SECTION 3. MEDICARE

                                CONTENTS

Overview
  Coverage
  Benefits
  Payments for Services
  Administration
  Financing
  Federal Outlays
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
  Components of Medicare Spending Growth
  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
Managed Care
  Enrollment
  Payment Methodology
Selected Issues
  Utilization and Quality Control Peer Review Organizations
  Financing Graduate Medical Education
  Secondary Payer
  Health Insurance Protection that Supplements Medicare
            Coverage
  Qualified Medicare Beneficiaries (QMBs)
Legislative History, 1980-93
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 Program and Part B,
Supplementary Medical Insurance Program. Total program outlays
were $180.1 billion in fiscal year 1995. Net outlays after
deduction of beneficiary premiums were $159.9 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
1996, part A will cover an estimated 37.5 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--$42.50 in 1996. In fiscal year 1996, part B
will cover an estimated 36.0 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 ($736 in 1996) 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 the 21st-100th day ($92 in
1996). 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' services accounts for over 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 or 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 1996, the premium is $42.50. 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 $180.1 billion in fiscal year
1995. Net outlays (that is, net of premiums beneficiaries pay
for enrollment, largely for part B) were $159.9 billion.
    Tables 3-1, 3-2, and 3-3 provide historical spending and
coverage data for Medicare. Table 3-4 provides State-by-State
information for fiscal year 1995.

                              TABLE 3-1.--MEDICARE OUTLAYS, FISCAL YEARS 1967-2002
                                                  [In millions]
----------------------------------------------------------------------------------------------------------------
                                                                                                        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


                                                HCFA PROJECTIONS

1996..........................................    126,642     70,871    197,513   (19,842)    177,671       11.1
1997..........................................    138,372     78,184    216,556   (20,287)    196,269       10.5
1998..........................................    150,580     86,778    237,358   (22,048)    215,310        9.7
1999..........................................    163,291     95,001    258,292   (23,295)    234,997        9.1
2000..........................................    176,446    104,160    280,606   (24,304)    256,302        9.1
2001..........................................    190,243    114,630    304,873   (25,331)    279,542        9.1
2002..........................................    204,599    126,315    330,914   (26,422)    304,492        8.9


                                          CBO PROJECTIONS (in billions)

1996..........................................      127.1       71.9      199.0     (20.0)      179.1       12.0
1997..........................................      139.3       79.3      218.6     (20.6)      198.0       10.6
1998..........................................      151.8       87.8      239.7     (22.6)      217.1        9.6
1999..........................................      164.2       96.5      260.8     (24.0)      236.8        9.1
2000..........................................      177.0      106.0      283.0     (25.1)      257.9        8.9
2001..........................................      190.4      116.4      306.8     (26.2)      280.6        8.8
2002..........................................      204.5      127.9      332.3     (27.4)      305.0       8.7
----------------------------------------------------------------------------------------------------------------
Source: Office of the President, 1996; Congressional Budget Office projections are from CBO's April 1996
  baseline.

                            TABLE 3-2.--NUMBER OF AGED AND DISABLED ELIGIBLE ENROLLEES AND BENEFICIARIES AND AVERAGE MEDICARE BENEFIT PAYMENTS PER ENROLLEE, 1975-98
                                                                                  [Beneficiaries in thousands]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                    Average annual     Projected
                                                                                                                                                                        growth          average
                                     1975      1980      1985      1990      1991      1992      1993      1994      1995       1996        1997        1998    ----------------------   annual
           Fiscal year             (actual)  (actual)  (actual)  (actual)  (actual)  (actual)  (actual)  (actual)  (actual)  (est.) \1\  (est.) \1\  (est.) \1\                          growth
                                                                                                                                                                  1975-85    1985-95    1995-98
                                                                                                                                                                 (percent)  (percent)  (percent)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
              Part A

Persons enrolled (monthly
 average):
  Aged...........................    21,795    24,571    27,123    30,052    30,456    31,151    31,866    32,151    32,460     32,798      33,064      33,278       2.2        1.8         0.8
  Disabled.......................     2,047     2,968     2,944     3,313     3,380     3,617     3,833     4,158     4,474      4,730       5,009       5,300       3.7        4.3         5.8
  Total..........................    23,842    27,539    30,067    33,365    33,836    34,768    35,699    36,309    36,934     37,528      38,073      38,578       2.3        2.1         1.5
Beneficiaries receiving
 reimbursed services:
  Aged...........................     4,906     5,943     6,168     6,314     6,110     6,690     6,870     6,890     7,150      7,270       7,370       7,470       2.3        1.5         1.5
  Disabled.......................       456       721       672       675       700       755       805       860       930        990       1,055       1,120       4.0        3.3         6.4
  Total..........................     5,362     6,664     6,840     6,989     6,810     7,445     7,675     7,750     8,080      8,260       8,425       8,590       2.5        1.7         2.1
Average annual benefit per person
 enrolled: \2\ \3\
  Aged...........................      $432      $853    $1,563    $1,942    $1,982    $2,294    $2,532    $2,788    $3,080     $3,346      $3,623      $3,902      13.7        7.0         8.2
  Disabled.......................      $460      $948    $1,809    $2,225    $2,250    $2,493    $2,664    $2,813    $3,001     $3,195      $3,396      $3,606      14.7        5.2         6.3
  Total..........................      $434      $863    $1,587    $1,970    $2,009    $2,315    $2,546    $2,791    $3,070     $3,327      $3,593      $3,861      13.8        6.8         7.9

              Part B

Persons enrolled (average):
  Aged...........................    21,504    24,422    27,049    29,426    29,910    30,471    31,004    31,335    31,625     31,926      32,180      32,362       2.3        1.6         0.8
  Disabled.......................     1,835     2,698     2,672     2,907     3,023     3,163     3,374     3,638     3,873      4,080       4,310       4,561       3.8        3.8         5.6
  Total..........................    23,339    27,120    29,721    32,333    32,933    33,634    34,378    34,973    35,498     36,006      36,490      36,923       2.4        1.8         1.3
Beneficiaries receiving
 reimbursed services:
  Aged...........................    11,311    16,034    20,199    23,820    24,115    25,603    26,012    26,118    26,684     27,265      27,731      28,114       6.0        2.8         1.8
  Disabled.......................       797     1,669     1,933     2,184     2,276     2,522     2,766     2,867     3,094      3,305       3,528       3,768       9.3        4.8         6.8
  Total..........................    12,108    17,703    22,132    26,004    26,391    28,125    28,778    28,985    29,778     30,570      31,259      31,882       6.2        3.0         2.3
Average annual benefit per person
 enrolled: \2\
  Aged...........................      $153      $348      $705    $1,250    $1,342    $1,403    $1,472    $1,601    $1,728     $1,864      $2,035      $2,241      16.5        9.4         9.1
  Disabled.......................      $259      $610    $1,022    $1,603    $1,759    $1,847    $1,999    $2,154    $2,282     $2,339      $2,508      $2,697      14.7        8.4         5.7
  Total..........................      $161      $374      $734    $1,282    $1,381    $1,445    $1,524    $1,658    $1,788     $1,918      $2,091      $2,297      16.4        9.3         8.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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 3-3.--BENEFIT PAYMENTS BY SERVICE UNDER MEDICARE PART A AND PART B, SELECTED FISCAL YEARS 1975-97
                                                                                                          [Dollars in millions]
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       1975               1980               1985               1990                1995             1996 (est.)       1997 (est.) \1\   Average annual growth (percent)
                                                                ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Percent   Amount  Percent   Amount   Percent   Amount    Percent   Amount    Percent   Amount    Percent   Amount    Percent   Amount    1975-85    1985-95    1995-97
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                             Part A

For inpatient hospital services................................     70.5    9.947     67.4    22,860     65.0    45,218      55.3    59,285      49.5    87,512      48.7    94,397      47.9   101,946       16.3        6.8        7.9
For skilled nursing facility services..........................      1.9      273      1.2       392      0.8       550       2.6     2,821       5.2     9,142       5.6    10,823       5.7    12,251        7.3       32.5       15.8
For home health services.......................................      0.9      133      1.5       524      2.7     1,908       3.1     3,297       8.4    14,895       8.9    17,174       9.2    19,567       30.5       22.8       14.6
For hospice services...........................................        0        0        0         0        0        34       0.3       318       1.0     1,854       1.3     2,447       1.4     3,035         NA       49.2       27.9
                                                                ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total benefit payments.....................................     73.3   10,353     70.1    23,776     68.6    47,710      61.3    65,721      64.1   113,403      64.4   124,841      64.2   136,799       16.5        9.0        9.8
                                                                ========================================================================================================================================================================

                             Part B

For physician services \2\.....................................     21.7    3,067     23.0     7,813     24.1    16,788      27.0    28,922      22.8    40,376      21.7    42,166      21.1    45,063       18.5        9.2        5.6
For outpatient services........................................      3.7      529      5.3     1,803      5.6     3,917       7.8     8,365       8.2    14,576       8.6    16,581       8.9    18,979       22.2       14.0       14.1
For other medical and health services..........................      1.2      169      1.6       528      1.6     1,103       3.9     4,165       4.8     8,530       5.3    10,308       5.7    12,245       20.6       22.7       19.8
                                                                ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    Total benefit payments.....................................     26.7    3,765     29.9    10,144     31.4    21,808      38.7    41,452      35.9    63,482      35.6    69,055      35.8    76.287       19.2       11.3        9.6
                                                                ========================================================================================================================================================================
    Total......................................................    100.0   14,118    100.0    33,920    100.0    69,518     100.0   107,173     100.0   176,885     100.0   193,896     100.0   213,086       17.3        9.8        9.8
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Represents current law. Does not include legislative proposals.
\2\ Includes other services.

NA--Not available.

Note.--Totals may not add due to rounding.

Source: Health Care Financing Administration, Division of Budget.

TABLE 3-4.--MEDICARE ESTIMATED BENEFIT PAYMENTS AND NUMBER OF PERSONS BY
                         STATE, FISCAL YEAR 1995
------------------------------------------------------------------------
                                              Benefit
                  State                     payments in     Persons \1\
                                             thousands
------------------------------------------------------------------------
Alabama.................................       3,042,184         637,466
Alaska..................................         132,635          33,232
Arizona.................................       2,717,415         593,046
Arkansas................................       1,638,020         420,208
California..............................      20,406,000       3,609,722
Colorado................................       1,834,837         417,748
Connecticut.............................       2,583,742         499,683
Delaware................................         444,964          99,618
District of Columbia....................       1,164,389          77,973
Florida.................................      14,826,459       2,596,865
Georgia.................................       4,089,815         825,657
Hawaii..................................         580,455         148,444
Idaho...................................         463,308         148,597
Illinois................................       7,276,339       1,610,013
Indiana.................................       3,491,081         818,903
Iowa....................................       1,526,969         472,510
Kansas..................................       1,545,162         381,445
Kentucky................................       2,401,250         582,370
Louisiana...............................       3,447,745         576,581
Maine...................................         706,519         200,525
Maryland................................       2,667,555         597,475
Massachusetts...........................       5,496,129         927,936
Michigan................................       6,237,472       1,340,016
Minnesota...............................       2,378,016         627,592
Mississippi.............................       1,722,814         394,259
Missouri................................       3,821,093         827,877
Montana.................................         488,525         129,257
Nebraska................................         840,202         247,921
Nevada..................................         894,027         190,107
New Hampshire...........................         597,488         154,889
New Jersey..............................       5,603,125       1,162,395
New Mexico..............................         710,444         209,155
New York................................      13,903,736       2,623,291
North Carolina..........................       4,276,049       1,017,769
North Dakota............................         411,918         102,740
Ohio....................................       7,282,212       1,658,932
Oklahoma................................       2,178,428         484,398
Oregon..................................       1,885,253         465,330
Pennsylvania............................      10,796,231       2,059,821
Rhode Island............................         772,209         167,217
South Carolina..........................       1,928,044         503,726
South Dakota \2\........................         563,046         116,160
Tennessee...............................       4,083,406         764,938
Texas...................................      11,504,091       2,061,794
Utah....................................         708,036         185,699
Vermont.................................         283,894          82,308
Virginia................................       2,979,371         811,257
Washington..............................       2,602,675         682,443
West Virginia...........................       1,207,737         327,588
Wisconsin...............................       2,673,209         757,404
Wyoming.................................         180,261          59,654
Puerto Rico.............................         875,417         473,408
All other areas.........................          32,857         314,691
                                         -------------------------------
  All Areas.............................    $176,884,237      37,278,050
------------------------------------------------------------------------
\1\ Data as of July 1, 1995.
\2\ Data overstated due to reporting problems.

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
  health maintenance organizations 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 1995 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 1996 monthly premium is $289 ($188 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 Supplementary Medical Insurance Program by paying the
monthly premium. The 1996 premium is $42.50 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 1995, 32.5 million aged and 4.5 million
disabled had protection under part A. Of those, 7.2 million
aged and 0.9 million disabled actually received reimbursed
services. In fiscal year 1995, 31.6 million aged and 3.9
million disabled were enrolled in part B. About 26.7 million of
the aged and 3.1 million of the disabled actually received
reimbursed services, see table 3-2.

                 BENEFITS AND BENEFICIARY COST-SHARING

                                 Part A

    Part A coverage includes:
 1. Inpatient hospital care.--The first 60 days of inpatient
        hospital services in a benefit period subject to a
        deductible ($736 in calendar year 1996). 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 ($184 in calendar year 1996) 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 ($368 in calendar year
        1996) is imposed for each reserve day.
 2. Skilled nursing facility care.--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
        ($92 in calendar year 1996).
 3. Home health care.--Home health visits provided to persons
        who need skilled nursing care on an intermittent basis,
        or physical therapy, or speech therapy.
 4. Hospice care.--Hospice care services provided to terminally
        ill Medicare beneficiaries with a life expectancy of 6
        months or less up to a 210-day lifetime limit. A
        subsequent period of hospice coverage is allowed beyond
        the 210-day limit if the beneficiary is recertified as
        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:
 1. Doctor's services.--Including 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.
 2. Other medical and health services.--Laboratory and other
        diagnostic tests, x ray and other radiation therapy,
        outpatient hospital services, rural health clinic
        services, durable medical equipment, home dialysis
        supplies and equipment, artificial devices (other than
        dental), physical and speech therapy, and ambulance
        services.
 3. Specified preventive services.--A screening mammography
        once every 2 years for persons over age 65 and at
        specified intervals for the disabled. A screening pap
        smear is authorized once every 3 years, except for
        women who are at a high risk of developing cervical
        cancer.
 4. Drugs and vaccines.--Generally Medicare does not pay for
        outpatient prescription drugs or biologicals. However
        there are a few exceptions. Part B pays for
        immunosuppressive drugs for 24 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.
 5. Home health services.--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.
    Table 3-5 illustrates the deductible, coinsurance and
premium amounts for both part A and part B services from the
inception of Medicare.

                               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.

                  TABLE 3-5.--HISTORICAL AND PROJECTED AMOUNTS OF PART A AND PART B DEDUCTIBLE, COINSURANCE AND PREMIUMS, \1\ 1966-2001
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Inpatient hospital \2\            Skilled        HI monthly premium \6\                     SMI premium
                                   -----------------------------------------   nursing   -------------------------------            --------------------
                                                               60 lifetime     facility
 For benefit periods beginning in    First 60    61st thru    reserve days    21st thru                                      SMI
           calendar year               days       90th day   (nonrenewable)   100th day   Effective    Full     Reduced  deductible  Effective   Amount
                                    deductible  coinsurance    coinsurance   coinsurance     date     amount    amount                  date
                                                per day \3\    per 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 \11\.........................        772          193             386         96.50       1/97       314       188        100        1/97     43.90
1998 \11\.........................        808          202             404        101.00       1/98       337       185        100        1/98     47.70
1999 \11\.........................        844          211             422        105.50       1/99       362       199        100        1/99     49.10
2000 \11\.........................        884          221             442        110.50       1/00       386       212        100        1/00     50.50
2001 \11\.........................        924          231             462        115.50       1/01       411       226        100        1/01     51.90
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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--190 day lifetime limit.
\3\ Always equal to \1/4\ of inpatient hospital deductible through 1988, and for 1990 and later, eliminated for 1989.
\4\ Always equal to \1/2\ of inpatient hospital deductible through 1988, and for 1990 and later, eliminated for 1989.
\5\ Always equal to \1/3\ 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 a 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.
\11\ Administration projections under current law using fiscal year 1996 budget assumptions.

NA--Not available; HI = hospital insurance; SMI = supplementary medical insurance.

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; and January 1, 1983 through December 31, 1989, $500 per year; January 1, 1990, and
  thereafter $750 per year.

