
                                                                [In millions of dollars]                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Income                                          Disbursements                          
                                      ------------------------------------------------------------------------------------------------------- Balance at
           Fiscal year \1\                                                  Interest                                                            end of  
                                        Premium from       Government      and other      Total      Benefit   Administrative      Total       year \4\ 
                                          enrollees    contributions \2\   income \3\    income     payments      expenses     disbursements            
--------------------------------------------------------------------------------------------------------------------------------------------------------
Historical data:                                                                                                                                        
    1970.............................            $936              $928           $12      $1,876      $1,979          $217          $2,196          $57
    1975.............................           1,887             2,330           105       4,322       3,765           405           4,170        1,424
    1980.............................           2,928             6,932           415      10,275      10,144           593          10,737        4,532
    1985.............................           5,524            17,898         1,155      24,577      21,808           922          22,730       10,646
    1986.............................           5,699            18,076         1,228      25,003      25,169         1,049          26,218        9,432
    1987.............................           6,480            20,299         1,018      27,797      29,937           900          30,837        6,392
    1988.............................           8,756            25,418           828      35,002      33,682         1,265          34,947        6,447
    1989.............................      \5\ 11,548            30,712     \5\ 1,022  \5\ 43,282      36,867     \5\ 1,450      \5\ 38,317   \5\ 11,412
    1990.............................      \5\ 11,494            33,210     \5\ 1,434  \5\ 46,138      41,498     \5\ 1,524      \5\ 43,022   \5\ 14,527
    1991.............................          11,807            34,730         1,629      48,166      45,514         1,505          47,019       15,675
    1992.............................          12,748            38,684         1,717      53,149      48,627         1,661          50,288       18,535
    1993.............................          14,683            44,227         1,889      60,799  \6\ 54,214         1,845          56,059       23,276
    1994.............................          16,895            38,355         2,118      57,368      58,006         1,718          59,724       20,919
    1995.............................          19,244            36,988         1,937      58,169      63,491         1,722          65,213       13,874
    1996.............................          18,731            61,702         1,392      82,025      67,176         1,771          68,946       26,953
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For 1970 and 1975, fiscal years cover the interval from July 1 through June 30; fiscal years 1980-2005 cover the interval from October 1 through    
  September 30.                                                                                                                                         
\2\ General fund matching payments, plus certain interest-adjustment items.                                                                             
\3\ Other income includes recoveries of amounts reimbursed from the trust fund which are not obligations of the trust fund and other miscellaneous      
  income.                                                                                                                                               
\4\ The financial status of the program depends on both the total net assets and the liabilities of the program.                                        
\5\ Includes the impact of the Medicare Catastrophic Coverage Act of 1988 (Public Law 100-360).                                                         
\6\ Includes the impact of the transfer to the HI Trust Fund of the SMI catastrophic coverage reserve fund on March 31, 1993 as specified in Public Law 
  102-394. Actual benefit payments for 1993 were $52,409 million and the amount transferred was $1,805 million.                                         
                                                                                                                                                        
Source: Board of Trustees, Federal Supplementary Medical Insurance Trust Fund (1997).                                                                   


  TABLE 2-11.--CONTRIBUTIONS AS A PERCENT OF EXPECTED LIFETIME BENEFITS 
UNDER MEDICARE FOR SELECTED SELF-INSURED ENROLLEES REACHING AGE 65 AS OF
                           1985, 1995, OR 2005                          
------------------------------------------------------------------------
                                                        Year            
                 Category                  -----------------------------
                                              1985      1995      2005  
------------------------------------------------------------------------
Self-insured men who earned average wages:                              
    Hospital insurance....................      31.6      50.4      66.2
    Supplementary medical insurance.......      24.3      17.8      11.5
                                           -----------------------------
        Medicare total....................      28.9      37.3      41.0
                                           =============================
Self-insured women who earned average                                   
 wages:                                                                 
    Hospital insurance....................      26.0      42.7      56.9
    Supplementary medical insurance.......      24.5      16.9      11.8
                                           -----------------------------
        Medicare total....................      25.5      31.8      36.0
------------------------------------------------------------------------
Note.--Contributions include employers' and employees' hospital         
  insurance (HI) payroll taxes, interest, and supplementary medical     
  insurance (SMI) premiums. Any other taxes paid by enrollees are not   
  included. Estimates are for beneficiaries with sufficient work history
  to qualify for benefits. However, up to 20 percent of Medicare        
  beneficiaries qualify on the basis of their spouse's work history, not
  their own. For spouse-insured beneficiaries, contributions as a       
  percent of benefits are lower because spouse-insured beneficiaries    
  paid little or no HI payroll taxes. Estimates assume an expected      
  lifetime at age 65 of 15 years for men (to age 80) and 19 years for   
  women (to age 84). Present discounted values for expected benefits    
  were obtained using the average interest rate projected for HI Trust  
  Fund earnings over the same years.                                    
                                                                        
Source: Congressional Budget Office.                                    

    Contributions by self-insured women as a percentage of 
expected benefits are smaller than they are for men. Actual 
contributions by men and women are the same in the illustrative 
calculations. However, a woman's lifetime benefits are larger 
because a woman's lifetime expectancy is 4 years longer at age 
65 (table 2-11).
    In 1995 dollars, the present discounted value of Medicare 
benefits net of contributions (that is the net transfer or 
subsidy value) is estimated at $32,222 for men and $41,355 for 
women who retired in 1985. For those retiring in 1995, the 
value is estimated at $51,813 for men and $68,777 for women. 
CBO projects that values will continue to increase in the 
future, reaching $71,868 for men and $91,594 for women by 2005 
(table 2-12).

       TABLE 2-12.--PRESENT DISCOUNTED VALUE OF LIFETIME BENEFITS,      
CONTRIBUTIONS, AND NET TRANSFER UNDER MEDICARE FOR SELECTED SELF-INSURED
            ENROLLEES REACHING AGE 65 IN 1985, 1995, OR 2005            
                       [In constant 1995 dollars]                       
------------------------------------------------------------------------
                                                    Year                
             Category             --------------------------------------
                                       1985         1995         2005   
------------------------------------------------------------------------
Self-insured men who earned                                             
 average wages:                                                         
    Benefits.....................     $45,305      $82,599     $121,898 
    Contributions................      13,083       30,787       50,030 
                                  --------------------------------------
        Net transfer.............      32,222       51,813       71,868 
                                  ======================================
Self-insured women who earned                                           
 average wages                                                          
    Benefits.....................      55,483      100,862      143,036 
    Contributions................      14,128       32,084       51,442 
                                  --------------------------------------
        Net transfer.............      41,355       68,777       91,594 
------------------------------------------------------------------------
Note.--Contributions include employers' and employees' HI payroll taxes,
  interest, and SMI premiums. Any other taxes paid by enrollees are     
  included. Net transfer is benefits net of contributions. Estimates are
  for beneficiaries with sufficient work history to qualify for         
  benefits. However, up to 20 percent of Medicare beneficiaries qualify 
  on the basis of their spouse's work history, not their own. For spouse-
  insured beneficiaries qualify on the basis of their spouse's work     
  history, not their own. For spouse-insured beneficiaries,             
  contributions as a percent of benefits are lower and the net transfer 
  is larger because spouse-insured beneficiaries paid little or no HI   
  payroll taxes. Estimates assume an expected lifetime at age 65 to 15  
  years for men (to age 80) and 19 years for women (to age 84). Present 
  discounted values for unexpected benefits were obtained using the     
  average interest rate projected for HI Trust Fund earnings over the   
  same years. The CPI-U was used to get constant 1995 dollars.          
                                                                        
Source: Congressional Budget Office.                                    

                 PART A SERVICES--COVERAGE AND PAYMENTS

                      Inpatient Hospital Services

    Medicare part A provides reimbursement for inpatient 
hospital care through the prospective payment system (PPS), 
established by Congress in the Social Security Amendments of 
1983 (Public Law 98-21). Before the enactment of PPS, Medicare 
paid hospitals retrospectively for the full costs they 
incurred, subject to certain limits and tests of 
reasonableness. Congress had previously acted to contain 
growing hospital costs by placing certain limits on routine 
inpatient care operating costs. However, medical costs 
continued to grow faster than the rate of inflation in the 
early 1980s, so PPS was enacted to constrain the growth of 
Medicare's inpatient hospital costs by providing incentives for 
hospitals to provide care more efficiently (see appendix D for 
further information about hospital services).
    Under PPS, fixed hospital payment amounts are established 
in advance of the provision of services on the basis of a 
patient's diagnosis. Hospitals that are able to provide 
services for less than the fixed PPS payment may keep the 
difference. Hospitals with costs that exceed the fixed PPS 
payment lose money on the case. The system's fixed prices are 
determined in advance on a cost-per-case basis, using a 
classification system of over 500 diagnosis-related groups 
(DRGs). Each Medicare case is assigned to one of the DRGs based 
on the patient's medical condition and treatment. DRGs are 
assigned relative weights to reflect the variation in the costs 
of treating a particular diagnosis. The DRG-based payment rate 
is designed to represent the national average cost per case for 
treating a patient with a particular diagnosis. Payments for a 
particular DRG will vary among different hospitals depending on 
the hospital's location and certain other characteristics. In a 
particular hospital, all cases assigned to the same DRG are 
reimbursed at the same predetermined rate.
    The PPS payment rates are updated each year using an update 
factor which is determined, in part, by the projected increase 
in the hospital market basket index (MBI). The hospital MBI 
measures the cost of goods and services that are purchased by 
hospitals, yielding one price inflator for all hospitals in a 
given year.
    In addition to the basic DRG payment for each case, PPS 
hospitals may also receive certain supplemental Medicare 
payments. Additional hospital payments include indirect medical 
education costs, disproportionate-share hospital payments, 
outlier payments, and payments for inpatient dialysis provided 
to end-stage renal disease beneficiaries. Certain categories of 
hospital expenses are not included in the PPS rates and are 
reimbursed in some other way, including direct medical 
education costs and capital-related costs. Certain facilities 
receive special treatment under PPS, particularly certain types 
of isolated or essential hospitals in rural areas, including 
regional referral centers (RRCs), sole community hospitals 
(SCHs), and Medicare-dependent small rural hospitals.
    Specialized facilities are excluded from PPS and are paid 
on the basis of reasonable costs subject to rate of increase 
limits. PPS-exempt facilities include psychiatric hospitals, 
rehabilitation hospitals, children's hospitals, cancer research 
centers, and long-term care hospitals. States are also allowed 
to apply for a waiver from PPS and establish a prospective 
system for setting hospital rates instead of what would be paid 
under PPS; Maryland is the only State that continues to operate 
under such a waiver.
    Table 2-13 provides 1995 data on the utilization of 
inpatient hospital services by type of enrollee and type of 
hospital.

                   Skilled Nursing Facility Services

Coverage
    The Medicare Program covers extended care services provided 
in nursing homes for beneficiaries who require additional 
skilled nursing care and rehabilitation services following a 
hospitalization. These extended care services, commonly known 
as skilled nursing facility (SNF) benefits, are covered under 
part A of the program for up to 100 days per spell of illness 
and must be provided in a skilled nursing facility certified to 
participate in Medicare. A spell of illness is that period 
which begins when a beneficiary is furnished 

TABLE 2-13.--USE OF INPATIENT HOSPITAL SERVICES BY MEDICARE ENROLLEES, BY TYPE OF ENROLLEE AND TYPE OF HOSPITAL,
                                             CALENDAR YEAR 1995 \1\                                             
----------------------------------------------------------------------------------------------------------------
                                    Bills \2\            Covered days of care               Reimbursement       
                             -----------------------------------------------------------------------------------
Type of enrollee and type of                                                         Amount                     
          hospital            Number in  Per 1,000  Number in  Per bill  Per 1,000     in     Per bill     Per  
                              thousands  enrollees  thousands            enrollees  millions            enrollee
----------------------------------------------------------------------------------------------------------------
All enrollees:                                                                                                  
  All hospitals.............     12,474        336     86,041       6.9      2,317   $76,519    $6,134    $2,061
    Short stay..............     11,260        303     72,124       6.4      1,942    69,261     6,151     1,865
    Long stay...............      1,214         33     13,917      11.5        375     7,258     5,979       195
      Psychiatric...........        302          8      2,688       8.9         72       937     3,103        25
      All other.............        912         25     11,229      12.3        302     6,321     6,931       170
Aged:                                                                                                           
  All hospitals.............     10,610        324     73,165       6.9      2,235    65,980     6,219     2,015
    Short stay..............      9,848        301     63,695       6.5      1,945    60,572     6,151     1,850
    Long stay...............        762         23      9,470      12.4        289     5,408     7,097       165
      Psychiatric...........         90          3        902      10.0         28       342     3,800        10
      All other.............        672         21      2,295       3.4         70     5,066     7,539       155
Disabled:                                                                                                       
  All hospitals.............      1,864        424     12,876       6.9      2,931    10,539     5,654     2,399
    Short stay..............      1,412        321      8,429       6.0      1,919     8,689     6,154     1,978
    Long stay...............        452        103      4,447       9.8      1,012     1,850     4,093       421
      Psychiatric...........        213         48      1,787       8.4        407       596     2,798       136
      All other.............        239         54      2,660      11.1        605     1,254     5,247       285
----------------------------------------------------------------------------------------------------------------
\1\ Preliminary data. Totals may not add due to rounding.                                                       
\2\ Discharges not available by type of hospital.                                                               
                                                                                                                
Note.--Only services rendered by inpatient hospitals are included.                                              
                                                                                                                
Source: Health Care Financing Administration, Bureau of Management and Strategy.                                

inpatient hospital or SNF care and ends when the beneficiary 
has been neither an inpatient of a hospital nor an SNF for 60 
consecutive days. A beneficiary may have more than one spell of 
illness per year.
    In order to be eligible for SNF care, the beneficiary must 
have been an inpatient of a hospital for at least 3 consecutive 
days and must be transferred to a SNF, usually within 30 days 
of discharge from the hospital. Furthermore, a physician must 
certify that the beneficiary is in need of skilled nursing care 
or other skilled rehabilitation services, which as a practical 
matter can only be provided on an inpatient basis and which are 
related to the condition for which the beneficiary was 
hospitalized.
    Covered SNF services include the following:
  --Nursing care provided by or under the supervision of a 
        registered nurse;
  --Room and board;
  --Physical or occupational therapy or speech-language 
        pathology;
  --Medical social services;
  --Drugs, biologicals, supplies, appliances, and equipment 
        ordinarily furnished by a SNF for the care of patients;
  --Medical services of interns and residents in training under 
        an approved teaching program of a hospital with which 
        the SNF has a transfer agreement; and
  --Other services necessary to the health of patients that are 
        generally provided by SNFs.
Reimbursement
     Medicare has reimbursed the great bulk of skilled nursing 
facility (SNF) care on a retrospective cost-based basis. This 
has meant that SNFs have been paid after services were 
delivered for the reasonable costs (as defined by program) they 
incurred for the care they provided. For these purposes, the 
costs SNFs incurred for providing services to beneficiaries 
were divided into three major categories: (1) routine service 
costs--nursing, room and board, administrative, and other 
overhead costs; (2) ancillary services, such as therapy 
services, laboratory, radiology procedures, supplies and other 
equipment; and (3) capital-related costs, including net 
depreciation expense, taxes, lease and rental payments, 
improvements that extend the life of or increase productivity 
of assets, net interest expense, and so forth.
     Routine costs have been subject to national average per 
diem limits, adjusted to reflect differences in wage levels 
from area to area. Ancillary service and capital costs have 
been paid on the basis of reasonable costs and neither have 
been subject to limits.
     Beginning July 1, 1998, the Balanced Budget Act of 1997 
phases in a prospective payment system for SNFs that will pay a 
Federal per diem rate for covered SNF services. Covered 
services will include part A SNF as well as all services for 
which payment may be made under part B during the period when 
the beneficiary is provided covered SNF care (excluding, 
however, physician services, certain nurse practitioner and 
physician assistant services, certified nurse-midwife services, 
qualified psychologist services, services of a certified 
registered nurse anesthetist, certain dialysis services and 
drugs, and in 1998 only, the transportation costs of 
electrocardiogram equipment).
     The Federal per diem payment will cover routine service 
costs, ancillary costs, and capital-related costs, but will not 
include costs associated with approved educational activities. 
The actual per diem rate received by a facility will include 
adjustments for case mix based on a resident classification 
system established by the Secretary to account for relative 
resource utilization of different patient types. The labor-
related portion of the rate will also include budget-neutral 
adjustments to reflect the relative levels of wages and wage-
related cost for the geographic area in which the facility is 
located.
     The resident classification system used by the Secretary 
for the new SNF prospective payment system is expected to be 
similar to that developed under a Health Care Financing 
Administration demonstration known as resource utilization 
groups (RUGs)-III. Under RUGs-III, classification is based on 
residents' clinical conditions; extent of services needed, such 
as nursing care, rehabilitation, respiratory/ventilator care of 
tube feedings; and functional status, such as the amount of 
support needed to eat or toilet. This new system pays, for 
example, three times more for bedridden, severely ill patients 
needing a variety of therapies than for ambulatory patients who 
need only posthospital monitoring and surgical wound treatment.
     For a beneficiary residing in a SNF (or a part of a 
facility that includes a SNF) but no longer eligible for part A 
SNF care, payments for part B covered services will have to be 
made to the facility whether or not the item or service was 
furnished by the facility, by others under arrangement, or 
under any other contracting or consulting arrangement. This 
requirement is often referred to as the ``consolidated 
billing'' provision of the new law. Payment for part B items 
and services must include a code identifying the items or 
services delivered. In addition, bills submitted by physicians 
must include the SNFs provider number.
 Growth in payments
     For the past several years, SNF care has been one of 
Medicare's fastest growing benefits. SNF spending in calendar 
year 1990 stood at $2.5 billion; by calendar year 1996 it had 
increased to $11.7 billion, for an average annual growth rate 
of 29 percent (see table 2-14). Because spending for SNF care 
has been growing at a faster rate than other benefits, both its 
share of total Medicare spending as well as its share of total 
part A expenditures have increased significantly, actually 
doubling during this same period. Table 2-14 presents 
historical SNF spending data on a calendar year basis.
     Table 2-15 shows that since 1990 the number of Medicare 
beneficiaries receiving SNF care grew from 638,000 to 1,145,000 
in 1996 or by 79.5 percent; the number of covered days grew 
from 25.1 million to 40.2 million or by 60 percent. Payment per 
day, however, tripled, increasing by 198 percent during the 
period, and reached $292 per day.

  TABLE 2-14.--ESTIMATED MEDICARE PAYMENTS FOR SKILLED NURSING FACILITY 
                  CARE BY TYPE OF SERVICE, 1983-96 \1\                  
------------------------------------------------------------------------
                                                  Payments              
                                                    (in        Percent  
                                                 billions)    change \2\
------------------------------------------------------------------------
Calendar year:                                                          
    1983......................................         $0.5  ...........
    1984......................................          0.6          6.9
    1985......................................          0.6          2.9
    1986......................................          0.6          0.2
    1987......................................          0.6          8.8
    1988......................................          0.9         47.1
    1989......................................          3.5        275.7
    1990......................................          2.5        -29.0
    1991......................................          2.9         18.4
    1992......................................          4.5         55.3
    1993......................................          6.5         44.4
    1994......................................          8.4         29.2
    1995 \1\..................................         10.4         23.8
    1996 \1\..................................         11.7         12.5
------------------------------------------------------------------------
\1\ Estimated.                                                          
\2\ Rounding in payments may not reflect actual change.                 
                                                                        
Note.--Payments reported here are incurred expenditures, net of         
  beneficiary copayments.                                               
                                                                        
Source: Health Care Financing Administration, Office of the Actuary, and
  Prospective Payment Assessment Commission (1995, 1996).               


       TABLE 2-15.--MEDICARE SKILLED NURSING FACILITY UTILIZATION AND PAYMENTS PER PERSON SERVED, 1983-96       
----------------------------------------------------------------------------------------------------------------
                                                    People served             Days             Payment per day  
                                               -----------------------------------------------------------------
                 Calendar year                                          Number      Per                         
                                                  Number   Per 1,000     (in       person     Amount    Percent 
                                                           enrollees  millions)    served                change 
----------------------------------------------------------------------------------------------------------------
1983..........................................    265,000          9        9.3       35.1        $56  .........
1984..........................................    299,000         10        9.6       32.2         58        3.2
1985..........................................    314,000         10        8.9       28.4         65       11.1
1986..........................................    304,000         10        8.2       26.8         71        9.6
1987..........................................    293,000          9        7.4       25.4         84       19.3
1988..........................................    384,000         12       10.7       27.8         87        2.6
1989..........................................    636,000         19       29.8       46.8        117       34.6
1990..........................................    638,000         19       25.1       39.5         98      -16.1
1991..........................................    671,000         20       23.7       35.3        123       25.9
1992..........................................    785,000         22       29.0       36.9        157       27.1
1993..........................................    908,000         25       34.4       37.9        188       20.1
1994..........................................  1,068,000         29       37.1       39.7        226       20.1
1995..........................................  1,110,000         30       39.8       35.1        267       18.1
1996 \1\......................................  1,145,000         30       40.2       35.1        242        9.3
----------------------------------------------------------------------------------------------------------------
\1\ Estimated.                                                                                                  
                                                                                                                
Source: Health Care Financing Administration, Office of the Actuary.                                            

     Tables 2-14 and 2-15 also show that SNF utilization and 
spending first began to increase significantly in 1988 and 
1989. These increases can be traced to significant changes that 
occurred in the benefit at that time. First HCFA issued new 
coverage guidelines that became effective early in 1988. The 
guidelines provided SNFs a great deal more information than had 
previously existed about criteria that must be met for a 
beneficiary to receive Medicare coverage. Prior to this time, 
studies had pointed to a lack of adequate written guidance on 
coverage criteria that led to inconsistencies in coverage 
decisions for a benefit that was intended to be uniform across 
the country. As a result, many SNFs were reluctant to accept 
Medicare beneficiaries because of the possibility that a 
submitted claim would be retroactively denied. The 1988 
guidelines clarified coverage criteria by providing numerous 
examples of covered and noncovered care. Furthermore, the 
guidelines explained that even when a patient's full or partial 
recovery is not possible, care could be covered if it were 
needed to prevent deterioration or to maintain current 
capabilities. Previously, some care had been denied because 
patients' health status was not expected to improve.
    The second major, though temporary, change in Medicare's 
SNF benefit came in 1988 with the enactment of the Medicare 
Catastrophic Coverage Act (MCCA). Effective beginning in 1989, 
this legislation: eliminated the SNF benefit's prior 
hospitalization requirement; revised the coinsurance 
requirement to be equal to 20 percent of the national average 
estimated per diem cost of SNF services for the first 8 days of 
care; and authorized coverage of up to 150 days of care per 
calendar year (rather than 100 days per spell of illness). 
These changes were repealed in 1989, and the SNF benefit's 
structure assumed its prior form. Table 2-14 shows that 
spending for SNF care decreased by 29 percent between 1989 and 
1990, but did not drop back to 1988 levels. Studies have 
suggested that the coverage guidelines and MCCA changes 
together might have caused a long-run shift in the nursing home 
industry toward Medicare patients that would not end with the 
repeal of MCCA. This trend is reflected in data showing a 65-
percent increase, from 8,638 to 14,219, in facilities 
participating in Medicare between 1989 and 1996.
    As noted above, large average annual rates of growth in 
Medicare SNF spending can be explained not only by increases in 
volume of services covered, but also by significant increases 
in reimbursements per day of care. Prospective Payment 
Assessment Commission analysis has shown that Medicare 
reimbursement policies may explain this increase. While routine 
care costs are subject to per diem limits, ancillary services 
are not. Higher ancillary service use, therefore, results in 
greater Medicare payments. In addition, a SNF may claim high 
ancillary service use as a justification for an exemption from 
routine service cost limits, thereby increasing those payments. 
In 1990, charges for physical, occupational, speech, and 
respiratory therapy services were approximately 15 percent of 
total Medicare SNF charges. By 1994, these services represented 
over 30 percent of charges. Although final payments for therapy 
and other ancillary services are based on costs rather than 
charges, these estimates reveal the relative importance of 
these services in the overall growth of Medicare Program 
payments for SNF services. This growth is expected to be 
controlled in the future by the new SNF prospective payment 
system mandated by the Balanced Budget Act of 1997.

                          Home Health Services

Coverage
    Both parts A and B of Medicare cover home health visits for 
persons who need skilled nursing care on an intermittent basis 
or physical therapy or speech therapy. Persons must also be 
homebound and under the care of a physician who establishes and 
periodically reviews a plan of care for the patient. While a 
beneficiary cannot become eligible for home health on the basis 
of needing only occupational therapy, this need can continue 
eligibility for home health care coverage, even if intermittent 
skilled nursing care or physical or speech therapy are no 
longer needed.
    Medicare's home health benefit is intended to serve 
beneficiaries needing acute medical care that must be provided 
by skilled health care personnel, and was never envisioned as 
providing coverage for the nonmedical supportive care and 
personal care assistance needed by chronically impaired 
persons. If beneficiaries meet the required eligibility 
criteria, they become entitled to an unlimited number of home 
health visits. Home health visits are not subject to 
deductibles or coinsurance.
    For beneficiaries meeting the qualifying criteria, 
Medicare's home health benefit covers the following services:
  --Part-time or intermittent nursing care provided by or under 
        the supervision of a registered nurse;
  --Physical or occupational therapy or speech-language 
        pathology services;
  --Medical social services;
  --Part-time or intermittent services of a home health aide 
        who has successfully completed a training program 
        approved by the Secretary;
  --Medical supplies (excluding drugs and biologicals) and 
        durable medical equipment;
  --Medical services provided by an intern or resident in 
        training under an approved training program with which 
        the agency may be affiliated; and
  --Certain other outpatient services which involve the use of 
        equipment that cannot readily be made available in the 
        beneficiary's home.
    In 1989, as a result of an agreement reached in a class 
action lawsuit, Duggan v. Bowen, HCFA published new manual 
instructions that clarified the criteria which must be met for 
Medicare coverage of home health services. The coverage 
guidelines, for example, specify that to meet the requirement 
of needing ``intermittent'' skilled nursing care, an individual 
must have a medically predictable recurring need for skilled 
nursing services. This need can be met in most instances if the 
individual requires these services at least once every 60 days. 
The guidelines further provide that a service is not considered 
a skilled nursing service merely because it is performed by or 
under the direct supervision of a licensed nurse; instead the 
inherent complexity of the service, the condition of the 
patient, and accepted standards of medical and nursing practice 
must be considered. Skilled nursing services may be justified 
for such purposes as treatment of illness or injury; 
observation and assessment of a patient's condition when only 
the specialized skills of a medical professional can determine 
a patient's status; management and evaluation of a patient care 
plan to ensure that essential nonskilled care is achieving its 
purpose; and teaching and training activities for the patient 
and the patient's family or care givers.
     The Balanced Budget Act included several provisions which 
clarified coverage criteria for home health care:
  --Persons will no longer be able to qualify for Medicare's 
        home health benefit on the basis of needing skilled 
        nursing care for venipuncture for the purpose of 
        obtaining a blood sample.
  --Effective for services furnished on or after October 1, 
        1997, the Medicare statute includes definitions for 
        part-time and intermittent skilled nursing and home 
        health aide services. For purposes of receiving skilled 
        nursing and home health aide services, ``part-time or 
        intermittent'' is defined as skilled nursing and home 
        health aide services furnished any number of days per 
        week as long as they were furnished (combined) less 
        than 8 hours each day and 28 or fewer hours each week 
        (or, subject to review on a case-by-case basis as to 
        the need for care, less than 8 hours each day and 35 or 
        fewer hours per week). For purposes of qualifying for 
        Medicare's home health benefit because of a need for 
        intermittent skilled nursing care, ``intermittent'' is 
        defined as skilled nursing care that is either provided 
        or needed on fewer than 7 days each week, or less than 
        8 hours of each day for periods of 21 days or less 
        (with extensions in exceptional circumstances when the 
        need for additional care is finite and predictable).
  --The Secretary of Health and Human Services is required to 
        conduct a study on the criteria that should be applied 
        for determining whether an individual should be 
        considered homebound for purposes of qualifying for 
        Medicare's home health benefit. The criteria should 
        include the extent and circumstances under which a 
        person may be absent from the home but nonetheless 
        qualify. The Secretary is required to report to 
        Congress by October 1, 1998, and make specific 
        recommendations on such criteria.
  --Effective for services furnished on or after October 1, 
        1997, the Secretary is required to establish normative 
        guidelines for the frequency and duration of home 
        health services. Payments will be denied for visits 
        that exceed the normative standards. The Secretary is 
        also authorized to establish a process for notifying a 
        physician when the number of home health visits 
        furnished according to a prescription or certification 
        of the physician significantly exceeds the threshold 
        normative guidelines. The Secretary may adjust the 
        thresholds to reflect demonstrated differences in the 
        need for home health services among different 
        beneficiaries.
Reimbursement
    Home health care agencies have been reimbursed on the basis 
of reasonable costs, up to specified limits. Cost limits are 
determined separately for each type of covered home health 
service (skilled nursing care, physical therapy, speech 
pathology, occupational therapy, medical social services, and 
home health aide), and according to whether an agency is 
located in an urban or rural area. Cost limits, however, have 
been applied to aggregate agency expenditures; that is, an 
aggregate cost limit is set for each agency that equals the 
limit for each type of service multiplied by the number of 
visits of each type provided by the agency.
     The Balanced Budget Act reduces the per visit cost limits 
from 112 percent of the mean labor-related and nonlabor per 
visit cost to 105 percent of the national median of labor-
related and nonlabor costs for freestanding home health 
agencies, effective for cost-reporting periods beginning 
October 1, 1997 (in effect, delaying the cycle for updating the 
limits).
     In addition, home health agencies, for cost-reporting 
periods beginning on or after October 1, 1997, will be paid the 
lesser of: (1) their actual costs (that is, allowable 
reasonable costs); (2) the per visit limits, reduced to 105 
percent of the national median, applied in the aggregate; or 
(3) a new blended agency-specific per beneficiary annual limit 
applied to the agency's unduplicated census count of patients. 
The blended per beneficiary limit will be based 75 percent on 
an agency's own costs per beneficiary and 25 percent on the 
average cost per beneficiary for agencies in the same census 
region (adjusted for differences in labor costs). These costs 
will be calculated from cost reports for cost-reporting periods 
ending in fiscal year 1994, recognizing 98 percent of 
reasonable costs for that period and updating them by the home 
health market basket. The costs associated with nonroutine 
medical supplies would be included in this calculation. For new 
providers and those providers without a 12-month cost-reporting 
period ending in fiscal year 1994, the per beneficiary limit 
will equal the median of these limits (or the Secretary's best 
estimates) applied to home health agencies. Home health 
agencies that have altered their corporate structure or name 
will not be considered new providers for these purposes. For 
beneficiaries using more than one home health agency, the per 
beneficiary limitation will be prorated among the agencies.
     The Secretary is required to establish the per visit 
limits in effect for fiscal year 1998 by January 1, 1998, and 
the per beneficiary limits by April 1, 1998. For subsequent 
fiscal years (beginning October 1), the Secretary will be 
required to establish limits by the prior August 1.
Prospective payment for home health care
    Beginning October 1, 1999, the Secretary is required to 
establish a prospective payment system (PPS) for home health 
and implement the system. All services covered and paid on a 
reasonable cost basis at the time of enactment of the Balanced 
Budget Act including medical supplies, must be paid on a 
prospective basis. For the new prospective system, the 
Secretary will consider an appropriate unit of service and the 
number, type, and duration of visits provided within that unit, 
potential changes in the mix of services provided within that 
unit and their cost, and a general system design that provides 
for continued access to quality services. In implementing the 
system, the Secretary can provide for a transition of not 
longer than 4 years during which a portion of the payment will 
be based on agency-specific costs, but only if aggregate 
payments are not greater than they would have been if a 
transition had not occurred.
     Under the new system, the Secretary will compute a 
standard prospective payment amount (or amounts) that will 
initially be based on the most current audited cost report data 
available to the Secretary. For fiscal year 2000, payment 
amounts under the prospective system must be computed in such a 
way that total payments will equal amounts that would have been 
paid had the system not been in effect, but will also reflect a 
15-percent reduction in cost limits and per beneficiary limits 
in effect September 30, 1999. To assure savings from this 
reduction, the Secretary will be required to reduce cost limits 
and per beneficiary limits in effect September 30, 1999, by 15 
percent, even if the Secretary is not prepared to implement the 
new system on October 1.
     The payment amount for a unit of home health service will 
be adjusted by a case-mix adjustor factor established by the 
Secretary to explain a significant amount of the variation in 
the cost of different units of service. The labor-related 
portion of the payment amount will be adjusted by an area wage 
adjustment factor that reflects the relative level of wages and 
wage-related costs in a particular geographic area as compared 
to the national average.
     Claims for home health services furnished on or after 
October 1, 1998, will have to contain an appropriate identifier 
for the physician prescribing home health services or 
certifying the need for care. Claims will also be required to 
include information on the length of time of a service unit, as 
measured in 15-minute increments. The categories of services 
for which time information must be included on a claim are 
skilled nursing care; physical and occupational therapy and 
speech-language pathology; medical social services; and home 
health aide services.
     In order for home health services to be considered covered 
care, home health care agencies will be required to submit 
claims for all services, and all payments will have to be made 
to a home health agency without regard to whether the item or 
service was furnished by the agency, by others under 
arrangement, or under any other contacting or consulting 
arrangement.
 Transfer of some home health payments to part B
     Under current law, both parts A and B of Medicare cover 
home health. Neither part of the program applies deductibles or 
coinsurance to covered visits, and beneficiaries are entitled 
to an unlimited number of visits as long as they meet 
eligibility criteria. Section 1833(d) of Medicare law prohibits 
payments under part B for covered services to the extent that 
individuals are also covered under part A for the same 
services. As a result, the comparatively few persons who have 
no part A coverage are the only beneficiaries for whom payments 
have been made under part B.
     The Balanced Budget Act of 1997 gradually transfers from 
part A to part B home health visits that are not part of the 
first 100 visits following a beneficiary's stay in a hospital 
or SNF (that is, postinstitutional visits) and during a home 
health spell of illness.
     The transfer will be phased in over a period of 6 years, 
between 1998 and 2003, with the Secretary transferring one-
sixth of the aggregate expenditures associated with transferred 
visits in 1998 and an additional one-sixth each year thereafter 
until fully implemented in 2003. Beginning January 1, 2003, 
part A will cover only postinstitutional home health services 
for up to 100 visits during a home health spell of illness, 
except for those persons with part A coverage only, who will be 
covered for services without regard to the postinstitutional 
limitation.
    The increase in the part B premium attributable to 
transferred expenditures will be phased in over a period of 7 
years, between 1998 and 2004. For 1998, the part B premium will 
be increased by one-seventh of the extra costs due to the 
transfer; for 1999, the part B premium will be increased by 
two-sevenths of the extra costs; for 2000, three-sevenths; for 
2001, four-sevenths; for 2002, five-sevenths; for 2003, six-
sevenths; and for 2004, the total of the extra costs due to the 
transfer.
     Postinstitutional home health services are defined for 
these purposes as services furnished to a Medicare beneficiary: 
(1) after an inpatient hospital or rural primary care hospital 
stay of at least 3 consecutive days, initiated within 14 days 
after discharge; or (2) after a stay in a SNF, initiated within 
14 days after discharge. Home health spell of illness is 
defined as the period beginning when a patient first receives 
postinstitutional home health services and ending when the 
beneficiary had not received inpatient hospital, SNF, or home 
health services for 60 days.
     Claims administration for transferred visits will continue 
to be done by part A fiscal intermediaries.
     In related Medicaid provisions, States will receive 
allotments to cover under their Medicaid Programs that portion 
of the Medicare part B premium attributable to the transfer of 
visits to part B for Medicare beneficiaries with incomes 
between 135 and 175 percent of poverty. The Federal Government 
will pay 100 percent of these costs, just so long as a State 
does not exceed its allotment. (See Specified Low-Income 
Beneficiaries, below.)
     The Balanced Budget Act also includes a provision 
requiring the Secretary, not later than October 1, 1997, to 
report to the Commerce, Ways and Means, and Finance Committees 
on an estimate of Medicare home health outlays under parts A 
and B during each of fiscal years 1998-2002. Not later than the 
end of each of the years 1999-2002, the Secretary is also 
required to submit a report that compares actual outlays with 
estimated outlays. If the Secretary finds for a fiscal year 
that actual outlays were greater than estimated outlays, the 
report is also required to include recommendations regarding 
beneficiary copayments or such other methods as will reduce the 
growth in outlays for Medicare home health services.
Growth in payments
    For the past several years, the home health benefit has 
been Medicare's fastest growing benefit. As table 2-16 
indicates, spending for home health began to increase in 1989 
when the total stood at $2.5 billion. By 1996, spending had 
increased to $18.1 billion, for an average annual rate of 
growth of 33 percent. Because spending for home health has been 
growing at a faster rate than other benefits, its share of 
total net Medicare spending has also increased. Almost all home 
health claims have been paid out of the Medicare Part A 
Hospital Insurance Trust Fund, but beginning with fiscal year 
1998, this will change as explained above.

       TABLE 2-16.--MEDICARE PAYMENTS FOR HOME HEALTH, 1983-96 \1\      
------------------------------------------------------------------------
                                                  Payments              
                Calendar year                       (in        Percent  
                                                 billions)    change \2\
------------------------------------------------------------------------
1983..........................................         $1.6           NA
1984..........................................          1.8         17.5
1985..........................................          1.9          4.0
1986..........................................          1.9         -0.5
1987..........................................          1.9         -1.2
1988..........................................          2.0          8.3
1989..........................................          2.5         23.3
1990..........................................          3.9         53.2
1991..........................................          5.6         43.6
1992..........................................          7.9         41.1
1993..........................................         10.3         30.4
1994..........................................         13.3         30.1
1995..........................................         16.2         21.8
1996 \3\......................................         18.1         11.7
------------------------------------------------------------------------
\1\ Includes both part A and part B expenditures.                       
\2\ Rounding in payments may not reflect actual change.                 
\3\ Estimated.                                                          
                                                                        
NA--Not applicable.                                                     
                                                                        
Note.--Payments reported here are incurred expenditures rather than     
  outlays.                                                              
                                                                        
Source: Health Care Financing Administration, Office of the Actuary and 
  Prospective Payment Assessment Commission (1995, 1996).               

    Table 2-17 shows that most of the growth in home health 
spending has been the result of an increasing volume of 
services being covered under the program, both in terms of 
increasing numbers of users and an increasing number of covered 
visits per user. The number of persons served per 1,000 
enrollees increased from 50 in 1989 to 99 in 1996, an increase 
of 98 percent over the period. Average number of visits per 
person served increased from 27 in 1989 to 76 in 1996, an 
increase of 181 percent.
    Increasing per-visit costs for home health services have 
accounted for comparatively little spending growth. Payments 
per visit increased at a relatively low rate, from $54 per 
visit in 1989 to $62 in 1996, a 14.8-percent increase for the 
period.
    Some portion of growth in the volume of covered visits may 
represent a delayed response to an increasing need for skilled 
home care resulting from incentives, contained within 
Medicare's hospital prospective payment system, to discharge 
patients more quickly to their homes. During early years of 
hospital prospective payment, HCFA had in place medical review 
and claims processing policies that had resulted in high denial 
rates for home health care. These policies were relaxed by 
1989. In addition, the 1989 revised home health guidelines are 
believed to have liberalized coverage policies, increasing the 
number of allowed visits per week and duration of eligibility. 
Furthermore, the revised guidelines may have opened the door to 
eligibility for persons who have ongoing medical problems that 
require personal care assistance associated more with long-term 
care rather than acute care. Other factors that explain growth 
in spending include aging of the population, technological 
advances that have made possible a level of care in the home 
that previously was only available in hospitals and other 
institutions, and increased supply of services because of the 
expanding number of agencies participating in Medicare (9,939 
in 1996 compared to 5,686 in 1989).