Source: Health Care Financing Administration, Office of the Actuary.

                 Hospital Insurance Trust Fund--Income

    The primary source of income to the HI fund is HI payroll
taxes. This source accounted for $104.4 billion (88.2 percent)
of the total $118.4 billion in income in fiscal year 1995.
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 $62,700 in 1996 continues to apply under
Social Security. Table 3-6 shows the history of the
contribution rates and maximum taxable earnings base for both
the HI and OASDI Programs.

TABLE 3-6.--CURRENT LAW SOCIAL SECURITY PAYROLL TAX RATES FOR EMPLOYERS AND EMPLOYEES AND TAXABLE EARNINGS BASES
----------------------------------------------------------------------------------------------------------------
                                                            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
----------------------------------------------------------------------------------------------------------------
\1\ Prior to 1991, the upper limit on tax earnings was the same as for Social Security. The Omnibus Budget
  Reconciliation Act of 1990 (OBRA 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.

Other income
    The following are additional sources of income to the HI
fund:
 1. Railroad retirement account transfers.--In fiscal year
        1995, $396 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 1995, $462
        million was transferred to HI on this basis.
 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 ($289 in 1996; $188 for persons who
        have at least 30 quarters of covered employment). This
        accounted for an estimated $998 million of financing in
        fiscal year 1995.
 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-1957 deemed wage credits; and (2) adjustments as
        deemed necessary to any previously transferred amounts
        representing HI taxes on noncontributory wage credits.
        In fiscal year 1995, this accounted for $61 million of
        income to the HI Trust Fund.
 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 $3.9 billion in fiscal year 1995.
 6. Interest.--The remaining income to the trust fund consists
        almost entirely of interest on the investments of the
        trust fund. This amounted to an estimated $11.0 billion
        in fiscal year 1995.

           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 upon the projected
costs of the program for the coming year. The monthly premium
amount in calendar year 1996 is $42.50.
    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 is
$42.50, a full $3.60 less than the 1995 premium. Under current
law, the provision limiting the annual percentage increase to
the percentage increase in the Social Security COLA would again
apply, beginning in 1999.

           Financial Status of Hospital Insurance Trust Fund

Current operations and short-term projections
    The Hospital Insurance Trust Fund balance is dependent on
total income to the HI Trust Fund exceeding total outlays from
the fund. Tables 3-7 and 3-8 show historical information from
the 1996 trustees report on the operation of the trust fund and
intermediate projections for the 1996-2005 period. The
information is presented on both a calendar year and fiscal
year basis.

                                                  TABLE 3-7.--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED FISCAL YEARS 1970-2005
                                                                                    [In millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           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:
    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
Intermediate estimates:
    1996.......................   104,433    3,976        412          419         1,100   \10\ -2,29
                                                                                                    8      10,375   118,417     125,250         1,327          126,577        -8,160     121,360
    1997.......................   109,620    4,331        412          481         1,224           66       9,519   125,653     137,199         1,407          138,606       -12,953     108,407
    1998.......................   114,416    4,623        406          265         1,348           64       8,151   129,273     149,720         1,488          151,208       -21,935      86,472
    1999.......................   120,498    4,927        403          206         1,475           64       6,166   133,739     162,994         1,572          164,566       -30,827      55,645
    2000.......................   126,897    5,260        406          170         1,612           63       3,447   137,855     176,889         1,663          178,552       -40,697      14,948
    2001.......................   133,033    5,627        416          160         1,759           63          45   141,103     191,664         1,759          193,423       -52,320     -37,372
    2002.......................   140,213    6,022        429          151         1,918           63      -3,735   145,061     207,204         1,862          209,066       -64,005    -101,377
    2003.......................   147,916    6,459        443          143         2,088           63      -8,224   148,888     223,885         1,976          225,861       -76,973    -178,350
    2004.......................   155,968    6,936        459          148         2,275           63     -13,439   152,410     241,878         2,098          243,976       -91,566    -269,916
    2005.......................   166,620    7,447        476          151         2,466           63     -19,030   158,193     261,050         2,228          263,278      -105,085   -375,001
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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.
\10\ Includes -$2,366 million preliminary estimate of the lump-sum general revenue adjustment provided for by section 151 of Public Law 98-21.

Note.--Totals may not add due to rounding. Estimates shown for 2001 and later are hypothetical, since the Hospital Insurance Trust Fund would be exhausted in those years.

Source: Board of Trustees, Federal Hospital Insurance Trust Fund (1996).

                                                 TABLE 3-8.--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED CALENDAR YEARS 1970-2005
                                                                                    [In millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           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:
    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
Intermediate estimates:
    1996.......................    106,568     3,976       412          419         1,131   \9\-2,298      10,073   120,281     128,171         1,346          129,517        -9,236     121,031
    1997.......................    111,139     4,331       412          481         1,255          66       8,987   126,671     140,224         1,428          141,652       -14,981     106,050
    1998.......................    116,141     4,623       406          265         1,379          64       7,302   130,180     152,964         1,508          154,472       -24,292      81,758
    1999.......................    121,814     4,927       403          206         1,507          64       4,928   133,849     166,373         1,594          167,967       -34,118      47,640
    2000.......................    123,056     5,260       406          170         1,647          63       1,913   137,515     180,488         1,685          182,173       -44,658       2,982
    2001.......................    134,806     5,627       416          160         1,796          63      -1,652   141,216     195,464         1,783          197,247       -56,031     -53,049
    2002.......................    142,131     6,022       429          151         1,959          63      -5,304   145,451     211,201         1,888          213,089       -67,638    -120,687
    2003.......................    150,182     6,459       443          143         2,131          63      -9,885   149,536     228,223         2,005          230,228       -80,692    -201,379
    2004.......................    158,725     6,936       459          148         2,323          63     -15,299   153,355     246,526         2,129          248,655       -95,300    -296,679
    2005.......................    168,213     7,447       476          151         2,514          63     -21,661   157,203     266,023         2,261          268,284      -111,081    -407,760
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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 -$2,366 million preliminary estimate of the lump-sum general revenue adjustment provided for by section 151 of Public Law 98-21.

Note.--Totals may not add due to rounding. Estimates shown for 2001 and later are hypothetical, since the Hospital Insurance Trust Fund would be exhausted in those years.

Source: Board of Trustees, Federal Hospital Insurance Trust Fund (1996).

    The 1996 trustees report states that the program fails to
meet both short-range and long-range tests of financial
adequacy. Disbursements began to exceed income in 1995. Under
the trustee's 1996 intermediate assumptions, the fund would
become insolvent in 2001. This estimate is a year earlier than
projected in the 1995 report, but the same as projected in the
1994 report. The change from the 1995 estimate was attributable
to several factors. First, actual 1995 benefits payments were
3.1 percent higher and income was 1.2 percent lower than
estimated in the 1995 report. The higher benefit payments
primarily reflected more prompt billing by hospitals and other
providers and a greater increase in the average complexity of
Medicare hospitalizations. Lower income reflected slower than
expected growth in wages and salaries subject to payroll taxes
and lower revenue gains from the elimination (beginning in
1994) of the maximum contribution base for HI payroll taxes.
Future projections also reflect several other factors
including: (1) a projected faster increase in spending for home
health and skilled nursing facility services; (2) a projection
that future hospital patients will be somewhat sicker and more
costly than previously projected; and (3) updated long-range
economic and demographic assumptions.
    The trustees report projected that the fund's shortfall
would be $53.0 billion at the end of calendar 2001. The
shortfall would continue to build each year, rising to $375
billion at the end of fiscal year 2005 and $407.8 billion at
the end of calendar 2005. The trustees report reflected the
same general trends as had been reported by the CBO in April
1996. At that time, the CBO also estimated that the HI Trust
Fund would become insolvent in fiscal year 2001. It noted that
the shortfall would be $331.6 billion at the end of fiscal year
2005 and $443.8 billion at the end of fiscal year 2006 (see
table 3-9).
    Table 3-10 presents CBO projections of HI Trust Fund growth
through 2006 using different growth assumptions. The
alternatives are arranged in the table from 5 percentage points
below current part A spending growth to 2 percentage points
above this level. The table suggests that for the fiscal year
1997-2006 period, growth would have to be reduced nearly 5
percentage points to stabilize the assets of the fund and more
than 5 percentage points to maintain a beginning of the year
balance of at least 100 percent of outgo for the year. All of
these projections assume the same overall economic projections
underlying the baseline path.
Long-range financial soundness
    The 1996 HI trustees report does not contain actual dollar
projections of program operations beyond the year 2005.
Instead, the trustees measure long-range financial soundness by
comparing: (1) HI payroll tax contributions and income from the
taxation of Social Security benefits as a percentage of taxable
payroll (``income rate'') with (2) HI cost as a percentage of
taxable payroll (``cost rate''). The trustees view this measure
as more meaningful since the value of the dollar changes over
time. The trustees estimate that there is already a gap between
the cost rate of the program and the income rate. In 1996 the
estimated cost rate is 3.54 percent of taxable payroll, while
the estimated income rate is only 3.02 percent. The gap is thus
0.52 percent of taxable payroll in 1996. Since costs are rising
faster than payroll tax receipts, this deficit increases
dramatically over the 75-year projection period rising to 2.0
percent in 2010, and 8.38 percent by 2070.
    The trustees also average both the income and the cost
rates over various time periods to get a picture of trends in
the shortfall. Based on intermediate projections, over the
first 25-year projection period (1996-2020) the average income
rate is 3.07 percent and the average cost rate is 5.01 percent,
leaving an actuarial balance of -1.95 percent of taxable
payroll. Over the first 50 years (1996-2045) the average income
rate is 3.16 percent and the average cost rate is 6.68 percent,
leaving an actuarial balance of -3.52 percent of taxable
payroll. For the full 75-year projection period (1996-2070),
the balance declines to -4.52 percent of taxable payroll (see
table 3-11).
    The trustees state that to bring the program into actuarial
balance even for the first 25 years would require either a
reduction in outlays of 39 percent or an increase in total
income of 63 percent (or some combination thereof) throughout
the 25-year period. If changes were made just to the payroll
tax, the rate would have to be increased 0.98 percentage
points. This change would raise the payroll tax rate from the
current level of 1.45 percent to 2.43 percent for employees and
employers each; it would raise the level for the self-employed
from the current 2.9 percent to 4.86 percent.
    The outlook over the 75-year valuation period is even
bleaker. Income over the period is expected to equal only 42
percent of the program's cost. The payroll tax would have to be
immediately increased over the entire period from 1.45 to 3.71
percent for both employees and employers to achieve long-term
financial solvency.
What the projections reflect
    Both the short-range and long-range projections reflect the
fact that HI costs are rising faster than HI income. Currently
the shortfall is primarily attributable to the increase in
hospital payments, which account for about 70 percent of HI
payments. Hospital wages and other input costs are expected to
continue to exceed the increase in the consumer price index
(CPI). Increases in admissions, changes in the complexity of
admissions, and other factors will contribute to additional
increases.
    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 is a shift in the number of covered workers
supporting each HI enrollee. In 1995, there were 3.9 workers
for every beneficiary; in 2030 there will only be an estimated
2.2.
    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 1996
trustees report, the program's cost is expected to rise from
1.6 percent of gross domestic product (GDP) in 1995 to about 5
percent of GDP in 2070.

   TABLE 3-9.--PROJECTIONS FOR THE HOSPITAL INSURANCE TRUST FUND OF INCOME AND OUTLAYS, FISCAL YEARS 1995-2005, UNDER CBO AND ADMINISTRATION BASELINE
                                                                       ASSUMPTIONS
                                                                [In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        1995 \1\    1996     1997     1998     1999     2000     2001     2002      2003      2004      2005      2006
--------------------------------------------------------------------------------------------------------------------------------------------------------
CBO projections: \2\
  Income..............................     114.8    119.9    126.0    129.7    134.3    138.8    142.8     147.3     151.4     155.1     159.2     163.0
  Outlays.............................     114.9    127.1    139.3    151.8    164.2    177.0    190.4     204.5     219.7     236.6     255.0     275.2
  Net additions to fund...............      -0.0     -7.2    -13.3    -22.1    -30.0    -38.2    -47.6     -57.1     -68.3     -81.5     -95.8    -112.2
  End-of-year balance.................     129.5    122.3    109.0     86.9     56.9     18.7    -28.9     -88.0    -154.3    -235.8    -331.6    -443.8
Administration projections: \3\
  Income..............................     114.8    118.4    125.7    129.3    133.7    137.9    141.1     145.1     148.9     152.4     158.2        NA
  Outlays.............................     114.9    126.6    138.6    151.2    164.6    178.6    193.4     209.1     225.9     241.0     263.3        NA
  Net additions to fund...............      -0.0     -8.2    -13.0    -21.9    -30.8    -40.7    -52.3     -64.0     -77.0     -91.6    -105.1        NA
  End-of-year balance.................     129.5    121.4    108.4     86.5     55.6     14.9    -37.4    -101.4    -178.4    -269.9    -375.0        NA
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Actual.
\2\ April 1996 baseline projections.
\3\ Board of Trustees, Hospital Insurance Trust Fund (1996).

NA--Not available.

                TABLE 3-10.--ALTERNATIVE PROJECTIONS OF HOSPITAL INSURANCE OUTLAY GROWTH AND YEAR-END BALANCES BY FISCAL YEAR, 1995-2006
                                                                [In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   1995 \1\   1996   1997    1998    1999    2000     2001     2002     2003     2004     2005     2006
--------------------------------------------------------------------------------------------------------------------------------------------------------
5 percentage points lower HI:
    Outlay growth................................
    Outlays......................................      115     127     133     138     143     147      150      154      158      162      166      171
    EOY balance..................................      130     122     116     108     102      98       96       98      103      112      125      143
    Ratio by BOY assets to outlays...............     1.13    1.02    0.92    0.84    0.76    0.69     0.65     0.62     0.62     0.64     0.67     0.73
4 percentage points lower HI:
    Outlay growth................................
    Outlays......................................      115     127     134     141     147     152      158      163      169      175      182      189
    EOY balance..................................      130     122     114     104      93      82       72       63       55       47       42       37
    Ratio by BOY assets to outlays...............     1.13    1.02    0.91    0.81    0.71    0.61     0.52     0.44     0.37     0.31     0.26     0.22
3 percentage points lower HI:
    Outlay growth................................
    Outlays......................................      115     127     135     144     151     158      166      173      180      189      198      208
    EOY balance..................................      130     122     113     100      84      67       48       27        5      -19      -45      -72
    Ratio by BOY assets to outlays...............     1.13    1.02    0.90    0.79    0.66    0.53     0.40     0.28     0.15     0.03    -0.10    -0.22
2 percentage points lower HI:
    Outlay growth................................
    Outlays......................................      115     127     137     146     155     164      174      183      193      204      215      228
    EOY balance..................................      130     112     112      95      75      51       23      -10      -47      -89     -138     -194
    Ratio by BOY assets to outlays...............     1.13    1.02    0.89    0.76    0.61    0.46     0.29     0.12    -0.05    -0.23    -0.41    -0.60
1 percentage points lower HI:
    Outlay growth................................
    Outlays......................................      115     127     138     149     160     171      182      193      206      220      234      251
    EOY balance..................................      130     122     110      91      66      35       -3      -49     -105     -175     -259     -361
    Ratio by BOY assets to outlays...............     1.13    1.02    0.89    0.74    0.57    0.39     0.19    -0.01    -0.24    -0.48    -0.75    -1.03
Baseline:
    HI Trust Fund income.........................      115     120     126     130     134     139      143      147      151      155      159      163
    HI Trust Fund outlays........................      115     127     139     152     164     177      190      204      220      237      255      275
    HI Trust Fund surplus........................       -0      -7     -13     -22     -30     -48      -38      -57      -68      -82      -96     -112
    HI Trust Fund balance at end of year.........      130     122     109      87      57      19      -29      -86     -154     -236     -332     -444
    Ratio of BOY assets to outlays...............     1.13    1.02    0.88    0.72    0.53    0.32     0.10    -0.14    -0.39    -0.65    -0.92    -1.21
1 percentage points higher HI:
    Outlay growth................................
    Outlays......................................      115     127     141     155     169     184      199      216      234      255      277      302
    EOY balance..................................      130     122     108      83      48       2      -54     -117     -188     -269     -361     -463
    Ratio by BOY assets to outlays...............     1.13    1.02    0.87    0.70    0.49    0.26     0.01    -0.25    -0.50    -0.74    -0.97    -1.20
2 percentage points higher HI:
    Outlay growth................................
    Outlays......................................      115     127     142     157     173     190      209      228      250      274      301      331
    EOY balance..................................      130     122     106      78      38     -15      -84     -170     -278     -411     -572     -766
    Ratio by BOY assets to outlays...............     1.13    1.02    0.86    0.68    0.45    0.20    -0.07    -0.37    -0.68    -1.01    -1.37    -1.73
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Actuals: EOY = End of year; BOY = Beginning of year; HI = Hospital Insurance.