               TABLE 2-17.--MEDICARE HOME HEALTH CARE UTILIZATION AND PAYMENTS PER VISIT, 1983-96               
----------------------------------------------------------------------------------------------------------------
                                        People served                  Visits                                   
                                   -------------------------------------------------------                      
     Calendar year of service                               Number                 Per      Payment     Percent 
                                      Number   Per 1,000     (in     Per 1,000    person   per visit  change \1\
                                               enrollees  millions)  enrollees    served                        
----------------------------------------------------------------------------------------------------------------
1983..............................  1,318,000         45       36.9      1,234         28        $43          NA
1984..............................  1,498,000         50       40.4      1,330         27         46         7.3
1985..............................  1,549,000         50       39.4      1,274         25         49         6.5
1986..............................  1,571,000         50       38.0      1,204         24         50         3.4
1987..............................  1,544,000         48       35.6      1,104         23         53         5.2
1988..............................  1,582,000         48       37.1      1,130         23         55         3.8
1989..............................  1,685,000         50       46.2      1,379         27         54        -0.9
1990..............................  1,940,000         57       69.5      2,038         36         56         2.2
1991..............................  2,223,000         64      100.2      2,875         45         56        -1.8
1992..............................  2,523,000         72      134.9      3,863         54         58         3.8
1993..............................  2,868,000         80      169.1      4,742         59         61         4.1
1994..............................  3,175,000         87      220.7      6,090         70         60        -0.3
1995..............................  3,570,000         96      266.4      7,158         75         61         0.7
1996 \2\..........................  3,735,000         99      285.7      7,578         76         62         3.8
----------------------------------------------------------------------------------------------------------------
\1\ Rounding in payments may not reflect actual change.                                                         
\2\ Estimated.                                                                                                  
                                                                                                                
NA--Not applicable.                                                                                             
                                                                                                                
Source: Health Care Financing Administration, Office of the Actuary and Prospective Payment Assessment          
  Commission (1995, 1996).                                                                                      

                            Hospice Services

Coverage and benefits
    Medicare covers hospice care, in lieu of most other 
Medicare benefits, for terminally ill beneficiaries. Hospice 
care emphasizes palliative medical care, that is, relief from 
pain, and supportive social and counseling services for the 
terminally ill and their families. Services are provided 
primarily in the patient's home. The Tax Equity and Fiscal 
Responsibility Act of 1982 (TEFRA), Public Law 97-248, first 
authorized Medicare part A coverage for hospice care (for the 
period November 1, 1983 to October 1, 1986); in 1986, Congress 
made the hospice benefit a permanent part of the Medicare 
Program, effective April 7, 1986.
     For a person to be considered terminally ill and eligible 
for Medicare's hospice benefit, the beneficiary's attending 
physician and the medical director of the hospice (or physician 
member of the hospice team) must certify that the individual 
has a life expectancy of 6 months or less. As a result of an 
amendment in the Balanced Budget Act, persons electing hospice 
are covered for two 90-day periods, followed by an unlimited 
number of 60-day periods. The medical director or physician 
member of the hospice team must recertify at the beginning of 
each new election period that the beneficiary is terminally 
ill. Services must be provided under a written plan of care 
established and periodically reviewed by the individual's 
attending physician and by the medical director of the hospice.
    Covered hospice services include the following: (1) nursing 
care provided by or under the supervision of a registered 
nurse; (2) physical or occupational therapy or speech-language 
pathology services; (3) medical social services; (4) services 
of a home health aide who has successfully completed a training 
program approved by the Secretary of DHHS; (5) homemaker 
services; (6) medical supplies (including drugs and 
biologicals) and the use of medical appliances; (7) physician 
services; (8) short-term inpatient care (including both respite 
care and procedures necessary for pain control and acute and 
chronic symptom management); (9) counseling, including dietary 
counseling, for care of the terminally ill beneficiary and for 
adjustment to the patient's death (bereavement counseling is 
not a reimbursable service); and (10) any other item or service 
which is specified in a patient's plan of care and which 
Medicare may pay for (effective April 1, 1998).
    Medicare's hospice benefit is intended to be principally an 
in-home benefit. For this reason, Medicare law prescribes that 
respite care, or relief for the primary care giver of the 
terminally ill patient, may be provided only on an 
intermittent, nonroutine, and occasional basis and may not be 
provided consecutively over longer than 5 days. In addition, 
the aggregate number of inpatient care days provided in any 12-
month period to Medicare beneficiaries electing hospice care 
can not exceed 20 percent of the total number of days of 
hospice coverage provided to these persons.
    Only two covered hospice services--outpatient drugs or 
biologicals and respite care--are subject to coinsurance. 
Outpatient drugs and biologicals are subject to a coinsurance 
amount that approximates 5 percent of the cost of the drug to 
the hospice program, except that the amount may not exceed $5 
per prescription. For respite care, coinsurance equals 5 
percent of program payments for respite, but may not exceed 
Medicare's inpatient hospital deductible during a hospice 
coinsurance period (defined as the period when hospice election 
is not broken by more than 14 days).
    Covered services must be provided by a Medicare-certified 
hospice. Certified hospices must be either public agencies or 
private organizations primarily engaged in providing covered 
hospice services and must make services available on a 24-hour 
basis, in individuals' homes, on an outpatient basis, and on a 
short-term inpatient basis. Hospices must routinely directly 
provide substantially all of the following ``core'' services: 
nursing care, medical social services, and counseling services. 
The remaining hospice services may be provided either directly 
by the hospice or under arrangements with others. If services 
are provided through arrangements with other providers, the 
hospice must maintain professional management responsibility 
for all such services, regardless of the facility in which the 
services are furnished.
    The hospice program must also have an interdisciplinary 
group of personnel which includes at least one registered 
professional nurse and one social worker employed by the 
hospice; one physician employed by or under contract with the 
hospice; plus at least one pastoral or other counselor.
Reimbursement
    In implementing Medicare's hospice benefit, HCFA 
established a prospective payment methodology. Under this 
methodology, hospices are paid one of four prospectively 
determined rates, which correspond to four different levels of 
care, for each day a Medicare beneficiary is under the care of 
the hospice. Reimbursement will thus vary by the length of the 
patient's period in the hospice program as well as by the 
characteristics of the services (intensity and site) furnished 
to the beneficiary.
    The four rate categories for reimbursing hospices are:
 1. Routine home care day.--Routine home care day is a day on 
        which an individual is at home and is not receiving 
        continuous home care. The routine home care rate is 
        paid for every day a patient is at home and under the 
        care of the hospice regardless of the volume or 
        intensity of the services provided on any given day as 
        long as less than 8 hours of care are provided. This 
        rate is $95.77 for services provided between October 1, 
        1997 and September 30, 1998.
 2. Continuous home care day.--A continuous home care day is a 
        day on which an individual receives hospice care 
        consisting predominantly of nursing care on a 
        continuous basis at home. Home health aide or homemaker 
        services or both may also be provided on a continuous 
        basis. Continuous home care is furnished only during 
        brief periods of crisis and only as necessary to 
        maintain the terminally ill patient at home. Home care 
        must be provided for a period of at least 8 hours 
        before it would be considered to fall within the 
        category of continuous home care. Payment for 
        continuous home care will vary depending on the number 
        of hours of continuous services provided. Currently 
        this rate is $558.99 for 24 hours or $23.29 per hour.
 3. Inpatient respite care day.--An inpatient respite care day 
        is one on which the individual who has elected hospice 
        care receives care in an approved facility on a short-
        term (not more than 5 days at a time) basis for the 
        respite of his caretakers. Currently this rate is 
        $99.07.
 4. General inpatient care day.--A general inpatient care day 
        is one on which an individual receives general 
        inpatient care in an inpatient facility for pain 
        control or acute or chronic symptom management which 
        cannot be managed in other settings. Care may be 
        provided in a hospital, skilled nursing facility, or 
        inpatient unit of a freestanding hospice. Currently 
        this rate is $426.05.
    To reflect differences in wage levels from area to area, 
each of these four payment rates is adjusted by the hospital 
area wage index used by Medicare for adjusting payments to 
hospitals, skilled nursing facilities, and home health 
agencies. HCFA separates each of the national payment rates for 
hospice care into components which reflect the estimated 
proportion of the rate attributable to wage and nonwage costs. 
The wage component of each rate is then adjusted by the index 
applicable to the area in which the hospice is located.
    The Omnibus Budget Reconciliation Act (OBRA) of 1989 
required that the payment rates be increased by the hospital 
market basket percentage increase each fiscal year. OBRA 1993, 
however, reduced the updates for the prospective rates as 
follows: for fiscal year 1994, the hospital market basket 
percentage increase minus 2.0 percentage points; for fiscal 
years 1995 and 1996, the hospital market basket minus 1.5 
percentage points; and for fiscal year 1997, market basket 
minus 0.5 percentage points.
    The Balanced Budget Act of 1997 reduces the hospice payment 
update to market basket minus 1 percentage point for each of 
fiscal years 1998-2002.
    Medicare law requires that payments to a hospice for care 
furnished over the period of a year be limited to a ``cap 
amount.'' The cap amount is applied on an aggregate rather than 
a case-by-case basis. Therefore, each individual hospice's cap 
amount is calculated by multiplying the yearly cap amount by 
the number of Medicare beneficiaries who received hospice care 
from the hospice during the cap period. Medicare defines a cap 
year as the period from November 1 through October 31 of the 
following year. The cap amount for the period November 1, 1996 
through October 31, 1997, is $14,394. Cap amounts are updated 
annually by the percentage change in the medical care component 
of the Consumer Price Index (CPI-U) for Urban Consumers.
 Hospice program data
     Table 2-18 shows that the number of hospices participating 
in Medicare has grown from 553 in 1988 to 2,090 in 1996. Table 
2-19 indicates that spending for the benefit has increased 
signifi- 

               TABLE 2-18.--NUMBER OF HOSPICES BY PROVIDER TYPE WITH PERCENTAGE OF TOTAL, 1988-96               
----------------------------------------------------------------------------------------------------------------
                                                                      Month and year                            
              Provider type              -----------------------------------------------------------------------
                                           7/88    7/89    5/90    9/91    1/92    5/93    8/94    6/95    10/96
----------------------------------------------------------------------------------------------------------------
Freestanding............................     191     220     260     394     404     499     608     656     762
Hospital based..........................     138     182     221     282     291     341     401     447     507
Skilled nursing facility based..........      11      13      12      10      10      10      12      18      21
Home health agency based................     213     286     313     325     334     438     583     674     800
                                         -----------------------------------------------------------------------
    Total...............................     553     701     806   1,011   1,039   1,288   1,604   1,795   2,090
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Program Operations.                                     


                                      TABLE 2-19.--SELECTED MEASURES OF MEDICARE HOSPICE CARE, FISCAL YEARS 1988-95                                     
                                                                   [By claim approved]                                                                  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Fiscal year                                       
                           Measure                            ------------------------------------------------------------------------------------------
                                                                  1988       1989       1990       1991       1992       1993        1994        1995   
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash outlays by provider type:                                                                                                                          
    Freestanding.............................................      $52.1      $87.1     $130.7     $219.2     $444.2      $620.4      $724.2      $977.1
    Hospital based...........................................       13.5       33.0       57.0       92.0      168.0       205.3       226.1       319.3
    Skilled nursing facility based...........................        4.8        5.9        7.6        8.6       17.1        22.6        17.7        26.0
    Home health agency based.................................       47.8       79.3      113.5      125.7      224.3       303.7       348.7       508.1
                                                              ------------------------------------------------------------------------------------------
        Total................................................      118.4      205.4      308.8      445.4      853.6     1,151.9     1,316.7     1,830.5
                                                              ==========================================================================================
Cash outlays by care type:                                                                                                                              
    Routine home care........................................       95.7      175.2      262.8      376.6      720.0     1,004.9     1,158.6     1,611.6
    Continuous home care.....................................        2.5        2.6        3.1        3.9       10.4        12.2        14.5        25.6
    Inpatient respite care...................................        0.3        0.6        0.9        1.3        2.5         2.6         2.7         4.4
    General inpatient care...................................       18.9       25.5       39.6       59.7      114.0       125.5       134.1       179.1
    Physicians...............................................        0.9        1.4        2.4        3.9        6.7         6.7         6.8         9.8
                                                              ------------------------------------------------------------------------------------------
        Total................................................      118.4      205.4      308.8      445.4      853.6     1,151.9     1,316.7     1,830.5
                                                              ==========================================================================================
Average dollar amount per beneficiary:                                                                                                                  
    Freestanding.............................................      2,837      3,436      4,237      4,121      5,668       6,085       6,355       6,451
    Hospital based...........................................      3,129      3,217      3,832      4,234      5,296       5,361       5,631       5,740
    Skilled nursing facility based...........................      3,247      3,260      3,231      4,198      5,538       5,344       5,426       6,079
    Home health agency based.................................      2,965      3,395      3,994      3,993      5,169       5,239       5,408       5,509
                                                              ------------------------------------------------------------------------------------------
        Total................................................      2,935      3,378      4,037      4,108      5,452       5,681       5,935       8,049
                                                              ==========================================================================================
Number of beneficiaries:                                                                                                                                
    Freestanding.............................................     18,396     25,351     30,861     53,184     78,374     102,283     113,959     151,466
    Hospital based...........................................      4,315     10,269     14,870     21,717     31,734      38,295      40,156      55,631
    Skilled nursing facility based...........................      1,494      1,818      2,353      2,040      3,084       4,221       3,262       4,272
    Home health agency based.................................     16,151     23,364     28,407     31,472     43,391      57,969      64,472      91,238
                                                              ------------------------------------------------------------------------------------------
        Total................................................     40,356     60,802     76,491    108,413    156,583     202,768     221,849     302,608
                                                              ==========================================================================================
Average number of days a beneficiary elects hospice care:                                                                                               
    Freestanding.............................................      39.26      48.40      52.41      46.15      59.11        62.0        63.7        62.9
    Hospital based...........................................      37.70      41.24      45.85      44.19      54.57        53.8        55.4        56.7
    Skilled nursing facility based...........................      31.05      37.10      34.51      37.59      44.45        42.7        45.5        49.3
    Home health agency based.................................      35.26      43.14      46.46      42.45      52.59        52.2        53.3        63.8
                                                              ------------------------------------------------------------------------------------------
        Total \1\............................................      37.19      44.83      48.38      44.52      56.09        57.2        58.9        68.3
                                                              ==========================================================================================
Number of units by care type:                                                                                                                           
    Routine home care--days..................................  1,460,414  2,677,170  3,600,407  4,667,703  8,564,904  11,324,524  12,699,617  17,257,734
    Continuous home care--hours..............................    154,989    160,056    166,039    199,309    442,968     565,903     654,667   1,129,697
    Inpatient respite care--days.............................      4,223      8,398     12,573     14,867     28,495      27,887      28,769      45,932
    General inpatient care--days.............................     58,346     83,750    117,989    161,211    297,190     303,245     299,823     418,093
    Physicians--procedures...................................     19,257     24,442     39,587     53,491    111,716     115,560     110,790     165,066
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Weighted by the number of beneficiaries in each hospice type.                                                                                       
                                                                                                                                                        
Note.--Totals may not add due to rounding.                                                                                                              
                                                                                                                                                        
Source: Health Care Financing Administration.                                                                                                           

cantly, rising from $118.4 million in fiscal year 1988 to $1.8 
billion in fiscal year 1995. The number of beneficiaries 
electing Medicare's hospice benefit has increased from about 
40,000 in fiscal year 1988 to almost 303,000 in fiscal year 
1995. The average number of days a beneficiary spends in 
hospice care has risen from 37 to 68 days during this period, 
and the average amount spent per beneficiary has increased from 
$2,935 to $8,049. The vast majority of care paid for by the 
program is routine home care.

                 PART B SERVICES--COVERAGE AND PAYMENTS

                          Physicians Services

    Medicare pays for physicians services on the basis of a fee 
schedule which went into effect in 1992. The fee schedule 
assigns relative values to services. Relative values reflect 
three factors: physician work (time, skill, and intensity 
involved in the service), practice expenses, and malpractice 
costs. These relative values are adjusted for geographic 
variations in the costs of practicing medicine. Geographically-
adjusted relative values are then converted into a dollar 
payment amount by a dollar figure known as the conversion 
factor. In 1997, there are three conversion factors--one for 
surgical services, one for primary care services, and one for 
other services. The conversion factors in 1997 are $40.96 for 
surgical services, $35.77 for primary care services, and $33.85 
for other services (for a further discussion of physician 
payment issues, see appendix E).
    The conversion factors have been updated each year by a 
formula called the default formula. However, Congress may elect 
to reduce the update that would otherwise apply. The default 
formula has been based on two factors: (1) inflation as 
measured by the Medicare economic index (MEI); and (2) a 
comparison of actual physician spending in a base period 
compared to an expenditure goal known as the Medicare volume 
performance standard (MVPS). Specifically, the update has been 
equal to the MEI, plus or minus the difference between the MVPS 
for the second preceding fiscal year and actual expenditures 
for that year. (Thus fiscal year 1995 data were used in 
determining the calendar year 1997 update.) However, regardless 
of actual performance during the base period, there has been a 
limit on the actual reduction (but not increase).
    The Balanced Budget Act of 1997 specified that there will 
be a single conversion factor beginning in 1998. The 1998 
amount--$36.69 is the 1997 primary care conversion factor, 
updated to 1998 by the average of the three separate updates 
that would occur in the absence of the legislation. Beginning 
in fiscal year 1998, the MVPS is replaced with a cumulative 
``sustainable growth rate'' based on real GDP growth. The 1998 
rate is 1.5 percent. This new target will begin affecting 
updates in 1999. An upper limit is placed on allowable fee 
increases--3 percentage points above inflation. The lower limit 
on decreases is changed from inflation minus 5 percentage 
points to inflation minus 7 percentage points.
    Anesthesiologists are paid under a separate fee schedule 
which uses base and time units. A separate conversion factor 
($16.68 in 1997) applies. The Balanced Budget Act of 1997 
specifies that beginning in 1998, the conversion factor equals 
46 percent of the single conversion factor, except as adjusted 
for changes in work, practice expense, or malpractice relative 
value units. The 1998 factor is $16.88.
    Medicare payments are made for physicians' services after 
the annual deductible requirement of $100 has been satisfied. 
Payment is set at 80 percent of the fee schedule with 
beneficiaries responsible for the remaining 20 percent, which 
is referred to as coinsurance.
    Medicare payment is made either on an ``assigned'' or 
``unassigned'' basis. By accepting assignment, physicians agree 
to take the Medicare fee schedule amount as payment in full. 
Thus, if assignment is accepted, beneficiaries are not liable 
for any out-of-pocket costs other than standard deductible and 
coinsurance payments. In contrast, if assignment is not 
accepted, beneficiaries may be liable for charges in excess of 
the Medicare approved charge, subject to limits. This procedure 
is known as balance billing.
    Medicare's Participating Physician Program was established 
to provide beneficiaries with the opportunity to select 
physicians (designated as ``participating physicians'') who 
have agreed to accept assignment on all services provided 
during a 12-month period. Nonparticipating physicians continue 
to be able to accept or refuse assignment on a claim-by-claim 
basis. There are a number of incentives for physicians to 
become participating physicians, the chief of which is that the 
fee schedule payment amount for nonparticipating physicians is 
only 95 percent of the recognized amount paid to participating 
physicians. Additional incentives include more rapid claims 
payment and widespread distribution of participating physician 
directories.
    Nonparticipating physicians may not charge more than 115 
percent of Medicare's allowed amount for any service. 
Medicare's allowed amount for nonparticipating physicians is 
set at 95 percent of that for participating physicians. Thus, 
nonparticipating physicians are only able to bill 9.25 percent 
(115 percent times 95 percent) over the approved amount for 
participating physicians.

                 Services of Nonphysician Practitioners

    The physician fee schedule is also used for calculating 
payments made for certain services provided by nonphysician 
practitioners.
Physician assistants and nurse practitioners
    Currently, separate payments are made for physician 
assistant services, when provided under the supervision of a 
physician: (1) in a hospital, skilled nursing or nursing 
facility; (2) as an assistant at surgery; or (3) in a rural 
area designated as a health manpower shortage area. Payments 
equal a percentage of what would be paid if the services were 
performed by a physician, namely 65 percent of the fee schedule 
amount for services performed as an assistant-at-surgery, 75 
percent for other hospital services, and 85 percent for other 
services, including services ``incident to'' physicians 
services.
    Currently, separate payments are made for nurse 
practitioner services, provided in collaboration with a 
physician, which are furnished in a nursing facility. Payments 
equal 85 percent of the physician fee schedule amount. Nurse 
practitioners and clinical nurse specialists are paid directly 
for services provided in collaboration with a physician in a 
rural area. Payments equal 75 percent of the physician fee 
schedule amount for services furnished in a hospital and 85 
percent of the fee schedule amount for other services.
    The Balanced Budget Act of 1997 removes the restriction on 
settings for these practitioners, effective January 1, 1998. 
Payment for services can only be made if no facility or other 
provider charges are paid in connection with the service. 
Payment will equal 80 percent of the lesser of either the 
actual charge or 85 percent of the fee schedule amount for the 
same service if provided by a physician. For assistant-at-
surgery services, payment will equal 80 percent of the lesser 
of either the actual charge or 85 percent of the amount that 
would have been recognized for a physician serving as an 
assistant-at-surgery. The physician assistant may be in an 
independent contractor relationship with the physician.
Certified nurse midwife services
    Certified nurse midwife services are paid at 65 percent of 
the physician fee schedule amount.
Certified registered nurse anesthetists (CRNAs)
    CRNAs are paid under the same fee schedule used for 
anesthesiologists (see above). Payments for services furnished 
by an anesthesia care team composed of an anesthesiologist and 
a CRNA are capped at a percentage of the amount that would be 
paid if the anesthesiologist were practicing alone. The 
percentage is 105 percent in 1997 and 100 percent in 1998 and 
thereafter. The payments are evenly split between each 
practitioner.
Clinical psychologists and clinical social workers
    Diagnostic and therapeutic services provided by clinical 
psychologists are paid under the physician fee schedule. 
Payments for services provided by clinical social workers are 
equal to 75 percent of the amount allowed for clinical 
psychologists. Some services are subject to the psychiatric 
services limitation which limits Medicare payments for some 
services to 50 percent of incurred expenses.
Physical or occupational therapists
    Payments for physical or occupational therapists in 
independent practice are made under the physician fee schedule, 
subject to an annual limit of $900 per patient in billed 
charges for each type of therapist. Beginning in 1999, BBA 
places a $1,500 per patient limit on all physical therapy 
services and a separate $1,500 limit on all occupational 
therapy services. The limits do not apply to services provided 
by hospitals.

                      Clinical Laboratory Services

    Medicare provides coverage for diagnostic clinical 
laboratory services. These services may be provided by an 
independent laboratory, a physician's office laboratory, or a 
hospital laboratory to outpatients. Since 1984, Medicare has 
paid for clinical laboratory services on the basis of a fee 
schedule. Fee schedules have been established on a carrier 
service area basis. The law set the initial payment amount for 
services performed in physicians' offices or independent 
laboratories at the 60th percentile of the prevailing charge 
established for the fee screen year beginning July 1, 1984. 
Similarly, the initial fee schedule payment amount for services 
provided by hospital-based laboratories serving hospital 
outpatients was set at the 62d percentile of the prevailing 
charge level. Subsequent amendments to the payment rules 
limited application of the hospital fee schedule to ``qualified 
hospitals.'' A qualified hospital is a sole community hospital 
(as that term is used for payment purposes under Medicare's 
hospital prospective payment system) which provides some 
clinical diagnostic tests 24 hours a day in order to serve a 
hospital emergency room which is available to provide services 
24 hours a day, 7 days a week.
    The fee schedule payment amounts have been increased 
periodically since 1984 to account for inflation. The updates 
have generally occurred on January 1 of each year. Allowable 
increases in 1991, 1992, and 1993 were limited to 2 percent per 
year. There were no increases in 1994 and 1995. The increase in 
1996 was 2.9 percent. The increase in 1997 is 2.7 percent. The 
Balanced Budget Act of 1997 freezes the fee schedule for the 
1998-2002 period.
    Beginning in 1988, the law established national ceilings on 
payment amounts. Initially the ceiling was set at 115 percent 
of the median for all fee schedules for that test. This 
percentage has been lowered several times. In 1997, the ceiling 
is 76 percent of the median. The Balanced Budget Act sets the 
ceiling at 74 percent of the median beginning in 1998.
    As of January 1, 1998, HCFA is eliminating the use of old 
codes for certain automated panel/profile tests and replacing 
them with revised codes. The Balanced Budget Act of 1997 makes 
several changes with respect to the administration of the lab 
benefit. It requires the Secretary to divide the country into 
no more than five regions and designate a single carrier for 
each region to process lab claims (excluding those for services 
provided to inpatients of hospitals and skilled nursing 
facilities) no later than July 1, 1999. The allocation of 
claims to a particular carrier would be based on whether the 
carrier serves the geographic area where the specimen is 
collected or other method selected by the Secretary. The 
requirement will not apply to those physicians office labs that 
the Secretary determines would be unduly burdened by the 
application of billing responsibilities with respect to more 
than one carrier.
    The Balanced Budget Act also requires the Secretary, by 
January 1, 1999, to adopt uniform coverage, administration, and 
payment policies for lab tests using a negotiated rulemaking 
process. The policies would be designed to eliminate variation 
among carriers and to simplify administrative requirements. The 
use of interim regional policies are permitted in cases where a 
uniform national policy has not been established.
    Payment for clinical laboratory services (except for those 
provided by a rural health clinic) may only be made on the 
basis of assignment. The law specifically applies the 
assignment requirement to clinical laboratory services provided 
in physicians' offices. Payment for clinical laboratory 
services equals 100 percent of the fee schedule amount; no 
beneficiary cost sharing is imposed.
    Laboratories must meet the requirements of the Clinical 
Laboratory Improvement Amendments of 1988. This legislation, 
which focused on the quality and reliability of medical tests, 
expanded Federal oversight to virtually all laboratories in the 
country, including physician office laboratories.

        Durable Medical Equipment and Prosthetics and Orthotics

    Medicare covers a wide variety of durable medical equipment 
(DME). Medicare law specifies that DME includes, but is not 
limited to, iron lungs, oxygen tents, hospital beds, and 
wheelchairs used in a patient's home. A patient's home can 
include an institution, such as a home for the aged, so long as 
the institution is not a hospital or skilled nursing facility. 
Health Care Financing Administration (HCFA) guidelines 
implementing the law provide a definition for DME that allows 
additional items to be covered. The guidelines define DME as 
equipment which: (1) can withstand repeated use; (2) is 
primarily and customarily used to serve a medical purpose; (3) 
generally is not useful to a person in the absence of an 
illness or injury; and (4) is appropriate for use in the home. 
Each of these requirements must be met before an item can be 
considered covered DME. Medicare also covers related supplies 
that are necessary for the effective use of DME; such supplies 
include drugs and biologicals which must be put directly into 
equipment in order for it to achieve its therapeutic benefit or 
to assure its proper functioning. With these definitions, HCFA 
has issued coverage guidelines for numerous DME items.
    Medicare law defines prosthetic devices as items that 
replace all or part of an internal body organ (including 
colostomy bags and intraocular lenses) and prosthetics and 
orthotics such as leg, arm, back and neck braces, and 
artificial legs, arms and eyes. Program guidelines give 
additional examples of covered prosthetic devices. These 
include cardiac pacemakers, breast prostheses for 
postmastectomy patients, and a urinary collection and retention 
system that replaces bladder function. Examples of prosthetics 
and orthotics include rigid and semirigid back braces, special 
corsets, and terminal limb devices, such as artificial hands 
and hooks.
Reimbursement for durable medical equipment
    Medicare pays for DME on the basis of a fee schedule 
originally enacted in the Omnibus Budget Reconciliation Act 
(OBRA) of 1987 and modified on several occasions since then. 
Prior to OBRA 1987, reimbursement for DME was generally made on 
the basis of reasonable charges. The fee schedule first became 
effective January 1, 1989.
    Under the DME fee schedule, reimbursement is the lesser of 
either 80 percent of the actual charge for the item or the fee 
schedule amount. Covered DME items are classified into five 
groups for determining the fee schedule amounts: (1) 
inexpensive or other routinely purchased durable medical 
equipment (defined as equipment costing less than $150 or which 
is purchased at least 75 percent of the time); (2) items 
requiring frequent and substantial servicing; (3) customized 
items (defined as equipment constructed or modified 
substantially to meet the needs of an individual patient); (4) 
other items of durable medical equipment (frequently referred 
to as the ``capped rental'' category); and (5) oxygen and 
oxygen equipment.
    In general, the fee schedules establish national payment 
limits for DME. The limits have floors and ceilings. The floor 
is equal to 85 percent of the weighted median of local payment 
amounts and the ceiling is equal to 100 percent of the weighted 
median of local payment amounts.
    Prosthetics and orthotics are also paid according to a fee 
schedule that is based on principles similar to the DME fee 
schedule. The fee schedule establishes regional payment limits 
for covered items. The payment limits have floors and ceilings. 
The floor is equal to 90 percent of the weighted average of 
regional payment amounts; the ceiling is 120 percent. Fee 
schedule amounts are updated annually by the Consumer Price 
Index for all Urban Consumers.
     The Balanced Budget Act freezes payments for DME at the 
1997 level for 1998-2002. It limits the update for prosthetics 
and orthotics to 1 percent for those years.
     In addition, under the Balanced Budget Act, payments for 
oxygen are reduced in 1998 to 75 percent of the 1997 payment 
limits. Beginning in fiscal year 1999 and continuing through 
subsequent years, oxygen payments are limited to 70 percent of 
the 1997 levels. The Secretary is also authorized to establish 
separate classes of oxygen and oxygen equipment and establish 
separate national monthly payment limits for each class, as 
long as expenditures are neither more nor less than what would 
have been made without the separate classes. In addition, the 
Secretary is required to establish service standards for home 
oxygen providers. The General Accounting Office is required to 
submit a report to Congress, including recommendations for 
legislation, by February 1999 regarding beneficiary access to 
home oxygen equipment.
     The Balanced Budget Act of 1997 also permits the Secretary 
to establish fee schedules for certain items of medical 
equipment which are currently paid on a reasonable charge 
basis.
     Medicare payments for DME are intended to pay for items 
which are reasonable and medically necessary. Upgraded or 
deluxe items of DME purchased or rented for a beneficiary's 
convenience or other purposes do not meet these criteria. A 
beneficiary who wants an upgraded item must purchase it from 
the supplier and then seek Medicare reimbursement. The 
reimbursement will be based on the amount paid for the kind of 
item normally used to meet the intended purpose. The Balanced 
Budget Act authorizes (but does not require) the Secretary to 
publish regulations allowing reimbursement for upgraded DME. 
The regulations must include consumer protection safeguards and 
a determination of fair market prices for upgraded items of 
DME. If the regulations are released, a beneficiary could rent 
or purchase an upgraded item and Medicare would pay the 
supplier the standard fee for the item; the beneficiary would 
be responsible for paying the additional cost of the upgrade. 
The supplier's charge for the upgraded item could not exceed 
the established fee schedule amount (if any).
    Table 2-20 shows total Medicare allowed payment amounts in 
calendar year 1995 for DME, prosthetics and orthotics, and 
other covered items that are not paid according to the fee 
schedule, as well as non-DME items that are paid according to 
the fee schedule.

TABLE 2-20.--ALLOWED AMOUNTS FOR DURABLE MEDICAL EQUIPMENT, PROSTHETICS,
         ORTHOTICS, AND CERTAIN OTHER ITEMS, CALENDAR YEAR 1994         
                        [In millions of dollars]                        
------------------------------------------------------------------------
                                                                Allowed 
                           Category                             amounts 
------------------------------------------------------------------------
Inexpensive/routinely purchased \1\..........................     $367.0
Items with frequent maintenance \2\..........................       71.4
Customized items \3\.........................................        0.2
Capped rental \4\............................................      886.1
Oxygen \5\...................................................    1,654.9
Prosthetics/orthotics \6\....................................      802.6
Other \7\....................................................      922.0
                                                              ----------
      Total..................................................    4,704.2
------------------------------------------------------------------------
\1\ Inexpensive defined as equipment for which the purchase price does  
  not exceed $150. Routinely purchased defined as equipment that is     
  acquired 75 percent of the time by purchase. These items include      
  commode chairs, electric heat pads, bed rails, and blood glucose      
  monitors.                                                             
\2\ Paid on a rental basis until medical necessity ends; includes such  
  items as ventilators and continuous and intermittent positive         
  breathing machines.                                                   
\3\ Includes such items as wheelchairs adapted specifically for an      
  individual. Payment based on individual determination.                
\4\ Items of DME on a monthly rental basis not to exceed a period of    
  continuous use of 15 months. Includes such items as hospital beds and 
  wheelchairs.                                                          
\5\ Payment for oxygen and oxygen equipment based on a monthly rate per 
  beneficiary. Payment not made for purchased equipment except where    
  installment payments continue.                                        
\6\ These items include covered prosthetic and orthotic devices (except 
  for items included in the categories ``customized items'' and ``items 
  requiring frequent maintenance,'' and transcutaneous electrical nerve 
  stimulators, parenteral/enteral nutritional supplies and equipment,   
  and intraocular lenses).                                              
\7\ This category includes other covered items, such as enteral formulae
  and enteral medical supplies, that are not paid according to the fee  
  schedules. It also includes non-DME items that are paid according to  
  the DME fee schedule, such as surgical dressings.                     
                                                                        
Source: Health Care Financing Administration, Bureau of Data Management 
  and Strategy. Data from the part B Medicare Annual Data System.       

Administration of the fee schedule
    Consolidation of administration.--On June 18, 1992, the 
Health Care Financing Administration (HCFA) published a final 
rule regarding DME claims payments. The rule established four 
regional carriers to process all claims for DME and prosthetics 
and orthotics. HCFA argued that, as a result of this 
consolidation, greater efficiency in claims processing would be 
achieved, and variance in coverage policy and utilization 
parameters would be greatly reduced.
    In addition, the rule also required that the responsibility 
for processing claims for beneficiaries residing within each 
regional area would fall to the regional carrier for that area. 
This change was made in order to eliminate ``carrier 
shopping,'' that is, filing claims in those carrier areas that 
have higher payment rates.
    Overused items.--OBRA 1990 required the Secretary to 
develop a list of DME items frequently subject to unnecessary 
utilization; the list must include seat-lift mechanisms; 
transcutaneous electrical nerve stimulators (TENS); and 
motorized scooters. Carriers are directed to determine, in 
advance, whether payment will be made for items on the 
Secretary's list. DME suppliers must obtain carriers' approval 
before providing items on the list to Medicare beneficiaries.
    Certificates of medical necessity.--All DME must be 
prescribed by a physician in order to be reimbursed by 
Medicare. Instead of a physician's prescription, carriers may 
require the physician to submit a certificate of medical 
necessity to document that an item is reasonable and medically 
necessary. OBRA 1990 prohibited DME suppliers from distributing 
completed or partially completed certificates and established 
penalties for suppliers who knowingly and willfully distribute 
forms in violation of the prohibition. The purpose of this 
provision was to prohibit DME suppliers from directly marketing 
items to Medicare beneficiaries by providing them with 
completed certificates that could then be submitted to their 
physicians. It was hoped that requiring physicians to complete 
the certificates would encourage them to take a more active 
role in considering their patients' needs for DME, while 
simultaneously reducing suppliers' ability to influence DME 
acquisition.
    The Social Security Amendments of 1994 modified this 
prohibition to allow suppliers to distribute forms to 
physicians or beneficiaries with some limited information such 
as the supplier's identification number, a description of the 
item, or payment information.
    Inherent reasonableness.--The Secretary is permitted to 
increase or decrease Medicare payments in cases where the 
payment amount is ``grossly excessive or grossly deficient and 
not inherently reasonable.'' The Secretary's authority to make 
these payment adjustments is generally referred to as 
``inherent reasonableness authority.''
    In order to make a payment adjustment, the Secretary must 
demonstrate that the payment meets several criteria of inherent 
reasonableness specified by law. In addition, the Secretary 
must publish a notice in the Federal Register outlining his 
proposal to reduce or increase payment amounts, the proposed 
methodology for adjusting the payment amount, and the potential 
impact of the payment adjustment. The Secretary is also 
required to meet with representatives of the affected 
suppliers, to provide a 60-day public comment period, and to 
publish a final determination in the Federal Register. The 
final determination must include an explanation of the factors 
and data the Secretary took into consideration in making the 
determination.
    According to HCFA, the Secretary rarely uses inherent 
reasonableness authority because the requirements are too 
stringent and the notice requirements too burdensome.
 Competitive bidding
     Investigations have shown that Medicare pays higher prices 
for certain medical supplies than those paid by other health 
care insurers and other government agencies, including the 
Department of Veterans Affairs (VA). In order to lower 
payments, the Secretary currently must initiate the inherent 
reasonableness process or rely on congressional legislation. 
Thus, critics suggested granting the Secretary the authority to 
engage in a competitive bidding arrangement similar to the one 
used by the VA. The Balanced Budget Act provided such authority 
on a limited basis by authorizing not more than five 3-year 
competitive bidding demonstration projects. Within established 
competitive acquisition areas, providers of part B services 
(excluding physician services) will compete for contracts to 
supply items or services. At least one of the projects must 
include oxygen and oxygen equipment. The Secretary may limit 
the number of suppliers within an area to that number necessary 
to meet the projected demand for items and services covered 
under the contract. The Secretary will evaluate the effect of 
these projects on Medicare payments, access, quality, and 
diversity of product selection and report these evaluations 
annually to Congress. All projects must terminate by December 
31, 2002.
Requirements for participation in Medicare
    The Social Security Amendments of 1994 established 
requirements for suppliers of medical equipment. Some of the 
requirements codified regulations proposed by HCFA in 1992. In 
order to be paid under Medicare, suppliers must be issued a 
supplier number. To obtain this number, the supplier must 
receive and fill orders from its own inventory or inventory in 
other companies with which it has contracted. Suppliers must 
also deliver Medicare covered items to beneficiaries, honor any 
warranties, answer any questions or complaints, maintain and 
repair rental items, and accept returns of substandard or 
unsuitable items. The law further required that the supplier 
must comply with all State and Federal regulations, must 
maintain an appropriate physical plant, and must have proof of 
insurance coverage.
    The Secretary is not permitted, except under specific 
circumstances, to issue multiple supplier numbers to one 
supplier.
    The law also addressed marketing and sales activities of 
suppliers. Except under specified conditions, a supplier is 
prohibited from making unsolicited telephone calls to Medicare 
beneficiaries to sell them equipment. If such a sale is made, 
the supplier will not be paid by Medicare and costs paid by the 
beneficiary must be refunded by the supplier. Penalties were 
established for suppliers that violate this provision.

                Hospital Outpatient Department Services

    Medicare hospital outpatient department (OPD) services are 
reimbursed under Medicare part B. Services provided in 
outpatient hospital settings and included in expenditure data 
for this service setting are: emergency room services, clinic, 
laboratory, radiology, pharmacy, physical therapy, ambulance, 
operating room services, end-stage renal disease services, 
durable medical equipment, and other services such as computer 
axial tomography and blood. Services rendered by physicians in 
OPD settings are not included in these expenditure data.
    Prior to 1983, hospital outpatient services, excluding 
physicians' services, were paid for on a reasonable cost basis. 
Some services, such as emergency services, are still reimbursed 
on a reasonable cost basis. However, Congress has enacted a 
number of provisions that have altered the ways hospital OPDs 
are paid for many of their services and has placed limits on 
payments for others. For example, outpatient dialysis services 
are paid on the basis of a fixed composite rate; clinical 
laboratory services are paid on the basis of a fee schedule; x-
ray services are subject to a limit on payments; and ambulatory 
surgical facility fees for surgeries performed in hospital 
outpatient departments are based on a weighted average of the 
hospital's costs and the prevailing fee that would be paid to a 
freestanding ambulatory surgical facility in the area.
    The aggregate payment to hospital OPDs and hospital-
operated ambulatory surgical centers (ASCs) for covered ASC 
procedures is equal to the lesser of the following two amounts: 
(1) the lower of the hospital's reasonable costs or customary 
charges less deductibles and coinsurance; or (2) the amount 
determined based on a blend of the lower of the hospital's 
reasonable costs or customary charges, less deductibles and 
coinsurance, and the amount that would be paid to a 
freestanding ASC in the same area for the same procedures. For 
cost-reporting periods beginning on or after January 1, 1991, 
the hospital cost portion and the ASC cost portion are 42 and 
58 percent, respectively.
    Payments for services delivered in hospital OPDs were $12.9 
billion in calendar year 1995. Payments to hospital OPDs 
constituted approximately 20 percent of all Medicare part B 
payments in 1995 and about 8 percent of total parts A and B 
Medicare payments. Table 2-21 provides information on the 
number of part B enrollees, covered charges, aggregated 
reimbursements and reimbursements per enrollee for hospital 
outpatient services from 1974 to 1995. Table 2-22 shows the 
percent distribution of Medicare hospital OPD charges, by type 
of service, for 1995.
    The law provides for a reduction in payment for services 
paid on a cost-related basis, other than capital costs, by 5.8 
percent of the recognized costs for payments. The Balanced 
Budget Act of 1997 extends the reduction through cost-reporting 
periods, occurring through January 1, 2000. The reduction also 
applies to cost portions of blended payment limits for 
ambulatory surgery and radiology services. The Balanced Budget 
Act also extends the reduction in reimbursement for capital 
costs for OPDs by 10 percent for cost-reporting periods 
occurring through January 2000. Sole community hospitals and 
rural primary care hospitals are exempt from these reductions.
     The Balanced Budget Act requires the Secretary to 
establish a prospective payment system for covered OPD services 
furnished beginning in 1999. The Secretary is required to 
develop a classification system for covered OPD services, such 
that services within each group are comparable clinically and 
with respect to the use of resources. The Secretary is also 
required to establish relative payment rates for covered OPD 
services using 1996 hospital claims and cost report data, and 
to determine projections of the frequency of use of each 
service or group of services in 1999. In addition, she must 
determine a wage adjustment factor to adjust for relative 
geographic differences in labor and labor-related cost that 
must be applied in a budget-neutral manner and establish other 
adjustments as necessary, including adjustments to account for 
variations in coinsurance payments for procedures with similar 
resource costs, and to ensure equitable payments under the 
system. Finally, the Secretary must develop a method for 
controlling unnecessary increases in the volume of covered OPD 
services.