Note.--Changes in outlays begin with fiscal year 1997. During the projection period, those new measures indicate that growth would have to be reduced by
  between 4 and 5 percentage points to stablize the assets of the trust fund, and by more than 5 percentage points to maintain a solvency ratio of at
  least 1.00.

Source: Congressional Budget Office.

 TABLE 3-11.--ACTUARIAL BALANCES OF THE HOSPITAL INSURANCE PROGRAM UNDER
                        INTERMEDIATE ASSUMPTIONS
------------------------------------------------------------------------
                                                            Intermediate
                                                             assumptions
------------------------------------------------------------------------
Projection periods:
    1996-2020:
        Summarized income rate (percent)..................         3.07
        Summarized cost rate \1\..........................         5.01
        Actuarial balance \2\.............................        -1.95
    1996-2045:
        Summarized income rate............................         3.16
        Summarized cost rate \1\..........................         6.68
        Actuarial balance \2\.............................        -3.52
    1996-2070:
        Summarized income rate............................         3.21
        Summarized cost rate \1\..........................         7.72
        Actuarial balance \2\.............................        -4.52
25-year subperiods:
    1996-2020:
        Summarized income rate (percent)..................         3.07
        Summarized cost rate \3\..........................         4.93
        Actuarial balance \2\.............................        -1.86
    2021-2045:
        Summarized income rate............................         3.27
        Summarized cost rate \3\..........................         8.70
        Actuarial balance \2\.............................        -5.43
    2046-2070:
        Summarized income rate............................         3.36
        Summarized cost rate \3\..........................        10.81
        Actuarial balance \2\.............................        -7.45
------------------------------------------------------------------------
\1\ Expenditures for benefit payments and administrative costs for
  insured beneficiaries, on an incurred basis, expressed as a percentage
  of taxable payroll, computed on the present-value basis, including the
  cost of attaining a trust fund balance at the end of the period equal
  to 100 percent of the following year's estimated expenditures, and
  including an offset to cost due to the beginning trust fund balance.
\2\ Difference between the summarized income rate and the summarized
  cost rate.
\3\ Expenditures for benefit payments and administrative costs for
  insured beneficiaries, on an incurred basis, expressed as a percentage
  of taxable payroll, computed on the present-value basis. Includes
  neither the trust fund balance at the beginning of the period nor the
  cost of attaining a nonzero trust fund balance at the end of the
  period.

Note.--Totals may not add due to rounding.

Source: Board of Trustees, Federal Hospital Insurance Trust Fund (1996).

     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
rapidly 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 3-12 shows
historical information from the 1996 SMI trustees report as
well as intermediate projections through 2005.

                 TABLE 3-12.--OPERATIONS OF THE SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND (CASH BASIS), SELECTED FISCAL YEARS 1970-2005
                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Income                                        Disbursements
                                          --------------------------------------------------------------------------------------------------- Balance at
             Fiscal year \1\                 Premium                        Interest                                                            end of
                                              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
Intermediate estimates:
    1996.................................      18,743          61,319           1,793      81,855      69,378         1,654          71,032       24,697
    1997.................................      19,090          59,529           2,181      80,800      77,277         1,718          78,995       26,502
    1998.................................      20,811          64,892           2,259      87,962      85,456         1,789          87,245       27,219
    1999.................................      21,996          72,245           2,258      96,499      93,856         1,860          95,716       28,002
    2000.................................      22,958          80,905           2,242     106,105     103,156         1,937         105,093       29,014
    2001.................................      23,983          92,225           2,270     118,478     113,924         2,019         115,943       31,549
    2002.................................      25,071         103,896           2,412     131,379     125,969         2,105         128,074       34,854
    2003.................................      26,275         116,815           2,590     145,680     139,647         2,199         141,846       38,688
    2004.................................      27,616         131,482           2,803     161,901     155,237         2,303         157,540       43,049
    2005.................................      29,068         148,183           3,045     180,296     172,949         2,415         175,364       47,981
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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 (1996).

                 Components of Medicare Spending Growth

    Projections of the growth in Medicare spending are based on
estimates of changes in utilization, number of beneficiaries,
prices, and mix of services. Table 3-13 shows CBO projections,
using the April 1996 baseline, of the growth in Medicare
spending and the factors underlying those estimates. All
projections, including the inflation update projections, are
based on current law requirements. Further details on
calculation of inflation adjustments are provided in subsequent
sections of this chapter.

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 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 are dependent on uncertain
projections of future health spending.
    The CBO estimates are for illustrative individuals with
specified characteristics. Contributions as a percentage of
specified benefits would be lower for persons who did not work
continuously from 1966 until retirement or who earned less than
the average wage. Conversely, contributions as a percent of
benefits would be higher for persons who worked continuously
and earned more than the average wage.
    For a self-insured man who worked continuously at an
average wage from 1966 (when Medicaid 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 38 percent; for those retiring in 2005, contributions
represent about 42 percent of benefits. 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 current law, after 1998, annual
premium increases are limited by the percentage increase in the
Social Security COLA, see table 3-14.
    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, see table 3-14.

                                                 TABLE 3-13.--CONGRESSIONAL BUDGET OFFICE PROJECTIONS FOR MEDICARE PROGRAM COMPONENTS, 1995-2006
                                                                  [Baseline outlays by fiscal year, dollar amounts in billions]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                              1995       1996       1997       1998       1999       2000       2001       2002       2003       2004        2005        2006
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
             PART A: HOSPITAL INSURANCE (HI)

Total HI outlays \1\.....................................    $114.9     $127.1     $139.3     $151.8     $164.2     $177.0     $190.4     $204.5     $219.7      $236.6      $255.0      $276.2
    Annual growth rate (percent).........................                 10.7        9.5        9.0        8.2        7.8        7.6        7.4        7.5         7.7         7.7         7.9
Total HI mandatory \2\...................................    $113.6     $126.0     $138.0     $160.5     $162.9     $175.6     $189.0     $203.0     $218.2      $235.0      $253.2      $275.4
Total HI benefits \3\....................................    $113.4     $126.7     $137.8     $150.2     $162.6     $175.3     $188.7     $202.6     $217.8      $234.6      $252.9      $273.0
    Annual growth rate (percent).........................  .........      10.8        9.6        9.1        8.2        7.8        7.6        7.4        7.5         7.7         7.8         8.0
Hospitals................................................     $79.8      $84.1      $88.5      $93.7      $99.2     $104.7     $110.1     $116.3     $120.8      $126.6      $132.5      $138.6
    Annual growth rate (percent).........................  .........       6.4        5.2        5.9        6.0        5.5        5.2        4.7        4.7         4.8         4.7         4.7
HMOs.....................................................      $7.7      $10.5      $13.6      $16.9      $19.9      $23.3      $27.3      $31.9      $37.3       $43.6       $51.0       $59.7
    Annual growth rate (percent).........................  .........      36.5       29.9       24.0       17.7       17.2       17.0       16.8       16.9        17.0        17.1        17.0
Hospice..................................................      $1.9       $2.5       $3.1       $3.7       $4.2       $4.7       $5.2       $5.7       $6.2        $6.7        $7.3        $7.9
    Annual growth rate (percent).........................  .........      32.0       24.0       18.0       15.0       12.0       10.0        9.0        8.5         8.5         8.5         8.5
Home health..............................................     $14.9      $17.5      $20.1      $22.5      $24.6      $26.7      $28.9      $31.3      $33.8       $36.5       $39.4       $42.4
    Annual growth rate (percent).........................  .........      17.7       15.0       11.7        9.3        8.6        8.4        8.2        8.1         8.0         7.8         7.8
Skilled nursing facilities...............................      $9.1      $11.0      $12.4      $13.6      $14.7      $16.0      $17.3      $18.6      $20.0       $21.4       $22.9       $24.6
    Annual growth rate (percent).........................  .........      20.6       12.9        9.3        8.5        8.4        8.1        7.7        7.4         7.3         7.1         7.1

      PART B: SUPPLEMENTARY MEDICAL INSURANCE (SMI)

Total SMI outlays \1\....................................     $65.2      $71.9      $79.3      $87.6      $96.5     $106.0     $116.4     $127.9     $141.3      $156.6      $173.4      $192.4
    Annual growth rate (percent).........................  .........      10.2       10.4       10.7        9.9        9.8        9.8        9.9       10.5        10.8        10.9        10.9
Total SMI benefits \3\...................................     $63.5      $70.1      $77.5      $85.9      $94.5     $103.9     $114.2     $125.8     $138.8      $153.9      $170.8      $189.6
    Annual growth rate (percent).........................  .........      10.4       10.5       10.9       10.0        9.9        9.9       10.0       10.6        10.9        11.0        11.0
Benefits paid by carriers \4\............................     $41.7      $44.6      $47.6      $51.3      $54.8      $58.3      $61.9      $65.6      $69.9       $74.8       $80.1       $85.7
    Annual growth rate (percent).........................  .........       6.9        6.9        7.6        6.8        6.4        8.2        5.9        6.6         7.0         7.1         7.1
Physician fee schedule...................................     $33.0      $35.1      $37.0      $39.3      $41.3      $43.1      $44.8      $46.3      $48.3       $50.7       $53.4       $58.2
    Annual growth rate (percent).........................  .........       6.2        5.6        8.2        5.0        4.4        4.0        3.4        4.3         5.0         5.2         5.3
Benefits paid by Intermediaries \5\......................     $16.4      $17.3      $19.4      $21.9      $24.6      $27.7      $31.2      $35.0      $39.1       $43.4       $47.9       $52.7
    Annual growth rate (percent).........................  .........      12.5       12.4       12.4       12.7       12.6       12.4       12.2       11.7        11.1        10.4         9.9
Group plans..............................................      $6.4       $8.2      $10.4      $12.8      $15.2      $17.9      $21.2      $25.1      $30.0       $35.9       $42.9        51.4
    Annual growth rate (percent).........................  .........      28.0       26.6       23.0       18.6       18.1       18.3       18.5       19.4        19.6        19.7        19.6

                    PART A INFORMATION

Part A FY enrollment (in millions).......................      36.9       37.5       38.1       38.6       39.1       39.5       40.0       40.6       41.1        41.7        42.3        43.0
HI deductible (calendar year, in dollars)................    $716       $736       $764       $796       $832       $868       $904       $940       $980      $1,020      $1,064      $1,108
Monthly premium (calendar year, in dollars)..............    $261       $289       $311       $334       $356       $378       $402       $426       $451        $480        $510        $538
Premiums collected.......................................      $1.0       $1.1       $1.2       $1.4       $1.5       $1.6       $1.7       $1.9       $2.0        $2.2        $2.4        $2.6
PPS market basket increase (percent).....................       3.6        3.5        3.3        3.5        3.5        3.4        3.4        3.3        3.4         3.4         3.4         3.4
PPS update factor (average) percent......................       1.9        1.5        2.8        3.5        3.5        3.4        3.4        3.3        3.4         3.4         3.4         3.4
Part A hospital inpatient payments:......................
PPS hospitals............................................      69.2       72.6       75.5       78.7       82.3       86.0       89.5       92.9       96.3        99.9       103.4       107.2
Non-PPS hospitals/units..................................      10.6       11.5       13.0       14.9       16.9       18.6       20.6       22.4       24.4        26.7        29.0        31.5
Disproportionate share payments..........................       3.9        4.6        4.8        5.0        5.2        5.4        5.6        5.8        6.0         6.3         6.5         8.7
Indirect medical ed. payments (for patient care).........       4.9        5.2        5.5        5.8        6.3        6.7        7.2        7.7        8.2         8.8         9.3         9.9
Inpatient capital payments...............................       7.9        9.6       10.4       11.1       11.8       12.6       13.0       13.3       13.7        14.1        14.4        14.8
Part A and part B hospital inpatient payments; dIrect
 medical ed. payments (for teaching program).............       2.3        2.4        2.5        2.6        2.7        2.9        3.0        3.1        3.3         3.4         3.6         3.7
Part B information: (in calendar years, except as noted):
  Deductible (in dollars)................................    $100       $100       $100       $100       $100       $100       $100       $100       $100        $100        $100        $100
  MEI percentage change..................................       2.1        2.0        2.2        2.1        2.0        2.0        1.8        1.8        1.9         1.8         1.7         1.7
  Physician update (weighted average) (percent)..........       7.4        0.4        1.2        0.0       -3.0       -2.6       -3.2       -2.9       -0.6         0.0         1.2         1.7
    Conversion factor....................................     $36.11     $36.28     $36.75     $36.74     $35.65     $34.75     $33.66     $32.68     $32.49      $32.51      $32.91      $33.50
  Primary care update (percent)..........................       7.9       -2.7        2.5        7.2       -3.0       -1.0       -3.2       -3.2       -0.5        -0.5         1.5         2.5
    Conversion factor....................................     $36.38     $35.42     $36.31     $38.93     $37.77     $37.40     $36.22     $35.08     $34.89      $34.71      $35.24      $36.13
  Surgical update (percent)..............................      12.2        3.4        2.2       -2.9       -3.0       -3.0       -3.2       -3.1       -0.6         0.7         1.7         2.2
    Surgery conversion factor............................     $39.45     $40.80     $41.68     $40.48     $39.27     $38.07     $36.87     $35.73     $35.52      $35.76      $38.37      $37.15
    Anesthesia conversion factor.........................     $14.77     $15.28     $15.61     $15.16     $14.71     $14.26     $13.81     $13.38     $13.31      $13.39      $13.62      $13.92
  Other physician update (percent).......................       5.2        0.0        0.3       -1.3       -3.0       -3.0       -3.2       -2.7       -0.6        -0.0         0.9         1.2
    Conversion factor....................................     $34.62     $34.63     $34.74     $34.30     $33.26     $32.26     $31.24     $30.39     $30.21      $30.21      $30.47      $30.84
  Laboratory update (percent)............................       0          2.9        3.1        3.0        2.9        2.9        2.9        3.0        3.0         3.0         3.0         3.0
  DME update (percent)...................................       3.2        2.9        3.1        3.0        2.9        2.9        2.9        3.0        3.0         3.0         3.0         3.0
  P&O (percent)..........................................       0          2.9        3.1        3.0        2.9        2.9        2.9        3.0        3.0         3.0         3.0         3.0
  ASC update (percent)...................................       0          2.9        3.1        3.0        2.9        2.9        2.9        3.0        3.0         3.0         3.0         3.0
  Monthly premium (in dollars)...........................     $46.10     $42.50     $44.40     $48.70     $50.20     $51.70     $53.20     $54.70     $58.30      $58.00      $59.70      $61.50
  SMI premium (in dollars) \6\...........................     $19.2      $18.8      $19.4      $21.2      $22.5      $23.5      $24.5      $25.5      $26.6       $27.8       $28.7       $29.5
  Fiscal year enrollment (in millions)...................      35.5       36.0       36.5       36.9       37.3       37.7       38.2       38.6       39.0        39.5        40.0        40.6
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Includes discretionary administration.
\2\ Includes mandatory administration.
\3\ Includes the Impact of Public Law 104-121, enacted on March 29, 1996. This impact is not distributed to the components of Medicare benefits.
\4\ Includes all services paid under the physician fee schedule, durable medical equipment, independent and physician in-office lab services, ambulance services paid by carriers, and other
  services.
\5\ Includes outpatient hospital services, lab, services in hospital outpatient departments, hospital-provided ambulance services and other services.
\6\ Includes the impact of Public Law 104-121, enacted on March 29, 1996.

Source: Congressional Budget Office, April 1996 baseline.

  TABLE 3-14.--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
------------------------------------------------------------------------
For self-insured men who earned average
 wages:
    Hospital insurance....................      32.7      56.1      76.1
    Supplementary medical insurance.......      23.5      16.1      10.2
                                           -----------------------------
        Medicare total....................      29.2      38.2      42.2
                                           =============================
For self-insured women who earned average
 wages:
    Hospital insurance....................      28.2      47.7      65.8
    Supplementary medical insurance.......      23.4      15.3      10.5
                                           -----------------------------
        Medicare total....................      26.2      32.4      37.0
------------------------------------------------------------------------
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, using historical information and
  long-term projections presented in the Board of Trustees, Federal
  Hospital Insurance Trust Fund (1996).