   TABLE 2-21.--MEDICARE HOSPITAL OUTPATIENT CHARGES AND REIMBURSEMENTS BY TYPE OF ENROLLMENT AND YEAR SERVICE  
                                        INCURRED, SELECTED YEARS 1974-95                                        
----------------------------------------------------------------------------------------------------------------
                                                  Number of                           Program payments          
                                                   SMI \1\      Covered   --------------------------------------
     Type of enrollment and year of service       enrollees    charges in                                       
                                                      in       thousands    Amount in       Per       Percent of
                                                  thousands                 thousands     enrollee     charges  
----------------------------------------------------------------------------------------------------------------
All beneficiaries:                                                                                              
    1974.......................................   23,166,570     $535,296     $323,383          $14         60.4
    1976.......................................   24,614,402      974,708      630,323           26         64.7
    1978.......................................   26,074,085    1,384,067      923,658           35         66.7
    1980.......................................   27,399,658    2,076,396    1,441,986           52         69.4
    1982.......................................   28,412,282    3,164,530    2,203,260           78         69.6
    1983.......................................   28,974,535    3,813,118    2,661,394           92         69.8
    1984.......................................   29,415,397    5,129,210    3,387,146          115         66.0
    1985.......................................   29,988,763    6,480,777    4,082,303          136         63.0
    1986.......................................   30,589,728    8,115,976    4,881,605          160         60.1
    1987.......................................   31,169,960    9,794,832    5,690,786          183         58.2
    1988.......................................   31,617,082   11,833,919    6,371,704          202         53.8
    1989.......................................   32,098,770   14,195,252    7,160,586          223         50.4
    1990.......................................   32,635,800   18,346,471    8,171,088          250         44.5
    1991.......................................   33,239,840   22,016,673    8,612,320          259         39.1
    1992.......................................   33,956,460   26,799,501    9,941,391          293         37.1
    1993.......................................   34,642,500   32,026,576   10,938,545          315         34.2
    1994.......................................   35,178,600   36,323,649   11,813,522          336         32.6
    1995 \2\...................................   31,806,740   40,476,180   12,933,358          407         31.9
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:                                                                                  
    1974-95....................................          1.5         22.9         19.2         17.4         ----
    1974-83....................................          2.5         24.4         26.4         23.3         ----
    1984-95....................................          0.7         20.7         13.0         12.2         ----
================================================================================================================
Aged:                                                                                                           
    1974.......................................   21,421,545      394,680      220,742           10         55.9
    1976.......................................   22,445,911      704,569      432,971           19         61.5
    1978.......................................   23,530,893    1,005,467      648,249           28         64.5
    1980.......................................   24,680,432    1,517,183    1,030,896           42         69.9
    1982.......................................   25,706,792    2,402,462    1,645,064           64         68.5
    1983.......................................   26,292,124    2,995,784    2,066,207           79         69.0
    1984.......................................   26,764,150    4,122,859    2,679,571          100         65.0
    1985.......................................   27,310,894    5,210,762    3,211,744          118         61.6
    1986.......................................   27,862,737    6,529,273    3,809,992          137         58.4
    1987.......................................   28,382,203    7,859,038    4,522,841          159         56.4
    1988.......................................   28,780,154    9,790,273    5,098,546          177         52.1
    1989.......................................   29,216,027   11,855,127    5,767,589          197         48.7
    1990.......................................   29,691,180   15,384,510    6,563,454          221         42.7
    1991.......................................   30,183,480   18,460,835    6,842,329          227         37.1
    1992.......................................   30,722,080   22,253,657    7,741,774          252         34.8
    1993.......................................   31,162,480   26,556,415    8,522,089          273         32.1
    1994.......................................   31,443,800   29,768,892    9,116,610          290         30.6
    1995 \2\...................................   28,020,760   33,110,441    9,900,199          353         29.9
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:                                                                                  
    1974-95....................................          1.3         23.5         19.9         18.5         ----
    1974-83....................................          2.3         25.3         28.2         25.8         ----
    1984-95....................................          0.4         20.9         12.6         12.1         ----
================================================================================================================
Disabled:                                                                                                       
    1974.......................................    1,745,019      140,617      102,641           59         73.0
    1976.......................................    2,168,467      270,139      197,352           91         73.1
    1978.......................................    2,543,162      378,600      275,409          108         72.7
    1980.......................................    2,719,226      559,213      411,090          152         73.5
    1982.......................................    2,705,490      762,068      558,195          206         73.2
    1983.......................................    2,682,411      817,335      595,187          222         72.8
    1984.......................................    2,651,247    1,006,351      707,575          267         70.3
    1985.......................................    2,677,869    1,270,015      870,560          325         68.5
    1986.......................................    2,726,991    1,586,703    1,071,613          393         67.5
    1987.......................................    2,787,757    1,773,664    1,167,945          417         65.8
    1988.......................................    2,836,928    2,043,646    1,273,158          449         62.3
    1989.......................................    2,882,743    2,340,124    1,392,897          483         59.5
    1990.......................................    2,944,620    2,961,961    1,607,634          546         54.3
    1991.......................................    3,056,360    3,555,838    1,769,991          579         49.8
    1992.......................................    3,234,380    4,545,843    2,199,617          680         48.4
    1993.......................................    3,480,020    5,470,161    2,416,456          694         44.2
    1994.......................................    3,734,800    6,463,757    2,696,912          722         41.7
    1995 \2\...................................    3,785,980    7,465,739    3,033,158          801         40.6
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:                                                                                  
    1974-95....................................          3.8         20.8         17.5         13.2         ----
    1974-83....................................          4.9         21.6         21.6         15.9         ----
    1984-95....................................          3.3         20.0         14.1         10.5         ----
----------------------------------------------------------------------------------------------------------------
\1\ 1974 is the first full year of coverage for disabled beneficiaries under Medicare; SMI = supplementary      
  medical insurance.                                                                                            
\2\ Beginning in 1995, the utilization rates per 1,000 enrollees do not reflect managed care enrollment; that   
  is, Medicare enrollees in managed care plans are not included in the denominator used to calculate the        
  utilization rates.                                                                                            
                                                                                                                
Note.--Numbers may not add to totals because of rounding. Hospital outpatient services include clinics or       
  hospital-based renal dialysis facility services, and surgical facility or hospital-based ambulatory surgical  
  center services provided to hospital outpatient.                                                              
                                                                                                                
Source: Health Care Financing Administration, Bureau of Data Management and Strategy. Data from the Medicare    
  Decision Support System; data developed by the Office of Research and Demonstrations.                         

     The Secretary is authorized to periodically review and 
revise the groups, relative payment weights, wages, and other 
adjustments to take into account changes in medical practice, 
medical technology, the addition of new services, new cost 
data, and other relevant information. Any adjustments made by 
the Secretary must be made in a budget-neutral manner. If the 
Secretary determines that the volume of services increased 
beyond amounts established through those methodologies, the 
Secretary is authorized to adjust the update to the conversion 
factor in a subsequent year.

 TABLE 2-22.--PERCENT DISTRIBUTION OF HOSPITAL OUTPATIENT CHARGES UNDER 
                    MEDICARE BY TYPE OF SERVICE, 1995                   
------------------------------------------------------------------------
                                                              Percent of
                      Service category                         charges  
------------------------------------------------------------------------
Radiology..................................................         20.5
Laboratory.................................................         13.0
Operating room.............................................         11.4
End-stage renal disease....................................          7.9
Pharmacy...................................................          6.2
Emergency room.............................................          3.2
Clinic.....................................................          1.7
Physical therapy...........................................          2.5
Medical supplies...........................................          9.3
All other \1\..............................................         20.4
------------------------------------------------------------------------
\1\ Includes computerized axial tomography, durable medical equipment,  
  and blood.                                                            
                                                                        
Source: Health Care Financing Administration, Bureau of Data Management 
  and Strategy; Data from the Medicare Decision Support System.         

     A hospital may bill a beneficiary for the coinsurance 
amount owed for the outpatient services provided. The 
beneficiary coinsurance is based on 20 percent of the 
hospital's submitted charges for the outpatient service, 
whereas Medicare usually pays based on the blend of the 
hospital's costs and the amount paid in other settings for the 
same service. As a result, the amount the beneficiary pays in 
coinsurance does not equal 20 percent of the program's 
allowable payment. On average, beneficiaries pay 37 percent of 
the total payment.
     The Balanced Budget Act provides for a new method for 
determining beneficiary coinsurance beginning in 1999. Hospital 
OPD coinsurance payments are limited to 20 percent of the 
national median of the charges for the service (or services 
within the group) furnished in 1996 updated to 1999 using the 
Secretary's estimate of charge growth. The Secretary is 
required to develop rules for the establishment of a 
coinsurance payment amount for a covered OPD service not 
furnished during 1996, based on its classification within a 
group of such services. In addition, the Balanced Budget Act 
provides for the entire fee schedule amount (program payments 
plus beneficiary coinsurance payments) to be updated by the 
market basket increase minus 1 percentage point for years 2000 
through 2002, and by the market basket percentage increase in 
subsequent years. Beneficiary coinsurance payments are to be 
subtracted from the fee schedule amount to determine Medicare 
Program payments. Over time, beneficiary cost sharing will move 
closer to the 20 percent of Medicare's recognized amount 
applicable for most part B services.
     The Secretary must establish a procedure under which a 
hospital, before the beginning of a year (starting with 1999), 
can elect to reduce the coinsurance payment for some or all 
covered OPD services to an amount that is not less than 20 
percent of the total amount (Medicare Program plus beneficiary 
coinsurance payment) for the service involved, adjusted for 
relative differences in labor costs and other factors. A 
reduced coinsurance payment can not be further reduced or 
increased during the year involved, and hospitals can 
disseminate information on the reduction of coinsurance 
amounts.

                  Ambulatory Surgical Center Services

    Medicare reimburses ambulatory surgical centers (ASCs) for 
performing surgical procedures on an ambulatory basis. ASCs are 
paid a prospectively determined rate for use of an operating 
room associated with covered surgical procedures. Excluded are 
the physicians charge for professional services performed and 
other medical items and services (for example, durable medical 
equipment for the patient's home use) for which separate 
payment is authorized under Medicare. Participating ASCs are 
paid 80 percent of the prospectively determined rate for 
facility services, adjusted for regional wage variations. The 
rate is intended to represent HCFA's estimate of a fair 
payment, taking into account the costs incurred by ASCs 
generally in providing services that are furnished in 
connection with performing a surgical procedure.
    For payment purposes, ASC services are divided into nine 
groups, and the ASC facility payment for all procedures in each 
group is established at a single rate adjusted for geographic 
variation. The ASC payment groups for fiscal year 1998 range 
from $314 for a procedure in payment group one, to $928 for a 
procedure in payment group eight. Payment for group nine, 
allotted exclusively to extracorporeal shockwave lithotripsy 
services, was established and published in the Federal Register 
on December 31, 1991 (vol. 56, no. 251, 67666); however, a 
court decision in American Lithotripsy Society v. Sullivan, 785 
F.Supp. 1034 (D.D.C. 1992), currently prohibits payment for 
these services under the ASC benefit. The Secretary is required 
to review and update standard overhead amounts annually. The 
ASC facility payment rates are required to result in 
substantially lower Medicare expenditures than would have been 
paid if the same procedure had been performed on an inpatient 
basis in a hospital.
    Medicare also requires that payment for insertion of an 
intraocular lens include an allowance that is reasonable and 
related to the cost of acquiring the class of lens involved. 
OBRA 1993 also reduced the amount of payment for an intraocular 
lens inserted during or subsequent to cataract surgery in an 
ASC on or after January 1, 1994 and before January 1, 1999, to 
$150.
    OBRA 1993 eliminated inflation updates in the payment 
amounts for ASCs for fiscal years 1994 and 1995. The Social 
Security Act Amendments of 1994 (Public Law 103-432) required 
the Secretary to survey, not later than January 1, 1995, and 
every 5 years thereafter, the actual audited costs incurred by 
ASCs, based on a representative sample of procedures and 
facilities. In addition, the 1994 legislation provides for an 
automatic application of an inflation adjustment during a 
fiscal year when the Secretary does not update ASC rates based 
on survey data of actual audited costs. The act also provides 
that ASC payment rates be increased by the percentage increase 
in the Consumer Price Index for Urban Consumers (CPI-U), as 
estimated by the Secretary for the 12-month period ending with 
the midpoint of the year involved, if the Secretary has not 
updated rates during a fiscal year, beginning with fiscal year 
1996. The update for 1996 was 2.9 percent; the update for 1997 
was 2.6 percent.
    The Balanced Budget Act sets the annual update for ASC fees 
at the CPI-U minus 2 percentage points for fiscal years 1998-
2002, specifying that the update cannot be less than zero. The 
update for fiscal year 1998 was 0.6 percent. In 1997, there 
were 2,433 ASCs, a 400-percent increase over the 485 facilities 
which were participating in Medicare in 1985. As shown in table 
2-23, payments for ASC services totaled $688.9 million in 1996. 
Table 2-24 shows the top 10 procedures performed in ASCs in 
1996.

TABLE 2-23.--MEDICARE-CERTIFIED AMBULATORY SURGICAL CENTERS: UTILIZATION
       AND PROGRAM BENEFIT PAYMENTS FOR FACILITY SERVICES, 1993-96      
------------------------------------------------------------------------
                                              Allowed         Program   
                               Number of    charges for    payments for 
            Year               services    ASC facility    ASC facility 
                                             services        services   
------------------------------------------------------------------------
1993........................   1,059,644    $625,005,465    $495,313,388
1994........................   1,298,740     721,315,789     572,001,981
1995........................   1,497,934     836,270,472     659,726,047
1996 \1\....................   1,527,130     867,629,247     688,910,712
------------------------------------------------------------------------
\1\ Short file, as of December 1996 (89 percent complete).              
                                                                        
Source: Health Care Financing Administration, Bureau of Data Management 
  and Strategy. Data from part B Extract and Summary System.            


   TABLE 2-24.--HIGH VOLUME PROCEDURES PERFORMED AT MEDICARE-CERTIFIED  
                    AMBULATORY SURGICAL CENTERS, 1996                   
------------------------------------------------------------------------
                                                               Volume of
Current procedural terminology         Short descriptor         Medicare
             code                                                cases  
------------------------------------------------------------------------
66984.........................  Remove cataract, insert lens.    525,520
66821.........................  After cataract laser surgery.    165,281
43239.........................  Upper GI endoscopy, biopsy...     78,391
45378.........................  Diagnostic colonoscopy.......     59,972
45385.........................  Colonoscopy, lesion removal..     41,699
62289.........................  Lumbar or caudal epidural....     35,340
45380.........................  Colonoscopy and biopsy.......     34,744
43235.........................  Upper GI endoscopy, diagnosis     24,055
45384.........................  Colonoscopy..................     22,537
52000.........................  Cystourethroscopy............     19,048
------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Data Management 
  and Strategy. Data from the National Claims History Procedure Summary 
  File.                                                                 

                         Other Part B Services

Preventive services
    Screening mammograms.--In 1997, Medicare covered a 
screening mammography once every 2 years for persons over age 
65. The program covers mammographies for the disabled according 
to the following schedule: age 35-39--one baseline screening; 
age 40-50--one every 2 years, except one every year for women 
at high risk; and age 50-64--one every year. The Balanced 
Budget Act authorizes coverage for annual mammograms for all 
women over age 40 beginning January 1, 1998. The deductible is 
waived for these services.
     Payment for a mammogram is based on the lesser of the 
actual charge, the amount established for the global procedure 
under Medicare's fee schedule, or the payment limit established 
for the procedure. The 1997 limit is $63.34; the 1998 limit is 
$64.73.
    Screening Pap smears; pelvic exams.--In 1997, a screening 
pap smear was authorized once every 3 years, except for women 
who were at a high risk of developing cervical cancer. 
Beginning in 1998, coverage is authorized every 3 years for 
screening pelvic exams; annual coverage is authorized for women 
at high risk. Payment is based on the clinical diagnostic 
laboratory fee schedule (see above).
     Prostate cancer screening tests.--The Balanced Budget Act 
authorizes coverage, beginning January 1, 2000, for an annual 
prostate cancer screening test for men over age 50. The test 
could consist of any (or all) of the following procedures: (1) 
a digital rectal exam; (2) a prostate-specific antigen blood 
test; and (3) after 2002, such other procedures as the 
Secretary finds appropriate for the purpose of early detection 
of prostate cancer.
     Colorectal screening.--The Balanced Budget Act authorizes 
coverage of and establishes frequency limits for colorectal 
cancer screening tests, effective January 1, 1998. A covered 
test is any of the following procedures furnished for the 
purpose of early detection of colorectal cancer: (1) screening 
fecal-occult blood test (for persons over 50, no more than 
annually); (2) screening flexible sigmoidoscopy (for persons 
over 50, no more than one every 4 years); (3) screening 
colonoscopy for high-risk individuals (limited to one every 2 
years); and (4) such other procedures as the Secretary finds 
appropriate for the purpose of early detection of colorectal 
cancer. Payment limits are established for the tests.
     The Balanced Budget Act requires the Secretary, within 90 
days of enactment, to publish a determination on the coverage 
of screening barium enema. The Secretary has determined that 
barium enema tests, as an alternative to either a screening 
flexible sigmoidoscopy or a screening colonoscopy, will be 
covered in accordance with the same screening parameters 
specified for those tests.
     Diabetes screening tests.--The Balanced Budget Act 
specifies that, effective July 1, 1998, Medicare's covered 
benefits will include diabetes outpatient self-management 
training services. These services are defined as including 
educational and training services furnished to an individual 
with diabetes by a certified provider in an outpatient setting. 
They will be covered only if the physician who is managing the 
individual's diabetic condition certifies that the services are 
needed under a comprehensive plan of care to ensure therapy 
compliance or to provide the individual with necessary skills 
and knowledge (including skills related to the self-
administration of injectable drugs) to participate in the 
management of their own condition. Certified providers for 
these purposes are defined as physicians or other individuals 
or entities that, in addition to providing diabetes outpatient 
self-management training services, provide other items or 
services reimbursed by Medicare. Providers must meet quality 
standards established by the Secretary. They are deemed to meet 
the Secretary's standards if they meet standards originally 
established by the National Diabetes Advisory Board and 
subsequently revised by organizations that participated in the 
establishment of standards of the Board, or if they are 
recognized by an organization representing persons with 
diabetes as meeting standards for furnishing such services.
     In addition, beginning January 1, 1998, Medicare will 
cover blood glucose monitors and testing strips for type I or 
type II diabetics (without regard to a person's use of insulin, 
as determined under standards established by the Secretary in 
consultation with appropriate organizations). The national 
payment limit for testing strips is reduced by 10 percent 
beginning in 1998.
     Bone mass measurements.--The Balanced Budget Act 
authorizes coverage, beginning July 1, 1998, for bone mass 
measurement for the following high risk persons: an estrogen-
deficient woman at clinical risk for osteoporosis; an 
individual with vertebral abnormalities; an individual 
receiving long-term glucocorticoid steroid therapy; an 
individual with primary hyperparathyroidism; or an individual 
being monitored to assess osteoporosis drug therapy. The 
Secretary would be required to establish frequency limits.
Drugs/vaccines
    Medicare generally does not cover outpatient prescription 
drugs. Despite the general limitation, Medicare law 
specifically authorizes coverage for the following drugs:
  --Immunosuppressive drugs.--Drugs used in immunosuppressive 
        therapy (such as cyclosporin) during the first 30 
        months following a covered organ transplant. The 
        coverage period is extended to 3 years beginning in 
        1998.
  --Erythropoietin (EPO).--EPO for the treatment of anemia for 
        persons with chronic kidney failure.
  --Osteoporosis drugs.--Injectable drugs approved for the 
        treatment of postmenopausal osteoporosis provided to an 
        individual by a home health agency. A physician must 
        certify that the individual suffered a bone fracture 
        related to postmenopausal osteoporosis and that the 
        individual is unable to self-administer the drug.
  --Oral cancer drugs.--Oral drugs used in cancer chemotherapy 
        when identical to drugs which would be covered if not 
        self-administered.
    The Balanced Budget Act also authorizes coverage, effective 
January 1, 1998, for oral antinausea drugs used as part of an 
anticancer chemotherapeutic regimen, subject to specified 
conditions.
    Generally, Medicare payment for drugs has been based on the 
lower of the estimated acquisition cost or the national average 
wholesale price. These provisions do not apply when payment is 
based on reasonable costs. Special limits apply in the case of 
erythropoietin; the limit is $10 per 1,000 units. Osteoporosis 
drugs can only be paid on the basis of reasonable costs.
    The Balanced Budget Act specifies that, effective January 
1, 1998, in any case where payment is not made on a cost or 
prospective payment basis, the payment will equal 95 percent of 
the average wholesale price. The Secretary is authorized to pay 
a dispensing fee to pharmacies. Further, the Secretary is 
required to study the effect of this provision on average 
wholesale prices.
    Medicare also pays for influenza virus vaccines (flu 
shots), pneumococcal pneumonia vaccine, and hepatitis B vaccine 
for persons at risk of contracting hepatitis B. Cost-sharing 
charges do not apply for pneumococcal pneumonia or influenza 
virus vaccines; cost-sharing charges do apply for hepatitis B 
vaccines.
Ambulance services
    Medicare pays for ambulance services provided certain 
conditions are met. The services must be medically necessary 
and other methods of transportation must be contraindicated. 
Ambulance services are currently paid on the basis of 
reasonable costs when such services are provided by a hospital; 
otherwise the payment is based on reasonable charge screens 
developed by individual carriers based on local billings (which 
may take a variety of forms). Based on these local billing 
methods, carriers develop screens for one or more of the 
following four main billing methods: (1) a single all inclusive 
charge reflecting all services, supplies, and mileage; (2) one 
charge reflecting all services and supplies, with separate 
charge for mileage; (3) one charge for all services and 
mileage, with separate charges for supplies; and (4) separate 
charges for services, mileage, and supplies. Within each broad 
payment method, additional distinctions are made based on 
whether the service is basic life support service or advanced 
life support, whether emergency or nonemergency transport was 
used, and whether specialized advanced life services were 
rendered.
    The Balanced Budget Act of 1997 specifies that the 
reasonable cost and charge limits will apply through 1999, with 
annual increases equal to the CPI minus 1 percentage point. A 
fee schedule will be implemented in 2000. The aggregate amount 
of payments in 2000 cannot exceed what would be paid if the 
interim reductions remained in effect in that year. Annual 
increases in subsequent years will equal the CPI increase, 
except that in 2001 and 2002 there will be a 1-percentage point 
reduction. The act specifies that coverage is provided for 
advanced life support services provided by paramedic intercept 
service providers in rural areas under contract with one or 
more volunteer ambulance services.

                    END-STAGE RENAL DISEASE SERVICES

                                Coverage

    The Medicare Program covers individuals who suffer from 
end-stage renal disease if they are: (1) fully insured for old 
age and survivor insurance benefits; (2) entitled to monthly 
Social Security benefits; or (3) spouses or dependents of 
individuals described in (1) or (2). Such persons must be 
medically determined to be suffering from end-stage renal 
disease and must file an application for benefits. In 1996, 8.4 
percent of the population suffering from end-stage renal 
disease (ESRD) who needed renal dialysis and 11.6 percent who 
needed kidney transplants did not meet any of these 
requirements and thus were not eligible for Medicare renal 
benefits.
    Benefits for qualified end-stage renal disease 
beneficiaries include all part A and part B medical items and 
services. ESRD beneficiaries are automatically enrolled in the 
part B portion of Medicare and must pay the monthly premium for 
such protection.
    Table 2-25 shows estimates of expenditures, number of 
beneficiaries, and the average expenditure per person for all 
persons with ESRD (including the aged and disabled) from 1974 
through 2002. Total projected program expenditures for the 
Medicare End-Stage Renal Disease Program for fiscal year 1998 
are estimated at $11.0 billion. In fiscal year 1998, there are 
an estimated 287,169 beneficiaries, including successful 
transplant patients and persons entitled to Medicare on the 
basis of disability who also have ESRD.

 TABLE 2-25.--END-STAGE RENAL DISEASE MEDICARE BENEFICIARIES AND PROGRAM
                         EXPENDITURES, 1974-2002                        
                  [Expenditures in millions of dollars]                 
------------------------------------------------------------------------
                                Expenditures        HI        Per person
          Fiscal year            (HI & SMI)   beneficiaries      cost   
------------------------------------------------------------------------
1974..........................          $229        15,993        $4,319
1975..........................           361        22,674        15,921
1976..........................           512        28,941        17,691
1977..........................           641        35,889        17,861
1978..........................           800        43,482        18,398
1979..........................         1,009        52,636        19,169
1980..........................         1,245        54,725        22,750
1981..........................         1,464        61,487        23,810
1982..........................         1,640        69,267        23,676
1983..........................         1,984        78,361        25,319
1984..........................         2,325        87,609        26,538
1985..........................         2,835        96,965        29,237
1986..........................         3,165       106,568        29,699
1987..........................         3,490       117,020        29,824
1988..........................         3,998       128,075        31,216
1989..........................         4,653       140,324        33,159
1990..........................         5,251       154,575        33,971
1991..........................         5,634       170,718        33,003
1992..........................         6,433       186,729        34,451
1993..........................         7,192       202,988        35,429
1994..........................         7,877       220,359        35,747
1995..........................         8,652       237,469        36,436
1996..........................         9,560       254,157        37,614
1997..........................        10,252       270,672        37,875
1998..........................        11,008       287,169        38,334
1999..........................        11,849       303,765        39,007
2000..........................        12,795       320,593        39,909
2001..........................        14,121       337,774        41,806
2002..........................        15,606       355,387        43,914
------------------------------------------------------------------------
Note.--Estimates for 1979-2001 are subject to revision by the Office of 
  the Actuary, Office of Medicare and Medicaid Cost Estimates;          
  projections for 1994-2001 are under the fiscal year 1996 budget       
  assumptions.                                                          
                                                                        
Source: Health Care Financing Administration, Office of the Actuary.    

    When the ESRD Program was created, it was assumed that 
program enrollment would level out at about 90,000 enrollees by 
1995. That mark was passed several years ago, and no indication 
exists that enrollment will stabilize soon.
    Table 2-26 shows that new enrollment for all Medicare 
beneficiaries receiving ESRD services grew at an average annual 
rate of 7.4 percent from 1989 to 1994. Most of the growth in 
program participation is attributable to growth in the numbers 
of elderly people receiving services and growth in the numbers 
of more seriously ill people entering treatment. Table 2-26 
shows the greatest rate of growth in program participation is 
in people over age 75, at 12.0 percent, followed by people of 
ages 65-74 with a growth rate of 9.1 percent. The largest rate 
of growth in primary causes of people entering ESRD treatment 
was diabetes. People with diabetes frequently have multiple 
health problems, making treatment for renal failure more 
difficult.
    The rates of growth in older and sicker patients entering 
treatment for end-stage renal disease indicate a shift in 
physician practice patterns. In the past, most of these people 
would not have entered dialysis treatment because their age and 
severity of illness made successful treatment for renal failure 
less likely. Although the reasons that physicians have begun 
treating older and sicker patients are not precisely known, it 
is clear that these practice patterns have resulted, and will 
continue to result, in steady growth in the number of patients 
enrolling in Medicare's End-Stage Renal Disease Program.
    End-stage renal disease is invariably fatal without 
treatment. Treatment for the disease takes two forms: 
transplantation and dialysis. Although the capability to 
perform transplants had existed since the 1950s, problems with 
rejection of transplanted organs limited its application as a 
treatment for renal failure. The 1983 introduction of a 
powerful and effective immunosuppressive drug, cyclosporin, 
resulted in a dramatic increase in the number of transplants 
being performed and the success rate of transplantation.
    Table 2-27 indicates that the number of kidney transplants 
in 1995 was more than double the number performed in 1980. 
Despite the significant increases in the number and success of 
kidney transplants, transplantation is not the treatment of 
choice for all ESRD patients. A chronic, severe shortage of 
kidneys available for transplantation now limits the number of 
patients who can receive transplants. Even absent a shortage of 
organs, some patients are not suitable candidates for 
transplants because of their age, severity of illness, or other 
complicating conditions. Finally, some ESRD patients do not 
want an organ transplant.
    For all of these reasons, dialysis is likely to remain the 
primary treatment for end-stage renal disease. Dialysis is an 
artificial method of performing the kidney's function of 
filtering blood to remove waste products. There are two types 
of dialysis: hemodialysis and peritoneal dialysis. In 
hemodialysis, still the most common form of dialysis, blood is 
removed from the body, filtered and cleansed through a 
dialyzer, sometimes called an artificial kidney machine, before 
being returned to the body. There are three types 

                    TABLE 2-26.--MEDICARE END-STAGE RENAL DISEASE PROGRAM INCIDENCE BY AGE, SEX, RACE, AND PRIMARY DIAGNOSIS, 1989-94                   
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                    Average             
                                                                                                                                    annual      Percent 
          Age, sex, race, and primary diagnosis              1989        1990        1991        1992        1993        1994       percent     change  
                                                                                                                                    change      1993-94 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Age:                                                                                                                                                    
  Under 15 years........................................         417         462         465         419         444         437         0.9        -1.6
  15-24 years...........................................       1,327       1,282       1,289       1,362       1,315       1,268        -0.9        -3.6
  25-34 years...........................................       3,442       3,459       3,556       3,580       3,628       3,496         0.3        -3.6
  35-44 years...........................................       4,718       5,174       5,590       5,954       5,825       5,986         4.9         2.8
  45-54 years...........................................       5,947       6,275       6,859       7,642       8,019       8,756         8.0         9.2
  55-64 years...........................................       9,230       9,973      10,796      11,430      11,631      12,426         6.1         6.8
  65-74 years...........................................      11,554      12,964      14,499      16,007      16,542      17,851         9.1         7.9
  75 years and over.....................................       6,845       7,765       8,932      10,275      10,813      12,046        12.0        11.4
                                                                                                                                                        
Sex:                                                                                                                                                    
  Male..................................................      23,569      25,708      27,958      30,251      31,289      33,259         7.1         6.3
  Female................................................      19,911      21,646      24,028      26,418      26,928      29,007         7.8         7.7
                                                                                                                                                        
Race:                                                                                                                                                   
  Asian.................................................         831       1,032       1,117       1,266       1,318       1,456        11.9        10.5
  Black.................................................      12,608      13,538      14,962      16,520      16,976      17,638         6.9         3.9
  White.................................................      28,983      31,564      34,669      37,477      38,072      40,532         6.9         6.5
  American Indian.......................................         540         580         633         792         618         689         5.0        11.5
  Other/unknown.........................................         518         640         605         614       1,233       1,951        30.4        58.2
                                                                                                                                                        
Primary diagnosis:                                                                                                                                      
  Diabetes..............................................      14,456      16,219      18,715      20,792      20,368      23,417        10.1        15.0
  Glomerulonephritis....................................       5,701       5,852       5,944       6,161       5,953       6,256         1.9         5.1
  Hypertension..........................................      12,408      13,544      15,014      16,831      15,839      17,705         7.4        11.8
  Polycystic-kidney disease.............................       1,268       1,400       1,484       1,548       1,359         969        -5.2       -28.7
  Interstitial nephritis................................       1,389       1,397       1,538       1,569       1,392       1,585         2.7        13.9
  Obstructive nephropathy...............................         980         945       1,019       1,091         960         944        -0.7        -1.7
  Other.................................................       2,678       2,866       3,588       3,931       4,157       5,030        13.4        21.0
  Unknown...............................................       2,506       2,481       2,760       3,018       2,594       2,453        -0.4        -5.4
  Not reported..........................................       2,094       2,650       1,924       1,728       5,595       3,907        13.3       -30.2
                                                         -----------------------------------------------------------------------------------------------
    Total number of new enrollees.......................      43,480      47,354      51,986      56,669      58,217      62,266         7.4         7.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Data Management and Strategy; data from the Program Management and Medical Information System,  
  September 1996 update.                                                                                                                                


          TABLE 2-27.--TOTAL KIDNEY TRANSPLANTS PERFORMED IN MEDICARE-CERTIFIED U.S. HOSPITALS, 1979-95         
----------------------------------------------------------------------------------------------------------------
                                                                          Living donor         Cadaveric donor  
                     Calendar year                          Total    -------------------------------------------
                                                         transplants    Number    Percent     Number    Percent 
----------------------------------------------------------------------------------------------------------------
1979...................................................        4,189      1,186         28      3,003         72
1980...................................................        4,697      1,275         27      3,422         73
1981...................................................        4,883      1,458         30      3,425         70
1982...................................................        5,358      1,677         31      3,681         69
1983...................................................        6,112      1,784         29      4,328         71
1984...................................................        6,968      1,704         24      5,364         76
1985...................................................        7,695      1,876         24      5,819         76
1986...................................................        8,976      1,887         21      7,089         79
1987...................................................        8,967      1,907         21      7,060         79
1988...................................................        8,932      1,816         20      7,116         80
1989...................................................        8,899      1,893         21      7,006         78
1990...................................................        9,796      2,091         21      7,705         79
1991...................................................       10,026      2,382         24      7,644         76
1992...................................................       10,115      2,536         25      7,579         75
1993...................................................       10,934      2,828         26      8,106         74
1994...................................................       11,312      3,000         26      8,312         73
1995...................................................       11,902      3,416         29      8,426         71
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.                           

of peritoneal dialysis. Intermittent peritoneal dialysis (IPD) 
and continuous cycling peritoneal dialysis (CCDP) requires the 
use of a machine while continuous ambulatory peritoneal 
dialysis (CAPD) does not require the use of a machine. Under 
peritoneal dialysis, filtering takes place inside the body by 
inserting dialysate fluid through a permanent surgical opening 
in the peritoneum (abdominal cavity). Toxins filter into the 
dialysate fluid and are then drained from the body through the 
surgical opening. Hemodialysis is usually performed three times 
a week, IPD is performed once or twice a week, while CAPD and 
CCPD require daily exchanges of dialysate fluid.

                             Reimbursement

    Medicare reimbursement for facility-based dialysis services 
provided by hospital-based and independent facilities are paid 
at prospectively determined rates for each dialysis treatment 
session. The rate, referred to as a composite rate, is derived 
from area wage differences and audited cost data adjusted for 
the national proportion of patients dialyzing at home versus in 
a facility. Adjustments are made to the composite rate for 
hospital-based dialysis facilities to reflect higher overhead 
costs.
    Beneficiaries electing home dialysis may choose either to 
receive dialysis equipment, supplies, and support services 
directly from the facility with which the beneficiary is 
associated (method I) or to make independent arrangements for 
equipment, supplies, and support services (method II). Under 
method I, the equipment, supplies, and support services are 
included in the facility's composite rate. Under method II, 
payments are made on the basis of reasonable charges and 
limited to 100 percent of the median hospital composite rate, 
except for patients on continuous cycling peritoneal dialysis, 
in which case the limit is 130 percent of the median hospital 
composite rate.
    Kidney transplantation services, to the extent they are 
inpatient hospital services, are subject to the prospective 
payment system. However, kidney acquisition costs are paid on a 
reasonable cost basis.
    The composite rate is not routinely updated, nor are method 
II reasonable charge payments. There is no specific update 
policy for reasonable costs of kidney acquisition; 100 percent 
of reasonable costs are reimbursed. In fiscal year 1998, the 
composite rate is $130 for hospitals and $126 for freestanding 
facilities.

                    PRIVATE HEALTH PLANS IN MEDICARE

     The Medicare Risk Contract Program in its current form 
(section 1876 of the Social Security Act) was authorized as 
part of the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA). It gives Medicare beneficiaries the option to enroll 
in a private health plan, typically a health maintenance 
organization (HMO). (An HMO is a type of managed care plan that 
acts as both insurer and provider of health care services to an 
enrolled population.) The program receives a predetermined, per 
capita payment from Medicare for each enrolled beneficiary and 
is at risk for providing each enrollee Medicare-covered items 
and services. The Risk Contract Program built upon an earlier 
Medicare provision, originating in the 1970s, which authorized 
private plans to contract with Medicare on a cost-reimbursement 
basis.
     The Balanced Budget Act of 1997 made several major changes 
to underlying Medicare law dealing with private health plans. 
First, it replaces the risk program (and most other Medicare 
managed-care options, such as plans with cost contracts) with a 
program called Medicare+Choice (new part C of Medicare). 
Second, it creates a new set of private plan options for 
Medicare beneficiaries. Third, it establishes a new method for 
paying participating private health plans. Under the Balanced 
Budget Act of 1997, every individual entitled to Medicare part 
A and enrolled in part B will be able to elect the existing 
package of Medicare benefits through either the existing 
Medicare fee-for-service program (traditional Medicare) or 
through a Medicare+Choice plan.
     This section describes the rules and standards under which 
both the old and new program operate. The Risk Contract Program 
is characterized as the ``current'' program; the new program is 
generally referred to as Medicare+Choice.

Plan Options and Rules for Enrollment Before the Balanced Budget Act of 
                                  1997

     Prior to the implementation of Medicare+Choice, which 
should be fully in place by 1999, persons enrolling in Medicare 
have two basic coverage options. They may elect to obtain 
services through the traditional fee-for-service system under 
which program payments are made for each service rendered. 
Alternatively, under section 1876 of the Social Security Act, 
they may elect to enroll with a managed care organization which 
has entered into a payment agreement with Medicare.
     Three types of managed care organizations are authorized 
under section 1876 to contract with Medicare: an entity that 
has a risk contract with Medicare, an entity that has a cost 
contract with Medicare, and a health care prepayment plan 
(HCPP) that has a cost contract to provide Medicare part B 
services. Risk contracts are frequently referred to as TEFRA 
risk contracts and cost contracts are frequently referred to as 
TEFRA cost contracts because the TEFRA legislation established 
the rules governing these types of contracts.
 Risk contracts
     Both HMOs and competitive medical plans (CMPs) are 
permitted to sign risk contracts with Medicare. (A CMP is a 
health plan that is not a federally qualified HMO but that 
meets specific Medicare requirements.) By contrast, provider-
sponsored organizations (PSOs) and preferred provider 
organizations (PPOs) that are not organized under the laws of a 
State and are neither a federally qualified HMO or CMP are not 
eligible to contract with Medicare under the Risk Contract 
Program. Allowing PSOs and PPOs to compete for Medicare 
beneficiaries is one of the major changes made by the Balanced 
Budget Act of 1997.
     Medicare makes a single monthly capitation payment for 
each of its enrollees. This payment has been called the 
adjusted average per capita cost (AAPCC). The Balanced Budget 
Act of 1997 changed the capitation payment methodology, as 
discussed below. In return, the entity agrees to provide or 
arrange for the full range of Medicare services through an 
organized system of affiliated physicians, hospitals, and other 
providers.
     In general, a beneficiary in an area served by an HMO or 
CMP with a risk contract may voluntarily choose to enroll in 
the organization. With a few exceptions, the beneficiary must 
obtain all covered services through the HMO or CMP, except in 
emergencies. Typically, the beneficiary is not responsible for 
many of the cost-sharing charges associated with traditional 
Medicare. In some cases, the beneficiary may be charged a 
monthly premium by the organization. In 1995, risk plans were 
authorized to offer point-of-service (POS) options in which 
enrollees can go out of plan for services, with cost-sharing 
responsibilities varying with the choice of provider (higher 
cost sharing is associated with the use of nonnetwork 
providers).
 Cost-based plans
     Beneficiaries may also enroll in organizations with TEFRA 
cost contracts. These entities must meet essentially the same 
conditions of participation as risk contractors. Under a cost 
contract, Medicare pays the actual cost the entity incurs in 
furnishing covered services (less the estimated value of 
beneficiary cost sharing).
     The other type of cost-based arrangement is the health 
care prepayment plan. A HCPP arrangement is similar to a TEFRA 
cost contract except that it provides only part B services. 
Further, there are no specific statutory conditions to qualify 
for a HCPP contract.
 Enrollment
     With certain exceptions, any Medicare beneficiary residing 
in the area served by a risk plan or cost plan may enroll. 
Under the rules in effect until Medicare+Choice is implemented, 
the plans must have an annual open enrollment period of at 
least 30 days duration. During this period, they must accept 
beneficiaries in the order in which they apply up to the limits 
of its capacity, unless doing so would lead: (a) to violation 
of the rule requiring HMOs to have no more than 50 percent of 
their enrollees as Medicare-Medicaid beneficiaries, or (b) to 
an enrolled population unrepresentative of the population in 
the area served by the HMO. As of January 1, 1997, the 
Secretary is authorized to waive this ``50-50 rule'' if she 
finds it in the public interest. This provision was included in 
the Balanced Budget Act of 1997, which also repeals the 50-50 
rule as of January 1, 1999.
     An enrollee may request termination of his or her 
enrollment at any time. An individual may file disenrollment 
requests directly with the HMO or at the local Social Security 
Office. Disenrollment takes effect on the first day of the 
month following the month during which the request is filed. 
The HMO may not disenroll or refuse to reenroll a beneficiary 
on the basis of health status or need for health services.
     The Secretary is authorized to prescribe procedures and 
conditions under which eligible organizations contracting with 
Medicare may inform beneficiaries about the organization. 
Brochures, application forms, or other promotional or 
informational material may be distributed only after review and 
approval by the Secretary of Health and Human Services (DHHS). 
HMOs must provide enrollees, at the time of enrollment and 
annually thereafter, an explanation of rights to benefits, 
restrictions on services provided through nonaffiliated 
providers, out-of-area coverage, coverage of emergency and 
urgently needed services, and appeal rights. A terminating HMO 
must arrange for supplementary coverage for Medicare enrollees 
to pay for certain cost-sharing charges during any preexisting 
condition exclusion under their successor coverage for the 
lesser of 6 months or the duration of the exclusion period.

               Trends in Plan Availability and Enrollment

     As of 1997, a small but growing portion of Medicare 
beneficiaries are enrolled in managed care plans. Recent growth 
in enrollment reflects increases in both the number of plans 
with Medicare risk contracts and the number of Medicare 
enrollees per plan.
 Availability of Medicare risk plans
     In the 1980s, many large HMOs did not participate in 
Medicare. Participation by health plans, however, has grown 
rapidly in the past 5 years, especially since 1993 (chart 2-1).

   CHART 2-1. NUMBER OF RISK PLANS PARTICIPATING IN MEDICARE, 1987-97





    Note: All data are for December, except that June data are 
used for 1997.

    Source: Physician Payment Review Commission (now Medicare 
Payment Advisory Commission) analysis of data from Health Care 
Financing Review, 1996 Statistical Supplement and Medicare 
Managed Care Contract Reports.


     By law, each risk plan is available for a specific service 
area. Plans define their service areas as a set of counties and 
partial counties (partial counties are identified by ZIP code). 
Typically, a plan serves some portion of a single State or a 
multistate metropolitan area. Analysis by the Physician Payment 
Review Commission (PPRC; 1997) shows that, in June 1997, 67 
percent of all Medicare beneficiaries had at least one risk 
plan available to them (chart 2-2). (PPRC has now merged with 
the Prospective Payment Assessment Commission to become the 
Medicare Payment Advisory Commission or MedPAC.) Almost 60 
percent of all beneficiaries had a choice of plans, and one-
third had five or more available to them. In 2 years, the 
proportion of all beneficiaries without access to at least one 
risk plan had dropped 12 percent, while the number with access 
to at least five plans had more than doubled.

  CHART 2-2. DISTRIBUTION OF MEDICARE BENEFICIARIES BY NUMBER OF RISK 
                 PLANS AVAILABLE IN THEIR AREA, 1995-97





    Note: Area is defined as the ZIP codes in a risk plan's 
service area.

    Source: Physician Payment Review Commission (now Medicare 
Payment Advisory Commission) analysis of Health Care Financing 
Administration enrollment data.


     Access to risk plans, however, is much greater in urban 
areas than in rural areas (chart 2-3). All residents of central 
urban areas have at least one plan available, and most have 
more. By contrast, rural beneficiaries rarely have even one 
plan available.
 Enrollment trends for Medicare managed care
     Historically, few Medicare beneficiaries have enrolled in 
HMOs, but the numbers have risen steadily to 14.2 percent of 
all beneficiaries in mid 1997 (chart 2-4). The largest numbers 
and all of the growth have been in risk plans, in which 
enrollment increased from 3.3 percent in 1990 to 12.6 percent 
in June 1997. By contrast, enrollment in cost contracting plans 
fell to a low of 1.6 percent in 1997. Nationally, enrollment in 
risk plans grew about 30 percent from June 1996 to June 1997.

 CHART 2-3. DISTRIBUTION OF MEDICARE BENEFICIARIES IN URBAN AND RURAL 
           LOCATIONS BY NUMBER OF AVAILABLE PLANS, JUNE 1997





    Note: Urban counties are divided into central counties and 
others; rural counties are divided into urban fringe counties 
and others.

    Source: Physician Payment Review Commission (now Medicare 
Payment Advisory Commission) analysis of Health Care Financing 
Administration enrollment data.


     In addition to enrollment in risk and cost plans, over 
16,000 beneficiaries had enrolled in plans offered through the 
Medicare Choices Demonstration Project as of mid 1997. This 
project was established to give Medicare beneficiaries expanded 
choices among types of managed care plans and test new ways to 
pay for managed care.
     Patterns of enrollment differ across urban and rural 
locales. Risk plan enrollment in central urban areas (cities at 
the core of metropolitan areas) was about 24 percent in June 
1997, about twice the level in outlying urban areas. That level 
was up from 17 percent 2 years earlier. Risk plan enrollment in 
rural areas was about 1.8 percent. Although low, it has been 
rising rapidly over the past 2 years. Enrollment in cost 
contract plans is more evenly distributed.
     Enrollment patterns are not uniform around the country, 
with risk plan enrollment higher generally in western States 
(chart 2-5). In particular, over one-third of the beneficiaries 
in Arizona (37 percent) and California (37 percent) were in 
risk plans in June 1997. The highest levels of enrollment in 
eastern States were in Florida (24 percent), Massachusetts (17 
percent), Pennsylvania (19 percent), and Rhode Island (16 
percent).

CHART 2-4. PERCENT OF MEDICARE BENEFICIARIES ENROLLED IN RISK AND COST 
                             PLANS, 1990-97





    Note: All data are for December, except that 1997 data are 
from June.

    Source: Physician Payment Review Commission (now Medicare 
Payment Advisory Commission) analysis of Medicare Managed Care 
Contract Reports.


     Further evidence of the degree of concentration is that 
five States account for just over two-thirds of all risk 
enrollees but just over one-third of all Medicare 
beneficiaries. Almost half of all risk enrollees live in 
California and Florida. New enrollees, however, come from a 
somewhat different mix of States than do current risk 
enrollees. Beneficiaries in California and Florida represent 
under one-fourth of net new enrollment between June 1996 and 
June 1997, whereas Pennsylvania has the largest share of new 
enrollees (14 percent).
     Although enrollment in the risk program initially was 
concentrated on the west coast and Florida, other areas, 
especially in the East and Midwest, have seen rapid rises in 
risk plan enrollment over the last 2 years. Urban areas with 
the greatest share of national enrollment growth tend to be 
those where Medicare payments are high. New competition has 
entered many of these markets, but the newer entrants do not 
necessarily attract the most new enrollees.
     Although nearly 300 risk plans participate in Medicare, 
risk contracts are concentrated among a few large national 
firms. Just 12 large national firms enroll over three-fourths 
of all risk plan enrollees (chart 2-6). The largest firm is 
Pacificare (including its recent merger partner, FHP) with 21 
percent of risk plan enrollees nationwide. Kaiser Permanente, 
the Blue Cross Blue Shield companies, and Humana are the next 
largest firms participating in Medicare. The concentration of 
enrollment appears to be declining, possibly because of the 
large number of recent new entrants into the program. 
Countering this trend, however, may be corporate mergers, which 
tend to increase enrollment concentration.

CHART 2-5. PERCENT OF MEDICARE BENEFICIARIES ENROLLED IN RISK PLANS, BY 
                            STATE, JUNE 1997





    Note: Enrollment in eight States falls in a different 
category than it would based on HCFA's monthly reports because 
certain plans serve beneficiaries in States other than where 
they are located.

    Source: Physician Payment Review Commission (now Medicare 
Payment Advisory Commission) analysis of Health Care Financing 
Administration enrollment data.


     Projections of enrollment show continued growth. Forecasts 
by the Congressional Budget Office (CBO) suggest enrollment 
will reach about 34 percent by 2005, modestly above the 29-
percent rate projected under prior law.

 CHART 2-6. PERCENT OF PLAN ENROLLEES WHO ARE IN RISK PLANS AFFILIATED 
                     WITH NATIONAL FIRMS, JUNE 1997





    Source: Physician Payment Review Commission (now Medicare 
Payment Advisory Commission) analysis of Health Care Financing 
Administration enrollment data.


        Plan Options and Rules for Enrollment in Medicare+Choice

     The Balanced Budget Act establishes Medicare+Choice, which 
will give beneficiaries an expanded array of private plan 
alternatives to traditional Medicare. Each Medicare+Choice plan 
will have to provide the same benefits as required under 
traditional Medicare. Standards for Medicare+Choice plan 
organization and performance are discussed below. Also 
discussed below are beneficiary and provider protections.
 Plan options
     A Medicare+Choice plan can be: (1) a coordinated care 
plan, (2) a private fee-for-service plan, or (3) on a limited 
demonstration basis, a combination of a medical savings account 
(MSA) plan and contributions to a Medicare+Choice MSA.
     Coordinated care plans may be offered by an HMO (with or 
without a point-of-service plan), a PPO, or a PSO. PPOs are 
generally groups of physicians and hospitals who contract with 
an insurer or employer to serve a group of enrollees on a fee-
for-service basis at negotiated rates that are lower than those 
charged to nonenrollees. PPOs do not traditionally have primary 
care gatekeepers. A PSO is generally a cooperative venture of a 
group of providers who control its delivery and financial 
arrangements.
     The Balanced Budget Act defines a private fee-for-service 
plan as a plan that: reimburses hospitals, physicians, and 
other providers at a rate determined by the plan on a fee-for-
service basis without placing the provider at financial risk; 
does not vary rates for a provider based on the utilization 
relating to the provider; and does not restrict the selection 
of providers among those who are lawfully authorized to provide 
the covered services, and who agree to accept the terms and 
conditions of payment established by the plan.
     The Balanced Budget Act defines an MSA plan as a plan that 
reimburses Medicare-covered services after a specified 
deductible (up to $6,000) is met. The difference between the 
premium for the high-deductible plan and applicable 
Medicare+Choice capitation payment would be placed into an 
account for the beneficiary to use in meeting his or her 
expenses below the deductible. The MSA option is offered on a 
demonstration basis. Up to 390,000 individuals can enroll in 
MSA plans (specific rules for MSA plans are described below).
     As Medicare+Choice begins operation, probably late in 
1998, most existing risk and cost-based contracts will be 
phased out. No new risk contracts may be initiated after 
Medicare+Choice standards are released, and no risk contracts 
may be renewed after January 1999. Existing risk-contract plans 
will be able to convert to Medicare+Choice if they meet the new 
program requirements. Effective immediately, no new cost-based 
contracts may be initiated, and most cost-based contracts may 
not be renewed beyond December 2002.
 Enrollment rules for Medicare+Choice
     With two exceptions, beneficiaries will be able to enroll 
in any Medicare+Choice plan that serves their area. The first 
exception applies to beneficiaries not enrolled in part B. The 
second exception applies to persons qualifying for Medicare on 
the basis of end-stage renal disease (ESRD); however, persons 
already enrolled who later develop ESRD may remain enrolled in 
the plan.
     After a transition period (through 2001) in which 
individuals are able to make and change elections on an ongoing 
basis, elections will be made and changed only during an annual 
coordinated election period. There will also be a 3-month 
period after making an election in which individuals can change 
their election (except for a 6-month period in 2002). 
Additional election periods (called special election periods) 
will apply for newly eligible Medicare beneficiaries (based on 
age, but not disability) and beneficiaries who experience 
certain events; for example, the individual is no longer 
eligible to participate in a plan because she moves or because 
the plan has terminated its contract with Medicare. Table 2-28 
summarizes the enrollment schedule for Medicare+Choice.

        TABLE 2-28.--TRANSITION TO ANNUAL COORDINATED ELECTION OF       
                          MEDICARE+CHOICE PLANS                         
------------------------------------------------------------------------
               Date                                 Event               
------------------------------------------------------------------------
June 1, 1998......................  Secretary of DHHS must issue        
                                     regulations implementing standards 
                                     (other than those for solvency) for
                                     Medicare+Choice plans.             
                                     Medicare+Choice contracts cannot be
                                     signed until such standards are in 
                                     place. Upon signing a contract with
                                     DHHS, Medicare+Choice plans begin  
                                     accepting Medicare beneficiaries on
                                     a continuous open enrollment and   
                                     continuous disenrollment basis.    
November 1998.....................  Medicare+Choice Information Fair    
                                     nationwide coordinated educational 
                                     and publicity campaign. Individuals
                                     can begin enrolling in             
                                     Medicare+Choice MSAs (with coverage
                                     becoming effective January 1,      
                                     1999).                             
January 1, 1999...................  Current risk contract enrollees are 
                                     hereafter considered to be enrolled
                                     in Medicare+Choice plans. MSA plans
                                     begin providing coverage.          
November 1999.....................  First coordinated annual election   
                                     period for Medicare+Choice plans   
                                     (for coverage becoming effective   
                                     January 1, 2000) and first mailing 
                                     of informational materials to all  
                                     Medicare beneficiaries.            
December 31, 2001.................  Last day of continuous open         
                                     enrollment/disenrollment during    
                                     which an individual can change     
                                     elections an unlimited number of   
                                     times.                             
January 1, 2002...................  First year in which elections become
                                     locked in. First 6 months of 2002  
                                     is a transition period when an     
                                     individual can change election only
                                     once (other than an election during
                                     the coordinated annual election    
                                     period or in the case of an event  
                                     qualifying for a special election).
                                     Limited exceptions are provided.   
December 31, 2002.................  New elections end for               
                                     Medicare+Choice MSA plans (unless  
                                     390,000 cap is reached prior to    
                                     this date).                        
January 1, 2003...................  New elections become effective the  
                                     first day of January following each
                                     election period. Each year there is
                                     a 3-month period when an individual
                                     can change election one time.      
                                     Otherwise, elections cannot be     
                                     changed until the next annual      
                                     coordinated election period (unless
                                     individual qualifies for special   
                                     enrollment period). Limited        
                                     exceptions are provided.           
------------------------------------------------------------------------
Source: Congressional Research Service analysis of provisions in the    
  Balanced Budget Act of 1997.                                          

 Marketing rules
     Medicare+Choice organizations and the plans they offer to 
Medicare beneficiaries must meet certain marketing rules. They 
will have to submit marketing material to the Secretary at 
least 45 days before distribution. The material can then be 
distributed if it is not disapproved by the Secretary (whereas 
in the previous rules active approval was required). The 
Secretary is required to disapprove such material if it is 
inaccurate or misleading. Each organization must conform to 
fair marketing standards, and must not permit an organization 
to provide for cash or other monetary rebates as an inducement 
for enrollment or otherwise. The Secretary is permitted to 
prohibit an organization or its agent from completing any 
portion of any election form on behalf of any individual.
 Information to beneficiaries
     The Secretary is required to provide for activities to 
disseminate broadly information on traditional Medicare and 
Medicare+Choice plans to current and prospective Medicare 
beneficiaries. The information has to be comparative in order 
to help beneficiaries make informed choices among available 
options. The Secretary is required to conduct an educational 
and publicity campaign during November 1998 to inform 
Medicare+Choice individuals about the identity of 
Medicare+Choice plans and risk contract plans offered in 
different areas and the election process. As shown in table 2-
28, the Secretary is required to provide comprehensive 
information, including plan comparisons, to beneficiaries every 
November, beginning with 1999.
     Specifically, the Secretary is required to mail to all 
individuals eligible for Medicare+Choice general and 
comparative plan information. This mailing must occur at least 
15 days before each annual, coordinated election period. (Such 
information will also be sent to newly eligible beneficiaries 
in advance of their initial enrollment period.)
     The general information is to include: (1) benefits and 
cost-sharing requirements under the traditional Medicare 
Program; (2) the procedures for electing traditional Medicare 
and Medicare+Choice; (3) a general description of procedural 
rights (including grievance and appeals procedures) for both 
traditional Medicare and Medicare+Choice; (4) information on 
benefits and other features of supplemental coverage, including 
Medigap and Medicare Select; and (5) notice that a 
Medicare+Choice organization may terminate its contract with 
Medicare or otherwise cease to be available to an enrolled 
individual and what would happen in that event.
     The comparative plan information for Medicare+Choice will 
have to include: (1) benefits, cost-sharing requirements, and 
the extent to which an enrollee may obtain benefits through 
out-of-network providers; (2) plan premiums; (3) plan service 
areas; (4) quality and performance information, including 
disenrollment rates, enrollee satisfaction, health outcomes, 
and compliance data; (5) supplemental benefits, if any, and 
their premiums.
     The Secretary is required to maintain a toll-free number 
and internet site to facilitate access to information on 
Medicare+Choice plans. Nonfederal entities may be used to carry 
out information activities required under the Balanced Budget 
Act. The Medicare+Choice organizations will be required to 
furnish the Secretary with the information needed to enable the 
Secretary to comply with these requirements.
     Medicare+Choice organizations will be required to pay a 
``user fee'' to offset HCFA's costs of providing beneficiaries 
with comparative plan information, conducting annual 
information fairs, maintaining the toll-free information number 
and internet site, and conducting the other activities designed 
to inform Medicare beneficiaries about their insurance options. 
This user fee must equal the organization's share (as 
determined by the Secretary) of the aggregate amount of fees 
which are appropriated for a fiscal year. The amounts collected 
are authorized to be appropriated, and are capped at $200 
million in fiscal year 1998; $150 million in fiscal year 1999; 
and $100 million in fiscal year 2000 and subsequent years. 
However, Public Law 105-78, providing for appropriations for 
the Departments of Labor, Health and Human Services, and 
Education, provides for only $95 million in user fees for 
fiscal year 1998. Report language accompanying the legislation 
suggests that HCFA should give priority in using these funds 
to: (1) publishing a comparative booklet to be mailed to 
beneficiaries describing the new Medicare+Choice plans; (2) 
contracting for a toll-free number and maintaining an internet 
site for questions about Medicare+Choice options; and (3) 
operating Medicare+Choice information fairs and funding future 
dissemination of information through local information centers 
and other forms of public relations.
 Nondiscrimination
     Medicare+Choice organizations are required to accept 
eligible individuals without restriction during election 
periods (also referred to as open enrollment periods). In 
general, organizations and plans cannot deny enrollment on the 
basis of health status related factors. These include: health 
status, medical condition (including both physical and mental 
illnesses), claims experience, receipt of health care, medical 
history, genetic information, evidence of insurability 
(including conditions arising out of acts of domestic 
violence), and disability. These provisions do not apply if 
they will result in enrollment misrepresentative of the 
Medicare population in the service area. An organization can 
deny enrollment in the event it has reached the limits of its 
capacity. Organizations also cannot terminate an enrollee's 
election except for failure to pay premiums on a timely basis, 
disruptive behavior, or because the plan ends for all 
Medicare+Choice enrollees.

                     Payments to Plans Through 1997

     There are two basic components of the risk program payment 
methodology used through 1997. The first is the actuarial 
method used to calculate risk plan payment rates each year. The 
second is the adjusted community rate (ACR) mechanism through 
which risk contracting plans determine the amount of Medicare 
noncovered benefits that they will provide to Medicare 
enrollees and the premiums they are permitted to charge for 
those benefits. As described below, the Balanced Budget Act 
made substantial changes in the calculation of plan payment 
rates, but only modest changes in the ACR mechanism.
 Capitation payments to risk contracting plans
     Under the old system, Medicare paid risk plans 95 percent 
of an actuarial projection, at the county level, of what the 
program would have paid if the beneficiary had remained in the 
traditional fee-for-service sector. This payment rate was known 
as the adjusted average per capita cost (AAPCC). The Health 
Care Financing Administration (HCFA) recalculated AAPCCs every 
calendar year based on estimates of national average spending, 
county spending, and beneficiary characteristics.
     National Medicare per capita expenditures.--In the first 
stage of the AAPCC calculation, HCFA actuaries used historical 
program expenditures to project national per capita program 
expenditures for the coming calendar year. These U.S. per 
capita costs (USPCC) were needed to update historical spending 
at the county level. Separate projections were made for part A 
services and part B services for the aged, the disabled, and 
people with ESRD. These projections took into account expected 
inflation and changes in utilization patterns and services 
covered by the Medicare Program. The USPCC was reported in 
terms of monthly per capita expenditures because risk plans are 
paid on a monthly basis.
     County level Medicare per capita expenditures.--In the 
second stage, HCFA estimated expected per capita program 
expenditures for the aged and the disabled in each county, and 
for people with ESRD in each State. County level per capita 
spending differed from the national average because of 
differences in input prices, practice patterns, health status, 
utilization, and Medicare payments for special purposes such as 
graduate medical education and support for disproportionate-
share hospitals. Risk adjusters were applied to these data to 
approximate what Medicare per capita spending in the fee-for-
service sector would have been in each year if a county had the 
same demographic characteristics as the nation as a whole. 
These projected risk-weighted per capita payments are the 
AAPCC.
     Enrollee-level payment to plans.--Finally, HCFA calculated 
what it would pay a risk plan for each individual enrollee. 
This payment was based on 95 percent of the AAPCCs for the 
enrollee's county of residence and was adjusted by national 
risk adjusters to reflect each enrollee's demographic 
characteristics, such as age, sex, and whether the person is in 
a nursing home (see section below on risk adjustment). Medicare 
also paid plans 95 percent of the State level end-stage renal 
disease AAPCCs for enrollees with end-stage renal disease.
 Payment issues
     For several years, certain issues have been raised about 
the AAPCC-based payment methodology. Payment rates varied 
widely across the country and from year to year. Risk plans 
also were paid for graduate medical education and 
disproportionate-share hospital (DSH) payments that they may 
not actually have incurred.
     Geographic variation and volatility.--Certain policies in 
place under the old system led to significant variation in risk 
payments across the country. Nationally, in 1997, AAPCCs ranged 
from $221 to $767. AAPCCs for central urban counties ($546) and 
other urban counties ($436) were higher on average than AAPCCs 
for rural counties adjacent to urban areas ($393) or the most 
rural counties ($371). Furthermore, because Medicare risk 
payments were county based, neighboring counties often had 
substantially different AAPCCs that could not be explained by 
differences in plan costs. For example, the AAPCC varied by 
over $200 per month among the counties adjacent to Chicago or 
to Washington, DC. These geographic variations in AAPCCs 
resulted from local differences in fee-for-service Medicare 
expenditures that in turn reflected service use patterns (both 
volume and intensity), provider input prices (for example, cost 
of wages or supplies), and Medicare payments for special 
purposes (for example, payments for graduate medical 
education).
     In addition, many counties experienced substantial changes 
in the AAPCC from year to year, despite the use of multiple 
years of expenditure data to smooth changes in per capita 
spending. Per capita costs for counties with small Medicare 
populations fluctuated more over time than per capita costs for 
counties with larger Medicare populations.
     Both the levels of AAPCC-based payment rates and their 
volatility over time have influenced Medicare risk plan 
enrollment rates. PPRC's analysis indicated that, in urban 
counties, the level of payments is one of the important factors 
influencing enrollment rates, with higher enrollment rates 
where payment rates are high. Payment volatility appears to 
have had a weaker but measurable effect, with lower enrollment 
rates where volatility is high.
     Medical education and disproportionate-share payments.--
Medicare fee-for-service payments for inpatient hospital stays 
include payments for direct and indirect medical education 
costs incurred by teaching hospitals and extra payments to 
hospitals that serve a disproportionate share of low-income 
beneficiaries. Under the old payment system, these payments 
were retained in the expenditures used to calculate the AAPCCs. 
As a result, an AAPCC reflected a county's average monthly per 
capita cost for fee-for-service medical education and 
disproportionate share hospitals. These amounts may not 
correspond with actual risk plan costs, however, because not 
all plans have medical education programs or use teaching or 
disproportionate-share hospitals. Each type of payment averaged 
about 3 percent of the AAPCC rates overall. The shares of total 
payments, however, varied across the country.
     Payments for services in VA or defense facilities.--In 
some areas, many Medicare enrollees obtain services from 
Veterans Administration or Department of Defense facilities. As 
a result, Medicare expenditures are reduced in these areas. 
Because the AAPCCs were based on Medicare fee-for-service 
expenditures, the exclusion of these services meant that the 
AAPCC did not represent the average service use of Medicare 
beneficiaries in the fee-for-service sector. The value of the 
services provided by these non-Medicare Programs averaged about 
3 percent of total Medicare per enrollee costs across all 
States, although it varied substantially across individual 
States.

                   Medicare+Choice Payments to Plans

     The Balanced Budget Act substantially restructured the 
system for setting the rates by which Medicare pays plans. 
While Medicare+Choice is not yet in place, the Balanced Budget 
Act requires HCFA to determine 1998 payments to risk plans 
using the new capitation payment methodology. The rates for 
1998, the first to be so calculated, were issued in September 
1997.
     In general, the program makes monthly payments in advance 
to each participating health plan for each covered individual 
in a payment area (typically a county). The Secretary is 
required to determine annually, and announce by March 1 before 
the calendar year concerned, the annual Medicare+Choice 
capitation rate for each payment area, and the risk and other 
factors to be used in adjusting such rates.
     Payments to Medicare+Choice organizations and payments to 
Medicare+Choice MSAs are made from the Medicare Trust Funds in 
proportion to the relative weights that benefits under parts A 
and B represent of Medicare's actuarial value of the total 
benefits.
 Calculation of the payment rate
     The major factors for determining Medicare's annual 
Medicare+Choice capitation rates are summarized in table 2-29. 
The annual Medicare+Choice capitation rate, for a payment area 
(for a contract for a calendar year) is set at the highest of 
three amounts calculated for each county:
  --a rate calculated as a blend of an area-specific (local) 
        rate and a national rate,
  --a minimum or floor rate, and
  --a rate reflecting a minimum increase from the previous 
        year's rate.
Each year, the two components of the blended rate and the floor 
rate will be updated by a national growth percentage. Each part 
of the system is described in more detail below.
     Blended rates.--The blended capitation rate is designed to 
shift county rates gradually away from local rates, which 
reflect the wide variations in fee-for-service costs discussed 
above, toward a national average rate. Blending is designed to 
reduce payments in counties where AAPCCs historically have been 
higher than the national average rate, and to increase payments 
in counties where AAPCCs have been lower. The blended rate is 
defined as the sum of:
  --a percentage of the annual area-specific Medicare+Choice 
        capitation rate for the year for the payment area, and
  --a percentage of the input-price adjusted annual national 
        Medicare+Choice capitation rate for the year.
     The area-specific (local) rate is based on the 1997 AAPCC 
for the payment area with two adjustments. First, the area-
specific rate is reduced to remove an amount corresponding to 
graduate medical education (GME) payments (described below). 
Second, rates are updated each year by the national growth 
percentage (described below).
     The national rate is the weighted average of all local 
area-specific rates. This component of the blend is adjusted to 
reflect differences in certain input prices, such as hospital 
labor costs, by a formula stated in the law. The Balanced 
Budget Act allows the Secretary to change the method for making 
input-price adjustments in the future.
     The percentage applied to the area-specific rate will be 
reduced in increments over 6 years from 90 percent in 1998 to 
50 percent in 2003, while the corresponding percentage for the 
national rate is increased over the same 6 years from 10 
percent to 50 percent (table 2-29). In 2003, the blended rate 
will be based on 50 percent of area-specific costs and 50 
percent of national, input-price adjusted costs. Each year, the 
blended rates may be raised or lowered to achieve budget 
neutrality (described below).

     TABLE 2-29.--MAJOR FACTORS FOR DETERMINING MEDICARE PAYMENTS TO    
                          MEDICARE+CHOICE PLANS                         
                                                                        
      Factor         Rule established in the Balanced Budget Act of 1997
                                                                        
                                                                        
                                                                        


                                                                        
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Blended counties (blend of      General..........  Transition over 6    
 local and national rates).                         years to 50-50 blend
                                                    of local and        
                                                    national rates.     
                                                    National rates are  
                                                    adjusted for        
                                                    differences in input
                                                    prices.             
                                1998.............  90 percent local, 10 
                                1999.............   percent national.   
                                2000.............  82 percent local, 18 
                                2001.............   percent national.   
                                2002.............  74 percent local, 26 
                                2003 and after...   percent national.   
                                                   66 percent local, 34 
                                                    percent national.   
                                                   58 percent local, 42 
                                                    percent national.   
                                                   50 percent local, 50 
                                                    percent national.   
Minimum payment (``floor'')     1998.............  Minimum of $367 or   
 rate.                                              150 percent of 1997 
                                                    payment outside the 
                                                    United States.      
                                1999 and after...  Previous year's      
                                                    payment times annual
                                                    percentage increase.
Minimum percent increase......  1998.............  102 percent of 1997  
                                1999 and after...   payment rate.       
                                                   102 percent of prior 
                                                    year's rate.        
Treatment of payments for                          GME payments excluded
 graduate medical education                         in equal intervals  
 (GME) and disproportionate-                        over 5 years. DSH   
 share hospitals (DSH).                             payments not        
                                                    excluded.           
Budget neutrality.............                     Total Medicare+Choice
                                                    payments may not    
                                                    exceed what would   
                                                    have been spent if  
                                                    payments were       
                                                    entirely based on   
                                                    local rates.        
Annual percentage increase....  1998.............  Increase in Medicare 
                                1999-2002........   per capita          
                                After 2002.......   expenditures minus  
                                                    0.8 percentage      
                                                    points.             
                                                   Increase in Medicare 
                                                    per capita          
                                                    expenditures minus  
                                                    0.5 percentage      
                                                    points.             
                                                   Increase in Medicare 
                                                    per capita          
                                                    expenditures.       
Risk adjustment...............                     Payments are adjusted
                                                    by Secretary to     
                                                    reflect demographic 
                                                    and other factors.  
                                                    Study is to be done 
                                                    of risk adjusters   
                                                    based on health     
                                                    status. Starting    
                                                    2000, payments are  
                                                    risk adjusted based 
                                                    on Secretary's      
                                                    recommendations.    
------------------------------------------------------------------------
Source: Congressional Research Service analysis of provisions in the    
  Balanced Budget Act of 1997.                                          

     Minimum (floor) rates.--Each county is also subject to a 
floor rate, designed to raise payment in certain counties more 
quickly than would occur through the blend alone. The minimum 
rate is set at $367 for 1998 (but not to exceed, in the case of 
an area outside the 50 States and the District of Columbia, 150 
percent of the 1997 payment rate). For subsequent years, this 
payment amount will be increased by the national growth 
percentage (described below). In about one-third of all 
counties, the 1998 payment rate had to be raised to meet the 
floor.
     Minimum percentage increase.--The minimum increase rule 
protects counties that would otherwise receive only a small (if 
any) increase. In 1998, the minimum rate for any payment area 
is 102 percent of its 1997 AAPCC. For subsequent years, it will 
be 102 percent of its annual Medicare+Choice capitation rate 
for the previous year.
     Exclusion of payments for graduate medical education.--
Payments (direct and indirect) for GME are excluded or ``carved 
out'' of the payments to Medicare+Choice plans over 5 years. 
Specifically, in determining the local rate prior to 
determining the blended rate, amounts attributable to payments 
for the indirect costs of medical education and for direct 
graduate medical education costs are deducted from the 1997 
payment amount. The amount excluded begins at 20 percent in 
1998, rising in equal amounts until it reaches 100 percent in 
2002. Payments for disproportionate-share hospitals are not 
carved out.
     National growth percentage.--The national per capita 
Medicare+Choice growth percentage is defined as the projected 
per capita increase in total Medicare expenditures minus a 
specific reduction set in law. In 1998, the reduction is 0.8 
percentage points; from 1999 through 2002, it is 0.5 percentage 
points. There is no reduction after 2002. (Starting with the 
1999 rates, adjustments will be made for errors in the previous 
year's projection of spending.) The actual national growth 
percentage for 1998, after the reduction, is 2.6 percent. 
Estimated growth percentages for the period 1999-2002 have been 
estimated by CBO to range from about 4-6 percent.
     Budget neutrality.--Once the rates are calculated for each 
county, based on the greatest of the blended rate, floor, and 
minimum increase, total payments are compared to a budget-
neutral amount. A budget neutrality adjustment is applied as 
necessary to the blended rates to ensure that the aggregate of 
payments for all payment areas equals that which would have 
been made if the payment were based on 100 percent of the area-
specific capitation rates for each payment area. In no case may 
rates be reduced below the floor or minimum increase amounts 
for the particular county. In some years, it may not be 
possible to achieve budget neutrality because no county rate 
may be reduced below its floor or minimum increase. The law 
makes no provision for achieving budget neutrality after all 
county rates are at the floor or minimum increase. When this 
situation occurred for the 1998 rates, HCFA chose to waive the 
budget-neutrality rule rather than one of the other rules.
     Rates for disabled and ESRD beneficiaries.--Payment rates 
for disabled and ESRD beneficiaries are set using a similar 
method as that for aged beneficiaries except that ESRD rates 
are calculated on a statewide basis. In particular, the same 
floor rates also apply to both groups of beneficiaries, even 
though payments for disabled beneficiaries have been 
historically 15 percent lower than for aged beneficiaries.
     Geographic basis for payment rates.--A Medicare+Choice 
payment area is defined as a county or equivalent area 
specified by the Secretary. (In the case of individuals 
determined to have ESRD, the Medicare+Choice payment area is 
each State, or other payment areas as the Secretary specifies.) 
Upon request of a State for a contract year (beginning after 
1998), the Secretary will redefine Medicare+Choice payment 
areas in all or a portion of the State to: (1) a single 
statewide payment area; (2) a metropolitan system; or (3) a 
single payment area consolidating noncontiguous counties (or 
equivalent areas) within a State.
     Special rules for MSA plans.--Special rules will apply for 
payments to MSA plans. If the monthly premium for an MSA plan 
(that is, a high deductible plan) for a Medicare+Choice payment 
area is less than the monthly capitation rate for the area and 
year involved, the Secretary is required to deposit the 
difference in a Medicare+Choice MSA established by the 
individual. For cases when an MSA election was terminated 
before the end of the year, the Secretary will have to 
establish a procedure to recover deposits attributable to the 
remaining months.
 Risk adjustment
     Actual payments to plans depend on the characteristics of 
the beneficiaries who enroll. The rate for an enrollee's county 
of residence (or State in the case of ESRD enrollees) is 
adjusted by national risk adjusters to reflect each enrollee's 
demographic characteristics (table 2-30).

 TABLE 2-30.--CALCULATION OF RISK PLAN MONTHLY PAYMENT ON BEHALF OF SELECTED BENEFICIARIES, LOS ANGELES COUNTY, 
                                                CALIFORNIA, 1998                                                
----------------------------------------------------------------------------------------------------------------
                                                 Part A                                 Part B                  
                          (Part A        risk     +     (Part B        risk     =      Total  
                           rate                adjuster)          rate                adjuster)         payment 
----------------------------------------------------------------------------------------------------------------
Male \1\                 ($364.81       0.65)     +    ($270.19       0.80)     =      $453.28
Female \2\               ($364.81       2.10)     +    ($270.19       1.65)     =    $1,211.91
----------------------------------------------------------------------------------------------------------------
\1\ Age 68, non-Medicaid, noninstitutionalized, nonworking.                                                     
\2\ Age 87, non-Medicaid, institutionalized, nonworking:                                                        
                                                                                                                
Note.--The monthly payment for an average beneficiary in Los Angeles County is $635.00.                         
                                                                                                                
Source: Medicare Payment Advisory Commission analysis.                                                          

     The risk adjusters currently in use reflect the relative 
level of program spending for groups defined on the basis of 
age, sex, institutional status, Medicaid enrollment, and 
working aged with employment-based insurance coverage (table 2-
31). Disability and ESRD status are handled through separate 
rates for each county (or State, in the case of ESRD), rather 
than as a national risk adjuster.
     The Physician Payment Review Commission, among others, has 
presented evidence of significant risk selection in the 
Medicare managed care program. For the 6 months before 
enrolling in managed care plans, beneficiaries' costs were 37 
percent below those of a fee-for-service comparison group. In 
the 6 months after disenrolling, beneficiaries' costs were 60 
percent above the fee-for-service average (chart 2-7). The 
current system does a poor job of risk adjustment because the 
risk adjusters used provide little information about 
beneficiaries' health and explain only 1 percent of the 
variation in their health case costs.

                        TABLE 2-31.--MEDICARE RISK ADJUSTERS FOR AGED BENEFICIARIES, 1998                       
----------------------------------------------------------------------------------------------------------------
                                                                                          Noninstitutional      
                                                                                   -----------------------------
                         Sex and age group                           Institutional               Non-    Working
                                                                                    Medicaid  Medicaid    aged  
----------------------------------------------------------------------------------------------------------------
Part A--hospital insurance:                                                                                     
    Male:                                                                                                       
         85 and over...............................................         2.25        2.60      1.35      0.90
         80-84.....................................................         2.25        2.35      1.20      0.80
         75-79.....................................................         2.25        1.95      1.05      0.70
         70-74.....................................................         2.25        1.50      0.85      0.45
         65-69.....................................................         1.75        1.15      0.65      0.40
    Female:                                                                                                     
         85 and over...............................................         2.10        2.10      1.20      0.80
         80-84.....................................................         2.10        1.70      1.05      0.70
         75-79.....................................................         2.10        1.45      0.85      0.55
         70-74.....................................................         1.80        1.05      0.70      0.45
         65-69.....................................................         1.45        0.80      0.55      0.35
Part B--supplementary medical insurance:                                                                        
    Male:                                                                                                       
         85 and over...............................................         1.95        1.70      1.15      1.00
         80-84.....................................................         1.95        1.70      1.15      0.90
         75-79.....................................................         1.95        1.55      1.10      0.80
         70-74.....................................................         1.80        1.35      0.95      0.65
         65-69.....................................................         1.60        1.10      0.80      0.45
    Female:                                                                                                     
         85 and over...............................................         1.65        1.25      1.00      0.85
         80-84.....................................................         1.65        1.25      0.95      0.75
         75-79.....................................................         1.65        1.25      0.95      0.70
         70-74.....................................................         1.65        1.15      0.85      0.55
         65-69.....................................................         1.50        1.05      0.70     0.40 
----------------------------------------------------------------------------------------------------------------
Note.--Values indicate the multiplier used for a beneficiary with a particular set of characteristics; average  
  beneficiary has a multiplier of 1.00. A separate set of risk adjusters is used for disabled beneficiaries.    
                                                                                                                
Source: Health Care Financing Administration.                                                                   

     By March 1, 1999, the Secretary must submit to Congress a 
report on a method of risk adjustment of payment rates that 
accounts for variations in per capita costs based on health 
status. The Balanced Budget Act calls for the new risk 
adjustment methodology to be in effect for payments to plans as 
of January 1, 2000.

   CHART 2-7. COSTS AS A PERCENTAGE OF AVERAGE MEDICARE SPENDING PER 
                              BENEFICIARY





    Source: Physician Payment Review Commission (now Medicare 
Payment Advisory Commission) analysis of 1989-94 Medicare 
claims and denominator files, 5-percent sample.


 Unresolved issues for plan payment
     As policy changes in the method of paying plans are 
implemented, several unresolved issues remain. Some issues are 
relatively technical, such as the absence of any alternative 
mechanism to achieve budget neutrality in a situation where all 
rates are reduced to floors or minimum updates. Other issues, 
among those described above, were not resolved by the Balanced 
Budget Act of 1997. They include adjustments to local rates for 
Medicare payments to disproportionate-share hospitals or for 
services beneficiaries receive from Veterans Administration and 
Department of Defense facilities, and basing payment on 
geographic areas larger than counties. Longer range issues 
include determining whether adequate progress toward reducing 
variation in rates will result from the rules in the Balanced 
Budget Act.

                    County Payment Rates, 1997-2003

     The payment rates used in 1998 are the first to be 
calculated under the new rules established by the Balanced 
Budget Act. Based on HCFA's projection of overall Medicare 
growth, the national growth percentage for 1998 is set to be 
2.6 percent for aged beneficiaries. This amount results from an 
estimated 3.4 percent Medicare spending growth, less the 0.8-
percent reduction required by the Balanced Budget Act. The 
carve-out for graduate medical education spending for an 
average county is about 0.8 percent, so the effective average 
increase in county payment rates, before floors and minimum 
increases are applied, is 1.8 percent.
     After applying the floors and minimum increases, the 
average county payment rate (weighted by beneficiaries) is 
$484, about a 3-percent increase over 1997. The difference 
between this average and the 1.8-percent increase expected from 
the formula results from the Balanced Budget Act requirement to 
create floor rates and minimum increases. The fact that the 
1.8-percent increase is below the minimum increase of 2 percent 
also illustrates why the budget-neutrality requirement could 
not be met for 1998 rates.
     The increases from 1997 to 1998 would have been even lower 
under the policy that was replaced by the Balanced Budget Act. 
This is because the Balanced Budget Act did not provide for a 
correction for HCFA's overprojection of 1997 spending a year 
earlier. Had such a correction been applied, the 1997 base 
rates used as the starting point for the calculation of 1998 
monthly county rates would have been lower by an average of 
about $10. After the statutory reduction, the effective 
national growth percentage would then have been 0.3 percent 
instead of 2.6 percent.
     As noted above, each county rate is set at the greatest of 
the amounts calculated under three rules--its blended rate, 
minimum increase, and floor. Because of the low national growth 
percentage in 1998, no county rate will be set by the blended 
rate rule. About one-third of all counties are set at the 
floor, with the rest receiving the minimum 2-percent increase 
(chart 2-8).
     Sample calculations show how the rates are determined 
(table 2-32). After the initial calculation of rates under the 
three rules (blended, floor, and minimum increase) but before 
budget neutrality, the rates are set simply at the highest of 
these three amounts. Among the sample counties shown in the 
table, there are two counties whose rates are determined by 
each rule. The budget-neutrality adjustment only applies to the 
counties whose rates are set by the blended-rate rule (Hennepin 
and Fairfax Counties in table 2-32) because rates may never 
fall below the rates set by the other two rules. The 1998 rates 
for such counties were reduced below where they would have been 
by about 1-2 percent because of this adjustment. Had the 
budget-neutrality adjustment been smaller, then rates for these 
counties would have been set between the blended and minimum-
increase amounts.
 Geographic variations
     Large variation in county payment rates was one of the 
motivating forces behind some of the changes enacted in the 
Balanced Budget Act. The establishment of a floor rate removed 
some of the greatest variation. The combination of the low 
national growth percentage and the budget-neutrality rule, 
however, delayed the application of the blended-rate rule. Only 
when county rates are more heavily based on the national 
component of the blend will more of the county variation be 
reduced.

 CHART 2-8. RULE USED TO DETERMINE COUNTY PAYMENT RATES, BY YEAR, 1998-
                                  2003





    Note: Analysis based on actual rates for 1998 and simulated 
rates for 1999-2003, using dynamic enrollment growth 
assumptions.

    Source: Medicare Payment Advisory Commission simulations of 
payment rates under the Balanced Budget Act of 1997.


                   TABLE 2-32.--CALCULATION OF MONTHLY PAYMENT RATES FOR SAMPLE COUNTIES, 1998                  
----------------------------------------------------------------------------------------------------------------
                                                             Calculation under separate    Determination of rate
                                                                        rule            ------------------------
                                                     1997  -----------------------------                Actual  
                      County                        actual                                  Before   rate (after
                                                     rate    Minimum             Blend     budget       budget  
                                                             update     Floor   (90:10)  neutrality   neutrality
                                                                                         adjustment  adjustment)
----------------------------------------------------------------------------------------------------------------
 Los Angeles, CA.................................   622.55    635.00   367.00    625.92      635.00      635.00 
 Dade, FL........................................   748.23    763.19   367.00    737.10      763.19      763.19 
 Hennepin, MN....................................   405.63    413.74   367.00    419.34      419.34      413.74 
 Fairfax, VA.....................................   400.54    408.55   367.00    417.44      417.44      408.55 
 Arthur, NE......................................   220.92    225.34   367.00    244.89      367.00      367.00 
 Presidio, TX....................................   229.70    234.29   367.00    255.58      367.00     367.00  
----------------------------------------------------------------------------------------------------------------
Note.--Before budget-neutrality adjustments are applied, county rates are determined by the highest of the three
  rates calculated under separate rules. In 1998, the budget-neutrality adjustment lowered all blended rates so 
  that they were no higher than the minimum update or floor rates. As a result, rates for Hennepin and Fairfax  
  Counties were set by the minimum update rule instead of the blend rule.                                       
                                                                                                                
Source: Medicare Payment Advisory Commission analysis.                                                          

     Across the counties, there is a substantial range above 
and below the average payment rate (chart 2-9). For 1997, the 
lowest rates in the country were $221 in two rural Nebraska 
counties (Arthur and Banner). The highest rates in 1997 were 
$767 and $748, respectively, in Richmond County, New York 
(Staten Island), and Dade County, Florida (Miami). In 1998 the 
floor rate brings the national minimum rate (excluding 
territories) up to $367, while the highest rate (Richmond 
County) rises to $783. Despite these extreme values, about half 
of all beneficiaries live in counties with 1998 rates between 
about $400 and $540.