    In 1995 dollars, the present discounted value of Medicare
benefits net of contributions (that is the net transfer or
subsidy value) is estimated at $31,766 for men and $39,443 for
women who retired in 1985. For those retiring in 1995, the
value is estimated at $49,751 for men and $66,613 for women,
see table 3-15.

                 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).

       TABLE 3-15.--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]
------------------------------------------------------------------------
                                       1985         1995         2005
------------------------------------------------------------------------
For self-insured men who earned
 average wages:
    Benefits.....................     $44,839      $80,442     $122,430
    Contributions................    ($13,074)    ($30,691)    ($51,634)
                                  --------------------------------------
Net transfer.....................     $31,766      $49,751      $70,796
                                  ======================================
For self-insured women who earned
 average wages
    Benefits.....................     $53,465      $98,581      143,145
    Contributions................    ($14,022)    ($31,968)    ($53,033)
                                  --------------------------------------
      Net transfer...............     $39,443      $66,613      $90,112
------------------------------------------------------------------------
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 funding earnings over the
  same years. The CPI-U was used to get constant 1995 dollars.

Source: Congressional Budget Office, using historical information and
  long-term projections presented in the Report of the Board of
  Trustees, Federal Hospital Insurance Trust Fund (1995).

    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 487 diagnosis-related groups (DRGs).
Each Medicare case is assigned to one of the 487 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 (ESRD) 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 3-16 provides 1994 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 inpatient hospital
or SNF care and ends when the beneficiary has been neither an
inpatient of a hospital or 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;

 TABLE 3-16.--USE OF INPATIENT HOSPITAL SERVICES BY MEDICARE ENROLLEES BY TYPE OF ENROLLEE AND TYPE OF HOSPITAL,
                                             CALENDAR YEAR 1994 \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.............     12,235        335     89,801       7.3      2,457   $71,842    $5,872    $1,966
    Short-stay..............     11,613        318     83,752       7.2      2,292    69,027     5,944     1,889
    Long-stay...............        622         17      6,049       9.7        166     2,815     4,526        77
      Psychiatric...........        312          9      2,828       9.1         77       932     2,987        26
      All other.............        310          8      3,221      10.4         88     1,883     6,074        52
Aged:
  All hospitals.............     10,459        323     76,818       7.3      2,370   $62,321    $5,959    $1,923
    Short-stay..............     10,091        311     72,989       7.2      2,252    60,302     5,976     1,861
    Long-stay...............        368         11      3,829      10.4        118     2,019     5,486        62
      Psychiatric...........         95          3        966      10.2         30       345     3,632        11
      All other.............        273          8      2,295       8.4         71     1,674     6,132        52
Disabled:
  All hospitals.............      1,776        430     12,983       7.3      3,140    $9,521    $5,361    $2,303
    Short-stay..............      1,522        368     10,763       7.1      2,603     8,725     5,733     2,110
    Long-stay...............        254         61      2,220       8.7        537       796     3,134       193
      Psychiatric...........        217         52      1,862       8.6        450       587     2,705       142
      All other.............         37          9        358       9.7         87       209     5,649        51
----------------------------------------------------------------------------------------------------------------
\1\ Preliminary data.
\2\ Discharges not available by type of hospital.

Note.--Only services rendered by inpatient hospitals are included. Totals may not add due to rounding.

Source: Health Care Financing Administration, Bureau of Management and Strategy.

  --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
    For Medicare reimbursement purposes, the costs SNFs incur
for providing services to beneficiaries are 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 services,
radiology procedures, supplies and other equipment; and (3)
capital-related costs.
    Routine costs are subject to national average per diem
limits. Separate per diem limits are established for
freestanding and hospital-based SNFs, by urban or rural area.
Freestanding SNF cost limits are set at 112 percent of the
average per diem labor-related and nonlabor-related costs.
Hospital-based SNF limits are set at the limit for freestanding
SNFs, plus 50 percent of the difference between the
freestanding limits and 112 percent of the average per diem
routine services costs of hospital-based SNFs. The law
authorizes the Secretary to allow for exceptions to the limits,
based on case mix or circumstances beyond the control of the
facility. The Secretary is required to rebase cost limits every
2 years, that is, to develop cost limits using the latest
available SNF cost report data. In the interim the Secretary
applies a SNF market basket developed by the Health Care
Financing Administration (HCFA) to reflect changes in the price
of goods and services purchased by SNFs. To reflect differences
in wage levels from area to area, the labor-related portion of
the limits are also adjusted by the hospital area wage index.
For this calculation, HCFA separates the limits into components
which reflect the estimated proportion of the limit
attributable to labor and nonlabor costs. The labor component
is then adjusted by the index applicable to the area in which
the SNF is located.
    Ancillary services provided as SNF care are paid on the
basis of reasonable costs and are not subject to cost limits.
However, HCFA has issued salary equivalency guidelines for
physical therapy services to provide guidance on the
reasonableness of the costs of these services, and prudent
buyer guidelines for occupational therapy and speech language
pathology services. Capital costs are also paid on the basis of
reasonable costs and are not subject to limits the way routine
costs are.
    SNFs providing less than 1,500 days of care per year to
Medicare patients in the preceding year, sometimes referred to
as low-volume SNFs, have the option of being paid a prospective
payment rate set at 105 percent of the regional mean for all
SNFs in the region. The rate covers routine and capital-related
costs (not ancillary services) and is calculated separately for
urban and rural areas, adjusted to reflect differences in wage
levels. Prospective rates can not exceed the routine service
cost limit that would be applicable to the facility, adjusted
to take into account average capital-related costs with respect
to the type and location of the facility. For these prospective
rates, the Secretary is required to reflect current SNF costs
using the most recent data available from SNF cost reports. For
SNFs receiving prospectively determined payment rates, the
Secretary may pay for ancillary services on a reasonable charge
basis, rather than on a cost basis, if the Secretary determines
that a reasonable charge basis provides an equitable level of
payment and eases the SNF's reporting burden.
    The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993)
required that there be no updates in SNF cost limits (including
no adjustments for changes in the wage index or updates of
data) for cost reporting periods beginning in fiscal year 1994
and fiscal year 1995, or in prospective payment amounts for
low-volume SNFs during these cost reporting periods. The
Secretary was also required, when granting or extending
exceptions to cost limits, to limit any exception to the amount
that would have been granted if there were no restriction on
changes in cost limits. OBRA 1993 also repealed the requirement
that additional payments be made to hospital-based SNFs for
costs attributable to excess overhead allocations, effective
for cost reporting periods beginning on or after October 1,
1993. Payments to proprietary SNFs for return on equity were
also eliminated, effective for cost reporting periods beginning
on or after October 1, 1993.
Growth in payments
    For the past several years, SNF care has been one of
Medicare's fastest growing benefits. SNF spending in fiscal
year 1990 stood at $2.8 billion; by fiscal year 1995 it had
increased to $9.1 billion, for an average annual growth rate of
27 percent (see table 3-3). Because spending for SNF care has
been growing at a faster rate than other benefits, its share of
total net Medicare spending has increased from 2.9 percent in
1990 to 5.7 percent in 1995. SNF spending as a percent of total
part A expenditures has increased from 4.2 percent in fiscal
year 1990 to 7.9 percent in fiscal year 1995. The Congressional
Budget Office projects that spending for SNF care will increase
to $18.6 billion by fiscal year 2002. Table 3-17 presents
historical SNF spending data on a calendar year basis.
    Table 3-18 shows that since 1990 the number of Medicare
beneficiaries receiving SNF care grew from 638,000 to 990,000
in 1995, or by 55 percent; the number of covered days grew from
25.1 million to 38.8 million, or by 55 percent. Payment per
day, however, increased by 170 percent during the period,
reaching $265 per day.
    Tables 3-17 and 3-18 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 in early 1988. These
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 where a patient's full or
partial recovery is not possible, care could be covered because
it is needed to prevent deterioration or to maintain current
capabilities. Previously, some care had been denied because
patients' health status was not expected to improve.

  TABLE 3-17.--ESTIMATED MEDICARE PAYMENTS FOR SKILLED NURSING FACILITY
                  CARE BY TYPE OF SERVICE, 1983-95 \1\
------------------------------------------------------------------------
                                                  Payments
                                                    (in        Percent
                                                 billions)    change \2\
------------------------------------------------------------------------
Calendar year:
    1983......................................         $0.5  ...........
    1984......................................           .6          6.9
    1985......................................           .6          2.9
    1986......................................           .6           .2
    1987......................................           .6          8.8
    1988......................................           .9         47.1
    1989......................................          3.5        275.7
    1990......................................          2.5        -29.0
    1991......................................          2.9         18.4
    1992......................................          4.5         55.3
    1993......................................          6.4         42.2
    1994......................................          8.3         29.7
    1995 \1\..................................         10.3         24.1
------------------------------------------------------------------------
\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).

    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 3-17 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 70-
percent increase, from 7,379 to 12,584, in facilities
participating in Medicare between 1988 and 1994.
    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.

       TABLE 3-18.--MEDICARE SKILLED NURSING FACILITY UTILIZATION AND PAYMENTS PER PERSON SERVED, 1983-95
----------------------------------------------------------------------------------------------------------------
                                                    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       34.3       37.8        188       20.1
1994..........................................    945,000         26       36.9       39.1        225       20.0
1995 \1\......................................    990,000         27       38.8       39.1        265       17.8
----------------------------------------------------------------------------------------------------------------
\1\ Estimated.

Source: Health Care Financing Administration, Office of the Actuary.

Prospective payment for SNF care
    Currently Medicare reimburses the great bulk of SNF care on
a retrospective cost-based basis. This means that SNFs are paid
after services are delivered for the reasonable costs (as
defined by the program) they have incurred for the care they
provide to program beneficiaries, up to limits noted above.
This system has been criticized on a number of grounds.
Providers have few incentives to maximize efficiency and
minimize costs because they are reimbursed for the reasonable
costs of services, after services have been provided. Nor do
SNFs have incentives to control the volume of services they
provide.
    For these reasons, Congress on a number of occasions--in
the Tax Equity and Fiscal Responsibility Act of 1982, the
Deficit Reduction Act of 1984, and OBRA 1990--has required the
Secretary of Health and Human Services to develop alternative
methods for paying for SNF care on a prospective basis.
Prospective payment involves establishing a rate or set of
rates for a specific amount of services before the service is
provided. Because SNFs would know in advance what payments they
could expect and would have to keep their costs within these
limits or incur losses, prospective payment is expected to
improve provider efficiency. In addition, prospective payments
could make program spending more predictable and could
effectively contain growth in expenditures.
    It is generally agreed that an effective prospective
payment system for Medicare SNF care must incorporate case-mix
adjustments that translate patients' varying service needs into
specific reimbursement rates. Case-mix adjustments result in
higher payment rates for patients who cost more to serve and
lower payments for patients who cost less. With such
adjustments, access for sicker patients with heavy care needs
would be improved. Without them, providers might admit only
those patients with the lowest resource needs and limit access
to the severely ill.
    Developing case-mix adjustments for a prospective payment
system for SNF care has been the major focus of the Health Care
Financing Administration's (HCFA) research efforts. Unlike
hospital care, diagnosis of a patient is not a very good
predictor for distinguishing the service needs of the SNF
patient. Research has indicated that several other dimensions
must be considered when developing a case-mix adjustment for
SNF patients, including medical problems and functional
limitations.
    To account for variations in resource use, HCFA since 1984
has been sponsoring research to develop a patient
classification system for Medicare SNF patients. Specifically
HCFA has sought to adapt to Medicare patients a classification
system known as resource utilization groups (RUGs), which was
developed originally for a Medicaid nursing home population and
which used primarily functional disability scores for
classifying patients. HCFA found that Medicare SNF patients
have different needs than the average Medicaid nursing home
patient and that additional case-mix measures are needed to
reflect resource use. Research has involved: (1) collecting
data on patient characteristics and resource use for Medicare
beneficiaries; (2) developing classification systems that are
based on these data and that would explain resource use for the
Medicare population; and (3) testing the usefulness of these
classification systems in predicting resource use. For this
research, resource use has been measured in three major
categories: (1) nurse staff time, including both licensed
nurses and nurse aides, the bulk of costs in nursing homes
across all patients; (2) ancillary services, largely therapy
services; and (3) other costs, such laboratory procedures and
medications.
    The version of RUGs that HCFA is currently testing for
application to Medicare is known as RUGs-III. RUGs-III is being
tested in six States--Kansas, Maine, Mississippi, New York,
South Dakota, and Texas. Under RUGs-III, classification is
based on residents' clinical conditions; extent of services
needed, such as rehabilitation, respirator/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.
    HCFA anticipates that 1,000 SNFs will be participating in
the demonstration by the time enrollment closes in 1997.
Beginning July 1, 1996, the demonstration incorporated
therapies into the prospective rates. An interim report is
expected in January 1998, and the demonstration is expected to
be completed by December 31, 1998.

                          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 can not 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 which 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.
Reimbursement
    Home health care agencies are 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. Costs limits, however, are
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. Limits for the individual services
are set at 112 percent of the mean labor-related and nonlabor
per visit costs for freestanding agencies (that is, agencies
not affiliated with hospitals). Cost limits are updated
annually by applying a market basket index to base year data
derived from home health agency cost reports. To reflect
differences in wage levels from area to area, the labor-related
portion of a service limit is adjusted by the current hospital
wage index.
    The Omnibus Budget Reconciliation Act of 1993 (OBRA 1993)
required that there be no updates in home health cost limits
(including no adjustments for changes in the wage index or
other updates of data) for cost reporting periods beginning on
or after July 1, 1994, and before July 1, 1996. OBRA 1993 also
repealed the requirement that additional payments be made to
hospital-based home health agencies for costs attributable to
excess overhead allocations, effective for cost reporting
periods beginning on or after October 1, 1993.
Growth in payments
    For the past several years, the home health benefit has
been Medicare's fastest growing benefit. As table 3-19
indicates, spending for home health began to increase in 1989
when the total stood at $2.6 billion. By 1995, spending had
increased to $16.0 billion, for an average annual rate of
growth of 35 percent. Because spending for home health has been
growing at a faster rate than other benefits, its share of
total net Medicare spending for all benefits has increased from
nearly 3 percent in 1989 to 9.4 percent in 1995. Almost all
home health claims are paid out of the Medicare Part A Hospital
Insurance Trust Fund.

       TABLE 3-19.--MEDICARE PAYMENTS FOR HOME HEALTH, 1983-95 \1\
------------------------------------------------------------------------
                                                  Payments
                                                    (in        Percent
                                                 billions)    change \2\
------------------------------------------------------------------------
Calendar year:
    1983......................................         $1.6  ...........
    1984......................................          1.9         17.5
    1985......................................          1.9          4.0
    1986......................................          1.9         -0.5
    1987......................................          1.9         -1.2
    1988......................................          2.1          8.6
    1989......................................          2.6         23.8
    1990......................................          3.9         53.2
    1991......................................          5.6         43.6
    1992......................................          7.9         41.1
    1993......................................         10.3         30.4
    1994......................................         13.4         30.1
    1995 \3\..................................         16.0         19.4
------------------------------------------------------------------------
\1\ Includes both part A and part B expenditures.
\2\ Rounding in payments may not reflect actual change.
\3\ Estimated.

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 3-20 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 97 in 1995, an increase
of 94 percent over the period. Average number of visits per
person served increased from 27 in 1989 to 70 in 1995, an
increase of 159 percent. In addition, much of this volume
growth can be attributed to heavy users. By 1992 (the latest
year for which data are available), home health users who had
more than 100 visits had grown to 18 percent of all users (from
4 percent in 1988) and accounted for over 55 percent of charges
(not actual reimbursements) for the benefit. During the period
1991-92 alone, the percent of users having more than 200 visits
in the calendar year increased from 3.8 to 6.3 percent.
    Increasing costs for home health services have accounted
for comparatively little spending growth. Payments per visit
increased at a relatively low rate, from $56 per visit in 1989
to $63 in 1995, a 12.5-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.

               TABLE 3-20.--MEDICARE HOME HEALTH CARE UTILIZATION AND PAYMENTS PER VISIT, 1983-95
----------------------------------------------------------------------------------------------------------------
                                        People served                  Visits
                                   -------------------------------------------------------
     Calendar year of service                               Number                 Per      Payment     Percent
                                      Number   Per 1,000     (in     Per 1,000    person   per visit  change \1\
                                               entollees  millions)  enrollees    served
----------------------------------------------------------------------------------------------------------------
1983..............................  1,318,000         45       36.9      1,234         28        $43  ..........
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         51         3.3
1987..............................  1,544,000         48       35.6      1,104         23         54         5.5
1988..............................  1,582,000         48       37.1      1,130         23         56         4.1
1989..............................  1,685,000         50       46.2      1,379         27         56        -0.5
1990..............................  1,940,000         57       69.5      2,038         36         57         1.7
1991..............................  2,223,000         64      100.2      2,875         45         56        -1.8
1992..............................  2,523,000         72      135.6      3,876         54         58         3.6
1993..............................  2,868,000         80      169.4      4,742         59         61         5.2
1994..............................  3,325,000         91      221.9      6,090         67         60        -1.6
1995 \2\..........................  3,615,000         97      252.3      6,800         70         63         5.0
----------------------------------------------------------------------------------------------------------------
\1\ Rounding in payments may not reflect actual change.
\2\ Estimated.

Source: Health Care Financing Administration, Office of the Actuary and Prospective Payment Assessment
  Commission (1995, 1996).

Prospective payment for home health care
    Currently Medicare reimburses home health agencies on a
retrospective cost-based basis. This means that agencies are
paid after services are delivered for the reasonable costs (as
defined by the program) they have incurred for the care they
provide to program beneficiaries, up to limits noted above.
They are also paid for each visit they make. This system has
been criticized as providing few incentives to maximize
efficiency, minimize costs, or control volume of services. In
addition, cost-based reimbursement is believed to contain few
incentives for providers to accept severely ill patients who
require intensive care and large amounts of service, especially
if they find they are exceeding their cost limits. Providers
also find the system's reporting requirements administratively
burdensome.
    For these reasons, Congress on a number of occasions--in
the Orphan Drug Act of 1983, OBRA 1987, and OBRA 1990--has
required the Secretary to develop alternative methods for
paying for home health care on a prospective basis. Prospective
payment involves setting a rate or set of rates for a specific
amount of services (for example, a skilled nursing visit, or an
entire episode of home health care) before the service is
provided. Because agencies would know in advance what payments
they could expect and would have to keep their costs within
these limits or incur losses, prospective payment is expected
to improve provider efficiency. In addition, prospective
payments could make program spending more predictable and could
effectively contain growth in expenditures.
    In 1994, the Office of Research and Demonstration in the
Health Care Financing Administration (HCFA) completed a
demonstration project that tested prospective payment on a per
visit basis. Preliminary analysis indicates that the per visit
prospective payment methodology had no effect on cost per visit
or volume of visits.
    HCFA has begun a second project, referred to as Phase II,
to test prospective payment on a per episode basis. This
project is not scheduled to be completed until December 1998.
One of the major goals of the demonstration is to test what
impact per episode payments will have on the volume of services
reimbursed. Paying a predetermined amount for an episode of
care is expected to control for volume since reimbursement
would be independent of the number of visits provided. Under
the demonstration, separate per episode payment limits would be
established for each of 18 different case categories of home
health care, defined by a mix of medical conditions and
limitations in activities of daily living. These 18 defined
categories would serve as a substitute for a true case-mix
adjustment not yet available. Case-mix adjustments translate
patients' varying service needs into specific reimbursement
rates and would result in higher payment rates for patients who
cost more to serve and lower payments for patients who cost
less.

                            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 must certify
that the individual has a life expectancy of 6 months or less.
Persons electing hospice are covered for four benefit periods:
two 90-day periods, a subsequent 30-day period, and a final
period of unlimited duration. 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 HHS; (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); and (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).
    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, physician 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 physician, one
registered professional nurse, and one social worker employed
by the hospital 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.
        Currently, this rate is $92.32.
 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 $538.87 for 24 hours or $22.45 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
        $95.50.
 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 $410.72.
    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.
    OBRA 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.
    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 elected to receive and
did receive 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, 1994 through October 31, 1995, is
$13,469. Cap amounts are updated annually by the percentage
change in the medical care component of the consumer price
index (CPI) for urban consumers.
Hospice program data
    Table 3-21 shows that the number of hospices participating
in Medicare has grown from 553 in 1988 to almost 1,800 in 1995.
Table 3-22 indicates that spending for the benefit has
increased significantly, rising from $118.4 million in fiscal
year 1988 to $1.3 billion in fiscal year 1994--a 49-percent
average annual rate of growth during the period. The number of
beneficiaries electing Medicare's hospice benefit has increased
from about 40,000 in fiscal year 1988 to almost 222,000 in
fiscal year 1994. The average number of days a beneficiary
spends in hospice care has risen from 37 to 59 days during this
period, and the average amount spent per beneficiary has
increased from $2,935 to $5,935. The vast majority of units of
care paid for by the program is for routine home care.

               TABLE 3-21.--NUMBER OF HOSPICES BY PROVIDER TYPE WITH PERCENTAGE OF TOTAL, 1988-95
----------------------------------------------------------------------------------------------------------------
                                                                          Month and year
                  Provider type                  ---------------------------------------------------------------
                                                   7/88    7/89    5/90    9/91    1/92    5/93    8/94    6/95
----------------------------------------------------------------------------------------------------------------
Freestanding....................................     191     220     260     394     404     499     608     656
Hospital-based..................................     138     182     221     282     291     341     401     447
Skilled nursing facility-based..................      11      13      12      10      10      10      12      18
Home health agency-based........................     213     286     313     325     334     438     583     674
                                                 ---------------------------------------------------------------
    Total.......................................     553     701     806   1,011   1,039   1,288   1,604   1,795
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Program Operations.

                  TABLE 3-22.--SELECTED MEASURES OF MEDICARE HOSPICE CARE, FISCAL YEARS 1988-94
                                               [By claim approved]
----------------------------------------------------------------------------------------------------------------
                                                                    Fiscal year
             Category             ------------------------------------------------------------------------------
                                      1988       1989       1990       1991       1992       1993        1994
----------------------------------------------------------------------------------------------------------------
1. Cash outlays by provider type:
    Freestanding.................      $52.1      $87.1     $130.7     $219.2     $444.2      $620.4      $724.2
    Hospital based...............       13.5       33.0       57.0       92.0      168.0       205.3       226.1
    SNF based....................        4.8        5.9        7.6        8.6       17.1        22.6        17.7
    HHA based....................       47.8       79.3      113.5      125.7      224.3       303.7       348.7
                                  ------------------------------------------------------------------------------
      Total......................      118.4      205.4      308.8      445.4      853.6     1,151.9     1,316.7
                                  ==============================================================================
2. Cash outlays by care type:
    Routine home care............       95.7      175.2      262.8      376.6      720.0     1,004.9     1,158.6
    Continuous home care.........        2.5        2.6        3.1        3.9       10.4        12.2        14.5
    Inpatient respite care.......        0.3        0.6        0.9        1.3        2.5         2.6         2.7
    General inpatient care.......       18.9       25.5       39.6       59.7      114.0       125.5       134.1
    Physicians...................        0.9        1.4        2.4        3.9        6.7         6.7         6.8
                                  ------------------------------------------------------------------------------
      Total......................      118.4      205.4      308.8      445.4      853.6     1,151.9     1,316.7
                                  ==============================================================================
3. Average dollar amount per
 beneficiary:
    Freestanding.................      2,837      3,436      4,237      4,121      5,668       6,085       6,355
    Hospital based...............      3,129      3,217      3,832      4,234      5,296       5,361       5,631
    SNF based....................      3,247      3,260      3,231      4,198      5,538       5,344       5,426
    HHA based....................      2,965      3,395      3,994      3,993      5,169       5,239       5,408
                                  ------------------------------------------------------------------------------
      Total......................      2,935      3,378      4,037      4,108      5,452       5,681       5,935
                                  ==============================================================================
4. Number of beneficiaries:
    Freestanding.................     18,396     25,351     30,861     53,184     78,374     102,283     113,959
    Hospital based...............      4,315     10,269     14,870     21,717     31,734      38,295      40,156
    SNF based....................      1,494      1,818      2,353      2,040      3,084       4,221       3,262
    HHA based....................     16,151     23,364     28,407     31,472     43,391      57,969      64,472
                                  ------------------------------------------------------------------------------
      Total......................     40,356     60,802     76,491    108,413    156,583     202,768     221,849
                                  ==============================================================================
5. Average number of days a
 beneficiary elects hospice care:
    Freestanding.................      39.26      48.40      52.41      46.15      59.11        62.0        63.7
    Hospital based...............      37.70      41.24      45.85      44.19      54.57        53.8        55.4
    SNF based....................      31.05      37.10      34.51      37.59      44.45        42.7        45.5
    HHA based....................      35.26      43.14      46.46      42.45      52.59        52.2        53.3
                                  ------------------------------------------------------------------------------
      Total \1\..................      37.19      44.83      48.38      44.52      56.09        57.2        58.9
                                  ==============================================================================
6. 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
    Continuous home care--hours..    154,989    160,056    166,039    199,309    442,968     565,903     654,667
    Inpatient respite care--days.      4,223      8,398     12,573     14,867     28,495      27,887      28,769
    General inpatient care--days.     58,346     83,750    117,989    161,211    297,190     303,245     299,823
    Physicians--procedures.......     19,257     24,442     39,587     53,491    111,716     115,560    110,790
----------------------------------------------------------------------------------------------------------------
\1\ Weighted by the number of beneficiaries in each hospice type.

Note.--Totals may not add due to rounding.

Source: Health Care Financing Administration.

                 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. There are three conversion factors--one for surgical
services, one for primary care services, and one for other
services. The conversion factors in 1996 are $40.80 for
surgical services, $35.42 for primary care services, and $34.63
for other services (for a further discussion of physician
payment issues, see appendix E).
    The conversion factors are 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 is 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 is 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 1994 data were used in determining the
calendar year 1996 update.) However, regardless of actual
performance during the base period, there is a limit on the
actual reduction (but not increase).
    Anesthesiologists are paid under a separate fee schedule
which uses base and time units. A separate conversion factor
($15.28 in 1996) applies.
    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 certain limits. This
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
recognized 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
    Physician assistants are paid directly for their 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'' their services).
Nurse practitioners
    Nurse practitioners are paid directly for 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.
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 110 percent in 1996, 105 percent in 1997, and 100
percent in 1998 and thereafter. The payments are evenly split
between each practitioner.
Clinical psychologists
    Therapeutic services provided by clinical psychologists are
paid on the basis of a separate fee schedule which is currently
equal to 80 percent of the fee schedule for psychiatrists.
Diagnostic tests are paid under the physician fee schedule.
Payments for services provided by clinical social workers are
equal to 75 percent of the scheduled amount allowed for
clinical psychologists. Some services are subject to the
psychiatric services limitation which effectively limits
Medicare payments for some services to 50 percent of incurred
expenses.
Physical or occupational therapists in independent practice
    Payments for physical or occupational therapists in
independent practice are made under the physician fee schedule,
subject to an annual limit of $900 in billed charges for each
type of therapist.

                      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. In calendar year 1995,
Medicare paid an estimated $4.5 billion for lab services, of
which an estimated $1.9 billion was for services in independent
labs, $.9 billion for services in office labs, and $1.7 billion
for services in hospital outpatient departments.
    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 level 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 is 2.9 percent.
    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. The ceiling is now
76 percent of the median.
    Effective March 1, 1996, Medicare instituted a new policy
for paying for tests in an automated profile. The past policy
permitted payment for all tests contained in an automated
profile when at least one was covered. Under the new policy,
payment is only made for those tests that meet Medicare
coverage rules. Where only some of the tests in a profile are
covered, payment cannot exceed the amount that would have been
paid if only the covered tests had been ordered. However, in no
event may the payment for the covered tests exceed the payment
allowance for the profile.
    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 are required to 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 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, just so long as the institution is
not a hospital or skilled nursing facility. This is not an all
inclusive definition of covered DME, however. Health Care
Financing Administration (HCFA) guidelines implementing the law
provide a definition for DME that allows a broad array of 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 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 with 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 local payment
amounts and the ceiling is 120 percent. Fee schedule amounts
are updated annually by the consumer price index for all urban
consumers, CPI-U.
    Table 3-23 shows total Medicare allowed payment amounts in
calendar year 1994 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.
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 completion of a certificate of medical necessity (CMN)
to document that an item is reasonable and medically necessary.
OBRA 1990 prohibited DME suppliers from distributing completed
or partially completed CMNs 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 DME items to
Medicare beneficiaries by providing them with completed CMNs
for them to submit to their physicians. It was hoped that
requiring physicians to complete CMNs would encourage them to
take a more active role in considering their patients' needs
for DME, while simultaneously reducing DME suppliers' ability
to influence DME acquisition.

TABLE 3-23.--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\..........................     $290.5
Items with frequent maintenance \2\..........................       59.8
Customized items \3\.........................................        1.8
Capped rental \4\............................................      672.0
Oxygen \5\...................................................    1,473.3
Prosthetics/orthotics \6\....................................      887.3
Other \7\....................................................      675.3
                                                              ----------
      Total..................................................   $4,060.0
------------------------------------------------------------------------
\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, and 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,'' 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.

    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 to permit
easy imposition of inherent reasonableness adjustments.
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 to the
beneficiary must be refunded by the supplier. Further,
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 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.
    Under Medicare, 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 $11.9
billion in calendar year 1994. Payments to hospital OPDs
constituted approximately 20 percent of all Medicare part B
payments in 1994 and about 8 percent of total parts A and B
Medicare payments. Table 3-24 provides information on the
number of part B enrollees, covered charges, aggregated
reimbursements and reimbursements per enrollee for hospital
outpatient services from 1974 to 1994. Table 3-25 show the
percent distribution of Medicare hospital OPD charges, by type
of service for 1994.
    OBRA 1993 extended reduced payment for services paid on a
cost-related basis, other than capital costs, by 5.8 percent of
the recognized costs for payments attributable to cost-
reporting periods, through fiscal year 1998. The reduction also
applies to cost portions of blended payment limits for
ambulatory surgery and radiology services. OBRA 1993 also
extended the reduction in reimbursement for capital costs for
hospital OPDs by 10 percent for cost reporting periods
occurring through fiscal year 1998. Sole community hospitals
and rural primary care hospitals are exempt from these
reductions.
Proposed modification
    OBRA 1990 required the Secretary to submit a proposal to
Congress regarding prospective payments for hospital OPDs, and
also required the Prospective Payment Assessment Commission
(ProPAC) to submit its analysis and comments on the proposal.
On March 15, 1995, the Secretary reported on a proposal to
replace the current payment system with a prospective payment
system (PPS) beginning in fiscal year 1996. The proposal would
require the development of a new classification system for
paying hospital OPDs using an ambulatory patient group (APG)
system for paying prospective rates for all outpatient surgery,
radiology, and other diagnostic services. These services
account for approximately half of total hospital outpatient
charges. The APG system could then be expanded to a
comprehensive system for all OPD services as more data becomes
available and further research is completed.

   TABLE 3-24.--MEDICARE HOSPITAL OUTPATIENT CHARGES AND REIMBURSEMENTS BY TYPE OF ENROLLMENT AND YEAR SERVICE
                                        INCURRED, SELECTED YEARS 1974-94
----------------------------------------------------------------------------------------------------------------
                                                  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   36,675,637   11,903,180          338         32.5

(4) Average annual rate of growth
1974-94........................................          2.1         23.5         19.8         17.3  ...........
1974-83........................................          2.5         24.4         26.4         23.3  ...........
1984-94........................................          1.8         21.7         13.4         11.4  ...........
----------------------------------------------------------------------------------------------------------------
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   30,211,880    9,206,268          193         30.5

(4) Average annual rate of growth
1974-93........................................          1.9         24.2         20.5         16.0  ...........
1974-83........................................          2.3         25.3         28.2         25.8  ...........
1984-94........................................          1.6         22.0         13.1          6.8  ...........
----------------------------------------------------------------------------------------------------------------
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

(4) Average annual rate of growth
1974-93........................................          3.9         21.1         17.8         13.3  ...........
1974-83........................................          4.9         21.6         21.6         15.9  ...........
1984-94........................................          3.5         20.4         14.3         10.5  ...........
----------------------------------------------------------------------------------------------------------------
\1\ 1974 is the first full year of coverage for disabled beneficiaries under Medicare; SMI = supplementary
  medical insurance.

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.

    ProPAC submitted its report to Congress on July 27, 1995,
recommending that Congress reject the Secretary's proposal for
a phased-in prospective payment system for OPD services. ProPAC
concluded that adding more OPD services to a prospective
payment system would be difficult because it would create
financial winners and losers under the program. ProPAC argued
that hospitals and the Medicare Program would be required to
bear the cost of adopting a new PPS. Such a system, partially
implemented, would provide few benefits while increasing
payment complexity and the administrative burden on hospitals.
In addition, ProPAC found that the proposal would do little to
control utilization of outpatient services. ProPAC recommended
that HCFA submit to the Congress a detailed legislative
proposal to implement a PPS covering all outpatient services.