    CHART 2-9. MEAN, MINIMUM, AND MAXIMUM COUNTY PAYMENT RATES, BY 
                           LOCATION, 1997-98





    Note: The tick mark on each bar indicates the mean county 
payment rate (weighted by the number of beneficiaries in each 
county). The length of each bar represents the range of payment 
rates.

    Source: Physician Payment Review Commission (now Medicare 
Payment Advisory Commission) analysis of payment rates under 
the Balanced Budget Act of 1997.


     Regionally, payment varies considerably, with higher 
payments generally in more urbanized areas (chart 2-9). The 
1998 floor mostly affects rural counties, but it raises rates 
for some urban counties as well. Since all counties not 
affected by the floor get the same increase for 1998 (that is, 
2 percent), payment rates will continue to be higher in urban 
areas and lowest in the most rural areas. The average payment 
in central urban counties is more than $100 above that for 
other urban counties and nearly $160 above that for rural 
counties. The range within each of the urban-rural categories 
remains substantial as well.
     Payment rates range widely across markets as well as 
across counties. For example, plans serving southern Florida 
will be paid an average of $675 per month in 1998, compared 
with $409 in Minneapolis-St. Paul (table 2-33). Moreover, 
within some markets that encompass more than one county, the 
range of monthly payment rates across counties is $200 or 
greater. Plans competing in the same market may receive 
substantially different payments for beneficiaries who live on 
opposite sides of a county boundary. These differing payment 
levels appear to affect plan participation and enrollment. The 
Balanced Budget Act will eventually reduce some of this 
variation, but generally not until increases are high enough to 
support blended rates. Among the largest markets, the only 
significant compression of variation for 1998 occurs in 
Minneapolis-St. Paul, where many suburban counties have rates 
raised to the $367 floor.

TABLE 2-33.--MONTHLY PAYMENT RATES FOR AGED ENROLLEES IN SELECTED AREAS,
                                  1998                                  
------------------------------------------------------------------------
                                                                 Payment
                            County                                rate  
------------------------------------------------------------------------
Washington, DC-Maryland-Virginia:                                       
     Prince George's County, MD...............................      $614
     Washington, DC...........................................       596
     Montgomery County, MD....................................       501
     Arlington County, VA.....................................       460
     Falls Church City, VA....................................       456
     Alexandria City, VA......................................       456
     Fairfax City, VA.........................................       425
     Loudoun, VA..............................................       422
     Fairfax County, VA.......................................       409
Minneapolis-St. Paul, MN metro area:                                    
     Ramsay (St. Paul)........................................       431
     Hennepin (Minneapolis)...................................       414
     Anoka....................................................       403
     Dakota...................................................       387
     Washington...............................................       373
     Carver...................................................       367
     Scott....................................................       367
Southern Florida:                                                       
     Dade (Miami).............................................       763
     Broward (Ft. Lauderdale).................................       663
     Palm Beach...............................................       577
Southern California:                                                    
     Los Angeles..............................................       635
     Orange...................................................       584
     San Bernardino...........................................       544
     Riverside................................................       526
------------------------------------------------------------------------
Source: Health Care Financing Administration.                           

Impact of reforms beyond 1998
     This section uses the results of simulations conducted by 
MedPAC to assess the impact of the new payment rules 
established by the Balanced Budget Act. These simulations 
incorporate the published 1998 rates and simulated rates from 
1999 to 2003, using CBO's assumptions about spending growth to 
set the annual national growth percentage. Dynamic assumptions 
about enrollment growth are incorporated into these 
simulations, that is, it is assumed that enrollment will 
respond to changes in payment rates leading to a different 
distribution of plan enrollment across the United States 
(regardless of how much the level of enrollment changes).
     Source of payment rate determination.--Based on 
projections by MedPAC, it appears that there may be no counties 
with rates set by the blended rate rule in 1999, the same 
result as in 1998. This result assumes that the projected 
national growth percentage for 1999 will be too low to achieve 
budget neutrality and that at least some enrollment is shifting 
to counties affected by the floor rate or the minimum increase.
     Starting in 2000, the national growth percentage is 
projected to be high enough to pay for increased enrollment in 
counties where rates have been raised to the floor or minimum 
increase and still support some higher blended rates. By 2003, 
when all transitions are complete, over 80 percent of all 
counties are projected to be at their blended rates, with 2 
percent raised to the minimum increase and 16 percent raised to 
the floor rate (chart 2-8).
     Once the various phased-in changes (blended percentages 
and phasing out of GME payments) are complete in 2003, the 
projection is that 16 percent of counties will remain at floor 
rates unless the Congress makes further changes in the payment 
methodology. This result occurs because floor rates and blended 
rates grow each year by the same amount.
     The small number of counties that are still affected by 
the minimum increase in 2003 (2 percent of all counties) should 
in the future receive blended rates, given no further shift in 
the blend proportions. As long as the national growth 
percentage is greater than 2 percent, blended rates for these 
counties will eventually rise above the minimum increase.
     Reducing volatility in payments.--The Balanced Budget Act 
effectively eliminates the year-to-year volatility inherent in 
county payment rates under the old rules. In 1998, the $367 
floor rate caused volatility in the sense that rates for many 
counties rose dramatically to achieve that floor. But, from 
1999 to 2003, as various changes are phased in, county rates 
generally will increase by a minimum of 2 percent each year and 
a maximum of about 2 percentage points above the national 
growth percentage that year. The differences among counties 
reflect the relative magnitudes of such factors as the amount 
of GME payments being excluded and the input-price adjustments 
(for example, hospital wages). After 2003, all county rates 
will increase uniformly by the national growth percentage 
(except for those few counties still affected by the minimum-
increase rule).
     Reducing variation in payments.--The rate system in the 
Balanced Budget Act will reduce the amount of variation 
occurring under current law (chart 2-10). Although central 
urban counties remain on average substantially above the 
national average and all other types of counties remain below, 
the range is reduced over the first 5 years of new rates. In 
the first year, the only source for reducing variation is the 
use of the floor rate, since all other county rates are 
increased by a uniform 2 percent. Floor rates apply to about 
half of the most rural counties and to decreasing proportions 
of counties in the more urban categories.

 CHART 2-10. EFFECT OF NEW RATES ON REGIONAL VARIATION, USING DYNAMIC 
                ENROLLMENT GROWTH ASSUMPTIONS, 1997-2003





    Note: Analysis based on actual rates for 1998 and simulated 
rates for 1999-2003.

    Source: Medicare Payment Advisory Commission simulations of 
payment rates under the Balanced Budget Act of 1997.


     At the individual county level, changes can be more 
dramatic (chart 2-11). As a proportion of the national average 
rate, those rural counties paid at very low rates (for example, 
Arthur County, Nebraska) will get a big increase the first 
year, then stay at just under 80 percent of the national 
average. Counties with historically high rates (for example, 
Richmond County, New York) will get only a 2-percent increase 
each year and thus fall from nearly two-thirds above the 
national rate to only 50 percent above it. Other counties 
converge toward rates driven by local input-price variations.
     The degree to which variation is reduced is influenced by 
at least two factors. First, the low national growth 
percentages projected for Medicare+Choice combined with the 
guaranteed 2-percent increase limit the influence of the 
blended rates. Second, stopping the blended rates at a 50-50 
blend, together with the appropriate application of input-price 
adjustments, limits the potential for convergence toward a 
national rate.

 CHART 2-11. EFFECT OF NEW RATES ON COUNTY VARIATION, 1997-2003, USING 
                 DYNAMIC ENROLLMENT GROWTH ASSUMPTIONS





    Note: Analysis based on actual rates for 1998 and simulated 
rates for 1999-2003.

    Source: Medicare Payment Advisory Commission simulations of 
payment rates under the Balanced Budget Act of 1997.


                     Adjusted Community Rate (ACR)

     The adjusted community rate mechanism is a process through 
which health plans determine the minimum amount of Medicare 
noncovered benefits they are required to provide to Medicare 
enrollees and the premiums they are permitted to charge for 
those benefits. This system, which has been in place for the 
Risk Contract Program, will continue with only a few changes 
under Medicare+Choice. HCFA, however, is considering 
administrative changes to this system.
     No later than May 1 of each year, each Medicare+Choice 
organization is required to submit to the Secretary for each of 
its Medicare+Choice plans specific information about premiums, 
cost sharing, and additional benefits (if any). Under 
Medicare's rules, a plan may not earn a higher return from its 
Medicare business than it does in the commercial market. The 
Secretary will be required to review this information and 
approve or disapprove the premiums, cost-sharing amounts, and 
benefits. The Secretary will not have the authority to review 
the premiums for either MSA plans or private fee-for-service 
plans.
     Beneficiaries are expected to share in any projected cost 
savings between Medicare's capitation payment to a plan and 
what it would cost the plan to provide Medicare benefits to its 
commercial enrollees. To accomplish this, a plan must provide 
additional benefits and reduced cost sharing to its enrollees. 
A plan is also permitted to offer extra benefits, known as 
supplemental benefits, beyond those required by the ACR 
mechanism.
     The ACR process requires a plan to use its costs and 
revenues from its commercial business to estimate the cost of 
providing services to Medicare enrollees. These costs are 
adjusted to reflect differences between Medicare and commercial 
enrollees with regard to both utilization of services and the 
range of covered benefits. The plan's commercial revenues are 
used to calculate an allowance for administrative costs and 
profits.
     As with medical costs, the allowance for administrative 
costs and profits for Medicare-covered services provided to 
Medicare enrollees is calculated by applying the ratio of 
administrative to direct patient care expenses for commercial 
enrollees. This provides plans with expected profits on 
Medicare enrollees that probably are comparable in percentage 
terms to profits on commercial members, but substantially 
larger in terms of dollars per member.
     In the first year of Medicare participation, plans may use 
utilization factors provided by HCFA or obtained from other 
sources. In subsequent years, plans are supposed to use factors 
based on their own utilization data. Because the Balanced 
Budget Act drops the existing requirement that at least half of 
a plan's enrollment be commercial (the 50-50 rule), procedures 
will be created to calculate the ACR for plans without such 
enrollment.

                      Required Noncovered Services

     Plans must provide additional benefits or reduced premiums 
to Medicare enrollees valued at the difference between the 
projected cost of providing Medicare services and expected 
revenue for Medicare enrollees. HCFA calls this difference 
between expected Medicare costs and revenues ``savings.'' These 
savings are distributed to Medicare enrollees in the form of 
additional benefits either as services or as reduced cost 
sharing (table 2-34).
     Plans calculate the cost of providing Medicare noncovered 
services to make up this difference between their expected 
revenues and costs in the same way they determine their costs 
of providing Medicare covered services. They choose which 
additional benefits to offer. The total cost of these 
additional benefits must at least equal the ``savings'' on 
Medicare-covered services (table 2-34).
 Allowable cost sharing
     Plans are permitted to charge Medicare enrollees the 
expected cost of additional benefits (that is, Medicare 
noncovered services beyond the amount required to spend the 
savings) plus the national average amount of beneficiary cost 
sharing for Medicare-covered services. Plans can collect these 
payments through a combination of copayments and premiums. 
Premiums cannot exceed the difference between total allowable 
beneficiary cost sharing and expected copayments. Plans may 
choose to waive part or all of this allowable premium for all 
enrollees. Thus, plans report on the ACR proposal the maximum 
premium that will be charged to any Medicare enrollee (table 2-
34).

 TABLE 2-34.--CALCULATION OF ADJUSTED COMMUNITY RATE AND MAXIMUM MONTHLY
              PREMIUM USING NATIONAL AVERAGE AMOUNTS, 1995              
------------------------------------------------------------------------
                                                               Weighted 
                          Component                             average 
------------------------------------------------------------------------
Cost of covered benefits and administrative overhead........     $433.14
    Less average fee-for-service cost sharing...............      -65.08
                                                             -----------
        Adjusted community rate (ACR).......................      368.06
                                                             ===========
Average Medicare payment rate...............................      409.97
    Less ACR................................................     -368.06
                                                             -----------
        ``Savings''.........................................       41.91
                                                             ===========
Additional benefits.........................................       35.02
Net waived cost sharing.....................................      +51.59
    Less ``savings''........................................      -41.91
                                                             -----------
        Maximum monthly premium.............................       44.70
                                                             ===========
Monthly premium to be charged...............................       17.65
Waived monthly premium......................................       27.05
------------------------------------------------------------------------
Note.--Weighted averages are based on the number of enrollees in each   
  risk plan.                                                            
                                                                        
Source: Physician Payment Review Commission (now Medicare Payment       
  Advisory Commission) analysis of adjusted community rate proposal data
  from the Health Care Financing Administration.                        

 Differences for private fee-for-service and MSA plans
     For private fee-for-service plans, most of the same rules 
apply as for other Medicare+Choice plans. For example, they 
must provide additional benefits to beneficiaries in the amount 
of the savings calculated through the ACR. Allowable cost 
sharing (not including premiums) cannot exceed the comparable 
cost sharing in traditional Medicare. But there is no limit on 
the additional premium charged by these plans. For MSA plans, 
there are no restrictions provided through the ACR process. 
These plans must submit information on premiums charged, but no 
review or approval by the Secretary is required.

     Additional Benefits and Premiums in the Medicare Risk Program

     Although plans may charge premiums to enrollees, about 
two-thirds of plans do not do so for their basic package (chart 
2-12). These are commonly referred to as zero-premium plans. 
The proportion of zero-premium plans increased by about one-
third in the past 2 years. One in nine plans charges a monthly 
premium of over $40 for their basic package. (Plans may charge 
higher premiums for high-option packages that include more 
extensive benefits.)

 CHART 2-12. DISTRIBUTION OF MEDICARE RISK PLANS BY PREMIUMS CHARGED, 
                             1995 AND 1997





    Source: Physician Payment Review Commission (now Medicare 
Payment Advisory Commission) analysis of Medicare Managed Care 
Contract Reports.


     At least two reasons explain why a risk plan may offer a 
zero-premium plan. The first is that Medicare's capitation 
payment to a plan exceeds its costs (a ``savings'' in the terms 
of the ACR) and the plan chooses to add only enough benefits to 
match the savings. In this case, no premium would be allowable 
under the ACR rules. The second is that a plan is allowed to 
charge a premium to cover the cost of the total benefits 
offered, but the plan waives its premium to stay competitive in 
its local market. In the latter case, the plan may not be at 
risk of taking a loss on its Medicare business because profits 
and overhead based on commercial rates are included in its 
allowed costs under the ACR calculation.
     Nearly all plans offer some additional benefits to 
enrollees beyond those in traditional Medicare (chart 2-13). 
These include both required benefits offered to meet ACR rules 
and optional benefits the plan chooses to offer. Benefits 
widely available include routine physicals, eye exams, and 
immunizations. Two-thirds of plans offer some outpatient drug 
coverage as an additional benefit in their basic package. In 
addition, about half of plans offer a high-option package that 
may include more extensive benefits.
     The ACR data allow analysis of patterns in the 
availability of additional benefits. Risk plans with the most 
generous packages in 1996 served areas having above-average 
payment rates. They also expected to incur below-average costs 
in providing Medicare benefits (table 2-35). For example, plans 
that offered the richest packages served counties where payment 
rates were 17 percent above average, and they projected costs 7 
percent below average. By contrast, plans offering the fewest 
extra benefits anticipated below-average payment rates and 
projected costs 3 percent above average.

   CHART 2-13. PERCENTAGE OF MEDICARE RISK PLANS OFFERING ADDITIONAL 
    BENEFITS IN THEIR BASIC OPTION PACKAGE, JUNE 1995 AND JUNE 1997





    Source: Physician Payment Review Commission (now Medicare 
Payment Advisory Commission) analysis of Medicare Managed Care 
Contract Reports, June 1995 and June 1997.


     At the market level, similar patterns appear. In Miami, 
which has one of the highest payment rates in the country, 
plans had an average Medicare savings of over $100 per month 
for 1995, meaning that they were required to provide this 
amount to beneficiaries in benefits (table 2-36). Including 
optional benefits, they provided a total of over $125 in 
benefits for no premium. Where Medicare payment rates were 
lower, plans typically provided fewer benefits. 

 TABLE 2-35.--CHARACTERISTICS OF MEDICARE RISK PLANS RANKED BY VALUE OF 
                          EXTRA BENEFITS, 1996                          
------------------------------------------------------------------------
                                                   Average              
                                  --------------------------------------
              Decile                                   Plan             
                                     Standardized    payment      Cost  
                                    extra benefits    index      index  
------------------------------------------------------------------------
All..............................             $ 77       1.00       1.00
10 (highest).....................              148       1.17       0.93
 9...............................              111       1.06       0.96
 8...............................               99       1.03       0.99
 7...............................               90       1.03       0.96
 6...............................               82       1.02       1.01
 5...............................               73       1.06       1.09
 4...............................               60       0.92       1.04
 3...............................               51       0.92       1.02
 2...............................               39       0.91       0.97
 1 (lowest)......................               15       0.87       1.03
------------------------------------------------------------------------
Note.--Extra benefits are the sum of any savings and the amount of      
  waived premium, standardized by the Medicare hospital wage index for  
  the risk plan's service area. They are expressed as per member per    
  month values. The decile averages are for 10 equal-sized groups of    
  plans, ranked by the value of extra benefits.                         
                                                                        
Source: Prospective Payment Assessment Commission (now Medicare Payment 
  Advisory Commission) analysis of adjusted community rate proposal data
  from the Health Care Financing Administration.                        


 TABLE 2-36.--RISK-PLAN BENEFITS AND MONTHLY PREMIUMS BASED ON ADJUSTED COMMUNITY RATE PROPOSALS BY MARKET, 1995
                                               [Dollars per month]                                              
----------------------------------------------------------------------------------------------------------------
                                                                                                                
                                                                 Number   Medicare  Required  Optional   Premium
             Primary metropolitan statistical area                 of     payment    benefit   benefit   charged
                                                                  plans               value     value           
----------------------------------------------------------------------------------------------------------------
United States..................................................     174    $382.27    $25.17    $56.67    $22.04
Boston.........................................................       8     360.06      4.09     71.56     47.84
Chicago........................................................       3     418.79     24.45     38.31      0.00
Los Angeles....................................................      13     462.88     68.83     37.18      6.08
Miami..........................................................       8     488.65    106.27     20.75      0.00
Minneapolis....................................................       3     333.93      0.00     75.89     60.97
New York.......................................................       5     465.95     53.37     46.77      8.80
Philadelphia...................................................       6     434.12     19.30     66.85     10.00
Portland, OR...................................................       7     315.07      9.38     64.52     46.00
San Francisco..................................................       8     390.51     21.50     56.96     20.25
Nonmetropolitan California.....................................       6     369.00     14.43     60.19     31.08
Nonmetropolitan Florida........................................       5     353.36     12.46     73.61      9.80
Nonmetropolitan Pennsylvania...................................       3     402.32      6.70     62.18     18.14
----------------------------------------------------------------------------------------------------------------
Note.--Required benefit value is equal to Medicare savings in the adjusted community rate proposal; optional    
  benefit value is equal to the maximum monthly premium. Values are unweighted averages of all Medicare risk    
  plans.                                                                                                        
                                                                                                                
Source: Physician Payment Review Commission (now Medicare Payment Advisory Commission) analysis of 1995 adjusted
  community rate proposal data from the Health Care Financing Administration.                                   

In Minneapolis, for example, plans' revenues matched their 
adjusted costs, so that beneficiaries received no required 
additional benefits in 1995. Plans offered $76 in optional 
benefits, but charged a $61 premium.

                        Beneficiary Protections

     Risk contract plans currently operating under section 1876 
of the Social Security Act must comply with requirements 
designed to limit beneficiaries' financial liability and to 
assure beneficiaries of certain rights and remedies. Most of 
these requirements have been included and expanded in the new 
Medicare+Choice Program. A few of the areas in which there are 
significant differences between the risk plan requirements and 
those for Medicare+Choice relate to beneficiary liability, 
access to emergency medical services, and quality assurance. In 
addition, the Medicare+Choice requirements largely incorporate 
procedures for expedited review of coverage denials that were 
issued by HCFA in final regulations on April 30, 1997.
 Beneficiary financial liability
     Enrollees currently in risk plans pay the part B premium 
and have the same balance billing protections as beneficiaries 
under traditional Medicare, so long as they do not obtain 
unauthorized services from a provider that is not part of the 
plan's network. Under traditional (fee-for-service) Medicare, 
for example, hospitals must accept Medicare's payment as 
payment in full for inpatient services except for required 
beneficiary cost sharing. Similarly, participating physicians 
agree to accept Medicare's payment amount as payment in full. 
They can only bill patients for the coinsurance and any unmet 
deductible. Physicians who are not ``participating'' physicians 
in the Medicare Program, and who do not accept Medicare's 
payment as payment in full, can bill beneficiaries only 15 
percent above Medicare's recognized payment amount. (Medicare's 
recognized payment for these physicians is actually 95 percent 
of the fee schedule amount for the service.) The amount in 
excess of Medicare's recognized payment amount is known as 
``balance billing.'' Balance billing limits do not apply to 
certain services (for example, durable medical equipment).
     In the new program, all Medicare+Choice enrollees will 
continue to pay the part B premium. Additional beneficiary out-
of-pocket liabilities will differ depending on the type of 
Medicare+Choice plan the individual elects (table 2-37). The 
rules for beneficiary financial liability apply to the basic 
benefit package and required additional benefits. The basic 
benefit package includes benefits required under traditional 
Medicare. Medicare+Choice plans might also have to cover 
additional benefits as part of the basic package if their 
capitation payment exceeds the estimate of the amount it would 
cost them to cover Medicare's benefits for a commercial 
population (as described in the section on the adjusted 
community rate).

                 TABLE 2-37.--BENEFICIARY COST SHARING AND PROVIDER REIMBURSEMENT UNDER MEDICARE+CHOICE PLANS FOR BASIC BENEFIT PACKAGE                 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                Item                            Coordinated care plan                   Private fee-for-service plan                  MSA plan          
--------------------------------------------------------------------------------------------------------------------------------------------------------
Beneficiary out-of-pocket costs       Premium and actuarial value of other cost  The actuarial value of the cost sharing    A deductible of no more than
 (premium plus any deductibles,        sharing (for example, coinsurance) on      (not including the premium) on average     $6,000 (indexed for        
 coinsurance, and copayments).         average cannot exceed the actuarial        cannot exceed the actuarial value of       inflation). Amounts above  
                                       value of the cost sharing applicable on    cost sharing on average under              traditional Medicare       
                                       average under traditional Medicare.        traditional Medicare.                      payments (including        
                                                                                                                             coinsurance) do not have to
                                                                                                                             be counted toward          
                                                                                                                             satisfying the deductible. 
                                                                                                                                                        
                                                                                                                                                        
Beneficiary liability for balance     Beneficiaries are not liable for any       Contract providers can bill 15 percent                                 
 billing.                              balance billing amounts.                   above the private fee schedule (or other                              
                                                                                  provider reimbursement amount).                                       
                                                                                                                            Balance billing is allowed  
                                                                                                                                                        
Medicare+Choice plan payment          Contract providers are paid fees or rates                                                                         
 obligation to physicians,             that are privately negotiated by the                                                                             
 hospitals, and other providers.       plan with them.                                                                                                  
                                                                                 Contract providers are paid private fees                               
                                                                                                                            Above the deductible, plan  
                                                                                                                                                        
Medicare+Choice payments received by  Contract providers receive payments based                                                                         
 physicians, hospitals, and other      on a privately negotiated fee schedule.                                                                          
 providers.                                                                                                                                             
                                                                                 Contract providers receive payments based                              
                                                                                                                            Providers receive payments  
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Research Service and Medicare Payment Advisory Commission analysis of provisions in the Balanced Budget Act of 1997.              

     Enrollees in Medicare+Choice coordinated care plans are 
likely to experience the least amount of out-of-pocket costs 
(compared to other Medicare+Choice options). For them, the 
amount of cost sharing per enrollee (including premium) for 
covered services can be no more than the actuarial value of the 
deductibles, coinsurance, and copayments under traditional 
Medicare. Neither a contracting nor a noncontracting physician, 
hospital, or other provider can impose balance billing charges 
on coordinated care enrollees. Coordinated care plans will have 
to pay noncontracting providers at least the same amount they 
would have received if the enrollee was in traditional 
Medicare, including allowed balance billing amounts.
     The rules for private fee-for-service plans and MSA plans 
are different (table 2-37). Generally, contract providers will 
be allowed to bill enrollees in private fee-for-service plans 
up to 15 percent above the fee schedule the plan uses. In 
contrast to traditional Medicare, this privilege extends to all 
categories of providers, including hospitals. The term 
``contract provider'' refers to providers who have entered into 
an explicit agreement with a plan establishing payment amounts 
for services rendered to the plan's enrollees. A provider can 
be deemed to have a contract with a Medicare+Choice private 
fee-for-service plan if, before furnishing services to the 
enrollee of such a plan, the provider: (1) received a notice of 
the individual's enrollment in a private fee-for-service plan 
and had been informed of the terms and conditions of the plan's 
payment or (2) if the provider was given reasonable opportunity 
to obtain such information. For MSA plans, unlimited balance 
billing is allowed, regardless of whether the deductible has 
been met. Plans could determine whether they count these 
amounts toward the deductible.
 Access to emergency services
     Each Medicare+Choice plan must ensure access to emergency 
services for emergency medical conditions. The so-called 
prudent layperson definition will apply. This definition states 
that an emergency medical condition is one manifesting itself 
by acute symptoms of sufficient severity (including severe 
pain) that a prudent layperson, who possesses an average 
knowledge of health and medicine, could reasonably expect the 
absence of immediate medical attention to result in: (1) 
placing the health of the individual in serious jeopardy (and 
in case of a pregnant women, her health or that of her unborn 
child); (2) serious impairment to bodily functions, or (3) 
serious dysfunction of any bodily organ or part.
 Quality standards
     In the current risk program, a risk plan is required to 
have arrangements for an ongoing quality assurance program that 
stresses health outcomes and provides review by physicians and 
other health care professionals of the process followed in 
providing health services. External review is conducted by a 
peer review organization (PRO) or similar organization that 
contracts with the Secretary to do review of specified Medicare 
services. Such reviews cover both inpatient and outpatient 
care. The Secretary also has the right to inspect or otherwise 
evaluate the quality, appropriateness, and timeliness of 
services provided and the facilities of the organization when 
there is reasonable evidence of some need for inspection.
     In the new program, Medicare+Choice organizations and 
plans must have a quality assurance program that: (1) stresses 
health outcomes and provides data permitting measurement of 
outcomes and other indices of quality; (2) monitors and 
evaluates high volume and high risk services and the care of 
acute and chronic conditions; (3) evaluates the continuity and 
coordination of care that enrollees receive; (4) is evaluated 
on an ongoing basis as to its effectiveness; (5) includes 
measures of consumer satisfaction, and (6) provides the 
Secretary with certain information to monitor and evaluate the 
plan's quality. Only coordinated care plans (and not private 
fee-for-service and nonnetwork MSA plans) will have to comply 
with other quality assurance requirements, such as providing 
for internal peer review, establishing written protocols for 
utilization review, and establishing mechanisms to detect under 
and over utilization.
     Most Medicare+Choice organizations must obtain external 
review of the quality of their inpatient and outpatient 
services and of their response to written complaints about poor 
quality of care from an independent quality review and 
improvement organization (such as a PRO). In addition, the 
external review requirement does not apply to private fee-for-
service plans and nonnetwork MSA plans that do not have 
utilization review programs. However, the Secretary is required 
to ensure that the external review activities do not duplicate 
the review activities conducted as part of the accreditation 
process. Also, the Secretary may waive the external review 
requirement if she determines that the organization has 
consistently maintained an excellent record of quality 
assurance and compliance with other Medicare+Choice 
requirements. Plans may be deemed to have met all these 
requirements if they are accredited by an organization whose 
accreditations are no less stringent than Medicare's.
 Grievances and appeals
     A Medicare+Choice organization must have meaningful 
procedures for hearing and resolving grievances between the 
organization and enrollees. It also must maintain a process for 
determining whether an individual enrolled within the plan is 
entitled to receive a health service and the amount (if any) 
that the individual must pay for the service. These 
determinations must be made on a timely basis, appropriate to 
the urgency of the situation. The explanation of the 
determination must be in understandable language and state the 
reasons for the denial. A description of the reconsideration 
and appeals processes must be provided.
     Upon request by the enrollee, the organization generally 
will have to provide for reconsideration of a determination. 
The reconsideration must occur within a time period specified 
by the Secretary, but (except where an expedited process is 
appropriate) no longer than 60 days after receipt of the 
request. A reconsideration of a denial of coverage based on 
lack of medical necessity must be made by a physician with 
appropriate expertise who was not involved in the initial 
determination.
     An enrollee in a Medicare+Choice plan or a physician will 
be able to request an expedited determination or 
reconsideration. If the request is made by a physician, a 
Medicare+Choice organization is required to expedite the 
determination or reconsideration if the request indicates that 
the normal time frame for making the determination or 
reconsideration could seriously jeopardize the life or health 
of the enrollee or the enrollee's ability to regain maximum 
function. The time limits for the organization to respond to 
the request will be established by the Secretary but must be 
within 72 hours of receipt of the request.

                             Plan Standards

 Current program standards and contractor requirements
     Under the existing program, managed care organizations 
seeking to enroll Medicare beneficiaries must meet standards 
that are specified under section 1876 of the Social Security 
Act. These include minimum enrollment requirements (they 
generally must have at least 5,000 members; those serving 
primarily rural areas may have 1,500 members). In addition, the 
entity seeking the Medicare contract must be organized under 
State law and be a federally qualified HMO or a CMP. The entity 
must provide physicians' services primarily through physicians 
who are either employees or partners of the organization or 
through contracts with individual physicians or physician 
groups. The entity also has to assume full financial risk on a 
prospective basis for Medicare services, except that it may 
obtain stop-loss coverage and other insurance for catastrophic 
and other specified costs. Finally, it has to make provision 
for protection against the risk of insolvency. Provider-
sponsored organizations (PSOs) that are not organized under the 
laws of a State and are neither a federally qualified HMO or 
CMP are not eligible to contract with Medicare under the Risk 
Contract Program.
     Current contracts with risk plans are for 1 year, and may 
be made automatically renewable. However, the contract may be 
terminated by the Secretary at any time (after reasonable 
notice and opportunity for a hearing) if the organization fails 
substantially to carry out the contract, carries out the 
contract in a manner inconsistent with the efficient and 
effective administration of Medicare HMO law, or no longer 
meets the requirements specified for Medicare HMOs. The 
Secretary also has authority to impose lesser sanctions.
 Medicare+Choice standards
     The Medicare+Choice standards and requirements draw 
extensively from those under current law. Contracts with 
Medicare+Choice organizations will be made for at least 1 year 
and will be automatically renewable in the absence of notice by 
either party of intention to terminate. Organizations must have 
at least 5,000 individuals (or 1,500 in the case of a PSO) who 
are receiving health benefits through the organization or at 
least 1,500 individuals (or 500 in the case of a PSO) who are 
receiving health benefits if the organization primarily serves 
individuals residing outside of urbanized areas.
     The Secretary is required to establish by regulation 
standards for Medicare+Choice organizations and plans. By June 
1, 1998, the Secretary must issue interim standards based on 
currently applicable standards for Medicare risk plans (except 
for Federal solvency standards that apply to PSOs, as described 
below). In certain areas, these Federal standards will preempt 
any State law or regulation with respect to Medicare+Choice 
plans to the extent such law or regulation is inconsistent with 
the Federal standards. State standards that are preempted are: 
(1) benefit requirements, (2) requirements relating to 
inclusion or treatment by providers, and (3) coverage 
determinations (including related appeals and grievance 
processes).
     Organizational and financial requirements.--In general, a 
Medicare+Choice organization must be organized and licensed 
under State law as a risk-bearing entity eligible to offer 
health insurance or health benefits coverage in each State in 
which it offers a Medicare+Choice plan. A Medicare+Choice 
organization must assume full risk for Medicare benefits on a 
prospective basis. However, an organization may obtain 
insurance or make other arrangements to cover: (1) aggregate 
costs in excess of a level specified by the Secretary; (2) 
medically necessary services provided by nonnetwork providers; 
and (3) no more than 90 percent of the amount by which its 
costs exceed 155 percent of its income. The organization also 
may make arrangements with physicians or other health care 
professionals and health care institutions to assume all or 
part of the financial risk on a prospective basis for the 
provision of Medicare benefits by these individuals and 
entities.
    Provider-sponsored organizations.--Special rules apply to 
PSOs. A PSO is defined as a public or private entity that is 
established or organized and operated by a health care provider 
or group of affiliated providers. A PSO must provide a 
substantial proportion of health care under a Medicare+Choice 
contract directly through the provider or affiliated group of 
providers. The affiliated providers must share, directly or 
indirectly, substantial financial risk with respect to Medicare 
benefits and have at least a majority financial interest in the 
entity.
     A PSO may seek a waiver of State law by filing an 
application with the Secretary by no later than November 1, 
2002. The waiver will be effective for 3 years and is not 
renewable. The Secretary will have to approve the waiver 
application if the State denied the PSO's licensing application 
based on its failure to meet solvency requirements that are the 
same as the Federal ones or that the State imposed as a 
condition of approval procedures or standards regarding 
solvency that were different from those applied under Federal 
law. Waivers are also available if the State fails to act on a 
substantially complete license application within 90 days.
     A waiver granted to a PSO will depend on the 
organization's compliance with all State consumer protection 
and quality standards insofar as such standards: (1) would 
apply to the organization if it were licensed under State law; 
(2) are generally applicable to other Medicare+Choice 
organizations and plans in the State; and (3) are consistent 
with the Federal standards established under the act. Certain 
State standards will be preempted as they apply to PSOs and 
Medicare+Choice plans more generally (as described above). The 
Secretary is required to report by December 31, 2001 on whether 
the waiver process should be continued after December 31, 2002. 
The report must consider the impact of the waiver process on 
beneficiaries and the long-term solvency of Medicare.
     The Secretary is required to establish, on an expedited 
basis and using a negotiated rulemaking process, final 
standards related to financial solvency and capital adequacy of 
organizations seeking to qualify as PSOs. The target date for 
publication of the resulting rule is April 1, 1998. The 
negotiated rulemaking committee was appointed by the Secretary 
in October 1997. In establishing the standards for PSO 
solvency, the Secretary is required to take into consideration 
any standards developed by the National Association of 
Insurance Commissioners specifically for risk-based health care 
delivery organizations.
     Provider protections and requirements.--Each 
Medicare+Choice organization is required to establish 
reasonable procedures relating to the participation of 
physicians in any Medicare+Choice plan it offers. The 
procedures include: (1) providing notice of the rules regarding 
participation; (2) providing written notice of adverse 
participation decisions; and (3) providing a process for 
appealing adverse decisions. The organization must consult with 
contracting physicians regarding the organization's medical 
policy, quality, and medical management procedures. The use of 
gag clauses (restricting communications between providers and 
their patients) is prohibited. The use of physician financial 
incentive plans is also limited. (A financial incentive plan is 
any compensation arrangement between the organization and a 
physician or physician group that may directly or indirectly 
have the effect of reducing or limiting services provided to 
enrollees.)
     Protections against fraud.--Like the current program, 
Medicare+Choice requires contractors to comply with various 
disclosure and notification requirements. Medicare+Choice 
organizations are required to report financial information to 
the Secretary, including information demonstrating that the 
organization is fiscally sound, a copy of the financial report 
filed with HCFA containing information on ownership, and a 
description of transactions between the organization and 
parties in interest.
     The Secretary is also required to audit annually the 
financial records of at least one-third of the Medicare+Choice 
organizations (including data relating to utilization, costs, 
and computation of the adjusted community rate). In addition, 
the Secretary has the right to inspect or otherwise evaluate 
the quality, appropriateness, and timeliness of services, as 
well as the organization's facilities, if there is reasonable 
evidence of need for such inspection. Also, the Secretary has 
the right to audit and inspect any books and records that 
pertain either to the ability of the organization to bear the 
risk of potential financial loss or pertain to services 
performed or determinations of amounts payable under the 
contract. Medicare+Choice contracts must require the 
organization to provide and pay for advance written notice to 
each enrollee of a plan termination, along with a description 
of alternatives for obtaining benefits. They must also require 
that organizations notify the Secretary of loans and other 
special financial arrangements made with subcontractors, 
affiliates, and related parties.
     Sanctions and termination of contracts.--The Secretary is 
authorized to carry out specific remedies in the event that a 
Medicare+Choice organization: (1) fails substantially to 
provide medically necessary items and services required to be 
provided, if the failure adversely affects the individual; (2) 
imposes premiums on individuals that are in excess of those 
allowed; (3) acts to expel or refuses to reenroll an individual 
in violation of Federal requirements; (4) engages in any 
practice that would have the effect of denying or discouraging 
enrollment (except as permitted by law) of eligible individuals 
whose medical condition or history indicates a need for 
substantial future medical services; (5) misrepresents or 
falsifies information to the Secretary or others; (6) fails to 
comply with rules regarding physician participation; or (7) 
employs or contracts with any individual or entity that has 
been excluded from participation in Medicare. The remedies 
include civil money penalties, and suspension of enrollment 
until the Secretary is satisfied the deficiency has been 
corrected and is not likely to recur. A noncomplying plan can 
also be terminated from participation in Medicare+Choice if the 
Secretary determines that the organization: (1) fails 
substantially to carry out the contract; (2) is carrying it out 
in a manner substantially inconsistent with the efficient and 
effective administration of Medicare+Choice; or (3) no longer 
substantially meets Medicare+Choice conditions.

          Demonstrations Authorized by the Balanced Budget Act

     The Balanced Budget Act authorizes several demonstrations 
in conjunction with the Medicare+Choice Program. The most 
important of these are a medical savings account option for 
Medicare beneficiaries, a test of whether savings can be 
achieved by setting payments to plans through competitive 
pricing of plan premiums, and a test of the feasibility of 
using enrollment brokers for Medicare+Choice.
 Medical savings account (MSA) demonstration
     The Balanced Budget Act authorizes a demonstration to test 
the feasibility of medical savings accounts for the Medicare 
Program. Although this is the first use of this system in 
Medicare, the Health Insurance Portability and Accountability 
Act of 1996 (Public Law 104-1) authorized an MSA demonstration 
for employed individuals who are not yet eligible for Medicare.
     The Medicare+Choice option is a combination of an MSA plan 
providing health insurance with an annual deductible initially 
limited to $6,000 and a Medicare+Choice MSA. Initial enrollment 
for MSA plans will take place in November 1998 for the 1999 
plan year. Under the terms of the demonstration, new 
enrollments will not be allowed after 2002 or after the number 
of enrollees reaches 390,000.
     MSA plans will not be available to certain low-income or 
disabled individuals, among others. When enrolled in an MSA 
plan, individuals will not be able to have other health 
insurance (including Medigap policies), with some exceptions, 
and they must reside in the United States for at least half the 
year. Individuals will be able to disenroll from an MSA plan 
only during an annual election period or under special 
circumstances.
     An MSA plan will provide reimbursement for items and 
services covered under parts A and B of Medicare, though only 
after the enrollee incurs countable expenses equal to the 
annual deductible (limited to $6,000, indexed for inflation). 
Countable expenses include at least those payable by Medicare 
under parts A and B as well as the deductibles, coinsurance, 
and copayments the enrollee would have paid under those parts. 
At a plan's option, other expenses (such as prescription drugs 
or charges that exceed what Medicare would have paid) may also 
be counted.
     After the deductible is met, the plan will have to 
reimburse at least 100 percent of parts A and B expenses (the 
provider charges) or 100 percent of what Medicare would have 
paid for these expenses without regard to deductibles or 
coinsurance, whichever is less. Providers delivering services 
to those with MSA plans will not be subject to balance billing 
limitations, and the plans will not be required to pay any 
balance billing charges, though some might do so (see table 2-
37).
     Contributions to a Medicare+Choice MSA will be made 
annually from the enrollee's capitation rate after the MSA plan 
insurance premium has been paid. Contributions to accounts will 
be exempt from taxes, as will account earnings. Withdrawals 
will likewise not be taxed nor be subject to penalties if they 
are used to pay unreimbursed enrollee medical expenses that are 
deductible under the Internal Revenue Code. However, qualified 
withdrawals cannot be made to pay insurance premiums other than 
for long-term care insurance, continuation coverage (such as 
COBRA), or coverage while an individual is receiving 
unemployment compensation.
     Nonqualified withdrawals will be included in the 
individual's gross income for tax purposes. Withdrawals would 
also be subject to an additional 50-percent penalty to the 
extent they exceed the amount by which the account balance on 
December 31 of the prior year is greater than 60 percent of the 
MSA plan deductible for the year of withdrawal. For example, if 
the account balance on December 31 were $3,500 and the plan 
deductible the next year were $5,000, the amount that could be 
withdrawn for nonqualified purposes without the penalty is $500 
(that is, $3,500 minus 60 percent of $5,000). The 50-percent 
penalty will not apply in cases of death or disability. Account 
balances at death will be subject to various tax treatments 
depending on their disposition.
     If MSA plan enrollees switch to another Medicare+Choice 
option or traditional Medicare, they will be able to maintain 
their account and use it to pay qualified medical expenses. No 
additional contributions will be allowable unless enrollees 
elect an MSA plan again.
 Medicare competitive pricing demonstration
     Under its demonstration authority, HCFA attempted to 
initiate a project in 1996 and 1997 to determine whether 
changes in methods for paying health plans, specifically a 
shift to some form of negotiated rates, would have the effect 
of increasing the efficiency and economy of providing Medicare 
services. HCFA's plan called for the application of competitive 
bidding as a method for establishing payments for risk contract 
HMOs in either the Baltimore or the Denver area. Through a 
combination of court and legislative decisions, these 
demonstrations have been terminated.
     The Balanced Budget Act of 1997 requires the Secretary of 
DHHS to establish a demonstration project under which payments 
to Medicare+Choice organizations in certain areas are 
determined in accordance with a competitive pricing 
methodology.
     The Secretary is required to designate, in accordance with 
recommendations of the newly created Competitive Pricing 
Advisory Committee (CPAC), up to seven Medicare payment areas 
in which the project would be conducted. The Balanced Budget 
Act spells out the composition and responsibilities of the 
CPAC. The CPAC is required to recommend to the Secretary four 
specific areas to be included. Demonstrations in two areas 
should begin January 1, 1999, and in two other areas on January 
1, 2000. Of the four areas recommended, three must be in urban 
areas and one in a rural area. By December 31, 2001, the 
committee could recommend to the Secretary the designation of 
up to three additional payment areas to be included in the 
project. The CPAC will terminate on December 31, 2004.
     For each Medicare payment area in the project, the 
Secretary will (in accordance with recommendations of the 
CPAC), establish the benefit design among plans, structure the 
method for selecting plans, establish methods for setting the 
price to be paid to plans, and provide for the collection and 
dissemination of plan information. In doing this, the Secretary 
will have to consult an area advisory committee created for 
that payment area. The Secretary is required to monitor the 
project and report to Congress on its impact by the end of 
2002.
 Medicare+Choice enrollment demonstration
     Under both the risk program and the Medicare+Choice 
Program, plans with Medicare contracts may directly market to 
and enroll Medicare beneficiaries. The Balanced Budget Act 
authorizes the Secretary to conduct a 3-year demonstration 
using a third-party contractor (sometimes called a broker) to 
conduct Medicare+Choice plan enrollment and disenrollment 
functions in an area. The demonstration must be conducted 
separately from the Medicare competitive pricing 
demonstrations. Before implementing the project, the Secretary 
must consult with affected parties on the design of the 
project, the selection criteria, and the establishment of 
performance standards. The Secretary is required to establish 
performance standards for accuracy and timeliness of enrollment 
and disenrollment. In the event that the third-party contractor 
fails to comply substantially with the performance standards, 
the enrollment and disenrollment functions will be performed by 
Medicare+Choice organizations until a new contractor is 
appointed by the Secretary.

                            SELECTED ISSUES

       Utilization and Quality Control Peer Review Organizations

    The Medicare Utilization and Quality Control Peer Review 
Organization Program was established by Congress under the Tax 
Equity and Fiscal Responsibility Act of 1982 (TEFRA, Public Law 
97-35). Building on the former professional standards review 
organizations, the new peer review organizations (PROs) were 
charged by the 1982 law with reviewing services furnished to 
Medicare beneficiaries to determine if the services met 
professionally recognized standards of care and were medically 
necessary and delivered in the most appropriate setting. Major 
changes were made to the PRO Program by the Social Security Act 
Amendments of 1983 (Public Law 98-21) and subsequent budget 
reconciliation acts. Most PRO review is focused on inpatient 
hospital care. However, there is limited PRO review of 
ambulatory surgery, postacute care, and services received from 
Medicare HMOs.
    There are currently 53 PRO areas, incorporating the 50 
States and the territories. Organizations eligible to become 
PROs include physician-sponsored and physician-access 
organizations. In limited circumstances, Medicare fiscal 
intermediaries may also be eligible. Physician-sponsored 
organizations are composed of a substantial number of licensed 
physicians practicing in the PRO review area (for example, a 
medical society); physician access organizations are those 
which have available to them sufficient numbers of licensed 
physicians so that adequate review of medical services can be 
assured. Such organizations obtain PRO contracts from the 
Secretary of DHHS through a competitive proposal process. Each 
organization's proposal is evaluated by HCFA for technical 
merit using specific criteria that are quantitatively valued. 
Priority is given to physician-sponsored organizations in the 
evaluation process. Effective October 1, 1996, all 53 PROs are 
operating under the fifth round of contracts (also referred to 
as the ``fifth scope of work'').
    In general, each PRO has a medical director and a staff of 
nurse reviewers (usually registered nurses), data technicians, 
and other support staff. In addition, each PRO has a board of 
directors, comprised of physicians and, generally, 
representatives from the State medical society, hospital 
association, and State medical specialty societies. The Omnibus 
Budget Reconciliation Act of 1986 (Public Law 99-509) requires 
each board to have a consumer representative. Because the board 
is usually consulted before a case is referred by the PRO to 
the DHHS inspector general for sanction, it assumes a major 
role in the PRO review process. Each PRO also has physician 
advisors who are consulted on cases in which there is a 
question regarding the nurse reviewer's referral. Only 
physician advisors can make initial determinations about 
services furnished or proposed to be furnished by another 
physician.
    PROs are paid by Medicare on a cost basis for their review 
work. Spending for the PROs in fiscal year 1996 totaled $191 
million; in fiscal years 1997 and 1998, spending was expected 
to be $269 million and $279 million, respectively. Spending 
varies considerably from year to year depending on where the 
PROs are in their contract cycles. HCFA has indicated that 
actual spending for 1997 and 1998 may be considerably lower 
than these figures. Funds for the PRO Program are apportioned 
each year from the Medicare HI and SMI Trust Funds in an amount 
that is supposed to be sufficient to finance PRO Program 
requirements. This is the same procedure as that followed for 
payment of Medicare services provided directly to 
beneficiaries. HCFA is bound by law to follow the 
apportionments in the running of the PRO Program; as such, the 
apportionments determine contract specifications and serve as a 
device to control spending.
    The PRO review process combines both utilization and 
quality review. In conducting utilization review, the PRO 
determines whether the services provided to a Medicare patient 
were necessary, reasonable, and appropriate to the setting in 
which they were provided. Although some utilization review is 
done on a prospective basis, the bulk of the reviews are done 
retrospectively. When a PRO determines that the services 
provided were unnecessary or inappropriate (or both), it issues 
a payment denial notice. The providers, the physicians, and the 
patient are given an opportunity to request reconsideration of 
the determination.
    The PRO checks for indications of poor quality of care as 
it is conducting utilization review. If a PRO reviewer detects 
a possible problem, further inquiry is made into the case. If 
it is determined that the care was of poor quality, the PRO 
must take steps to correct the problem. Specific sanctions are 
required if the PRO determines that the care was grossly 
substandard or if the PRO has found that the provider or the 
physician has a pattern of substandard care. In addition, under 
section 9403 of COBRA (Public Law 99-272), as amended by Public 
Law 101-239, authority exists for the PROs to deny payments for 
substandard quality care. This provision, however, has never 
been used.
    Each of the contracts between DHHS and the PROs must 
contain certain similar elements outlined in a document known 
as the Scope of Work. Under the third and previous scopes of 
work, PRO review was centered on case-by-case examinations of 
individual medical records, selected primarily on a sample 
basis. This approach to medical review was criticized by the 
Institute of Medicine and others as being costly, 
confrontational, and ineffective. The fourth scope of work 
incorporated a new review strategy called the Health Care 
Quality Improvement Initiative. PROs were required to use 
explicit, more nationally uniform criteria to examine patterns 
of care and outcomes using detailed clinical information on 
providers and patients. Instead of focusing on unusual 
deficiencies in care, the PROs were instructed to focus on 
persistent differences between actual indications of care and 
outcomes from those patterns of care and outcomes considered 
achievable. HCFA believed that this approach would encourage a 
continual improvement of medical practice in a way that would 
be viewed by physicians and providers as educational and not 
adversarial.
    The fifth scope of work similarly emphasizes continuous 
quality improvement. Sample case reviews, other than those 
mandated by law (such as those relating to hospital notices of 
noncoverage and to beneficiary complaints) are no longer 
required. Instead, each PRO is required to conduct 4-18 quality 
improvement projects each year, depending on the size of their 
beneficiary populations.

                            Secondary Payer

    Generally, Medicare is the ``primary payer,'' that is, it 
pays health claims first, with an individual's private or other 
public health insurance filling in some or all of Medicare's 
coverage gaps. However, in certain cases, the individual's 
other coverage pays first, while Medicare is the secondary 
payer. This phenomenon is referred to as the Medicare Secondary 
Payer (MSP) Program.
    An employer (with 20 or more employees) is required to 
offer workers age 65 and over (and workers' spouses age 65 and 
over) the same group health insurance coverage as is made 
available to other employees. Workers have the option of 
accepting or rejecting the employer's coverage. If the worker 
accepts the coverage, the employer's plan is primary for the 
worker and/or spouse who is over age 65; Medicare becomes the 
secondary payer. Employers may not offer a plan that 
circumvents this provision.
    Similarly, a group health plan, offered by a large employer 
with 100 or more employees, is the primary payer for employees 
or their dependents who are on the Medicare Disability Program. 
The provision applies only to persons covered under the group 
health plan because the employee (generally the spouse of the 
disabled person) is in ``current employment status'' (that is, 
is an employee or is treated as an employee by the employer).
    Secondary payer provisions also apply to ESRD individuals 
with employer group health plans (regardless of employer size). 
Prior to enactment of the Balanced Budget Act of 1997, the 
group health plan was the primary payer for 18 months for 
persons who became eligible for Medicare ESRD benefits. The 
employer's role as primary payer was limited to a maximum of 21 
months (18 months plus the usual 3-month waiting period for 
Medicare ESRD coverage). The Balanced Budget Act extends the 
application of the secondary payer provisions for the ESRD 
population from 18 to 30 months. This applies to items and 
services furnished on or after August 5, 1997 for periods 
beginning on or after February 5, 1997.
    Medicare is also the secondary payer when payment has been 
made, or can reasonably be expected to be made, under workers' 
compensation, automobile medical liability, all forms of no-
fault insurance, and all forms of liability insurance.
    The law authorizes a data match program which is intended 
to identify potential secondary payer situations. Medicare 
beneficiaries are matched against data contained in Social 
Security Administration and Internal Revenue Service files to 
identify cases in which a working beneficiary (or working 
spouse) may have employer-based health insurance coverage. 
Cases of previous incorrect Medicare payments are identified 
and recoveries are attempted. The Balanced Budget Act clarifies 
that recoveries can be initiated up to 3 years after the date 
the service was furnished. Further, recoveries may be made from 
third-party administrators except where such administrators 
cannot recover amounts from the employer or group health plan.
    Table 2-38 shows savings attributable to these Medicare 
secondary payer provisions. In fiscal year 1996, combined 
Medicare part A and B savings are estimated at $2.9 billion.

TABLE 2-38.--MEDICARE SAVINGS ATTRIBUTABLE TO SECONDARY PAYER PROVISIONS BY TYPE OF PROVISION, FISCAL YEARS 1988-
                                                       96                                                       
                                            [In millions of dollars]                                            
----------------------------------------------------------------------------------------------------------------
                                                                     End-stage                                  
           Year and Medicare part              Workers'     Working    renal    Automobile  Disability    Total 
                                             compensation    aged     disease                                   
----------------------------------------------------------------------------------------------------------------
1988:                                                                                                           
  Part A...................................      $110.1      $786.7      $88.4     $149.6      $275.5   $1,410.3
  Part B...................................        18.1       313.8       20.2       22.3        93.5      467.9
                                            --------------------------------------------------------------------
    Total..................................       128.2     1,100.5      108.6      171.9       369.0    1,878.2
                                            ====================================================================
1989:                                                                                                           
  Part A...................................        99.4       867.7       75.0      179.6       399.3    1,621.0
  Part B...................................        27.5       337.1       25.1       28.2       137.0      554.9
                                            --------------------------------------------------------------------
    Total..................................       126.9     1,204.8      100.1      207.8       536.3    2,175.9
                                            ====================================================================
1990:                                                                                                           
  Part A...................................       120.9       981.6      144.1      220.1       498.4    1,965.1
  Part B...................................        21.6       325.8       21.5       26.4       123.2      518.5
                                            --------------------------------------------------------------------
    Total..................................       142.5     1,307.4      165.6      246.5       621.6    2,483.6
                                            ====================================================================
1991:                                                                                                           
  Part A...................................       107.4       932.7      144.9      235.6       526.6    1,947.2
  Part B...................................        21.2       417.5       40.2       26.6       186.2      691.7
                                            --------------------------------------------------------------------
    Total..................................       128.6     1,350.2      185.1      262.2       712.8    2,638.9
                                            ====================================================================
1992:                                                                                                           
  Part A...................................       118.9     1,044.9      140.8      233.9       600.9    2,139.4
  Part B...................................        17.3       398.3       37.4       34.5       182.9      670.4
                                            --------------------------------------------------------------------
    Total..................................       136.2     1,443.2      178.2      268.4       783.8    2,809.8
                                            ====================================================================
1993:                                                                                                           
  Part A...................................       100.4     1,073.1      133.6      239.6       657.8    2,204.5
  Part B...................................        11.3       392.2       32.8       28.9       192.3      657.5
                                            --------------------------------------------------------------------
    Total..................................       111.7     1,465.3      166.4      268.5       850.1    2,862.0
                                            ====================================================================
1994:                                                                                                           
  Part A...................................        96.5     1,101.1      130.2      265.9       682.3    2,276.0
  Part B...................................        13.0       398.1       31.8       32.7       211.8      687.4
                                            --------------------------------------------------------------------
    Total..................................       109.5     1,499.2      162.0      298.6       894.1    2,963.4
                                            ====================================================================
1995:                                                                                                           
  Part A...................................       107.0     1,068.0      142.0      295.5       728.9    2,341.4
  Part B...................................        10.5       360.3       39.0       40.2       215.5      665.5
                                            --------------------------------------------------------------------
    Total..................................       117.5     1,428.3      181.0      335.7       944.4    3,006.9
                                            ====================================================================
1996:                                                                                                           
  Part A...................................        93.6     1,062.5      133.4      335.0       728.5    2,353.0
  Part B...................................        11.1       295.1       34.3       50.1       196.4      586.9
                                            --------------------------------------------------------------------
    Total..................................       104.7     1,357.6      167.6      385.0       924.9    2,939.9
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Program Operations.                                     

                    Supplementing Medicare Coverage

     In 1995, 7.7 percent of the total Medicare population were 
enrolled in Medicare managed care plans. Approximately 87 
percent of persons not enrolled in Medicare managed care plans 
had some form of supplementary coverage. Of these, 33 percent 
had individually purchased coverage, known as Medigap; 31 
percent had employer-provided coverage; 6 percent had both 
Medigap and employer-provided coverage; 15 percent had 
Medicaid; and 2 percent had other supplemental coverage such as 
the military or veterans benefits. Approximately 13 percent of 
the fee-for-service population had Medicare coverage only (see 
table 2-39).

 TABLE 2-39.--SUPPLEMENTAL INSURANCE STATUS OF BENEFICIARIES IN MEDICARE
                          FEE-FOR-SERVICE, 1995                         
------------------------------------------------------------------------
                                                                 Persons
                       Type of coverage                           (in   
                                                                percent)
------------------------------------------------------------------------
 Medigap.....................................................         33
 Employer provided...........................................         31
Medigap and employer provided................................          6
Medicaid.....................................................         15
Other supplemental...........................................          2
Medicare only................................................         13
                                                              ----------
     Total...................................................        100
------------------------------------------------------------------------
Source: Physician Payment Review Commission, 1997.                      

 Medigap
     Medigap policies offer coverage for Medicare's deductibles 
and coinsurance and for some services not covered by Medicare. 
The typical premium for a community-rated plan is estimated to 
be $1,300 in 1997 (Physician Payment Review Commission, 1997). 
The Omnibus Budget Reconciliation Act of 1990 provided for a 
standardization of Medigap policies; the intention was to 
enable consumers to better understand policy choices and to 
prevent marketing abuses. Implementing regulations generally 
limit the number of different types of Medigap plans that can 
be sold in a State to no more than 10 standard benefit plans, 
known as ``plan A'' to ``plan J.'' The standardized plan A 
covers a core benefits package. Each of the other nine includes 
the core package plus a different combination of additional 
benefits. Four plans make up an estimated three-quarters of 
plan sales: plan A, 7 percent; plan B, 16 percent; plan C, 22 
percent; and plan F (the most frequently sold policy), 33 
percent. Only plan H, plan I, and plan J offer some drug 
coverage; together they account for 14 percent of plan sales. 
Beneficiaries who purchased policies prior to the 
standardization requirement may renew these policies; however, 
policies issued after July 1992 must be one of the 10 standard 
plans. Approximately half of the beneficiaries with Medigap 
policies have nonstandardized plans.
     The Balanced Budget Act of 1997significantly changed 
certain Medigap enrollment requirements, effective July 1, 
1998. Prior to that date, the following rules apply. All 
insurers offering Medigap policies are required to offer a 6-
month open enrollment period for persons turning age 65. This 
is known as guaranteed open enrollment. There is no guaranteed 
open enrollment for the under-65 disabled population. At the 
time insurers sell a Medigap policy, whether or not during an 
open enrollment period, they are permitted to limit or exclude 
coverage for services related to a preexisting health 
condition; such exclusions cannot be imposed for more than 6 
months. An individual who has met the preexisting condition 
limitation in one Medigap policy does not have to meet the 
requirement under a new policy for previously covered benefits. 
However, an insurer could impose exclusions for newly covered 
benefits.
     The Balanced Budget Act also expands the guaranteed issue 
requirements, effective July 1, 1998. Specifically, the law 
guarantees issuance of specified Medigap policies without a 
preexisting condition exclusion for certain continuously 
enrolled individuals. The insurer is prohibited from 
discriminating in the pricing of such policy on the basis of 
the individual's health status, claims experience, receipt of 
health care, or medical condition.
     The guaranteed issuance is extended to the following 
persons provided they enroll within 63 days of termination of 
other enrollment:
 1. An individual enrolled under an employee welfare benefit 
        plan that provides benefits supplementing Medicare and 
        the plan terminates or ceases to provide such benefits.
 2. A person enrolled with a Medicare+Choice organization who 
        discontinues enrollment under circumstances permitting 
        disenrollment other than during an annual election 
        period. (These include: (1) the termination of the 
        entity's certification, (2) the individual moves 
        outside of the entity's service area; or (3) the 
        individual elects termination due to cause.)
 3. An individual enrolled with an HMO and enrollment ceases 
        for the reasons noted above.
 4. An individual enrolled under a Medigap policy and 
        enrollment ceases because: (1) of the bankruptcy or 
        insolvency of the issuer, or because of other 
        involuntary termination of coverage and there is no 
        provision under applicable State law for the 
        continuation of such coverage, (2) the issuer 
        substantially violates a material provision; or (3) the 
        issuer misrepresented the policy's provisions.
 5. An individual who: (1) was enrolled under a Medigap policy; 
        (2) subsequently terminates such enrollment and enrolls 
        with a Medicare+Choice organization, a risk or cost 
        contract HMO, a similar organization operating under a 
        demonstration project authority, or a Medicare Select 
        policy; and (3) terminates such enrollment during any 
        period within the first 12 months during which the 
        individual is permitted to terminate enrollment, but 
        only if the individual was never previously enrolled 
        with such an entity.
 6. An individual who upon first becoming eligible for Medicare 
        at age 65, enrolls in a Medicare+Choice plan, and 
        disenrolls from such plan within 12 months.
     The guaranteed issue is generally for plan A, B, C or F. 
However: (1) for persons described in (5) it refers to the same 
policy in which the person was previously enrolled; and (2) for 
persons described in (6) it is for any Medigap policy. At the 
time of the event which resulted in the cessation of enrollment 
or loss of coverage, the organization, insurer, or plan 
administrator (whichever was appropriate) would have to notify 
the individual of his or her rights and the obligations of 
issuers of Medigap policies.
     The Balanced Budget Act prohibits the imposition of a 
preexisting exclusion period for persons who on the date of 
application, have at least 6 months of creditable coverage. 
Specifically, such an exclusion can not be imposed on an 
individual who, on the date of application, has a continuous 
period of at least 6 months of health insurance coverage 
defined as ``creditable coverage'' under the Health Insurance 
Portability and Accountability Act (HIPAA). If the individual 
has less than 6 months coverage, the policy would have to 
reduce the period of any preexisting exclusion by the aggregate 
of periods of ``creditable coverage'' applicable to the 
individual as of the enrollment date. The rules used to 
determine the reduction would be based on rules used under 
HIPAA.
     The Balanced Budget Act provides for high deductible 
Medigap plans. Specifically, it adds 2 plan types to the 
current list of 10 standard Medigap plans. These will offer the 
benefit package of either plan F or plan J, except for the high 
deductible feature. The high deductible is $1,500 in 1998 and 
1999, increased by the CPI in subsequent years. The beneficiary 
would be responsible for expenses up to this amount.
Medicare Select
    OBRA 1990 established a demonstration project under which 
insurers could market a product known as Medicare Select. 
Select policies are the same as other Medigap policies except 
that they will only pay in full for supplemental benefits if 
covered services are provided through designated health 
professionals and facilities known as preferred providers. OBRA 
1990 limited the demonstration project to 3 years (1992-94) and 
to 15 States. The Social Security Amendments of 1994 (Public 
Law 103-432) extended Select for 6 months. Public Law 104-18 
extended the program for 3 years (to June 30, 1998) and to all 
States. A permanent extension beyond the 3 year period is 
authorized unless the Secretary determines that the Select 
Program significantly increased Medicare expenditures, 
significantly diminished access to and quality of care, or did 
not result in lower Medigap premiums for beneficiaries. This 
determination must be made by December 31, 1997, based on a 
study completed by June 30, 1997.
    Public Law 104-18 also required the General Accounting 
Office (GAO) to determine the extent to which individuals who 
are continuously covered under a Medigap policy are subject to 
medical underwriting if they change the policy under which they 
are covered. Further, GAO was required to identify options, if 
necessary, for modifying the Medigap market to make sure that 
continuously insured beneficiaries are able to switch plans 
without medical underwriting. Many of the issues identified in 
the GAO report were addressed in the Balanced Budget Act of 
1997.
 Employer-based policies
     In 1995, employer-based policies covered 37 percent of 
Medicare beneficiaries. Employer-based plans are typically more 
comprehensive than Medigap plans. Generally they are defined 
benefit plans which may overlap significantly with Medicare 
benefits. As a result, employers use a variety of approaches to 
coordinate their plans with Medicare (which is the primary 
payer for retirees). The costs of coverage are generally shared 
by the employer and retiree. In 1996, large firms (over 500 
employees) shared the costs for 43 percent of individual 
retiree plans, and paid in full for an additional 29 percent of 
plans. In 1996, retirees on average spent $948 for their 
employer-sponsored coverage (Foster Higgins, 1996).
     In recent years, the percentage of employers offering 
retiree health coverage for their Medicare retirees has 
dropped. Between 1994 and 1996, the number of large firms 
offering such coverage dropped from 40 percent to 33 percent 
(Foster Higgins, 1996).
     In addition, many other employers are pursuing strategies 
to lower their liabilities for retiree health costs. Some 
employers are moving toward a defined contribution model for 
retiree health benefits. Others are using Medicare risk plans 
and other managed care organizations to deliver services to 
their retirees. A number of large employers (accounting for 
over 2 million Medicare-eligible retirees) have joined the 
National Medicare HMO initiative to negotiate contracts with 
Medicare risk plans for the provision of benefits in excess of 
those otherwise offered by the plans (Physician Payment Review 
Commission, 1997).
Impact of supplemental insurance on Medicare spending
    Medicare cost-sharing requirements are intended, in part, 
to encourage cost-conscious utilization. Insurance that 
supplements Medicare by covering deductibles and coinsurance 
removes these incentives. Many analyses have addressed how 
supplemental insurance affects beneficiaries' use of Medicare-
covered services and the cost of those services to Medicare. 
Typically, these studies have estimated that Medicare spending 
for beneficiaries with supplemental coverage are one-quarter to 
one-third higher, on average, than expenditures for 
beneficiaries without such coverage.
    A Physician Payment Review Commission analysis (Physician 
Payment Review Commission, 1997) of the Medicare Current 
Beneficiary Survey (MCBS) found a similar effect: Medicare 
expenditures for beneficiaries covered by supplemental 
insurance were about 30 percent higher than they were for those 
without such coverage. Subsequent analysis showed that the 
effect of secondary coverage on Medicare expenditures differs, 
depending on the source of coverage. Expenditures for 
beneficiaries having Medicare only are less than 75 percent of 
those for beneficiaries with Medigap. Spending for 
beneficiaries with employer-provided benefits average only 
about 10 percent less (chart 2-14).

  CHART 2-14. COMPARISON OF PROJECTED PER CAPITA SPENDING FOR AVERAGE 
       BENEFICIARIES, BY TYPE OF SUPPLEMENTAL INSURANCE AND YEAR





    Note._These spending levels represent the expected 
differences in outlays after other factors have been taken into 
account.

    Source: Physician Payment Review Commission analysis of 
data from the 1993 and 1995 Medicare Current Beneficiary 
Survey. The sample size for 1993 was 11,285 and the sample size 
for 1995 was 13,261.


    Higher utilization among beneficiaries with supplemental 
insurance translates into increased Medicare costs because 
Medicare is the primary payer for those services. The MCBS 
analysis found that per capita expenditures for Medicare 
beneficiaries with Medigap insurance were from $1,000 to $1,400 
higher than those for beneficiaries with Medicare only. Per 
capita spending for beneficiaries with employer-provided 
supplements were from $700 to $900 higher than those for 
beneficiaries with no supplemental coverage.
    These results reflect the difference in spending by source 
of insurance, once other factors have been considered. High 
service use among beneficiaries with secondary insurance 
appears to be a consequence of having such insurance, 
presumably reflecting the reduced financial burden associated 
with using additional services.

                Qualified Medicare Beneficiaries (QMBs)

    Medicare beneficiaries are liable for specified cost-
sharing charges; namely, premiums, deductibles, and 
coinsurance. Such charges could pose a potential hardship for 
some persons, especially those who do not have supplementary 
protection, either through an individually-purchased 
``Medigap'' policy or employer-based coverage. Certain low-
income persons are entitled to have their Medicare cost-sharing 
charges paid by the Federal-State Medicaid Program. More 
limited coverage is available for two other population groups: 
(1) persons who meet the QMB criteria (see below) except that 
their income is slightly in excess of the poverty line; and (2) 
qualified disabled and working individuals. Persons meeting the 
qualifications for coverage under one of these categories, but 
not otherwise eligible for Medicaid, are not entitled to the 
regular Medicaid benefits package. Instead, they are entitled 
to have Medicaid make specified payments in their behalf.
QMB eligibility
    State Medicaid Programs are required to make Medicare cost-
sharing assistance available to QMBs. A QMB is an aged or 
disabled Medicare beneficiary who has: (1) income at or below 
the Federal poverty line ($7,890 for a single, $10,610 for a 
couple in 1997); and (2) resources below 200 percent of the 
resources limit set for the Supplemental Security Income (SSI) 
Program (the QMB resource limits are $4,000 for an individual 
and $6,000 for a couple). Certain items, such as an 
individual's home and household goods, are excluded from the 
calculation.
    Persons meeting the QMB definition are entitled to Medicare 
part A. Included is the relatively small group of aged persons 
who are not automatically entitled to part A coverage, but who 
have bought part A protection by paying a monthly premium. Not 
included are working disabled persons who have exhausted 
Medicare part A entitlement but who have extended their 
coverage by payment of a monthly premium.
QMB benefits
    Medicaid is required to pay Medicare premiums and cost-
sharing charges for the QMB population as follows: (1) part B 
monthly premiums; (2) part A monthly premiums paid by the 
limited number of persons not automatically entitled to part A 
protection; (3) coinsurance and deductibles under part A and 
part B including the Medicare hospital deductible, the part B 
deductible, and the part B coinsurance; and (4) coinsurance and 
deductibles that health maintenance organizations (HMOs) and 
competitive medical plans charge their enrollees.
    Medicaid coverage is limited to payment of these charges 
unless the individual is otherwise eligible for Medicaid. A 
person eligible for regular Medicaid benefits as well as QMB 
assistance is entitled to Medicaid payment for Medicare 
premiums and cost-sharing charges as well as to the full range 
of Medicaid services otherwise available to them.
Payment of QMB benefits
    States are required to pay part A and part B premiums in 
full for the QMB population. They are also required to pay the 
requisite deductibles and coinsurance, though the actual amount 
of the payment may vary. State Medicaid Programs frequently 
have lower payment rates for services than those applicable 
under Medicare. Federal program guidelines permit States to 
either: (1) pay the full Medicare deductible and coinsurance 
amounts; or (2) only pay those amounts to the extent that the 
Medicare provider or supplier has not received the full 
Medicaid rate for the service. If the Medicare service is not 
covered under the State Medicaid Program, the State may either 
pay the full Medicare deductibles and coinsurance amounts or 
alternatively provide for reasonable payments (subject to 
approval by DHHS).
    Twenty-nine States instituted policies which used payment 
rates below those applicable under Medicare. However, the U.S. 
Court of Appeals for four judicial circuits issued decisions 
which required States in their jurisdictions to pay the full 
Medicare cost-sharing expenses for QMBs. As a result, 8 of the 
29 States were required to change their policies. However, in 
May 1997, another judicial circuit found that California could 
cap payments to Medicare providers at Medicaid payment rates. 
This issue was subsequently addressed by the Balanced Budget 
Act of 1997 which permits States to limit total payments to the 
amount which would otherwise be paid by Medicaid. The provision 
is effective on enactment, except that it also applies to 
services furnished before that date if payment for such 
services is subject of a pending lawsuit.
Buy-in
    All States have buy-in agreements with the Secretary that 
allow them to enroll their QMB population in part B. Some 
States have also elected to include payment of part A premiums 
under their buy-in agreements. Payment of premiums under a buy-
in agreement is advantageous to the State because premiums paid 
through this method are not subject to delayed enrollment 
penalties which might otherwise be applicable in the case of 
delayed enrollment or reenrollment.
    The buy-in agreements for the QMB population are in 
addition to the traditional buy-in agreements that States have 
for other population groups. Under these traditional buy-in 
agreements, States enroll in Medicare part B persons who are 
eligible for both Medicare and Medicaid. As a minimum, States 
may limit buy-in coverage to persons receiving cash assistance; 
alternatively, they may add some or all categories of other 
persons who are eligible for both programs.
Specified low-income Medicare beneficiaries (SLMBs)
    States are also required to pay Medicare part B premiums 
for SLMBs. These are persons meeting the QMB criteria except 
that their income is slightly over the QMB limit. In 1997, the 
SLMB income limit is 120 percent of the Federal poverty line. 
Medicaid protection is limited to payment of the Medicare part 
B premiums, unless the beneficiary is otherwise eligible for 
Medicaid.
     The Balanced Budget Act of 1997 requires State Medicaid 
Programs, effective January 1, 1998 through December 31, 2002, 
to pay part B premiums for beneficiaries with incomes up to 135 
percent of poverty. For Medicare beneficiaries with incomes 
between 135 and 175 percent of poverty, State Medicaid Programs 
are required to cover that portion of the Medicare part B 
premium attributable to the transfer of home health visits from 
part A to part B.
     The Federal Government will pay 100 percent of the costs 
associated with expanding Medicare part B premium assistance 
from 120 percent to 135 percent, as well as the extra premium 
cost attributable to the home health transfer for persons 
between 135 and 175 percent. To cover these costs, the 
Secretary will be required to provide for allocations to States 
based on the sum of: (1) a State's number of Medicare 
beneficiaries with incomes between 135 and 175 percent of 
poverty, and (2) twice the number of Medicare beneficiaries 
with incomes between 120 and 135 percent of poverty, relative 
to the sum for all eligible States. Total amounts available for 
allocations are $200 million for fiscal year 1998, $250 million 
for fiscal year 1999, $300 million for fiscal year 2000, $350 
million for fiscal year 2001, and $400 million for fiscal year 
2002. The Federal matching rate for each participating State 
will be 100 percent up to the State's allocation. If a State 
exceeds its allocation, the matching rate on the excess is 
zero. Payments are to be made from Medicare part B for the 
costs of this program.
Qualified disabled and working individuals (QDWIs)
    Medicaid is authorized to provide partial protection 
against Medicare part A premiums for QDWIs. QDWIs are persons 
who were previously entitled to Medicare on the basis of a 
disability, who lost their entitlement based on earnings from 
work, but who continue to have the disabling condition. 
Medicaid is required to pay the Medicare part A premium for 
such persons if their incomes are below 200 percent of the 
Federal poverty line, their resources are below 200 percent of 
the SSI limit, and they are not otherwise eligible for 
Medicaid. States are permitted to impose a premium, based on a 
sliding scale, for individuals between 150 and 200 percent of 
poverty.
Data
    As of May 1997, Medicare reported that there were 317,753 
Medicare part A beneficiaries for whom QMB payments for part A 
premiums were being made. As of the same date, States reported 
a total of 4,987,918 part B buy-ins of which 2,429,792 were 
separately identified as QMBs and 242,749 were separately 
identified as SLMBs (see table 2-40). However, these numbers 
are low due to reporting problems. The QMB and SLMB numbers 
include persons who were eligible for the full Medicaid benefit 
package. No QMB-only or SLMB-only number is available. 
Nationwide there were 18 QDWIs in May 1997; this information is 
not broken down by State.

 TABLE 2-40.--NUMBER OF QUALIFIED MEDICARE BENEFICIARIES AND PART B BUY-
                         INS BY STATE, MAY 1997                         
------------------------------------------------------------------------
                                                             Part B buy-
                                                                 ins    
              State                Part A QMBs  Part B buy-   identified
                                                    ins       as QMBs by
                                                                State   
------------------------------------------------------------------------
Alabama..........................        3,444      122,455       30,441
Alaska...........................          630        6,821           15
Arizona..........................          433       48,777       31,519
Arkansas.........................        4,027       79,371       21,534
California.......................       78,784      767,174      403,732
Colorado.........................          512       50,574       12,589
Connecticut......................        2,453       50,639       41,009
Delaware.........................          468        8,293        1,900
District of Columbia.............        1,264       14,374          269
Florida..........................       40,583      303,138      214,388
Georgia..........................        7,017      167,895       46,156
Hawaii...........................        4,855       18,597        3,779
Idaho............................          264       14,099        8,121
Illinois.........................        3,686      144,828      112,728
Indiana..........................        1,841       76,479       49,777
Iowa.............................        1,326       49,865       35,551
Kansas...........................          602       37,243       13,216
Kentucky.........................        3,230      104,766       30,041
Louisiana........................        5,570      115,045       26,254
Maine............................           10       31,861       13,748
Maryland.........................        6,256       59,858       46,670
Massachusetts....................       14,814      131,730      104,371
Michigan.........................        5,748      130,454       38,093
Minnesota........................        3,118       56,216       17,444
Mississippi......................        7,269      106,647       74,407
Missouri.........................          662       79,264       58,821
Montana..........................          455       11,798        9,602
Nebraska.........................            1       17,356          652
Nevada...........................          983       16,374       12,057
New Hampshire....................           28        6,041        1,425
New Jersey.......................        7,188      134,114       87,141
New Mexico.......................          535       33,599        7,441
New York.........................          190      349,797      168,195
North Carolina...................       11,522      203,477       32,471
North Dakota.....................            8        5,683        1,363
Ohio.............................        6,643      176,472       79,081
Oklahoma.........................        4,722       62,727       56,416
Oregon...........................           37       49,120       26,801
Pennsylvania.....................       15,609      172,703      114,830
Puerto Rico......................            0            0            0
Rhode Island.....................          840       17,213        1,812
South Carolina...................        1,904      100,941       84,818
South Dakota.....................          779       12,766        4,560
Tennessee........................        8,316      161,479       66,794
Texas............................       43,166      334,970       94,082
Utah.............................          158       14,523        9,804
Vermont..........................          241       12,996        3,228
Virgin Islands...................            0          210            0
Virginia.........................        2,961      109,046       42,105
Washington.......................        4,548       81,054       29,654
West Virginia....................        3,714       43,386       39,095
Wisconsin........................        4,114       76,831       17,871
Wyoming..........................          225        5,778        1,936
Northern Marianas................            0          311            0
Guam.............................            0          690            0
                                  --------------------------------------
      Total......................      317,753    4,987,918    2,429,792
------------------------------------------------------------------------
Note.--See text for data limitations; QMB = qualified Medicare          
  beneficiary.                                                          
                                                                        
Source: Health Care Financing Administration.                           

                      LEGISLATIVE HISTORY, 1980-97

    This section summarizes major Medicare legislation enacted 
into law, beginning with the Social Security Disability 
Amendments of 1980 and continuing chronologically through the 
Balanced Budget Act of 1997. Previous editions of the Green 
Book review legislation enacted before 1980. Since only 
technical changes were included in the Social Security 
Amendments of 1994, this act is not discussed here.
    The summary highlights major provisions; it is not a 
comprehensive list of all Medicare amendments. Included are 
provisions which had a significant budget impact, changed 
program benefits, modified beneficiary cost sharing, or 
involved major program reforms. Provisions involving policy 
changes are mentioned the first time they are incorporated in 
legislation, but not necessarily every time a modification is 
made. For example, the enactment of the initial secondary payer 
provisions are noted in 1980, 1981, and 1982. Subsequent 
clarifying amendments to these provisions are not mentioned. 
The descriptions include either the initial effective date of 
the provision or, in the case of budget savings provisions, the 
fiscal years for which cuts were specified.

    Social Security Disability Amendments of 1980, Public Law 96-265

    Established a voluntary certification program for Medicare 
supplemental policies in States that failed to establish 
equivalent or more stringent standards. (Federal program put in 
place July 1, 1982.)

         Omnibus Reconciliation Act of 1980, Public Law 96-499

Home health services
    Liberalized home health benefits by eliminating the number 
of visits limits, the prior hospitalization requirement, and 
the deductible for any benefits provided under part B. 
(Effective July 1, 1981.)
Ambulatory surgical services
    Required the Secretary to develop a list of surgical 
procedures that could appropriately be performed on an 
outpatient basis in an ambulatory surgical center and provided 
that payments would be made for facility services on the basis 
of prospectively determined rates. (Effective on enactment.)
Secondary payer
    Provided that Medicare would be the secondary payer where 
payment could be made under liability or no-fault insurance. 
(Effective on enactment.)

      Public Law 96-611 (an Amendment to the Social Security Act)

    Authorized coverage for pneumococcal vaccines. (Effective 
July 1, 1981.)

Omnibus Budget Reconciliation Act of 1981 (OBRA 1981), Public Law 97-35

Part A deductible
    Increased the multiplier for computing the inpatient 
hospital deductible by 12.5 percent. (Effective January 1, 
1982.)
Part B deductible
    Eliminated the use of medical expenses incurred during the 
last 3 months of the preceding calendar year for determining 
whether an individual had met the part B deductible for the 
current calendar year. The part B deductible was also increased 
from $60 to $75. (Effective January 1, 1982.)
Medicare secondary payer
    Modified the existing Medicare benefit payment coordination 
rules for persons with end-stage renal disease (ESRD), making 
the individual's private employer group health plan the primary 
payer and Medicare the secondary payer for the first 12 months 
after an individual was determined to be eligible for Medicare 
under the ESRD provisions. (Effective October 1, 1981.)

 Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Public Law 
                                 97-248

Part A provider payments
    Expanded prospective limits on hospital costs reimbursed 
under Medicare originally enacted in the Social Security 
Amendments of 1972 (Public Law 92-603), to include, in addition 
to routine costs, all other inpatient hospital operating costs, 
such as ancillary costs (for example, laboratory, operating 
room, pharmacy, and so forth) and costs of special care units 
(for example, intensive care units). Established a 3-year 
Medicare ceiling (or target rate) on the allowable annual rate 
of increase in operating costs per case for inpatient hospital 
services. Required the Secretary to develop proposals for the 
prospective payment of hospitals under Medicare by the end of 
1982. (Effective for hospital cost-reporting periods beginning 
on or after October 1, 1982.)
Part B premium
    Increased the part B premium to cover 25 percent of program 
costs for the aged for 1-year periods beginning July 1, 1983 
and July 1, 1984. This provision was subsequently extended 
through 1990. (Effective July 1, 1983.)
Reimbursement for inpatient radiology and pathology services
    Eliminated the special 100-percent reimbursement rate for 
radiologist and pathologist services furnished directly to 
hospital inpatients, and the exemption of such services from 
being subject to the part B deductible and coinsurance. 
(Effective for items or services furnished on or after October 
1, 1982.)
Medicare secondary payer for older workers
    Amended the existing benefit payment coordination rules 
making Medicare secondary payer for older workers with private 
employer group health insurance coverage. Required private 
employers with 20 or more full-time workers to provide older 
workers with the same coverage provided for workers under age 
65. Subsequently extended to spouses. (Effective January 1, 
1983.)
Hospice care
    Authorized 210 days of hospice care for terminally ill 
Medicare beneficiaries with a life expectancy of 6 months or 
less. (Effective for the period from November 1, 1983 to 
October 1, 1986, with benefit becoming permanent and day limit 
repealed at a later date.)
Health maintenance organizations (HMOs) and competitive medical plans 
        (CMPs)
    Provided for contracts with HMOs or CMPs on a risk sharing 
(prospective) basis. Individuals eligible to receive benefits 
under Medicare would be eligible to enroll with any HMO or CMP 
that had a Medicare contract and served the geographic area in 
which the individual resided. Medicare's payment to the entity 
with a risk-sharing contract would be made on a per capita 
basis for each class of beneficiary enrolled in the plan, 
adjusted for factors such as age, disability status, and other 
factors. (Effective when the Secretary certified to Congress 
that the payment methodology was adequate.)
Peer review organizations (PROs)
    Established the PROs to review the medical necessity and 
reasonableness of care, quality of care, and the 
appropriateness of the setting in which the care was delivered 
for Medicare services furnished primarily in hospitals. 
Repealed authorization for the Professional Standards Review 
Organizations (PSROs), which had been charged since 1972 with 
reviewing both Medicare and Medicaid services. (Effective on 
enactment.)
Hospital insurance (HI) tax for Federal employees
    Required Federal employees to begin paying the Medicare HI 
tax and to earn eligibility for HI coverage under Medicare. 
(Effective January 1, 1983.)