 TABLE 3-25.--PERCENT DISTRIBUTION OF HOSPITAL OUTPATIENT CHARGES UNDER
                    MEDICARE BY TYPE OF SERVICE, 1994
------------------------------------------------------------------------
                                                              Percent of
                      Service category                         charges
------------------------------------------------------------------------
Radiology..................................................         21.2
Laboratory.................................................         12.9
Operating room.............................................         11.4
End-stage renal disease....................................         11.7
Pharmacy...................................................          6.3
Emergency room.............................................          3.2
Clinic.....................................................          1.7
Physical therapy...........................................          2.0
Medical supplies...........................................          9.2
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.

                  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 grouped 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 1996 range
from $304 for a procedure in payment group one, to $903 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; 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 (IOL) include an allowance for the IOL 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 IOL 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 also provided 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 provided
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.
    In 1995, there were 1907 ASCs, a 293 percent increase over
the 485 facilities which were participating in Medicare in
1985. Payments for ASC services totaled $659.7 million in 1995
(see table 3-26). Table 3-27 shows the top 10 procedures (by
CPT code) performed in ASCs in 1995.

TABLE 3-26.--MEDICARE CERTIFIED AMBULATORY SURGICAL CENTERS: UTILIZATION
       AND PROGRAM BENEFIT PAYMENTS FOR FACILITY SERVICES, 1993-95
------------------------------------------------------------------------
                                              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........................   1,487,559     830,949,111     659,726,047
------------------------------------------------------------------------
Note.--ASC = ambulatory surgical center.

Source: Health Care Financing Administration, Bureau of Data Management
  and Strategy. Data from Part B Extract and Summary System.

                         Other Part B Services

Preventive services
    Medicare covers a screening mammography once every 2 years
for persons over age 65. The program covers screening
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. 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 1996 limit is
$62.10.
    A screening pap smear is authorized once every 3 years,
except for women who are at a high risk of developing cervical
cancer. Payment is based on the clinical diagnostic laboratory
fee schedule (see above).

   TABLE 3-27.--HIGH VOLUME PROCEDURES PERFORMED AT MEDICARE CERTIFIED
                    AMBULATORY SURGICAL CENTERS, 1995
------------------------------------------------------------------------
                                                               Volume of
Current procedural terminology         Short descriptor         Medicare
           code \1\                                              cases
------------------------------------------------------------------------
66984.........................  Remove cataract, insert lens.    504,224
66821.........................  After cataract laser surgery.    164,697
43239.........................  Upper GI endoscopy, biopsy...     67,737
45378.........................  Diagnostic colonoscopy.......     55,751
45385.........................  Colonoscopy, lesion removal..     39,329
45380.........................  Colonoscopy and biopsy.......     31,660
43235.........................  Upper GI endoscopy, diagnosis     25,270
52000.........................  Cystoscopy...................     20,011
45384.........................  Colonoscopy..................     18,924
66170.........................  Glaucoma Surgery.............     15,725
------------------------------------------------------------------------
\1\ The American Medical Association Physicians' Current Procedural
  Terminology (``CPT'') is a listing of descriptive terms and numeric
  identifying codes and modifiers for reporting medical services and
  procedures performed by physicians. The numeric identifying codes and
  short descriptors used in this table are copyrighted by the American
  Medical Association.

Source: Health Care Financing Administration, Bureau of Data Management
  and Strategy. Data from the National Claims History Procedure Summary
  File.

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 2 years
following a covered organ transplant. The coverage period is
extended to 3 years beginning in 1997.
    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.
    Generally, Medicare payment for drugs is based on the lower
of the estimated acquisition cost (EAC) or the national average
wholesale price. The EAC is determined based on surveys of
actual invoice prices. For multiple source drugs, payment is
based on the lower of the EAC or the wholesale price. These
provisions apply, except when payment is based on reasonable
costs. Special limits apply in the case of EPO; the limit is
$10 per 1,000 units. Osteoporosis drugs can only be paid on the
basis of reasonable costs.
    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 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 (BLS) or advance life
support (ALS), whether emergency or nonemergency transport was
used, and whether specialized ALS services were rendered.

                    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 1994, 7.7
percent of the population suffering from end-stage renal
disease (ESRD) who needed renal dialysis and 9.3 percent who
needed kidney transplants did not meet any of these
requirements and thus were not covered 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 3-28 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 2001. Total projected program expenditures for the
Medicare End-Stage Renal Disease Program for fiscal year 1995
are estimated at $6.9 billion. In fiscal year 1995, there were
an estimated 216,828 beneficiaries, including successful
transplant patients and persons entitled to Medicare on the
basis of disability who also have ESRD.
    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 3-29 shows that new enrollment for all Medicare
beneficiaries receiving ESRD services grew at an average annual
rate of 8.6 percent from 1988 to 1993. 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 3-7
shows the greatest rate of growth in program participation is
in people over age 75, at 14.2 percent, followed by people of
ages 65-74 with a growth rate of 11.2 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.

 TABLE 3-28.--END-STAGE RENAL DISEASE MEDICARE BENEFICIARIES AND PROGRAM
                         EXPENDITURES, 1974-2001
                       [Expenditures in millions]
------------------------------------------------------------------------
                                Expenditures        HI        Per person
          Fiscal year            (HI & SMI)   beneficiaries      cost
------------------------------------------------------------------------
1974..........................          $229        15,993       $14,319
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        54,928        22,666
1981..........................         1,464        61,324        23,873
1982..........................         1,640        68,934        23,791
1983..........................         1,984        77,968        25,446
1984..........................         2,325        87,018        26,719
1985..........................         2,154        95,854        22,472
1986..........................         2,527       105,268        24,002
1987..........................         2,740       115,587        23,703
1988..........................         3,128       126,274        24,773
1989..........................         3,659       138,164        26,480
1990..........................         4,065       151,969        26,751
1991..........................         4,511       167,816        26,881
1992..........................         5,145       181,020        28,422
1993..........................         5,671       192,447        29,468
1994..........................         6,201       204,302        30,352
1995..........................         6,890       216,828        31,776
1996..........................         7,587       229,925        32,998
1997..........................         8,362       243,458        34,347
1998..........................         9,221       257,238        35,846
1999..........................        10,155       271,125        37,445
2000..........................        11,165       285,078        39,165
2001..........................        12,254       299,201        40,956
------------------------------------------------------------------------
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. HI = hospital insurance; SMI = supplementary medical
  insurance.

Source: Health Care Financing Administration, Office of the Actuary.

    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, and will continue,
to result in steady growth in the number of patients enrolling
in Medicare's End-Stage Renal Disease Program.

   TABLE 3-29.--MEDICARE END-STAGE RENAL DISEASE PROGRAM NEW ENROLLMENTS BY AGE AND PRIMARY DIAGNOSIS, 1988-93
----------------------------------------------------------------------------------------------------------------
                                                                                                Average
                                                                                                 annual  Percent
       Age and primary  diagnosis           1988     1989     1990     1991     1992     1993   percent   change
                                                                                                 change  1992-93
----------------------------------------------------------------------------------------------------------------
Number of new enrollees:
    Total...............................   38,151   42,885   46,658   50,831   55,583   57,621      8.6     3.7
                                         =======================================================================
Age:
  Under 15 years........................      403      405      461      454      409      440      1.8     7.6
  15-24 years...........................    1,268    1,315    1,271    1,242    1,350    1,312      0.7    (2.8)
  25-34 years...........................    3,087    3,413    3,438    3,485    3,560    3,601      3.1     1.2
  35-44 years...........................    4,340    4,704    5,133    5,501    5,848    5,796      6.0    (0.9)
  45-54 years...........................    5,390    5,904    6,230    6,753    7,559    7,962      8.1     5.3
  55-64 years...........................    8,456    9,108    9,819   10,587   11,214   11,551      6.4     3.0
  65-74 years...........................    9,669   11,302   12,682   14,097   15,629   16,415     11.2     5.0
  75 years and over.....................    5,538    6,734    7,624    8,712   10,014   10,736     14.2     7.2
Diagnosis:
  Diabetes..............................   11,717   14,214   15,939   18,249   20,201   20,073     11.4    (0.6)
  Glomerulonephritis....................    5,228    5,643    5,779    5,810    5,984    5,896      2.4    (1.5)
  Hypertension..........................   10,325   12,161   13,278   14,633   16,346   15,640      8.7    (4.3)
  Polycystic-kidney dis.................    1,250    1,275    1,402    1,474    1,546    1,460      3.2    (5.6)
  Interstit nephritis...................    1,233    1,378    1,371    1,497    1,515    1,379      2.3    (9.0)
  Obstructive nephropat.................      872      954      916      985    1,042      949      1.7    (8.9)
  Other.................................    2,182    2,596    2,788    3,456    3,775    3,961     12.7     4.9
  Unknown...............................    2,657    2,443    2,408    2,693    2,876    2,461     -1.5   (14.4)
  Not reported..........................    2,687    2,221    2,777    2,034    2,298    5,999     17.4   161.1
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Data Management and Strategy; data from the Program
  Management and Medical Information System, June 1995 update.

    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 3-30 indicates that the number of transplants in 1994
was more than double the number performed in 1980. Despite the
significant increases in the number and success of kidney
transplants, transplantation will not be 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. Some ESRD patients do not want an
organ transplant.

          TABLE 3-30.--TOTAL KIDNEY TRANSPLANTS PERFORMED IN MEDICARE CERTIFIED U.S. HOSPITALS, 1979-94
----------------------------------------------------------------------------------------------------------------
                                                                          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      1,760         20      7,116         80
1989...................................................        8,899      1,823         21      7,006         79
1990...................................................        9,796      2,001         21      7,705         79
1991...................................................       10,026      2,296         23      7,644         76
1992...................................................       10,115      2,391         24      7,579         75
1993...................................................       10,934      2,631         26      8,106         74
1994...................................................       11,312      2,738         24      8,312         73
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.

    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. Peritoneal dialysis does not
require use of a machine. Instead, 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. To be effective, both types
of dialysis generally need to be performed several times a
week, usually three times.

                             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 audited cost data and adjusted for the national
proportion of patients dialyzing at home versus in a facility,
and area wage differences. 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 paid 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 1996, the
composite rate is $130 for hospitals and $126 for freestanding
facilities.

                              MANAGED CARE

    The Medicare risk-contracting program was authorized by the
Tax Equity and Financial Responsibility Act of 1982. The
program gives Medicare beneficiaries the option to enroll in
health maintenance organizations (HMOs), all of which offer
Medicare-covered benefits and most of which also offer coverage
of cost sharing and supplemental services. Beneficiaries may
choose HMO enrollment when they become Medicare eligible or at
other times that Medicare HMOs offer open enrollment. They also
are allowed to disenroll from their plans at the end of any
given month.

                               Enrollment

    Currently, a small but growing portion of Medicare
beneficiaries are enrolled in managed care plans. Recent growth
in enrollment reflects growth in both the number of plans with
Medicare risk contracts and the number of Medicare enrollees
per plan.
Enrollment policies
    Medicare enrollees entitled to part B benefits may enroll
in a managed care plan with a Medicare contract if they live
within the plan's service area. Beneficiaries may enroll in a
plan upon becoming eligible for Medicare or during the plan's
open enrollment period.
    Plans are required to provide an open enrollment period,
publicized through appropriate media, for at least 30
consecutive days each year. Many, however, have a continuous
enrollment policy. Plans are required to enroll all eligible
beneficiaries (except those with end-stage renal disease or who
elect hospice care) on a first come basis until they have met
their enrollment capacity.
    To forestall discriminatory practices by plans during the
enrollment process, the Health Care Financing Administration
(HCFA) oversees plan marketing activities. Written descriptions
of plan rules, procedures, benefits, fees and charges,
services, and other information must be approved by HCFA and
provided to interested beneficiaries. The additional benefits
or services that the plan provides and any reductions in
premiums, deductibles, or copayments also must be documented.
In addition, plans are prohibited from misrepresenting
themselves to beneficiaries, offering gifts or payments to
enrollees, soliciting door-to-door, or distributing marketing
materials that have not been approved by HCFA.
    Beneficiaries may choose to disenroll at any time for any
reason. To disenroll, the beneficiary submits a written request
to the plan. The plan, in turn, must submit a disenrollment
notice to HCFA. The disenrollment generally is effective the
month after the request is made. Plans may disenroll a
beneficiary, but only for a limited number of reasons such as
the beneficiary moving out of the plan's service area, failing
to pay the premium, or providing fraudulent information on the
application.
Plan participation requirements
    Participation in Medicare's risk-contracting program is
limited to federally qualified health maintenance organizations
(HMOs) and competitive medical plans (CMPs). Other forms of
managed care that have evolved since the risk-contracting
program began, such as preferred provider organizations and
tightly managed fee-for-service insurance plans, are not
currently program options. However, HCFA is in the process of
entering into demonstration projects to test different kinds of
managed care arrangements.
    In general, to participate in Medicare risk contracts,
plans must: assume the full financial risk of providing the
health care services they have agreed to cover; show that they
have sufficient operating experience; and demonstrate that they
are capable of furnishing the range of services available to
fee-for-service Medicare enrollees in the same area, except
hospice services. In addition, plans must maintain a quality
assurance program and have a minimum number of commercial
members. For urban plans, this enrollment threshold is 5,000;
rural plans must have at least 1,500 commercial members. With
limited exceptions, plans must also maintain a non-Medicare,
non-Medicaid enrollment of at least 50 percent.
    Plans also may choose to serve Medicare beneficiaries under
a cost-based contract. Under this option, plans receive
reasonable costs for providing services rather than capitation
payments. Moreover, beneficiaries can use providers outside the
plan, in which case the providers are paid on a fee-for-service
basis. Two types of cost contracts exist. If a plan opts to
cover both part A and part B services, it is known as an 1876
(referring to that section of the Social Security Act) cost
contract. Medicare may also separately reimburse plans for
their part B costs under rules established for health care
prepayment plans (HCPPs). There are no specific statutory
conditions to qualify for a HCPP contract. Some HCPPs are
private market HMOs while others are union or employer plans.
Trends in enrollment and plan participation
    In April 1996, 3.5 million beneficiaries participated in
Medicare's risk-contracting program. Although these enrollees
still represent less than 10 percent of Medicare's total
population, enrollment in risk-based contracts has grown
substantially. Current levels are about triple the 1.2 million
beneficiaries enrolled in September 1990, as a result of annual
enrollment increases at double digit rates throughout the 1990s
(see table 3-31). Enrollment in cost-based HMOs is small (about
473,000) and in HCPPs is smaller (186,000).
    The number of Medicare risk contracts has varied over the
last 9 years. After holding fairly level through the late
1980s, the number of contracts dipped markedly through the
early 1990s. Despite this sharp drop, enrollment continued to
grow because plans leaving the risk-contracting program served
relatively few beneficiaries. Part of the drop in contracts can
be attributed to the market consolidation that occurred in the
early 1990s. Recently, plan participation has been increasing.
As of April 1996, there were 202 HMOs with risk contracts, 28
with Section 1876 cost contracts, and 53 with HCPP contracts.
For 1996, risk contracts grew almost 30 percent over 1995 (see
table 3-31).

                             TABLE 3-31.--MEDICARE RISK PLAN PARTICIPATION, 1990-96
----------------------------------------------------------------------------------------------------------------
                                                                                       As a
                                                                  Enrollees  (in   percentage of    Number  of
                              Year                                  millions)     total Medicare     contracts
                                                                                    enrollment
----------------------------------------------------------------------------------------------------------------
1990...........................................................              1.2             3.5              95
1991...........................................................              1.3             3.7              85
1992...........................................................              1.5             4.2              83
1993...........................................................              1.7             4.7              90
1994...........................................................              2.1             5.7             109
1995...........................................................              2.9             7.7             154
1996 \1\.......................................................              3.5             9.1             202
----------------------------------------------------------------------------------------------------------------
\1\ Data are as of April 1996.

Note.--Enrollment data are as of September each year; contract data are as of January each year.

Source: Health Care Financing Administration, Office of the Actuary and Office of Managed Care.

    Concentration of risk plans.--Risk contracts are
concentrated among a few corporate sponsors and are not
distributed uniformly across the country. More than 60 percent
of all risk contract members are enrolled in plans sponsored by
PacifiCare, FHP, Kaiser, Humana, and United Health Care (chart
5-1). While still relatively high, the concentration of
enrollment in certain corporations appears to be declining,
probably because of the large number of recent new entrants to
risk contracting. Further decline likely will be gradual since
many new plans serve fewer than 1,000 enrollees. Corporate
mergers, however, could lead to increases in enrollment
concentration.

   CHART 3-1. CONCENTRATION OF MEDICARE RISK ENROLLEES IN PLANS AND
 CORPORATIONS WITH THE HIGHEST MEDICARE ENROLLMENT, SELECTED YEARS (IN
                                PERCENT)
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>

    Note._Contract counts are as of April of each year.
    Source: Group Health Association of America.

    The number of managed care plans available to Medicare
beneficiaries in a given market is important to assessing both
the opportunities to enroll in any plan and the degree of
choice. About three-quarters of Medicare beneficiaries have
access to a plan, see table 3-32. But only 57 percent of
beneficiaries live in areas served by more than one plan. Those
beneficiaries who are eligible for Medicare due to disabilities
have slightly more limited access to plans than do those who
are eligible due to age only.

 TABLE 3-32.--DISTRIBUTION OF BENEFICIARIES BY NUMBER OF MEDICARE PLANS THAT SERVE THEIR ZIP CODE OF RESIDENCE,
                                                      1995
----------------------------------------------------------------------------------------------------------------
                                                                     Percent        Percent old       Percent
                        Number of plans                           beneficiaries         age         disability
----------------------------------------------------------------------------------------------------------------
No Plans.......................................................               25              25              30
1..............................................................               18              18              17
2-5............................................................               28              28              27
6-10...........................................................               21              21              20
11-15..........................................................                6               6               4
More than 15...................................................                3               3               2
----------------------------------------------------------------------------------------------------------------
Source: Physician Payment Review Commission analysis of Health Care Financing Administration Risk Plan
  Geographic Area File and the Medicare Master file.

                          Payment Methodology

    There are two basic components of the risk program payment
methodology. 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.
Capitation payments to risk-contracting plans
    Medicare pays risk plans based on an actuarial projection
of what the program would have paid if the beneficiary had
remained in the traditional fee-for-service sector. The Health
Care Financing Administration recalculates these HMO payment
rates every calendar year based on estimates of national
average spending, county spending, and beneficiary
characteristics.
    National Medicare per capita expenditures.--First, HCFA
actuaries use historical program expenditures to project
national per capita program expenditures for the coming
calendar year. These U.S. per capita costs (USPCC) are needed
to update historical spending at the county level. Separate
projections are made for part A services and part B services
for the aged, the disabled, and people with end-stage renal
disease (ESRD). These projections take into account expected
inflation and changes in utilization patterns and services
covered by the Medicare Program. The USPCCs are reported as
monthly per capita expenditures because risk plans are paid on
a monthly basis (see table 3-33). Fee-for-service claims for
services provided 3 years earlier are used to ensure that the
calculation is based on complete data.

       TABLE 3-33.--PROJECTED U.S. PER CAPITA MONTHLY COSTS, 1995
------------------------------------------------------------------------
              Eligibility group                  Part A        Part B
------------------------------------------------------------------------
Aged........................................       $251.61       $148.91
Disabled....................................        223.99        131.82
End-stage renal disease.....................      1,520.42      2,153.81
------------------------------------------------------------------------
Source: Health Care Financing Administration, Office of the Actuary.

    County-level Medicare per capita expenditures.--In the
second stage, HCFA estimates expected per capita program
expenditures for the aged and the disabled in each county, and
for people with ESRD in each State. To reduce the effect of
year-to-year swings in per capita payments, 5 years of fee-for-
service claims data are used (that is, the period 3-7 years
previously).
    County-level per capita spending differs 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 are
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 risk adjusters reflect the
relative level of program spending for groups defined on the
basis of age, sex, disability status, institutional status,
Medicaid enrollment, and working aged with employment-based
insurance coverage. These projected risk-weighted per capita
payments are known as the adjusted average per capita costs
(AAPCC).
    Enrollee-level payment to plans.--Finally, HCFA calculates
what it will pay a risk plan for each individual enrollee. This
payment is based on 95 percent of the AAPCCs for the enrollee's
county of residence, adjusted by the national risk adjusters to
reflect each enrollee's demographic characteristics (see table
3-34). Medicare also pays plans 95 percent of the State-level
end-stage renal disease AAPCCs for enrollees with this
condition.

   TABLE 3-34.--CALCULATION OF 1995 RISK PLAN MONTHLY PAYMENT FOR NONINSTITUTIONALIZED, NONMEDICAL, NONWORKING
                                 MALES AGE 68 IN LOS ANGELES COUNTY, CALIFORNIA
----------------------------------------------------------------------------------------------------------------
                                                         95                  Demographic
                   Medicare part                      percent                    risk                   Subtotal
                                                      of AAPCC                 adjuster
----------------------------------------------------------------------------------------------------------------
Part A.............................................    $340.59  <greek-e>          0.70         =        $238.41
Part B.............................................     218.17  <greek-e>          0.80         =         174.54
                                                                                                      ----------
      Total program payment to risk plan...........  .........  ...........  ...........        =         412.95
----------------------------------------------------------------------------------------------------------------
Note.--AAPCC = adjusted average per capita costs.

Source: Prospective Payment Assessment Commission calculations using data from the Health Care Financing
  Administration, Office of the Actuary.

Adjusted community rate requirements
    HCFA calculates the AAPCC for each county and the risk
adjusters for each demographic group and provides this
information to potential risk contractors. A plan uses this
payment information together with its own estimates of the
number and mix of Medicare enrollees it expects to enroll to
determine the amount of Medicare Program payments it would
receive. Plans that wish to enter into or continue risk
contracts are then required to submit an adjusted community
rate (ACR) proposal for the following calendar year.
    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 and intensity of
services and covered benefits. The plan's commercial revenues
are used to calculate an allowance for administrative costs and
profits.
    If expected Medicare revenues exceed projected costs, a
plan is required either to return the surplus to Medicare or to
spend it by providing additional benefits to Medicare
enrollees. The ACR process is used to calculate the value of
these required, noncovered benefits. The process also is used
to calculate premiums that Medicare enrollees will pay to risk
plans.
    Expected cost of Medicare-covered services.--The ACR
proposal is based on the average monthly revenue per member for
a plan's commercial business. This revenue is allocated to
direct patient care expense and administration. The direct
patient care expense categories include part A line items
(inpatient hospital, skilled nursing, and home health
services), part B line items (physician, outpatient laboratory,
and outpatient radiology services), and noncovered Medicare
services (such as routine physical examinations).
Administrative expense is the difference between total revenue
(commercial premiums plus other revenue) and direct patient
care expenses. Thus, administration includes both overhead
costs and profits on the plan's commercial business.
    The direct costs of providing Medicare-covered services are
adjusted to reflect the higher volume and complexity of
services provided to Medicare beneficiaries as compared to
commercial members. 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.
    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 from the
commercial base rate allocation. 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.
    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 (as discussed under the ACR calculation above). 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.
    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.
    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. Over half of the plans charge no additional
premiums.
Payment issues
    There are several issues involving the current AAPCC-based
payment methodology. Payment rates vary widely across the
country. Risk plans also have been paid fee-for-service medical
education and disproportionate share hospital (DSH) payments
for costs they may not actually have incurred.
    Geographic variation and volatility.--Current policies lead
to significant variation in risk payments across communities.
Because Medicare risk payments are county based, three problems
arise. First, neighboring counties often have substantially
different AAPCCs that may not be explained by differences in
plan costs. For example, the AAPCC varies by $180 per month in
the counties adjacent to Washington, DC and by more than $100
in the counties that comprise both the Miami and Minneapolis
markets (see table 3-35).
    Second, geographic variation in AAPCCs reflects local
differences in fee-for-service Medicare expenditures due to
service use patterns (volume and intensity), provider input
prices (for example, cost of wages or supplies), and Medicare
payments for special purposes (for example, DSH payments). In
1995, the published AAPCCs ranged from $177 to $679. AAPCCs for
urban counties were higher on average than for rural counties
($428 versus $323; see table 3-36).
    Different patterns of service use are the source of much of
this variation. When local differences in Medicare provider
input prices are removed, the resulting standardized AAPCCs
still vary substantially (see table 3-36). The 1995 input-
price-adjusted AAPCC rates ranged from $324 to $530. On
average, the actual AAPCC rates are higher for urban counties
and lower for rural locations than the input-price-adjusted
rates. The much larger variation in the AAPCC rates across the
country, compared with input-price-adjusted rates, reflects
large differences in utilization of services.
    Third, despite the use of 5 years of expenditure data to
smooth changes in per capita spending, many counties experience
substantial changes in the AAPCC from year to year. The
volatility of county-level risk payments over time is related
to the size of a county's Medicare population. Per capita costs
for small Medicare populations fluctuate more over time. The
average volatility of payment rates is significantly greater
for rural than for urban counties (table 3-36); volatility
exceeds 20 percent for some rural counties.
    Both the levels of AAPCC-based payment rates and their
volatility over time have influenced Medicare risk-plan
enrollment rates. PPRC's analysis indicates 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 a weaker but measurable effect, with lower enrollment
rates where volatility is high.

 TABLE 3-35.--STANDARDIZED PER CAPITA MONTHLY RATES OF PAYMENT FOR AGED
                    ENROLLEES IN SELECTED AREAS, 1995
------------------------------------------------------------------------
                                                                Rate of
                             Area                               payment
------------------------------------------------------------------------
Washington, DC--Maryland--Virginia:
    Washington, DC...........................................       $540
    Prince Georges County, MD................................        543
    Montgomery County, MD....................................        426
    Manassas Park City, VA...................................        464
    Falls Church City, VA....................................        408
    Alexandria City, VA......................................        407
    Arlington County, VA.....................................        396
    Fairfax City, VA.........................................        367
    Fairfax County, VA.......................................        361
Minneapolis-St. Paul, MN, metro area:
    Ramsey (St. Paul)........................................        380
    Hennepin (Minneapolis)...................................        363
    Anoka....................................................        342
    Dakota...................................................        334
    Washington...............................................        324
    Carver...................................................        285
    Scott....................................................        277
Southern Florida:
    Dade.....................................................        616
    Broward..................................................        544
    Palm Beach...............................................        473
Southern California:
    Los Angeles..............................................        559
    Orange...................................................        523
    San Diego................................................        459
------------------------------------------------------------------------
Note.--The 1995 U.S. per capita cost for aged enrollees is $401; 95
  percent of the U.S. per capita cost is $380, which corresponds to the
  standardized per capita rate of payment.

Source: Health Care Financing Administration, Office of the Actuary.

    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. These payments are retained in the expenditures
used to calculate the AAPCCs. As a result, an AAPCC reflects a
county's average monthly per capita cost for fee-for-service
medical education and DSH. 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.

TABLE 3-36.--AVERAGE MEDICARE RISK-PLAN MONTHLY PAYMENT RATES, PAYMENT VOLATILITY, AND ENROLLMENT RATES BY URBAN
                                            AND RURAL LOCATION, 1995
----------------------------------------------------------------------------------------------------------------
                                                                        Input-price-
                                                            AAPCC rate    adjusted       Payment      Enrollment
                                                            (standard       rate     volatility \1\      rate
                                                            deviation)   (standard      (percent)     (percent)
                                                                         deviation)
----------------------------------------------------------------------------------------------------------------
All counties.............................................    $402 (92)    $402 (46)            2.2           7.3
Urban counties...........................................     428 (87)     418 (42)            2.1           9.4
    Central urban........................................     499 (83)     441 (40)            1.8          16.8
    Other urban..........................................     393 (64)     406 (37)            2.2           5.8
Rural counties...........................................     323 (50)     357 (20)            2.9           0.6
    Urban fringe.........................................     330 (51)     357 (18)            2.7           0.7
    Other rural..........................................     317 (48)     354 (21)            3.1           0.5
----------------------------------------------------------------------------------------------------------------
\1\ Payment volatility is measured as the annual average magnitude of change (higher or lower) in a county's
  payment index for 1991-95 as a percentage of its 5-year average index for that time period. The payment index
  is the ratio of the county's AAPCC rate to the national average rate per beneficiary.

Note.--AAPCC = adjusted average per capita cost.

Source: Physician Payment Review Commission analysis of Medicare AAPCC payment rates for 1991-95 and risk-plan
  eligibility and enrollment data from the group health plan master file for mid-1995.

    Medical education and DSH payments are an estimated 5.5
percent of the AAPCC rates overall, but their share of total
payment rates varies across the country (table 3-37). On
average, medical education and DSH payments represent only 3.6
percent of capitation rates for rural counties but 6.1 percent
of the rates for urban ones. They average 8.4 percent of
payment rates for the most densely populated, central urban
counties.

TABLE 3-37.--ESTIMATED MEDICAL EDUCATION AND DISPROPORTIONATE SHARE PAYMENTS AS COMPONENTS OF MEDICARE RISK-PLAN
                                PAYMENT RATES, BY URBAN AND RURAL LOCATION, 1995
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                    Medical     Disproportionate       Total
                                                                   education          share         percentage
----------------------------------------------------------------------------------------------------------------
All counties..................................................             3.4              2.1              5.5
Urban counties................................................             3.8              2.3              6.1
    Central urban.............................................             5.3              3.1              8.4
    Other urban...............................................             3.1              1.9              5.0
Rural counties................................................             2.1              1.5              3.6
    Urban fringe..............................................             2.2              1.6              3.8
    Other rural...............................................             1.9              1.5              3.4
----------------------------------------------------------------------------------------------------------------
Source: Physician Payment Review Commission analysis of Medicare part A expenditures for the 5 percent sample of
  beneficiaries for 1993, published adjusted average per capita cost rates for 1995, and risk-plan eligibility
  and enrollment data from the group health plan master file for mid-1995.

    Medicare beneficiaries, and in particular those who are
risk-plan enrollees, tend to live in counties where medical
education and DSH payments are larger shares of the payment
rates. More than 30 percent of risk-plan enrollees are in
counties with medical education and DSH shares of 7 percent or
greater, and another 37 percent are in counties with 4-6
percent shares (table 3-38).

 TABLE 3-38.--ESTIMATED MEDICAL EDUCATION AND DISPROPORTIONATE SHARE (DSH) PAYMENTS FOR COUNTIES, BENEFICIARIES,
                                            AND PLAN ENROLLEES, 1995
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                                                     Risk-plan
         Medical education/ DSH share of capitation rate             Counties      Beneficiaries     enrollees
----------------------------------------------------------------------------------------------------------------
0 percent.......................................................             7.8             1.1             0.1
1-3 percent.....................................................            48.4            33.3            29.4
4-6 percent.....................................................            30.2            34.1            36.6
7-9 percent.....................................................             9.4            19.2            24.2
10 percent or more..............................................             4.2            12.3             9.7
----------------------------------------------------------------------------------------------------------------
Source: Physician Payment Review Commission analysis of Medicare part A expenditures for the 5-percent sample of
  beneficiaries for 1993, published adjusted average per capita cost rates for 1995, and risk-plan eligibility
  and enrollment data from the group health plan master file for mid-1995.

                            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, Puerto Rico, 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 (e.g., 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 HHS 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 will
be 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. OBRA 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 HHS 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 1995 totaled $190
million; in 1996, spending is expected to be $268 million.
Spending varies considerably from year to year depending on
where the PROs are in their contract cycles. HCFA projections
for fiscal year 1997 are $270 million. 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 provider(s), physician(s), 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 of care. This provision, however, has never
been used.
    Each of the contracts between HHS 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,
basically using local clinical criteria. 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) will no longer be
required. Instead, each PRO will be required to conduct 4-18
quality improvement projects each year, depending on the size
of their beneficiary populations.