          Social Security Amendments of 1983, Public Law 98-21

Part A hospital reimbursement
    Established a new method of Medicare reimbursement for 
hospital inpatient care, called the prospective payment system 
(PPS). Under this system, payment for each patient would be 
made at predetermined, specific rates based on the average cost 
of treating similar patients. Categories of patients would be 
defined by the diagnosis-related groups (DRGs) patient 
classification system which assigned each inpatient to a DRG 
based on the diagnosis and other factors. (Effective for 
hospital cost-reporting periods beginning on or after October 
1, 1983.)
PROs
    Authorized PROs to deny payment to a hospital for 
unnecessary or inappropriate services. (Effective on 
enactment.)

        Deficit Reduction Act of 1984 (DEFRA), Public Law 98-369

Physicians' services
    Froze physicians fees for 15 months, established the 
Participating Physicians' Program, and froze billed charges of 
nonparticipating physicians. (Freeze effective July 1, 1984 
through September 30, 1985.)
Laboratory services
    Established two fee schedules for clinical laboratory 
services, one for independent laboratories and physicians and 
one for services provided by hospital outpatient labs. Required 
independent laboratories to accept assignment on claims and 
waived patient cost-sharing charges on such claims, and 
permitted physicians to bill for lab services only when they 
personally performed or supervised the performance of the test. 
(Fee schedules effective July 1, 1984, with schedule for 
outpatient hospital services initially limited to 3 years and 
made permanent in subsequent legislation.)
Hepatitis B vaccine
    Authorized coverage for hepatitis B vaccine and its 
administration when furnished to a high risk individual. 
(Effective September 1, 1984.)

           Emergency Extension Act of 1985, Public Law 99-107

    Froze PPS payment rates for inpatient hospital services at 
fiscal year 1985 levels and continued physician payment freeze 
through November 14, 1985. Subsequent acts (Public Law 99-155, 
Public Law 99-181, Public Law 99-189, and Public Law 99-201) 
extended the freezes through March 14, 1986. (See below for 
further extension through April 30, 1986.)

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), Public 
                               Law 99-272

Hospital patient protection
    Established requirements for hospitals participating in 
Medicare to examine and treat patients in active labor or with 
emergency medical conditions (also known as ``antidumping'' 
provisions). (Effective on first day of first month beginning 
at least 90 days after enactment.)
Hospital payment freeze
    Extended freeze on payments through April 30, 1986 and 
reduced PPS updates for the remainder of fiscal year 1986. 
(Effective on enactment.)
Indirect medical education
    Began phased reduction of payments for indirect costs of 
medical education. (Applied to cost-reporting periods beginning 
on or after May 1, 1986.)
Direct graduate medical education
    Replaced cost-based hospital reimbursement for direct costs 
of medical education with a hospital-specific cost amount per 
approved full-time equivalent resident. Limited the period of 
residency training for which payments would be made. (Applied 
to cost-reporting periods beginning on or after July 1, 1985.)
Disproportionate-share hospitals
    Codified payment adjustments for hospitals serving a 
disproportionate share of low-income patients. (Effective May 
1, 1986.)
Physician fee freeze
    Extended fee freeze from March 14, 1986 through April 30, 
1986 for participating physicians and through December 1, 1986 
for nonparticipating physicians. Required the Secretary in 
consultation with the newly established Physician Payment 
Review Commission to develop a relative value scale for 
payments for physician services. (Fee freeze extension was 
effective on enactment; other changes became effective later in 
1986.)
Return on equity
    Began phase-out of return on equity capital for for-profit 
hospital services and reduced return on equity for other 
services. (Effective for hospitals for cost-reporting periods 
beginning on or after October 1, 1986; for other providers, on 
or after October 1, 1985.)
Coverage of new State and local employees
    Extended Medicare HI tax to State and local government 
employees hired on or after April 1, 1986 and established 
Medicare part A entitlement for these employees. (Effective 
beginning after March 31, 1986 for both tax and entitlement to 
coverage.)

 Omnibus Budget Reconciliation Act of 1986 (OBRA 1986), Public Law 99-
                                  509

Part A deductible
    Changed the annual indexing of the part A (hospital) 
deductible from an amount based on the average cost of 1 day of 
inpatient hospital care to an amount based on the applicable 
percentage increase used for prospective payment rates, 
adjusted to reflect changes in real case mix. (Effective for 
services provided on or after January 1, 1987.)
Payments for physicians' services
    Provided for higher recognized payment screens for 
participating physicians beginning January 1, 1987. Imposed 
limits on balance billing for nonparticipating physicians known 
as the maximum allowable actual charge (MAACs). (Effective 
January 1, 1987 with MAAC limits effective for 4 years.)
Secondary payer for the disabled
    Made Medicare the second payer for disabled Medicare 
beneficiaries who elected to be covered under employer plans as 
a current employee (or family member of such employee) of an 
employer with at least 100 employees. (Effective January 1, 
1987 through December 31, 1992. Subsequently modified and 
extended.)
Payment for cataract surgical procedures
    Reduced the prevailing charges of participating and 
nonparticipating physicians for certain cataract surgical 
procedures. (Effective for services furnished on or after 
January 1, 1987 until the earlier of December 31, 1990 or 1 
year after the Secretary reported to Congress on the relative 
value scale.)
Ambulatory surgery
    Revised payment methodology for ambulatory surgery provided 
in hospital outpatient departments to be the lesser of costs or 
charges or a blend of hospital costs and ASC rates (reaching 
50/50 in fiscal year 1988). Required the Secretary to develop a 
prospective payment system for ambulatory surgery performed in 
outpatient departments. (Applied to payment rates for cost-
reporting periods beginning on or after October 1, 1987.)
Vision care
    Provided for payment for vision care services furnished by 
optometrists if the services were among those covered by 
Medicare and the optometrist was legally authorized to perform 
that service. (Prior to this change, Medicare only covered 
optometrist services related to the treatment of aphakia.) 
(Effective April 1, 1987.)
Physician assistants
    Provided for coverage of and separate payment for services 
performed by a physician assistant if the service would be 
covered when performed by a physician. (Effective January 1, 
1987.)

   Medicare and Medicaid Patient and Program Protection Act of 1987, 
                           Public Law 100-93

Fraud and abuse
    Amended titles XI, XVIII, and XIX of the Social Security 
Act to improve antifraud provisions. Established civil 
penalties and sanction authority, including mandatory exclusion 
from Medicare, Medicaid, and other programs under the Social 
Security Act for specific acts of fraud or abuse. (Effective on 
the 15th day after enactment.)
Beneficiary protections and information clearinghouse
    Improved program protections for beneficiaries and created 
an information-reporting system concerning sanctions taken by 
State entities to prevent sanctioned providers in one State 
from setting up practices anew in another. (Generally effective 
on the 15th day after enactment.)

  Balanced Budget and Emergency Deficit Control Reaffirmation Act of 
                        1987, Public Law 100-119

    Froze payment rates at fiscal year 1987 levels through 
November 20, 1987, and mandated a sequester order that resulted 
in Medicare payment reductions of 2.324 percent effective 
November 21, 1987. (Effective as specified.)

 Omnibus Budget Reconciliation Act of 1987 (OBRA 1987), Public Law 100-
                                  203

Part A and B reductions under sequester order
    Extended payment reductions under the sequester order for 
all inpatient hospital services (including capital and direct 
medical education) until March 31, 1988, and for other part A 
services until December 31, 1987. Froze part B prevailing 
charges and the customary charges for physicians' services for 
the period January 1 through March 31, 1988 at 1987 levels, and 
extended the sequester order for part B services through March 
31, 1988. (Effective on enactment.)
Hospital inpatient payment rates
    Reduced the update factors for PPS hospitals for fiscal 
year 1988 and fiscal year 1989. Established separate updates 
for large urban, ``other urban,'' and rural areas. (Effective 
for discharges occurring on or after April 1, 1988, for fiscal 
year 1988 update factors.)
Hospital capital payments
    Reduced hospital capital-related payments by 7 percent 
between October 1 and December 31, 1987; by 12 percent for the 
remainder of fiscal year 1988, beginning January 1, 1988; and 
by 15 percent for fiscal year 1989. Required Secretary to 
establish a prospective payment system for capital to begin 
with cost-reporting periods beginning on or after October 1, 
1991. (Effective as specified.)
Physician payments
    Reduced payment update for 1988 and 1989 for participating 
physicians for nonprimary care services, beginning on April 1, 
1988. Reduced nonparticipating physician payments to 95.5 
percent of prevailing charges for participating physicians for 
services furnished from April 1 to December 31, 1988; for 
fiscal year 1989, further reduced payments to 95 percent of the 
prevailing charges of participating physicians. Added a 5-
percent bonus payment for services provided in underserved 
areas, effective January 1, 1989 in rural areas and January 1, 
1991 in urban areas. (Effective as specified.)
Reductions in overpriced procedures
    Expanded list of overpriced procedures (previously limited 
to cataract surgery) and reduced prevailing charges for them. 
Reduced prevailing charges by 2 percent from the 1987 level, 
and further reduced prevailing charges by specified amounts if 
the prevailing charge was above 85 percent of the national 
average level. (Effective for items and services provided on or 
after April 1, 1988.)
Durable medical equipment (DME) fee schedule
    Froze payment screens for DME for 1 year from January 1 
through December 31, 1988. Required the Secretary to establish 
a fee schedule for the fee screen year beginning January 1, 
1989, for each of 6 categories of DME services. (Effective date 
of fee schedule for items furnished on or after January 1, 
1989.)
Ambulatory surgery copayment
    Required that the deductible and coinsurance requirements 
be imposed for assigned physicians' services provided in ASCs 
and hospital outpatient departments. (Effective for services 
furnished on or after April 1, 1988.)
Flu vaccine
    Provided coverage of influenza vaccine and its 
administration if a demonstration conducted by the Secretary 
found it to be cost effective. (Effective date of 24-month 
demonstration October 1, 1988; Secretary authorized coverage 
effective May 1, 1993.)
Therapeutic shoes for diabetics
    Provided coverage for therapeutic shoes for diabetics 
contingent on the demonstration of their cost effectiveness by 
the Secretary. (Effective date of 24-month demonstration 
October 1, 1988; Secretary authorized coverage effective May 1, 
1993.)
Coverage of mental health services
    Increased the limit on recognized charges for the 
outpatient treatment of mental disorders beginning in calendar 
year 1988. Beginning calendar year 1989, the payment limit 
would not include brief office visits to prescribe or monitor 
prescription drugs used as treatment. (Effective January 1, 
1988.)

 Medicare Catastrophic Coverage Act of 1988 (MCCA), Public Law 100-360

Part A benefits
    Modified hospital coverage by specifying a maximum of one 
hospital deductible per year and eliminating the day limits, 
coinsurance charges, and spell of illness provisions. Modified 
skilled nursing facility (SNF) benefit by requiring coinsurance 
for the first 8 days of care; eliminating coinsurance for days 
21-100; covering up to 150 days per year; and eliminating the 
prior hospitalization requirement. Modified home health benefit 
by expanding definition of intermittent care and permitting 
extension of hospice benefit beyond 210 days. (Hospital and SNF 
benefits effective January 1, 1989; home health and hospice 
benefits effective January 1, 1990.)
Part B benefits
    Established a maximum out-of-pocket limit (``catastrophic 
cap'') on beneficiary liability for part B cost-sharing 
charges, and set cap at level to cover 7 percent of 
beneficiaries. Added coverage for routine mammography screening 
and home intravenous drug therapy services. Provided respite 
coverage for up to 80 hours per year for chronically dependent 
individuals who had met the catastrophic or prescription drug 
cap. (Effective January 1, 1990.)
Catastrophic drug benefits
    Established, effective January 1, 1990, a limited 
prescription drug benefit for two categories of drugs (home 
intravenous (IV) drugs and immunosuppressive drugs) once the 
beneficiary met a $550 deductible. Extended, beginning January 
1, 1991, catastrophic coverage for all outpatient prescription 
drugs once the beneficiary met a $600 deductible (indexed to 
cover 16.8 percent of beneficiaries in future years). Set the 
coinsurance at 50 percent, dropping to 20 percent by 1993. 
(Limited coverage effective beginning in 1990; coverage for all 
drugs beginning in 1991, with full implementation in 1993.)
Financing
    Added an additional amount to the monthly part B premium. 
Added a supplemental premium (a surtax collected in conjunction 
with the Federal income tax) for persons with income tax 
liability above $150. (Effective for part B premiums beginning 
January 1, 1989; supplemental premiums effective for tax years 
beginning after 1988.)
Qualified Medicare beneficiaries (QMBs)
    Required Medicaid to pay Medicare premiums and cost-sharing 
charges for Medicare beneficiaries below poverty. (Coverage 
phased in beginning January 1, 1989)

 Medicare Catastrophic Coverage Repeal Act of 1989, Public Law 101-234

    Repealed the Medicare and financing provisions included in 
the 1988 law. Generally the repeal restored prior law 
provisions as if the catastrophic act had not been passed. For 
hospital and SNF benefits which had gone into effect in 1989, 
prior law provisions were restored, effective January 1, 1990 
with transition provisions included for persons in a hospital 
or SNF on that date. The additional part B premium was 
repealed, effective January 1, 1990. The QMB provision was not 
repealed.

 Omnibus Budget Reconciliation Act of 1989 (OBRA 1989), Public Law 101-
                                  239

Sequester
    Extended sequester affecting part A and HMO payments (a 
reduction of 2.1 percent) through December 31, 1989, and 
extended sequester for part B payments (a 2.1-percent 
reduction) through March 31, 1990. (Effective on enactment.)
Hospital capital payments
    Extended the 15-percent reduction in hospital capital 
payments for discharges occurring during the period January 1 
through September 30, 1990. (Effective on enactment.)
DRG weighting factors
    Reduced the weighting factors for each diagnosis-related 
group (DRG) by 1.22 percent for hospital discharges occurring 
in fiscal year 1990 and revised the update factors for fiscal 
year 1990. (Effective on enactment.)
Disproportionate-share adjustment for hospitals
    Increased the adjustment for certain hospitals that served 
a disproportionate share of low-income patients. (Effective for 
discharges occurring on or after April 1, 1990.)
Additional payments for rural hospitals
    Extended rural referral centers designations for 3 years; 
expanded the Sole Community Hospital Program; established new 
criteria for Medicare-dependent small rural hospitals; and 
established the Essential Access Community Hospital Program. 
(Effective for varying periods after enactment.)
Physician payment reform
    Established a fee schedule for payment of physician 
services based on a resource-based relative scale, to be phased 
in over a 5-year period beginning January 1, 1992.
Physician payments
    Delayed the inflation update from January 1 until April 1, 
1990 and reduced the 1990 update for certain physician 
services; reduced payments for certain overvalued procedures; 
and reduced payments under the radiology fee schedule. 
(Effective for the 9-month period beginning on April 1, 1990.)
Clinical lab fee schedule
    Established a ceiling on lab fee schedule payments at 93 
percent of the national median for the particular test. 
(Effective for lab tests performed on or after January 1, 
1990.)
Durable medical equipment update
    Eliminated the inflation update in the fee schedules for 
durable medical equipment. (Effective for equipment provided 
during calendar year 1990.)
Mental health services
    Eliminated the dollar limit on payments for mental health 
services, and expanded settings in which services of clinical 
psychologists and clinical social workers could be covered. 
(Dollar limit elimination effective January 1, 1990; expanded 
settings provision effective July 1, 1990. )
Pap smear coverage
    Authorized coverage of pap smears, once every 3 years, more 
often for women at high risk of developing cervical cancer. 
(Effective July 1, 1990.)
Agency for Health Care Policy and Research (AHCPR)
    Created the AHCPR and authorized the agency to undertake 
research on the effectiveness, efficiency, quality, and 
outcomes of health care services, assuring that the needs and 
priorities of Medicare were reflected in such research. 
(Effective on enactment.)
Self-referral
    Prohibited physician referral to clinical laboratories with 
which the referring physician has a financial relationship. 
(Effective January 1, 1992.)

 Omnibus Budget Reconciliation Act of 1990 (OBRA 1990), Public Law 101-
                                  508

General payment freeze
    Froze payments for part A services at fiscal year 1990 
levels for the period October 21 through December 31, 1990. 
Reduced part B payments by 2 percent for November 1980 and 
December 1990. (Effective as specified.)
Hospital inpatient payment rates
    Reduced update factors for PPS hospitals for fiscal years 
1991-93. Set update factors for rural hospitals such that rural 
payment rates would equal those for ``other urban'' hospitals 
by fiscal year 1995. Increased and made permanent payment 
adjustments to disproportionate-share hospitals. (Effective for 
fiscal years 1991-95.)
Hospital capital payments
    Reduced capital payments by 15 percent for fiscal year 
1991; for fiscal years 1992-95, required reductions in hospital 
payments equal to 10 percent of what would have been paid for 
capital costs on a reasonable cost basis. (Effective for fiscal 
years 1991-95.)
Physician payments
    Reduced the 1991 inflation update for primary care services 
and froze rates for other services; reduced 1992 increases for 
nonprimary care services. Continued payment reductions for 
overpriced procedures and added to the list of such procedures. 
Established new limits on balance billing charges to be phased 
in over the 1991-93 period. (Payment limits effective for 
calendar years 1991 and 1992; balance billing limits effective 
beginning in 1991.)
Hospital outpatient payments
    Reduced by 5.8 percent payments for services paid on a 
reasonable cost basis. (Effective for fiscal years 1991-95.)
Durable medical equipment (DME)
    Replaced regional limits on DME fees with phased-in 
national upper and lower limits and reduced DME update. (Update 
reductions effective for calendar years 1991 and 1992; national 
limits effective for 1991 and later years.)
Clinical laboratory services
    Limited the update for clinical laboratory services to 2 
percent per year for 1991-93 and reduced the national limits on 
laboratory fee schedules. (Update reductions effective for 
calendar years 1991-93; national limit reductions effective 
January 1, 1991.)
Injectable drugs for osteoporosis
    Added coverage of injectable drugs for treatment of bone 
fractures of homebound individuals with osteoporosis who were 
unable to self-administer the drug. (Effective January 1, 1991 
through December 31, 1995.)
Mammography
    Added coverage of mammography screenings at specified 
intervals. (Effective January 1, 1991.)
Part B deductible
    Increased the part B deductible from $75 to $100. 
(Effective January 1, 1991.)
Part B premium
    Set part B premiums at fixed dollar amounts projected to 
equal 25 percent of program costs. (Effective for fiscal years 
1991-95.)
Medigap
    Established mandatory standards for Medigap policies, 
including uniform benefit packages, to replace the previous 
voluntary certification system. (Generally effective no later 
than 1 year after promulgation of model regulation by National 
Association of Insurance Commissioners.)
Federally qualified health centers (FQHCs)
    Established cost-based reimbursement for services furnished 
by FQHCs, including federally funded community and migrant 
health centers and similar facilities. (Effective October 1, 
1991.)
HI tax
    Raised the income level subject to the HI tax. (Effective 
January 1, 1991.)

 Omnibus Budget Reconciliation Act of 1993 (OBRA 1993), Public Law 103-
                                   66

Payment for part A services
    Reduced update factors for inpatient hospital and hospice 
services for fiscal years 1994-97; reduced hospital capital 
payment rates for fiscal years 1996-98; froze cost limits for 
SNFs for fiscal years 1994-95; eliminated return on equity 
payments for SNFs. (Payment reductions effective as specified; 
elimination of return on equity effective October 1, 1993.)
Payment for physician services
    Reduced updates for services other than primary care. 
Reduced Medicare volume performance standards (MVPS) for 1994 
and subsequent years and increased the potential reductions in 
fee updates for failure to meet the MVPS for 1995 and 
subsequent years. (Update reductions effective for calendar 
years 1994 and 1995.)
Payment for other part B services
    Froze payment rates for certain DME services, clinical 
laboratory services, ASC services, and home health agencies. 
Extended existing reductions in payments for hospital 
outpatient services for fiscal years 1996-98. (Payment freezes 
generally effective for 1994 and 1995.)
Graduate medical education
    Froze per resident payment amounts for nonprimary care 
residents. (Effective for fiscal years 1994 and 1995.)
Part B premium
    Extended policy of setting part B premium at 25 percent of 
program costs. (Effective for calendar years 1996-98.)
Oral cancer drugs
    Added coverage of certain self-administered anticancer 
drugs. (Effective January 1, 1994.)
Physician ownership and referral
    Extended self-referral prohibition to additional services, 
including DME, physical therapy, home health, prescription 
drugs, and hospital services. (Effective for referrals made 
after December 31, 1994.)
Part A revenue provisions
    Eliminated upper limit on earnings subject to HI payroll 
tax. Also transferred into part A trust fund new revenues from 
increased taxation of Social Security benefits. (Effective 
January 1, 1994.)

Health Insurance Portability and Accountability Act of 1996, Public Law 
                                 104-1

     Added new criminal health care fraud provisions, 
strengthened existing civil and criminal fraud and abuse 
provisions and provided funding for new antifraud programs 
(generally effective on enactment or January 1, 1997).

             Balanced Budget Act of 1997, Public Law 105-33

Hospitals
     Froze PPS hospital and PPS-exempt hospitals and units and 
limited updates for fiscal years 1999-2002. Established a 
prospective payment system for inpatient rehabilitation 
hospitals, effective beginning in fiscal year 2001. Rebased 
capital payment rates and provided for additional reductions 
over the fiscal year 1997-2002 period. Reduced the IME payment 
from the current 7.7 percent to 5.5 percent by fiscal year 2001 
and reformed direct GME payments (generally effective on 
enactment or October 1, 1997).
 Skilled nursing facilities
     Provided for a phase in of a prospective payment system 
that will pay a Federal per diem rate for covered SNF services 
(generally effective July 1, 1998).
Home health
     Provided for the establishment of a prospective payment 
system for home health services. Provided for a reduction in 
per visit cost limits prior to the implementation of the 
prospective payment system, clarified the definitions of part-
time and intermittent care, and provided for a study of the 
definition of homebound. Provided for the transfer of some home 
health costs from part A to part B (prospective payment 
effective October 1, 1999, reduction in cost-limits effective 
on enactment, definition clarification effective October 1, 
1997, and transfer of costs effective January 1, 1998).
 Hospice
     Reduced the hospice payment update for each of fiscal year 
1998 through fiscal year 2002, and clarified the definition of 
hospice care (generally effective on enactment).
Physicians
     Provided for use of a single conversion factor; replaced 
the volume performance standard with the sustainable growth 
rate; provided for phased-in implementation of resource-based 
practice expenses; and permitted use of private contracts under 
specified conditions (generally effective January 1, 1998).
 Hospital outpatient departments
     Extended reductions in payments for outpatient hospital 
services paid on the basis of costs through December 1999 and 
established a prospective payment system for hospital 
outpatient departments for covered services beginning in 1999 
(generally effective on enactment).
Other providers
     Froze payments for laboratory services for fiscal years 
1998-2002; provided for establishment of a fee schedule in 2000 
for payment for ambulance services (generally effective on 
enactment).
 Beneficiary payments
     Permanently set the part B premium at 25 percent of 
program costs and expanded the premium assistance beginning in 
1998 available under the Specified Low-Income Medicare 
Beneficiary (SLMB) Program (effective on enactment).
 Prevention initiatives
     Authorized coverage for annual mammograms for all women 
over 40. Added coverage for screening pelvic exams, prostate 
cancer screening tests, colorectal cancer screening tests, 
diabetes self-management training services, and bone mass 
measurements for certain high-risk persons (generally effective 
in 1998, except prostate cancer screening effective 2000).
 Supplementary coverage
     Provided for guaranteed issuance of specified Medigap 
policies without a preexisting condition exclusion for certain 
continuously enrolled aged individuals (effective July 1, 
1998).
 Competitive bidding
     Provided for competitive bidding demonstrations for 
furnishing part B services (not including physicians services) 
(effective on enactment).
Commissions
     Established a 17-member National Advisory Commission on 
the Future of Medicare (with appointments to be made by 
December 1, 1997). Established the Medicare Payment Advisory 
Commission replacing the Prospective Payment Assessment 
Commission and the Physician Payment Review Commission (with 
appointments to be made by September 30, 1997).
 Medicare+Choice
     Established a new part C of Medicare called 
Medicare+Choice. This program is built on the existing Medicare 
Risk Contract Program which enabled beneficiaries to enroll, 
where available, in health maintenance organizations (HMOs) 
that contracted with the Medicare Program. The Medicare+Choice 
Program expands, beginning in 1999, the private plan options 
that could contract with Medicare to other types of managed 
care organizations (for example, preferred provider 
organizations and provider-sponsored organizations), private 
fee-for-service plans, and, on a limited demonstration basis, 
high deductible plans (called medical savings account plans) 
offered in conjunction with medical savings accounts (effective 
on enactment).

CBO SAVINGS AND REVENUE ESTIMATES FOR BUDGET RECONCILIATION ACTS, 1981-
                                   93

    Table 2-41 shows estimates of savings and revenue increases 
for budget reconciliation legislation enacted from 1981 to 
1993. These estimates were made at the time of enactment by the 
Congressional Budget Office (CBO). It should be noted that the 
estimates are compared with the CBO budget baseline in effect 
at the time. The savings from the various reconciliation bills 
cannot be added together.

            TABLE 2-41.--MEDICARE SAVINGS ESTIMATES, 1981-93            
                        [In billions of dollars]                        
------------------------------------------------------------------------
                       Legislative act                          Savings 
------------------------------------------------------------------------
Omnibus Budget Reconciliation Act of 1981:                              
    Spending reductions for fiscal years 1982-84.............       $4.3
Tax Equity and Fiscal Responsibility Act of 1982:                       
    Spending reductions for fiscal years 1983-87.............       23.1
Social Security Amendments of 1983:                                     
    Spending reductions for fiscal years 1983-88.............        0.2
    Revenue increases for fiscal years 1983-88...............       11.5
Deficit Reduction Act of 1984:                                          
    Spending reductions for fiscal years 1984-87.............        6.1
Consolidated Omnibus Budget Reconciliation Act of 1985:                 
    Spending reductions for fiscal years 1986-81.............       12.6
Omnibus Budget Reconciliation Act of 1986:                              
    Spending reductions for fiscal years 1987-89.............        1.0
Omnibus Budget Reconciliation Act of 1987:                              
    Spending reductions for fiscal years 1988-90.............        9.8
Omnibus Budget Reconciliation Act of 1989:                              
    Spending reductions for fiscal years 1990-94.............       10.9
Omnibus Budget Reconciliation Act of 1990:                              
    Spending reductions for fiscal years 1991-95.............       43.1
    Revenue increases for fiscal years 1991-95...............       26.9
Omnibus Budget Reconciliation Act of 1993:                              
    Spending reductions for fiscal years 1994-98.............       55.8
    Revenue increases for fiscal years 1994-98...............       53.8
Health Insurance Portability and Accountability Act of 1996:            
    Spending reductions for fiscal years 1996-2002...........        3.0
Balanced Budget Act of 1997:                                            
    Spending reductions for fiscal years 1998-2002...........      116.4
    Spending reductions for fiscal years 1998-2007...........      393.8
------------------------------------------------------------------------
Note.--Savings relative to baseline at time of enactment. Figures cannot
  be summed.                                                            
                                                                        
Source: Committee on Ways and Means, (1988, 1989, 1991); Congressional  
  Budget Office.                                                        

                        MEDICARE HISTORICAL DATA

    Tables 2-42 through 2-52 present detailed historical data 
on the Medicare Program. Tables 2-42, 2-43, and 2-44 present 
detailed enrollment data. Table 2-45 describes the percentage 
of enrollees participating in a State buy-in agreement. Tables 
2-46 and 2-47 show the distribution of Medicare payments by 
type of coverage and by type of service. Tables 2-48 and 2-49 
show the number of persons served and the average reimbursement 
per person served and per enrollee. Table 2-50 shows the 
utilization of hospital services. Table 2-51 presents Medicare 
utilization and reimbursement by State. Table 2-52 shows the 
number of participating institutions and organizations.

                                                              TABLE 2-42.--NUMBER OF MEDICARE ENROLLEES BY TYPE OF COVERAGE AND TYPE OF ENTITLEMENT, SELECTED YEARS 1968-95                                                             
                                                                                                             [In thousands]                                                                                                             
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   Year                                                                          Average annual rate of 
                                                           ---------------------------------------------------------------------------------------------------------------------------------------------------      growth (percent)    
             Type of entitlement and coverage                                                                                                                                                                 --------------------------
                                                              1968       1975      1980       1982      1984       1986      1988       1989      1990       1991      1992       1993      1994       1995    1968-75  1975-83  1984-95
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total:                                                                                                                                                                                                                                  
  HI \1\ and/or SMI \2\...................................    19,821     24,959    28,478     29,494    30,456     31,750    32,980     33,579    34,203     34,870    35,579     36,306    36,935     37,535      3.3      2.3      2.1
Total HI:                                                     19,770     24,640    28,067     29,069    29,996     31,216    32,413     33,040    33,719     34,429    35,153     35,904    36,543     37,135      3.2      2.3      2.2
  HI only.................................................     1,016      1,054     1,079      1,082     1,040      1,160     1,363      1,481     1,574      1,633     1,645      1,694     1,768      1,850      0.5      0.0      5.9
  Total SMI...............................................    18,805     23,905    27,400     28,412    29,416     30,590    31,617     32,099    32,629     33,237    33,933     34,612    35,167     35,685      3.5      2.4      2.0
  SMI only................................................        51        318       411        425       460        534       567        539       484        441       425        425       392        400     29.9      4.1     -1.4
Aged:                                                                                                                                                                                                                                   
  HI and/or SMI...........................................    19,821     22,790    25,515     26,540    27,571     28,791    29,879     30,409    30,948     31,485    32,010     32,462    32,801     33,142      2.0      2.2      1.9
  Total HI................................................    19,770     22,472    25,104     26,115    27,112     28,257    29,312     29,869    30,464     31,043    31,584     32,060    32,409     32,742      1.8      2.2      1.9
  HI only.................................................     1,016        845       835        833       807        928     1,098      1,192     1,263      1,300     1,297      1,315     1,353      1,000     -2.6     -0.4      2.2
  Total SMI...............................................    18,805     21,945    24,680     25,707    26,765     27,863    28,780     29,216    29,686     30,185    30,712     31,147    31,447     31,742      2.2      2.3      1.7
  SMI only................................................        51        318       411        425       459        534       567        539       484        441       425        401       392        400     29.9      4.1     -1.4
All disabled:                                                                                                                                                                                                                           
  HI and/or SMI...........................................     (\4\)      2,168     2,963      2,954     2,884      2,959     3,102      3,171     3,255      3,385     3,568      3,844     4,135      4,393       NA      3.8      4.3
  Total HI................................................     (\4\)      2,168     2,963      2,954     2,884      2,959     3,101      3,171     3,255      3,385     3,568      3,844     4,135      4,393       NA      3.8      4.3
  HI only.................................................     (\4\)        209       244        249       233        232       265        288       311        333       348        378       807        451       NA      1.5      6.8
  Total SMI...............................................     (\4\)      1,959     2,719      2,759     2,682      2,727     2,837      2,883     2,943      3,052     3,220      3,466     3,720      3,942       NA      4.0      4.0
  SMI only \3\............................................     (\4\)  .........  ........  .........  ........  .........  ........  .........  ........  .........  ........  .........  ........  .........  .......  .......  .......
ESRD \5\ only:                                                                                                                                                                                                                          
  HI and/or SMI...........................................     (\4\)         13        28         27        30         39        53         58        65         69        72        226       235         71       NA     10.1      9.0
  Total HI................................................     (\4\)         13        28         27        30         39        53         58        65         69        72        224       233         71       NA     10.1      9.0
  HI only.................................................     (\4\)          1         1          2         2          3         4          5         6          6         7         11        10          8       NA      9.1     14.9
  Total SMI...............................................     (\4\)         12        27         26        28         36        49         54        59         62        65        215       225         63       NA     10.1      8.4
  SMI only \3\............................................     (\4\)  .........  ........  .........  ........  .........  ........  .........  ........  .........  ........  .........  ........  .........  .......  .......  .......
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Hospital insurance.    \2\ Supplementary medical insurance.    \3\ Disabled and end-stage renal disease only must have HI to be eligible for SMI coverage.    \4\ Medicare disability entitlement began in 1973.    \5\ End-stage   
  renal disease.                                                                                                                                                                                                                        
                                                                                                                                                                                                                                        
NA--Not available.                                                                                                                                                                                                                      
                                                                                                                                                                                                                                        
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.                                                                                                                                                   


                                                 TABLE 2-43.--GROWTH IN NUMBER OF AGED MEDICARE ENROLLEES BY SEX AND AGE, SELECTED YEARS 1968-95                                                
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Year                                              Average annual growth                 Enrollees
                                                    ------------------------------------------------------------------------------------------       rate (percent)                   as percent
                                                                                                                                              --------------------------- Total aged   of total 
                    Sex and age                                                                                                                                           population     aged   
                                                       1968     1975     1980     1984     1986     1990     1991     1992     1993     1995   1968-75  1975-84  1986-95   1995 \1\   population
                                                                                                                                                                                         1995   
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
All persons........................................   19,496   22,548   25,515   27,571   28,791   30,948   31,485   32,011   32,462   33,142      2.1      2.3      1.6     33,530        97.8 
  65-69............................................    6,551    7,642    8,459    8,784    9,163    9,695    9,690    9,692    9,683    9,517      2.2      1.6      0.4      9,928        96.6 
  70-74............................................    5,458    5,950    6,756    7,300    7,564    7,951    8,163    8,373    8,509    8,756      1.2      2.3      1.6      8,830        98.6 
  75-79............................................    3,935    4,313    4,809    5,327    5,573    6,058    6,175    6,261    6,369    6,563      1.3      2.4      1.8      6,681        95.8 
  80-84............................................    2,249    2,793    3,081    3,382    3,559    3,957    4,065    4,166    4,257    4,470      3.1      2.2      2.6      4,463        97.8 
  85 and over......................................    1,303    1,850    2,410    2,778    2,932    3,286    3,393    3,519    3,643    3,837      5.1      4.6      3.0      3,628       102.9 
Males..............................................    8,177    9,201   10,268   11,044   11,525   12,416   12,650   12,886   13,095   13,434      1.7      2.0      1.7     13,688        96.9 
  65-69............................................    2,944    3,420    3,788    3,942    4,109    4,352    4,358    4,374    4,386    4,348      2.2      1.6      0.6      4,506        96.8 
  70-74............................................    2,322    2,504    2,841    3,088    3,214    3,406    3,505    3,604    3,670    3,791      1.1      2.4      1.9      3,836        98.1 
  75-79............................................    1,596    1,669    1,854    2,061    2,160    2,382    2,441    2,485    2,542    2,642      0.6      2.4      2.3      2,720        94.3 
  80-84............................................      864    1,005    1,062    1,161    1,221    1,369    1,411    1,454    1,495    1,593      2.2      1.6      3.0      1,609        96.0 
  85 and over......................................      450      604      722      793      822      906      934      968    1,003    1,060      4.3      3.1      2.9      1,017       101.2 
Females............................................   11,319   13,347   15,247   16,526   17,266   18,532   18,835   19,125   19,367   19,708      2.4      2.4      1.5     19,842        98.5 
  65-69............................................    3,606    4,222    4,671    4,842    5,054    5,343    5,332    5,317    5,298    5,169      2.3      1.5      0.3      5,422        96.5 
  70-74............................................    3,136    3,446    3,914    4,212    4,350    4,545    4,657    4,769    4,839    4,964      1.4      2.3      1.5      4,994        99.0 
  75-79............................................    2,338    2,644    2,954    3,266    3,414    3,676    3,734    3,776    3,827    3,921      1.8      2.4      1.6      3,961        96.8 
  75-84............................................    1,386    1,788    2,019    2,222    2,339    2,588    2,653    2,713    2,762    2,877      3.7      2.4      2.3      2,854        98.9 
  85 and over......................................      853    1,246    1,689    1,985    2,110    2,380    2,459    2,551    2,640    2,777      5.6      5.3      3.1      2,611       103.6 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ U.S. residents only.                                                                                                                                                                        
                                                                                                                                                                                                
Source: Health Care Financing Administration, Bureau of Data Management and Strategy; and U.S. Department of Commerce, Bureau of the Census.                                                    


                      TABLE 2-44.--GROWTH IN NUMBER OF DISABLED MEDICARE ENROLLEES WITH HOSPITAL INSURANCE COVERAGE BY TYPE OF ENTITLEMENT AND AGE, SELECTED YEARS 1975-95                      
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Year                                                       Average annual percent 
                                                          ------------------------------------------------------------------------------------------------------------        growth rate       
               Type of entitlement and age                                                                                                                            --------------------------
                                                              1975        1980        1984        1988        1990        1992        1993        1994        1995     1975-82  1982-88  1982-95
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
All disabled persons.....................................   2,058,424   2,425,231   2,884,410   3,101,482   3,254,983   3,568,625   3,844,178   4,134,604   4,393,287      2.3      4.3      4.7
    Under age 35.........................................     238,070     193,392     388,240     471,129     483,262     512,495     545,644     574,003     587,709     -2.7     15.7      8.8
    35-44................................................     251,142     258,374     422,207     572,408     654,953     762,759     834,426     908,076     973,328      1.0     13.4     10.4
    45-54................................................     508,345     572,823     584,214     670,131     741,193     874,797     974,589   1,083,945   1,187,993      0.7      3.9      6.4
    55-64................................................   1,060,967   1,400,642   1,489,749   1,397,814   1,375,575   1,418,574   1,489,519   1,568,580   1,644,257      4.2     -0.2      1.1
All disabled workers.....................................   1,638,662   2,396,897   2,309,866   2,456,135   2,579,097   2,856,517   3,100,532   3,367,187   3,602,559      5.5      0.5      3.2
    Under age 35.........................................     100,439     184,619     193,094     249,291     257,760     286,486     317,876     345,322     357,794      9.3      4.9      5.1
    35-44................................................     164,439     253,186     290,395     414,749     482,071     576,549     642,386     710,431     769,071      7.0      7.8      8.6
    45-54................................................     426,451     565,846     485,378     552,442     612,692     731,713     823,552     926,390   1,023,616      3.0      0.8      5.3
    55-64................................................     947,333   1,393,246   1,340,999   1,239,653   1,226,574   1,261,769   1,316,718   1,385,044   1,452,078      5.9     -2.1     -0.2
Adults disabled as children..............................     324,864     409,072     459,620     519,009     542,416     566,336     580,439     595,750     609,081      4.4      2.8      2.5
    Under age 35.........................................     151,708     173,684     186,003     207,311     208,901     208,710     210,760     212,944     213,973      2.4      2.2      1.3
    35-44................................................      84,508     105,092     126,252     146,460     158,725     170,363     176,182     182,861     189,108      4.8      3.8      3.8
    45-54................................................      71,484      80,381      87,380      99,444     107,092     117,333     122,435     127,622     132,484      2.4      2.8      3.5
    55-64................................................      45,164      49,910      59,985      65,774      67,698      69,930      71,062      72,323      73,516      3.2      2.7      2.1
Widows and widowers......................................      83,771     110,785      85,227      73,101      68,793      74,157      91,643     101,247     111,121      2.5     -5.0      0.9
    Under 55.............................................       7,446       7,577       4,608       5,685       5,615       7,399       9,811      11,458      12,420     -3.5     -0.4      6.0
    55-64................................................      76,325     103,208      80,618      67,416      63,178      66,758      81,832      91,789      98,701      2.9     -5.3     -0.4
End-stage renal disease only.............................      11,127      28,334      29,697      53,237      64,677      71,615      71,564      68,420      70,526     13.7     11.7      7.6
    Under age 35.........................................       3,729       8,773       9,143      14,507      16,601      17,299      17,008      15,737      15,942     12.3      9.5      5.0
    35-44................................................       2,187       5,188       5,559      11,199      14,157      15,847      15,858      14,784      15,149     12.3     14.7      9.0
    45-54................................................       2,966       6,977       6,848      12,560      15,794      18,352      18,791      18,475      19,473     12.2     11.2      8.6
    55-64................................................       2,245       7,396       8,147      14,971      18,125      20,117      19,907      19,424      19,962     18.6     12.5      7.9
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.                                                                                                           


TABLE 2-45.--NUMBER AND PERCENTAGE OF INDIVIDUALS ENROLLED IN SUPPLEMENTARY MEDICAL INSURANCE UNDER STATE BUY-IN
         AGREEMENTS BY TYPE OF BENEFICIARY AND BY YEAR OR 1995 AREA OF RESIDENCE, SELECTED YEARS 1968-95        
----------------------------------------------------------------------------------------------------------------
                                                       All persons              Aged               Disabled     
                                                  --------------------------------------------------------------
          Year or area of residence \1\                        Percent              Percent              Percent
                                                   Number in   of SMI   Number in   of SMI   Number in   of SMI 
                                                   thousands  enrolled  thousands  enrolled  thousands  enrolled
----------------------------------------------------------------------------------------------------------------
Year:                                                                                                           
    1968.........................................      1,648       8.8      1,648       8.8         NA        NA
    1975.........................................      2,846      12.0      2,483      11.4        363      18.7
    1980.........................................      2,954      10.9      2,449      10.0        504      18.9
    1981.........................................      3,257      11.7      2,659      10.6        598      21.7
    1982.........................................      2,791       9.8      2,288       8.9        503      18.6
    1983.........................................      2,654       9.3      2,177       8.4        477      18.1
    1984.........................................      2,601       8.9      2,127       8.0        474      18.2
    1985.........................................      2,670       9.0      2,164       8.0        505      19.2
    1986.........................................      2,776       9.2      2,222       8.0        554      20.9
    1987.........................................      2,985       9.6      2,337       8.2        648      23.2
    1988.........................................      3,033       9.6      2,341       8.1        691      24.4
    1989.........................................      3,351      10.4      2,549       8.7        802      27.8
    1990.........................................      3,604      11.0      2,714       9.1        890      30.2
    1991.........................................      3,768      10.4      2,817       8.7        949      27.8
    1992.........................................      4,066      12.0      2,972       9.7      1,083      33.6
    1993.........................................      4,353      12.6      3,122      10.0      1,231      35.5
    1994.........................................      4,625      13.2      3,243      10.3      1,382      37.2
    1995.........................................      4,895      13.7      3,369      10.6      1,526      38.7
Area of residence: \1\                                                                                          
    Alabama......................................        124      20.1         86      16.4         34      41.5
    Alaska.......................................          6      19.4          4      14.8          2      50.0
    Arizona......................................         46       8.0         31       6.0         15      30.0
    Arkansas.....................................         83      20.3         58      16.7         22      41.5
    California...................................        783      22.4        561      17.9        204      63.6
    Colorado.....................................         49      12.2         32       9.0         17      42.5
    Connecticut..................................         45       9.4         31       7.1         19      51.4
    Delaware.....................................          6       6.2          4       4.6          3      33.3
    District of Columbia.........................         15      21.4         11      17.5          4      57.1
    Florida......................................        284      11.1        211       9.0         77      42.3
    Georgia......................................        170      21.1        119      17.5         48      45.3
    Hawaii.......................................         18      12.9         14      10.8          4      44.4
    Idaho........................................         14       9.7          8       6.2          5      41.7
    Illinois.....................................        144       9.3         89       6.4         54      37.8
    Indiana......................................         84      10.6         53       7.5         29      34.9
    Iowa.........................................         53      11.5         33       7.8         18      48.6
    Kansas.......................................         36       9.7         24       7.1         12      41.4
    Kentucky.....................................        101      17.8         67      14.3         35      42.2
    Louisiana....................................        114      20.5         80      17.1         35      44.9
    Maine........................................         29      14.9         18      10.6         12      57.1
    Maryland.....................................         64      11.2         44       8.5         19      38.8
    Massachusetts................................        122      13.9         83      10.6         49      59.0
    Michigan.....................................        145      11.2         75       6.5         53      37.6
    Minnesota....................................         57       9.4         35       6.3         26      53.1
    Mississippi..................................        111      28.9         77      24.4         30      51.7
    Missouri.....................................         77       9.6         48       6.7         28      34.1
    Montana......................................         11       8.7          7       6.3          5      38.5
    Nebraska.....................................         17       7.1          9       4.1          8      44.4
    Nevada.......................................         15       8.2         10       6.1          5      33.3
    New Hampshire................................          6       4.1          3       2.2          3      23.1
    New Jersey...................................        127      11.3         92       9.0         39      42.4
    New Mexico...................................         31      16.1         22      12.6          9      40.9
    New York.....................................        313      12.6        232      10.5        105      42.7
    North Carolina...............................        177      17.8        138      16.1         56      47.9
    North Dakota.................................          6       6.0          4       4.3          2      25.0
    Ohio.........................................        173      10.8        119       8.3         54      32.5
    Oklahoma.....................................         65      13.8         45      10.8         17      38.6
    Oregon.......................................         45      10.0         29       7.1         16      42.1
    Pennsylvania.................................        166       8.3        105       5.8         64      38.8
    Rhode Island.................................         15       9.6         10       7.0          6      40.0
    South Carolina...............................        103      20.9         69      16.6         31      48.4
    South Dakota.................................         13      11.6          9       8.8          4      44.4
    Tennessee....................................        150      20.2        104      16.4         52      55.3
    Texas........................................        322      16.1        252      14.1         75      41.4
    Utah.........................................         15       8.4          8       5.0          6      40.0
    Vermont......................................         12      15.2          8      11.4          5      62.5
    Virginia.....................................        110      14.0         74      10.8         34      40.5
    Washington...................................         76      11.5         46       7.8         29      49.2
    West Virginia................................         40      12.5         26       9.7         16      34.0
    Wisconsin....................................         86      11.7         45       6.8         31      45.6
    Wyoming......................................          5       8.6          3       5.8          2      40.0
    Puerto Rico..................................          0       0.0          0       0.0          0       0.0
    Guam and Virgin Islands \2\..................          1       8.9          1       9.1          0       6.3
                                                  --------------------------------------------------------------
        United States............................      4,892      13.9      3,367      10.7      1,525      41.7
        All areas................................      4,895      13.7      3,369      10.6      1,526      41.0
----------------------------------------------------------------------------------------------------------------
\1\ State of residence is not necessarily State that bought coverage.                                           
\2\ Data for these areas combined to prevent disclosure of confidential information.                            
                                                                                                                
NA--Not available.                                                                                              
                                                                                                                
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.                           


                                     TABLE 2-46.--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE AND TYPE OF SERVICE, SELECTED YEARS 1975-95                                     
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
  Type of coverage and type of       1975                1980                1985                1990                1992                1993                1994                1995           
             service                amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Hospital insurance..............    $11,315     72.6    $25,051     70.2    $47,444     67.4    $66,050     60.9    $83,691     62.9    $93,290     63.3   $103,093     63.8    116,176     64.1
  Inpatient.....................     10,877     69.8     24,116     67.6     44,940     63.8     59,383     54.7     71,000     53.4     76,182     51.7     81,517     50.4     89,127     49.2
  Skilled nursing facility......        254      1.6        395      1.1        548      0.8      2,620      2.4      4,051      3.0      5,797      3.9      7,596      4.7      9,595      5.3
  Home health agency............        104      0.7        540      1.5      1,913      2.7      3,689      3.4      7,760      5.8     10,252      7.0     12,559      7.8     15,571      8.6
  Hospice.......................  .........  .......  .........  .......         43      0.1        358      0.3        880      0.7      1,059      0.7      1,421      0.9      1,883      1.0
Supplementary medical insurance.      4,273     27.4     10,635     29.8     22,947     32.6     42,468     39.1     49,260     37.1     53,979     36.7     58,618     36.2     64,973     35.9
  Physicians \1\................      3,416     21.9      8,187     22.9     17,312     24.6     29,609     27.3     32,394     24.4     35,282     24.0     37,435     23.1     40,435     22.3
  Outpatient hospital...........        643      4.1      1,897      5.3      4,319      6.1      8,482      7.8     10,990      8.3     11,539      7.8     13,497      8.3     15,394      8.5
  Home health agency............         95      0.6        234      0.7         38      0.1         74      0.1         71      0.1        112      0.1        144      0.1        194      0.1
  Group practice plan...........         80      0.5        203      0.6        720      1.0      2,827      2.6      3,933      3.0      5,002      3.4      5,465      3.4      6,883      3.8
  Independent laboratory........         39      0.3        114      0.3        558      0.8      1,476      1.4      1,872      1.4      2,044      1.4      2,077      1.3      2,067      1.1
                                 ---------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total payment...............     15,588    100.0     35,686    100.0     70,391    100.0    108,518    100.0    132,951    100.0    147,269    100.0    161,711    100.0    181,149    100.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Includes other services.                                                                                                                                                                    
                                                                                                                                                                                                
Note.--Amounts in millions.                                                                                                                                                                     
                                                                                                                                                                                                
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.                                                                                                           


    TABLE 2-47.--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE, TYPE OF SERVICE, AND TYPE OF    
                                                 ENROLLEE, 1995                                                 
----------------------------------------------------------------------------------------------------------------
                                                                    Type of enrollee                            
                                      --------------------------------------------------------------------------
                                            All enrollees                 Aged                   Disabled       
     Type of coverage and service     --------------------------------------------------------------------------
                                         Amount                   Amount                   Amount               
                                          (in      Percentage      (in      Percentage      (in      Percentage 
                                       millions)  distribution  millions)  distribution  millions)  distribution
----------------------------------------------------------------------------------------------------------------
Hospital insurance...................   $116,176        78.9     $102,889        64.8      $13,287        59.3  
  Inpatient..........................     89,127        60.5       77,607        48.9       11,520        51.4  
  Skilled nursing facility...........      9,595         6.5        9,176         5.8          419         1.9  
  Home health agency.................     15,571        10.6       14,317         9.0        1,254         5.6  
  Hospice............................      1,883         1.3        1,789         1.1           94         0.4  
Supplementary medical insurance......     64,973        44.1       55,844        35.2        9,129        40.7  
  Physicians \1\.....................     40,435        27.5       35,813        22.6        4,622        20.6  
  Outpatient hospital................     15,394        10.5       11,955         7.5        3,439        15.3  
  Home health agency.................        194         0.1          194         0.1            0         0.0  
  Group practice plan................      6,883         4.7        6,096         3.8          787         3.5  
  Independent laboratory.............      2,067         1.4        1,786         1.1          281         1.3  
                                      --------------------------------------------------------------------------
    Total payments...................    181,149       100.0      158,733       100.0       22,416       100.0  
----------------------------------------------------------------------------------------------------------------
\1\ Includes other services.                                                                                    
                                                                                                                
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.                           


 TABLE 2-48.--PERSONS SERVED AND REIMBURSEMENTS FOR AGED MEDICARE ENROLLEES BY TYPE OF COVERAGE AND BY 1994 DEMOGRAPHIC CHARACTERISTICS, SELECTED YEARS 
                                                                         1968-95                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        Hospital insurance and/or             Hospital insurance         Supplementary medical insurance
                                                     supplementary medical insurance  ------------------------------------------------------------------
                                                   -----------------------------------                Reimbursements                   Reimbursements   
                                                                   Reimbursements       Persons  -----------------------  Persons  ---------------------
       Year, period, and 1994 characteristic         Persons  ------------------------   served                            served                       
                                                      served      Per                  per 1,000  Per person     Per     per 1,000     Per        Per   
                                                    per 1,000    person       Per      enrollees    served     enrollee  enrollees    person    enrollee
                                                    enrollees    served     enrollee                                                  served            
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year:                                                                                                                                                   
  1968............................................      397.8    $670.08      $266.56      204.0     $934.42    $190.67      394.8    $203.94     $80.51
  1975............................................      527.9   1,054.63       556.78      220.9    1,855.38     409.78      536.0     295.91     158.60
  1980............................................      637.7   1,790.51     1,141.84      240.0    3,378.53     810.77      652.3     545.42     355.77
  1981............................................      655.0   2,024.49     1,325.97      243.4    3,877.39     943.84      669.5     613.13     410.47
  1982............................................      641.4   2,439.38     1,564.65      250.7    4,461.53   1,118.69      653.8     732.53     478.92
  1983............................................      660.2   2,610.80     1,723.69      250.9    4,803.71   1,205.13      672.2     825.26     554.77
  1984............................................      685.7         NA           NA      239.6          NA         NA      698.9         NA         NA
  1985............................................      722.1   2,762.06     1,994.59      218.8    6,167.28   1,349.60      739.1     933.25     689.79
  1986............................................      731.7   2,870.05     2,099.93      213.0    6,528.36   1,390.28      750.8   1,012.17     759.95
  1987............................................      754.1   3,025.22     2,281.19      209.8    6,902.60   1,448.33      775.9   1,147.95     890.64
  1988............................................      767.8   3,177.60     2,439.87      207.5    7,514.76   1,559.23      792.5   1,192.41     944.96
  1989............................................      784.9   3,444.86     2,703.90      206.1    8,196.19   1,688.96      812.8   1,338.10   1,087.56
  1990............................................      801.6   3,578.43     2,868.57      209.0    8,519.97   1,780.60      831.6   1,398.86   1,163.29
  1991............................................      800.1   3,905.65     3,124.82      211.8    9,348.53   1,980.26      830.0   1,473.27   1,222.80
  1992............................................      794.4   4,193.90     3,331.60      213.0   10,126.30   2,157.20      823.4   1,522.90   1,254.00
  1993............................................      825.4   4,263.99     3,519.44      215.6   10,555.75   2,275.67      855.9   1,548.86   1,325.63
  1994............................................      830.0   4,739.79     3,933.86      217.3   11,794.20   2,563.28      861.0   1,699.26   1,461.54
  1995............................................      826.1   5,074.92     4,192.53      218.3   12,541.50   2,737.52      858.0   1,392.49   1,553.67
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
Annual percentage change in period:                                                                                                                     
  1968-75.........................................        4.1        6.7         11.1        1.1        10.3       11.5        4.5        5.5       10.2
  1975-85.........................................        3.2       10.1         13.6       -0.1        12.8       12.7        3.3       12.2       15.8
  1985-95.........................................        1.4        6.3          7.7        0.0         7.4        7.3        1.5        4.1        8.5
========================================================================================================================================================
Age:                                                                                                                                                    
  65 and 66 years.................................      809.3  $3,014.06    $2,467.31      130.4  $11,146.10  $1,493.82      888.4  $1,216.70  $1,087.20
  67 and 68 years.................................      746.2   3,735.35     2,798.73      140.8   11,820.17   1,674.16      790.3   1,532.80   1,214.86
  69 and 70 years.................................      772.6   3,929.28     3,038.79      156.7   11,784.69   1,852.45      808.1   1,568.08   1,269.35
  71 and 72 years.................................      790.2   4,280.82     3,429.51      171.2   12,135.43   2,135.10      818.8   1,655.06   1,370.48
  73 and 74 years.................................      816.6   4,628.87     3,746.84      194.8   12,232.54   2,348.54      838.0   1,770.49   1,467.95
  75-79 years.....................................      844.8   5,173.87     4,434.61      232.3   12,242.76   2,875.92      858.2   1,868.11   1,624.22
  80-84 years.....................................      889.6   5,823.22     5,183.68      304.5   11,795.31   3,546.93      900.3   1,904.48   1,716.14
  85 years and over...............................      910.6   6,416.43     5,840.81      383.1   11,196.61   4,214.11      947.5   1,860.01   1,762.06
Sex:                                                                                                                                                    
  Male............................................      784.4   5,125.14     4,046.50      212.7   12,354.05   2,640.54      824.6   1,823.24   1,510.64
  Female..........................................      854.6   4,498.92     3,857.40      222.1   11,422.80   2,510.57      880.2   1,619.11   1,428.92
Race:                                                                                                                                                   
  White...........................................      835.8   4,611.30     3,862.70      217.2   11,558.04   2,496.00      865.0   1,659.52   1,437.14
  All other.......................................      754.9   6,094.26     4,628.90      233.0   13,829.43   3,204.08      803.1   2,040.84   1,645.54
Census region:                                                                                                                                          
  Northeast.......................................      864.5   5,502.98     4,757.37      223.8   13,838.84   3,097.66      896.8   1,982.43   1,777.95
  North central...................................      891.8   4,554.89     4,062.05      227.8   11,577.00   2,636.84      914.1   1,623.12   1,483.71
  South...........................................      869.4   5,263.13     4,575.79      245.8   12,264.78   3,014.69      891.7   1,828.78   1,630.75
  West............................................      663.3   5,035.56     3,339.89      159.0   13,732.15   2,183.41      681.8   1,845.51   1,258.24
--------------------------------------------------------------------------------------------------------------------------------------------------------
NA--Not available.                                                                                                                                      
                                                                                                                                                        
Note.--Data for 1995 are preliminary.                                                                                                                   
                                                                                                                                                        
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.                                                                   


  TABLE 2-49.--PERSONS SERVED AND REIMBURSEMENTS FOR DISABLED MEDICARE ENROLLEES BY TYPE OF COVERAGE AND BY 1995 DEMOGRAPHIC CHARACTERISTICS, SELECTED  
                                                                      YEARS 1968-95                                                                     
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                          Hospital insurance and/or                  Hospital insurance               Supplementary medical insurance   
                                       supplementary medical insurance    ------------------------------------------------------------------------------
                                   ---------------------------------------                    Reimbursements                         Reimbursements     
      Year, period, and 1994          Persons         Reimbursements          Persons   --------------------------   Persons   -------------------------
          characteristic             served per --------------------------  served per                              served per                          
                                       1,000      Per person      Per          1,000      Per person      Per         1,000      Per person      Per    
                                     enrollees      served      enrollee     enrollees      served      enrollee    enrollees      served      enrollee 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year:                                                                                                                                                   
  1968............................           NA           NA           NA         NA              NA           NA           NA           NA           NA
  1975............................        449.5    $1,548.09      $695.83        219.2     $2,076.58      $455.20        471.4      $564.95      $266.32
  1980............................        594.1     2,544.04     1,511.34        245.7      3,798.09       933.16        633.8       994.18       630.06
  1981............................        615.2     2,880.99     1,772.39        251.4      4,400.27     1,106.16        655.9     1,103.92       724.04
  1982............................        608.9     3,431.26     2,089.35        256.9      5,109.65     1,312.85        650.5     1,303.37       847.90
  1983............................        628.8     3,658.08     2,300.24        257.7      5,549.82     1,430.30        670.1     1,412.07       946.23
  1984............................        639.5           NA           NA        242.6            NA           NA        683.5           NA           NA
  1985............................        668.8     3,855.22     2,578.24        227.9      7,223.96     1,646.25        715.5     1,414.04     1,011.70
  1986............................        681.0     4,032.05     2,745.64        226.3      7,622.94     1,724.99        729.0     1,518.86     1,107.32
  1987............................        695.7     3,993.70     2,778.14        219.4      7,610.01     1,669.66        747.8     1,611.42     1,205.10
  1988............................        703.7     4,114.84     2,895.52        209.3      8,372.64     1,752.76        760.0     1,643.77     1,249.35
  1989............................        721.3     4,530.89     3,268.36        208.0      9,481.76     1,971.89        785.0     1,816.65     1,426.08
  1990............................        734.3     4,702.65     3,452.97        208.9      9,846.77     2,056.60        803.5     1,921.76     1,544.18
  1991............................        728.5     5,069.61     3,693.15        208.7     10,634.43     2,218.91        799.0     2,046.50     1,635.16
  1992............................        729.3     5,351.81     3,903.33        208.9     11,278.42     2,355.73        799.4     2,145.26     1,714.91
  1993............................        751.3     5,487.71     4,123.00        211.1     11,678.14     2,465.72        824.7     2,229.08     1,838.22
  1994............................        755.9     6,020.83     4,551.42        212.6     13,082.43     2,781.71        831.7     2,365.02     1,966.96
  1995............................        758.6     6,308.12     4,785.54        212.4     13,666.40     2,902.71        836.9     2,507.18     2,098.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
Annual percentage change in                                                                                                                             
 period:                                                                                                                                                
  1968-1975.......................           NA           NA           NA         NA              NA           NA           NA           NA           NA
  1975-1985.......................         4.05         9.55        13.99          0.39        13.28        13.72         4.26         9.61        14.28
  1985-1994.......................         1.27         5.05         6.38         -0.70         6.58         5.84         1.58         5.89         7.57
========================================================================================================================================================
Age:                                                                                                                                                    
  Under 35 years..................        740.6    $6,165.57    $4,566.25        200.5    $13,654.42    $2,736.12        806.2    $2,494.30    $2,010.93
  35-44 years.....................        731.1     6,099.46     4,459.24        197.8     13,460.28     2,661.94        809.8     2,483.45     2,011.13
  45-54 years.....................        729.1     6,252.92     4,559.26        199.4     13,635.98     2,718.60        816.7     2,550.75     2,083.13
  55-59 years.....................        765.1     6,573.88     5,029.76        220.2     13,959.38     3,074.09        842.7     2,581.74     2,175.65
  60-64 years.....................        831.9     6,453.85     5,368.65        246.0     13,679.54     3,364.86        904.9     2,434.15     2,202.71
Sex:                                                                                                                                                    
  Male............................        713.5     6,286.21     4,485.01        199.9     13,913.10     2,780.83        789.6     2,416.56     1,908.13
  Female..........................        825.9     6,336.28     5,232.85        231.0     13,348.74     3,084.11        906.4     2,623.31     2,377.66
Race:                                                                                                                                                   
  White...........................        760.4     5,684.71     4,322.77        204.5     12,978.13     2,654.26        840.2     2,215.36     1,861.44
  All other.......................        762.9     8,127.10     6,200.45        239.8     15,347.97     3,679.88        833.8     3,341.78     2,786.50
Census region:                                                                                                                                          
  Northeast.......................        781.0     6,914.23     5,399.69        212.5     15,713.52     3,339.57        866.6     2,668.28     2,312.38
  North central...................        778.3     5,709.39     4,443.64        211.2     12,903.54     2,725.33        859.6     2,229.50     1,916.47
  South...........................        792.3     6,269.54     4,967.55        235.7     12,806.23     3,017.91        849.4     2,482.44     2,108.58
  West............................        686.6     6,868.41     4,715.68        179.2     15,615.82     2,798.55        752.6     2,818.33     2,121.17
--------------------------------------------------------------------------------------------------------------------------------------------------------
NA--Not available.                                                                                                                                      
                                                                                                                                                        
Note.--Data for 1995 are preliminary.                                                                                                                   
                                                                                                                                                        
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.                                                                   


       TABLE 2-50.--USE OF SHORT-STAY HOSPITAL SERVICES BY MEDICARE EMPLOYEES BY YEAR AND 1994 DEMOGRAPHIC CHARACTERISTICS, SELECTED YEARS 1975-95      
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Discharges               Total days of care                      Program payments             
                                         Hospital  -----------------------------------------------------------------------------------------------------
    Calendar year, period, and 1994      insurance                                                                                       Per            
            characteristic               enrollees   Number in  Per 1,000   Number in     Per      Per 1,000   Amount in      Per      covered     Per  
                                            in       thousands  enrollees   thousands  discharge   enrollees   millions    discharge   day of   enrollee
                                         thousands                                                                                      care            
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year:                                                                                                                                                   
    1975..............................      24,640       8,001        325      89,275       11.2       3,623      $9,748      $1,218      $109      $396
    1980..............................      28,067      10,279        366     109,175       10.6       3,890      22,099       2,150       202       787
    1982..............................      29,069      11,109        382     113,047       10.0       3,889      30,601       2,755       271     1,053
    1984..............................      29,996      10,896        363      96,485        8.9       3,217      38,500       3,533       399     1,284
    1985..............................      30,589      10,027        328      86,339        8.6       2,823      40,200       4,009       466     1,314
    1986..............................      31,216      10,044        322      86,910        8.7       2,784      41,781       4,160       481     1,338
    1987..............................      31,853      10,110        317      89,651        8.9       2,815      44,068       4,359       492     1,383
    1988..............................      32,483      10,256        316      90,873        8.9       2,798      46,879       4,571       516     1,443
    1989..............................      33,040      10,148        307      89,902        8.9       2,721      49,091       4,838       546     1,486
    1990..............................      33,719      10,522        312      92,735        8.8       2,750      53,708       5,104       579     1,593
    1991..............................      34,428      10,896        316      93,936        8.6       2,728      58,901       5,406       627     1,711
    1992..............................      35,154      11,111        316      92,900        8.4       2,643      64,976       5,848       699     1,848
    1993..............................      35,904      11,158        311      88,871        8.0       2,475      67,439       6,044       759     1,878
    1994..............................      36,543      11,471        314      85,734        7.5       2,346      70,623       6,157       824     1,933
    1995..............................      37,135      11,681        315      81,282        7.0       2,189      74,836       6,407       921     2,015
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual percentage change in period:                                                                                                                     
    1975-1984 \1\.....................         2.2         4.8        2.4         1.0       -2.8        -1.5        18.7        14.2      17.6      15.8
    1984-1994 \1\.....................         2.0        -1.3       -3.1        -1.2       -1.7        -3.1         6.3         5.7       7.5       4.2
    1975-1994 \1\.....................         2.1         1.9       -0.2        -0.5       -2.3        -2.5        10.7         8.7      11.3       8.5
========================================================================================================================================================
Age:                                                                                                                                                    
    Less than 65 years................       4,393       1,570        357      11,277        7.2       2,567       9,845       6,271       873     2,241
    65-69 years.......................       9,411       2,060        219      13,355        6.5       1,419      14,142       6,865     1,059     1,503
    70-74 years.......................       8,652       2,260        261      15,122        6.7       1,748      15,346       6,790     1,015     1,774
    75-79 years.......................       6,483       2,151        332      15,067        7.0       2,324      14,121       6,565       937     2,178
    80-84 years.......................       4,409       1,806        410      13,057        7.2       2,961      11,048       6,117       846     2,506
    85 years or over..................       3,787       1,834        484      13,404        7.3       3,539      10,334       5,635       771     2,729
Sex:                                                                                                                                                    
    Male..............................      15,938       5,148        323      35,430        6.9       2,223      34,767       6,753       961     2,181
    Female............................      21,197       6,533        308      45,851        7.0       2,163      40,068       6,133       874     1,890
Race: \2\                                                                                                                                               
    White.............................      32,038       9,946        310      67,808        6.8       2,116      62,737       6,308       925     1,958
    All other.........................       4,113       1,625        395      12,706        7.8       3,089      11,413       7,023       898     2,775
Census region:                                                                                                                                          
    Northeast.........................       7,808       2,565        329      21,858        8.5       2,799      19,127       7,457       875     2,450
    North central.....................       8,954       2,962        331      19,414        6.6       2,168      18,362       6,199       946     2,051
    South.............................      12,815       4,371        341      29,657        6.8       2,314      26,159       5,985       882     2,041
    West..............................       6,765       1,664        246       9,477        5.7       1,401      10,863       6,528     1,146     1,606
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Does not reflect discharges for beneficiaries who received covered services but for whom program payments were reported during the year; for        
  example, beneficiaries who received inpatient services in health maintenance organizations were not included in the denominator used to calculate the 
  average program payments per discharge.                                                                                                               
\2\ Excludes unknown race.                                                                                                                              
                                                                                                                                                        
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.                                                                   


  TABLE 2-51.--NUMBER OF AGED PERSONS SERVED UNDER HOSPITAL INSURANCE AND SUPPLEMENTARY MEDICAL INSURANCE PER 1,000 ENROLLED AND REIMBURSEMENT PER PERSON SERVED BY CENSUS DIVISION AND STATE,  
                                                                                 SELECTED CALENDAR YEARS 1967-94                                                                                
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                         Year and persons served per 1,000           Annual percent change         Year and reimbursement per person served          Annual percent change      
                                                     enrolled                -------------------------------------------------------------------------------------------------------------------
      Census division and State      ----------------------------------------                                                                                                                   
                                       1967    1985    1990    1994    1995   1967-85  1985-90  1990-93  1993-95   1967     1985     1990     1994     1995   1967-85  1985-90  1990-93  1993-95
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
New England.........................   380.4   767.4   829.0   871.7   871.1      4.0      1.6      1.4      0.4     680    2,708    3,573    5,018    5,546      8.0      5.7      8.2     10.7
  Maine.............................   330.1   756.1   868.8   920.0   924.5      4.7      2.8      1.8      0.4     586    2,369    2,744    3,704    3,906      8.1      3.0      6.4      8.7
  New Hampshire.....................   391.6   739.7   810.5   874.3   888.1      3.6      1.8      2.4      0.6     467    2,374    2,974    3,820    4,043      9.5      4.6      5.8      7.1
  Vermont...........................   411.7   742.8   841.0   888.8   907.5      3.3      2.5      1.3      1.8     515    1,990    2,569    3,494    4,067      7.8      5.2      7.6     12.7
  Massachusetts.....................   394.2   766.5   813.6   851.8   840.6      3.8      1.2      1.4     -0.4     708    2,971    4,029    5,891    6,504      8.3      6.3      8.8     12.0
  Rhode Island......................   375.4   829.6   853.6   849.2   841.6      4.5      0.6     -0.5      0.0     625    2,619    3,236    4,563    5,139      8.3      4.3     11.2      7.5
  Connecticut.......................   390.9   764.1   838.1   893.1   906.8      3.8      1.9      1.6      1.6     711    2,570    3,511    4,759    5,380      7.4      6.4      7.7     10.7
                                                                                                                                                                                                
Middle Atlantic.....................   388.1   768.2   834.7   864.3   862.2      3.9      1.7      0.9      0.3     578    2,771    3,933    5,384    5,488      9.1      7.3      6.5      7.5
  New York..........................   406.9   765.7   830.4   841.3   839.7      3.6      1.6      0.2      0.2     610    2,533    4,119    5,347    5,751      8.2     10.2      5.2      9.5
  New Jersey........................   399.0   759.8   826.7   879.4   885.2      3.6      1.7      1.3      1.5     526    2,650    3,483    4,973    5,235      9.4      5.6     10.6      5.4
  Pennsylvania......................   365.0   776.4   844.7   884.2   877.1      4.3      1.7      1.5     -0.3     533    3,147    3,948    5,657    5,320     10.4      4.6      6.1      6.3
                                                                                                                                                                                                
East North Central..................   350.2   725.9   834.4   888.3   895.3      4.1      2.8      1.6      1.2     614    2,906    3,595    4,414    4,786      9.0      4.3      4.2      8.4
  Ohio..............................   353.6   718.4   846.3   897.4   904.8      4.0      3.3      1.3      1.4     585    2,792    3,824    4,078    4,692      9.1      6.5      2.2      7.3
  Indiana...........................   343.7   672.2   837.0   885.5   891.7      3.8      4.5      1.4      1.1     545    2,510    3,234    4,314    4,665      8.9      5.2      6.5      9.3
  Ilinois...........................   339.2   693.4   788.1   840.1   849.3      4.1      2.6      1.6      1.4     703    3,313    3,760    4,750    5,112      9.0      2.6      5.3      7.9
  Michigan..........................   379.5   804.3   871.4   929.3   933.2      4.3      1.6      1.6      1.0     532    2,991    3,749    4,675    5,173     10.1      4.6      4.3     10.2
  Wisconsin.........................   354.7   736.9   843.2   903.6   910.4      4.1      2.7      2.1      0.8     639    2,527    2,877    3,487    3,790      7.9      2.6      4.4      7.7
                                                                                                                                                                                                
West North Central..................   363.2   693.4   979.7   871.9   884.2      3.7      7.2     -4.3      1.5     558    2,627    3,108    3,876    4,041      9.0      3.4      3.7      8.0
  Minnesota.........................   389.0   624.8   682.5   796.3   816.1      2.7      1.8      4.5      2.4     601    2,447    3,101    3,341    3,624      8.1      4.9      1.6      5.5
  Iowa..............................   365.9   715.3   850.6   918.8   936.6      3.8      3.5      2.5      1.2     505    2,282    2,753    3,121    3,435      8.7      3.8      4.3      4.9
  Missouri..........................   364.8   712.0   816.6   871.8   876.6      3.8      2.8      1.6      1.1     544    3,118    3,514    4,523    4,773     10.2      2.4      4.2      9.5
  North Dakota......................   441.2   730.7   853.4   917.7   921.5      2.8      3.2      2.1      0.8     492    2,466    2,949    3,514    3,725      9.4      3.6      1.7      9.6
  South Dakota......................   358.0   694.2   815.1   877.6   886.4      3.7      3.3      2.1      1.1     514    2,281    2,714    6,296    3,805      8.6      3.5      3.7     12.1
  Nebraska..........................   352.5   634.2   808.8   886.3   901.7      3.3      5.0      2.3      2.0     540    2,449    2,719    3,181    3,543      8.8      2.1      2.6      9.8
  Kansas............................   365.3   765.4   850.0   914.0   924.6      4.2      2.1      2.0      1.3     540    2,553    3,144    3,987    4,420      9.0      4.3      5.7      9.2
                                                                                                                                                                                                
South Atlantic......................   350.5   740.4   827.7   862.3   863.2      4.2      2.3      1.2      0.4     554    2,531    3,438    4,705    5,031      8.8      6.3      7.3      8.8
  Delaware..........................   368.2   770.9   843.6   935.3   940.6      4.2      1.8      2.5      1.8     552    2,612    3,526    4,878    4,395      9.0      6.2      4.8      4.0
  Maryland..........................   349.4   757.6   838.3   875.6   880.8      4.4      2.0      1.2      0.7     564    2,975    4,190    5,498    5,771      9.7      7.1      6.6      6.6
  District of Columbia..............   452.8   739.4   772.7   784.5   789.0      2.8      0.9      0.1      0.9     570    3,774    5,019    6,553    6,650     11.1      5.9      6.4      4.8
  Virginia..........................   317.3   729.7   848.5   891.0   899.0      4.7      3.1      1.3      1.0     516    1,976    3,127    4,054    4,322      7.7      9.6      5.2      9.0
  West Virginia.....................   342.2   692.0   828.6   890.7   904.7      4.0      3.7      1.9      1.6     489    2,575    3,197    4,064    4,477      9.7      4.4      4.6     10.6
  North Carolina....................   324.0   727.9   852.3   908.1   924.1      4.6      3.2      1.8      1.4     515    1,982    2,799    3,691    4,201      7.8      7.1      7.5      9.9
  South Carolina....................   296.2   680.6   832.2   896.8   914.3      4.7      4.1      2.3      1.3     523    2,340    2,689    4,137    4,276      8.7      2.8      9.6      9.9
  Georgia...........................   320.2   743.5   843.8   899.5   911.7      4.8      2.6      1.8      1.2     474    2,479    3,456    4,848    5,148      9.6      6.9      8.6      7.8
  Florida...........................   420.9   759.1   805.8   813.5   797.4      3.3      1.2      0.3     -1.0     588    2,773    3,709    5,223    5,606      9.0      6.0      7.9      9.6
                                                                                                                                                                                                
East South Central..................   332.1   698.1   846.9   901.7   908.5      4.2      3.9      1.6      1.1     489    2,570    3,413    4,758    5,177      9.7      5.8      7.6     10.3
  Kentucky..........................   365.9   671.9   837.3   901.1   906.9      3.4      4.5      1.7      1.5     458    2,395    3,424    4,273    4,615      9.6      7.4      3.8      9.7
  Tennessee.........................   354.8   678.7   853.4   897.7   905.6      3.7      4.7      1.5      0.8     502    2,816    3,402    4,974    5,389     10.1      3.9      9.7      9.5
  Alabama...........................   322.7   743.8   848.9   906.6   912.6      4.7      2.7      1.6      1.2     490    2,502    3,596    4,959    5,359      9.5      7.5      6.8     10.6
  Mississippi.......................   283.2   699.9   845.1   902.6   909.6      5.2      3.8      1.6      1.3     471    2,480    3,122    4,711    5,278      9.7      4.7     10.3     12.3
                                                                                                                                                                                                
West South Central..................   374.8   687.4   825.0   863.7   856.5      3.4      3.7      1.1      0.3     504    2,811    3,624    5,163    5,778     10.0      5.2      7.0     14.2
  Arkansas..........................   319.3   715.4   862.9   897.2   908.7      4.6      3.8      0.8      1.4     466    2,550    3,155    4,211    4,538      9.9      4.3      5.3     11.0
  Louisiana.........................   343.4   653.5   821.1   877.1   861.7      3.6      4.7      1.5      0.2     446    3,167    4,368    6,208    6,872     11.5      6.6      6.2     14.6
  Oklahoma..........................   416.1   677.8   878.3   877.5   885.0      2.7      5.3     -0.4      1.0     486    2,482    3,127    4,507    5,068      9.5      4.7      8.2     13.2
  Texas.............................   393.7   693.2   805.1   850.2   838.4      3.2      3.0      1.5     -0.1     522    2,860    2,652    5,232    5,916      9.9      5.0      7.1     14.8
                                                                                                                                                                                                
Mountain............................   417.1   716.6   772.7   760.7   749.2      3.1      1.5     -0.1     -1.3     560    2,637    3,992    4,188    4,347      9.0      8.6     -2.4      8.2
  Montana...........................   416.5   679.7   823.5   895.1   905.6      2.8      3.9      2.1      1.7     505    2,348    3,000    4,122    3,990      8.9      5.0      3.7      9.2
  Idaho.............................   408.8   714.5   862.5   905.2   920.5      3.2      3.8      1.7      0.8     467    2,384    2,556    3,320    3,616      9.5      1.4      6.7      7.9
  Wyoming...........................   395.0   681.7   782.7   877.7   892.1      3.1      2.8      2.7      2.6     432    2,804    3,182    3,932    4,311     11.0      2.6      7.4      4.6
  Colorado..........................   475.4   704.0   740.8   778.0   760.1      2.2      1.0      1.5     -1.0     578    2,521    3,223    4,167    4,514      8.5      5.0      6.0      8.5
  New Mexico........................   377.6   689.8   736.4   735.1   728.5      3.4      1.3      1.4     -2.5     513    2,462    3,154    3,552    4,056      9.1      5.1     -0.4     14.1
  Arizona...........................   431.7   758.1   774.3   670.5   644.2      3.2      0.4     -3.5     -3.8     612    2,896    3,692    4,781    4,541      9.0      5.0      2.8      6.5
  Utah..............................   346.0   713.1   808.2   865.8   875.1      4.1      2.5      1.6      1.7     580    2,225    2,799    3,556    4,150      7.8      4.7      8.2      8.1
  Nevada............................   414.9   688.9   721.2   687.2   670.3      2.9      0.9     -0.7     -2.6     532    3,243    3,903    5,023    5,072     10.6      3.8      3.3      8.6
                                                                                                                                                                                                
Pacific.............................   468.9   739.7   713.8   665.4   629.9      2.6     -0.7     -1.2     -4.3     630    6,153    3,853    4,864    5,354     13.5     -8.9      5.6      8.6
  Washington........................   433.0   731.1   760.8   875.4   770.1      3.0      0.8      1.4     -1.5     507    2,522    3,218    3,738    4,117      9.3      5.0      3.4      7.6
  Oregon............................   392.6   716.2   707.8   701.7   694.9      3.4     -0.2      0.2     -1.3     583    2,459    2,833    3,288    3,587      8.3      2.9      3.7      6.5
  California........................   490.7   745.7   710.3   640.0   594.8      2.4     -1.0     -2.1     -5.6     653    3,379    4,138    5,416    5,987      9.6      4.1      6.5      9.4
  Alaska............................   307.2   678.4   759.0   818.2   828.3      4.5      2.3      2.1      1.3     376    3,554    4,007    4,463    6,021     13.3      2.4      0.9     21.0
  Hawaii............................   407.4   709.3   589.9   585.7   590.0      3.1     -3.6      0.7     -1.1     572    2,334    3,095    3,321    3,718      8.1      5.8      3.5      4.1
                                     -----------------------------------------------------------------------------------------------------------------------------------------------------------
    Total, all areas \1\............   366.5   722.1   801.6   830.0   826.1      3.8      2.1      1.0      0.0     592    2,762    3,578    4,740    5,075      8.9      5.3      6.0      9.1
    United States \2\...............   370.9   731.2   810.5   838.7   834.6      3.8      2.1      1.0      0.0     593    2,772    3,592    4,750    5,096      8.9      5.3      6.0      9.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Consists of United States, Puerto Rico, Virgin Islands, and other outlying areas.                                                                                                           
\2\ Consists of 50 States, District of Columbia, and residence unknown.                                                                                                                         
                                                                                                                                                                                                
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.                                                                                                           


TABLE 2-52.--MEDICARE PARTICIPATING INSTITUTIONS AND ORGANIZATIONS, 1984
                                AND 1996                                
------------------------------------------------------------------------
                                                          Year          
          Institution or organization          -------------------------
                                                    1984         1996   
------------------------------------------------------------------------
Hospitals.....................................        6,675        6,273
  Short stay..................................        6,038        5,185
  Long stay...................................          637        1,088
Skilled nursing facilities....................        5,952       14,177
Home health agencies..........................        4,684        8,860
Independent laboratories......................        3,801        5,769
Laboratories registered under the Clinical                              
 Laboratory Improvement Act (CLIA)............           NA      157,335
Outpatient physical therapy providers.........          791        2,432
Portable x-ray suppliers......................          269          609
Rural health clinics..........................          420        2,217
Comprehensive outpatient rehabilitation                                 
 facilities...................................           48          403
Ambulatory surgical centers...................          155        2,265
Hospices......................................          108        2,161
Facilities providing services to renal disease                          
 benefit......................................        1,335        3,082
  Hospital certified as both renal transplant                           
   and renal dialysis center..................          147          156
  Hospital certified as renal transplant                                
   centers....................................           16           81
  Hospital dialysis facilities................          117          256
  Nonhospital renal dialysis facilities.......          645        2,212
  Dialysis centers only.......................          359          334
  Inpatient care..............................           51           43
Hospital and skilled nursing facility beds:                             
  Hospitals...................................    1,144,142    1,038,105
    Short stay................................    1,023,465      912,054
    Long stay.................................      120,677      126,051
  Skilled nursing facilities..................      530,403      671,839
------------------------------------------------------------------------
NA--Not available.                                                      
                                                                        
Source: Health Care Financing Administration, Bureau of Data Management 
  and Strategy.                                                         

                               REFERENCES

Board of Trustees, Federal Supplementary Medical Insurance 
        Trust Fund. (1997, April 24). The 1997 Annual Report of 
        the Board of Trustees of the Federal Supplementary 
        Medical Insurance Trust Fund (U.S. House of 
        Representatives Document 105-74). Washington, DC: U.S. 
        Government Printing Office.
Board of Trustees, Federal Hospital Insurance Trust Fund. 
        (1997, April 24). The 1997 Annual Report of the Board 
        of Trustees of the Federal Hospital Insurance Trust 
        Fund (U.S. House of Representatives Document 105-73). 
        Washington, DC: U.S. Government Printing Office.
Committee on Ways and Means. (1988). 1988 Green book: Overview 
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