                  Financing Graduate Medical Education

    Medicare is the largest explicit Federal source of
financing for graduate medical education through the program's
support of medical residency training in teaching hospitals.
Private payers also support graduate medical education through
higher payments to teaching hospitals. However, the
contributions of other private, third-party payers for graduate
medical education are not specifically identified in their
payments. Medicare recognizes the costs of graduate medical
education under two mechanisms: direct graduate medical
education (GME) payments and an indirect medical education
(IME) adjustment. In fiscal year 1995, Medicare paid
approximately $2.3 billion in GME payments and $4.9 billion in
IME adjustments for its share of the costs of beneficiary
treatment at teaching hospitals.
    Today policymakers are concerned with a number of issues
related to the Nation's supply of physicians and the Federal
role in subsidizing graduate medical education. There is a
general consensus that the future physician work force will not
match the future health care needs of the Nation. The concern
is focused on the future surplus of physicians, comprised of
too few generalist physicians and too many specialists to meet
the Nation's future health care needs. In a health care economy
shifting markedly toward managed care arrangements, many argue
that HMOs and other managed care plans that use large numbers
of generalist physicians as gatekeepers and primary care
providers will face shortages of such physicians. In 1995,
about 35 percent of all physicians were generalists, and most
experts agree that the future proportion of generalists needs
to increase relative to specialist physicians.
    Medicare support for residency training has generally
allowed hospitals to determine the specialty distribution and
number of physicians to be trained. Hospitals make those
decisions based largely on hospital service needs rather than
on the broader health and medical needs of the community. While
in 1960 the physician-to-population ratio had been 142 to
100,000, the total number of physicians grew at a rate that was
almost four times faster than that of the total population,
reaching 263 physicians per 100,000 population by 1994. The
Bureau of Health Professions at HHS projects that at the
current rate of growth, by 2020 the total number of physicians
will reach 875,800, or 269 physicians per 100,000 population.
    International medical graduates (IMGs), physicians
receiving their training in medical schools in countries
outside the United States and Canada, make up a significant
part of the Nation's physician work force. The number of IMGs
has increased from just over 10 percent of all physicians in
1963, to 18 percent in 1970, and 23 percent in 1994 (144,783 of
the 619,751 physicians in practice). Not all IMGs are foreign-
born; about 3.2 percent of the total physician work force is
U.S.-born IMGs who have attended medical schools abroad.\3\
---------------------------------------------------------------------------
    \3\ Primarily medical schools in the Dominican Republic, Grenada,
Mexico and Montserrat.
---------------------------------------------------------------------------
    The growing number of IMGs in residency training in the
United States in recent years has been an important component
in the overall increase in the total number of physicians. The
training of IMGs was spurred by the perceived shortage of
physicians during the 1960s. However, the current concern about
a physician surplus in the early 1980s has not changed Federal
incentives provided through the Medicare GME payments to
hospitals that encourage expanding residency positions which
are increasingly filled by IMG residents.
    In addition, the increasing supply of physicians has not
eliminated concerns about the geographic distribution of
physicians. According to the American Medical Association
(Randolph, Seidman, & Pasko, 1996), in 1994 there were 149
counties without an active physician in patient care. Over one-
half million (581,040) people resided in these counties.
Despite the overall increases in the numbers of physicians,
there continue to be growing numbers of areas across the
country that are designated as health professions shortage
areas (HPSAs) based on the ratio of population to physicians.
According to the Division of Shortage Designation at HHS, as of
December 1995, there were 2,617 areas designated as primary
medical HPSAs that would require the placement of 5,280 primary
care physicians in order to eliminate the shortage designation.
HHS estimates that the underserved population residing in these
HPSAs is over 26.6 million.

                            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 she 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'' (i.e., is
an employee or is treated as an employee by the employer). The
MSP provision for the disabled population expires October 1,
1998.
    Secondary payer provisions also apply to ESRD individuals
with employer group health plans (regardless of employer size).
The group health plan is the primary payer for 18 months for
persons who become eligible for Medicare ESRD benefits. The
employer's role as primary payer is limited to a maximum of 21
months (18 months plus the usual 3-month waiting period for
Medicare ESRD coverage). The secondary payer provisions for the
ESRD population expire October 1, 1998.
    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 (SSA) and Internal Revenue Service
(IRS) 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 authority for the
program expires October 1, 1998. Recent court action has,
however, lessened the ability to make collections in certain
situations.
    Table 3-39 shows savings attributable to these Medicare
secondary payer provisions. In fiscal year 1995, combined
Medicare part A and B savings are estimated at $3 billion.

     Health Insurance Protection that Supplements Medicare Coverage

    The vast majority of aged Medicare beneficiaries have other
coverage to supplement their Medicare protection. In 1991, an
estimated 89 percent had such coverage through private
insurance or public programs. An estimated 33 percent had
employer-sponsored coverage, either through a current or former
employer; 37 percent had individually-purchased coverage; and 5
percent had both types of protection. In addition, 12 percent
had Medicaid protection, with an additional 2 percent reporting
other types of coverage.

  TABLE 3-39.--MEDICARE SAVINGS ATTRIBUTABLE TO SECONDARY PAYER PROVISIONS, BY TYPE OF PROVISIONS, FISCAL YEARS
                                                     1988-95
                                            [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
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Program Operations.

    Policies purchased by individuals to supplement their
Medicare coverage are known as Medigap policies. These polices
offer coverage for Medicare's deductibles and coinsurance and
pay for some services not covered under Medicare. In 1990,
Congress 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. The standardized package covers a
``core'' benefits package. Each of the other nine includes the
core package plus a different combination of additional
benefits.
    In 1992, nearly 27 million elderly and disabled persons
living outside institutions (78 percent of all such people) had
some form of private supplementary coverage. About 12.5 million
had only individually purchased policies (primarily Medigap),
11.8 million had only employer-sponsored coverage, and 2.4
million had both types of protection. The average annual
premium was $1,014 for persons with individually-purchased
policies only, $728 for those with employer-sponsored insurance
only; and $1,369 for persons who had both types of coverage
(see table 3-40).
    Over 80 percent of Medicare enrollees over age 65 living in
the community had private supplementary insurance protection in
1992; only 27 percent of the disabled under 45, and 46 percent
of the disabled 45-64, had such protection. For aged persons,
the share of persons with Medigap increased with age, while the
share of those with employer-sponsored coverage declined with
age. This later finding reflects the fact that health insurance
for retirees did not become widespread until after the 1960s;
thus more recent retirees are more likely to qualify for
coverage. There is however, some concern that employer support
for retiree health benefits is decreasing.
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 that
it 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 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.

   TABLE 3-40.--NUMBER AND PERCENT OF MEDICARE ENROLLEES LIVING IN THE
  COMMUNITY WITH PRIVATE SUPPLEMENTAL INSURANCE, AVERAGE PREMIUMS PAID,
 PERCENT WITH DRUG COVERAGE, AND PERCENT WITH NURSING HOME COVERAGE, BY
                  TYPE OF SUPPLEMENTAL INSURANCE, 1992
------------------------------------------------------------------------
                            Item
------------------------------------------------------------------------
All private health insurance:
    Number of persons in thousands.........................     26,788
    Percent of persons.....................................      100.0
    Average premium per person.............................       $914
    Percent with drug coverage.............................         50
    Percent with nursing home coverage.....................         21
Individually based only:
    Number of persons......................................     12,528
    Percent of persons.....................................      100.0
    Average premium per person.............................     $1,014
    Percent with drug coverage.............................         25
    Percent with nursing home coverage.....................         25
Employer-sponsored only:
    Number of persons......................................     11,832
    Percent of persons.....................................      100.0
    Average premium per person.............................       $728
    Percent with drug coverage.............................         72
    Percent with nursing home coverage.....................         15
Both individually based and employer-sponsored:
    Number of persons......................................      2,428
    Percent of persons.....................................      100.0
    Average premium per person.............................     $1,369
    Percent with drug coverage.............................         73
    Percent with nursing home coverage.....................         38
------------------------------------------------------------------------
Note.--Includes persons ever enrolled for Medicare who did not enter a
  long-term care facility during 1992. Numbers may not add to totals due
  to rounding.

Source: Health Care Financing Administration, Office of the Actuary; and
  Chulis, Eppig, & Poisal (1995).

Impact of supplemental insurance on Medicare spending
    Medicare cost-sharing requirements are in part intended to
encourage cost-conscious utilization of services. However,
since private supplementary insurance covers many of these
charges, beneficiaries may be insulated from the costs of care.
This insulation translates into higher utilization and thus
higher Medicare costs. Analysis of 1993 data shows that
beneficiaries with supplemental private insurance protection
cost Medicare 28 percent more than beneficiaries without this
coverage. Additional service use for those with supplemental
protection varies by type of service and may be influenced by
the urgency of the need for care, Medicare copayment policies,
or both. Beneficiaries with supplemental coverage use roughly
twice as much preventive care (which by definition does not
treat an immediate medical need) as those beneficiaries without
this coverage. Physicians' services (which may used for a range
of conditions) are used more by those with supplemental
protection. However, utilization of inpatient hospital services
(which typically address serious or urgent conditions) is only
slightly higher for those with supplemental insurance. On the
other hand, home health care (which requires no cost-sharing)
is actually used more frequently by those who lack supplemental
insurance than those who have it (see table 3-41).

  TABLE 3-41.--MEASURES OF MEDICARE SERVICE USE FOR BENEFICIARIES WITH
        DIFFERENT TYPES OF SUPPLEMENTAL INSURANCE COVERAGE, 1993
------------------------------------------------------------------------
                                                 Supplemental insurance
                                                        coverage
     Measure of service use         Medicare  --------------------------
                                      only      Employer-   Individually
                                                 provided     purchased
------------------------------------------------------------------------
Total payment...................       $2,356       $3,027        $3,042
                                 ---------------------------------------
Total part A reimbursement......        1,618        1,800         1,763
  Inpatient reimbursement.......        1,331        1,560         1,451
  Home health reimbursement.....          247          197           233
  Skilled nursing facility
   reimbursement................           38           35            63
  Hospice reimbursement.........            0           11            15
                                 =======================================
Total part B reimbursement......          739        1,227         1,279
                                 ---------------------------------------
  Physician reimbursement.......          573          928           971
  Outpatient reimbursement......          166          295           307
                                 =======================================
Percentage of beneficiaries:
  With at least one office visit           61           86            88
  Receiving flu shot............           30           52            52
Percentage of female
 beneficiaries receiving:
  Mammogram.....................           18           38            33
  Pap smear.....................           15           31            27
------------------------------------------------------------------------
Source: Physician Payment Review Commission (1996, p. 291).

                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 except that their income
is slightly in excess of the poverty line (the specified low-
income beneficiary (SLMB) population; 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 ($7,740 for a single, $10,360 for a
couple in 1996); and (2) resources below 200 percent of the
resources limit set for the Supplemental Security Income (SSI)
Program (the specific 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 must be 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 HHS).
    As of March 1995, 29 States were reported to be using
payment rates below those applicable under Medicare. However,
the U.S. Court of Appeals for four judicial circuits issued
decisions which require 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.
Buy-in
    All States have buy-in agreements with the Secretary. Under
buy-in agreements, States 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 agreement for the QMB population is in addition
to the traditional buy-in agreement 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 (SLIMBs)
    States are also required to pay Medicare part B premiums
for SLIMBs. These are persons meeting the QMB criteria except
that their income is slightly over the QMB limit. The SLIMB
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.
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 February 1996, Medicare reported that there were
295,980 Medicare part A beneficiaries for whom QMB payments
were being made. As of the same date, States reported a total
of 4,840,442 part B buy-ins of which 2,430,755 were separately
identified as QMBs; however, this number is low due to
reporting problems (see table 3-42). The QMB numbers include
persons who were eligible for the full Medicaid benefit
package. No QMB-only number is available. Nationwide there were
192,544 SLMBs and 13 QDWIs in April 1996; this information is
not broken down by State.

  TABLE 3-42.--QUALIFIED MEDICARE BENEFICIARIES BY STATE, FEBRUARY 1996
------------------------------------------------------------------------
                                                             Part B buy-
                                                                 ins
              State                Part A QMBs  Part B buy-   identified
                                                    ins       as QMBs by
                                                                State
------------------------------------------------------------------------
Alabama..........................        3,615      119,456       27,918
Alaska...........................          599        6,408            2
Arizona..........................          333       46,183       30,504
Arkansas.........................        4,286       79,415       21,559
California.......................       62,778      758,494      493,528
Colorado.........................          543       48,759       13,432
Connecticut......................        2,472       48,188       39,332
Delaware.........................          489        7,361        1,532
District of Columbia.............        1,316       14,413          138
Florida..........................       40,168      288,280      191,076
Georgia..........................        6,001      163,544       45,446
Hawaii...........................        4,467       17,466        3,861
Idaho............................          284       13,366        7,702
Illinois.........................        4,012      241,081      112,791
Indiana..........................        2,031       75,141       50,378
Iowa.............................        1,423       49,523       35,757
Kansas...........................          506       35,167       11,491
Kentucky.........................        3,125      100,760       28,455
Louisiana........................        5,621      114,366       25,784
Maine............................            9       30,683       10,007
Maryland.........................        6,472       59,531       53,218
Massachusetts....................       12,339      125,181      102,558
Michigan.........................        4,019      129,925       37,091
Minnesota........................        2,753       53,048       21,273
Mississippi......................        7,651      103,702       80,288
Missouri.........................          638       75,481       55,875
Montana..........................          495       11,442        9,872
Nebraska.........................            1       16,658            0
Nevada...........................          907       15,275       11,145
New Hampshire....................           19        5,618        1,459
New Jersey.......................        6,846      129,457       86,307
New Mexico.......................          586       31,549        6,608
New York.........................          119      336,570      164,977
North Carolina...................       11,447      195,765       28,860
North Dakota.....................            7        5,476        1,371
Ohio.............................        7,138      170,302       89,158
Oklahoma.........................        5,032       61,242       56,648
Oregon...........................           30       46,124       25,655
Pennsylvania.....................       15,416      168,093      119,684
Rhode Island.....................          925       16,418        2,216
South Carolina...................        1,947       97,793       68,520
South Dakota.....................          766       12,544        4,560
Tennessee........................        8,689      153,120       59,353
Texas............................       40,994      321,975       89,630
Utah.............................          170       14,067        9,184
Vermont..........................          269       12,613        2,980
Virgin Islands...................            0          214            0
Virginia.........................        2,685      105,236       38,432
Washington.......................        3,285       75,149       33,290
West Virginia....................        3,880       41,845       38,351
Wisconsin........................        4,139       77,105       17,490
Wyoming..........................          219        5,490        1,809
South Marianas...................            0          316            0
Other............................            0          683            0
                                  --------------------------------------
      Total......................      295,980    4,540,442    2,430,755
------------------------------------------------------------------------
Note.--See text for data limitations; QMB = qualified Medicare
  beneficiary.

Source: Health Care Financing Administration.

                      LEGISLATIVE HISTORY, 1980-93

    This section summarizes major Medicare legislation enacted
into law, beginning with the Social Security disability
amendments of 1980 and continuing chronologically through the
Omnibus Budget Reconciliation Act of 1993. Since only technical
changes were included in the Social Security amendments of
1994, it is not included 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

Medigap
    Established a voluntary certification program for Medicare
supplemental policies in States that failed to establish
equivalent or more stringent standards. (Federal program would
be 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)

Pneumococcal vaccine
    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 (e.g., laboratory, operating room,
pharmacy, etc.) and costs of special care units (e.g.,
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 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 areawide 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

Payment freezes
    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

Payment freezes
    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 21-
100 days; covering up to 150 days per year, and eliminating the
prior hospitalization requirement. Modified home health benefit
by expanding definition of intermittent care and permitted
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

Repeal provisions
    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, and 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.)
Medicare and Medicaid coverage data bank
    Established system to identify and collect payments from
liable third party payers for services to beneficiaries.
(Employers were required to report 1994 information no later
than February 1995. Public Law 100-333 suspended application of
the provision for fiscal year 1995.)
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.)

    Table 3-43 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 3-43.--MEDICARE SAVINGS ESTIMATES, 1981-93
                        [In billions of dollars]
------------------------------------------------------------------------
                       Legislative act                          Savings
------------------------------------------------------------------------
Omnibus Budget Reconciliation Act of 1981:
    Spending reductions: (FY 1982-FY 1984)...................       $4.3
Tax Equity and Fiscal Responsibility Act of 1982:
    Spending reductions: (FY 1983-FY 1987)...................       23.1
Social Security Amendments of 1983:
    Spending reductions: (FY 1983-FY 1988)...................        0.2
    Revenue increases: (FY 1983-FY 1988).....................       11.5
Deficit Reduction Act of 1984:
    Spending reductions: (FY 1984-FY 1987)...................        6.1
Consolidated Omnibus Budget Reconciliation Act of 1985:
    Spending reductions: (FY 1986-FY 1981)...................       12.6
Omnibus Budget Reconciliation Act of 1986:
    Spending reductions: (FY 1987-FY 1989)...................        1.0
Omnibus Budget Reconciliation Act of 1987:
    Spending reductions: (FY 1988-FY 1990)...................        9.8
Omnibus Budget Reconciliation Act of 1989:
    Spending reductions: (FY 1990-FY 1994)...................       10.9
Omnibus Budget Reconciliation Act of 1990:
    Spending reductions: (FY 1991-FY 1995)...................       43.1
    Revenue increases: (FY 1991-FY 1995).....................       26.9
Omnibus Budget Reconciliation Act of 1993:
    Spending reductions: (FY 1994-FY 1998)...................       55.8
    Revenue increases (FY 1994-FY 1998)......................      53.8
------------------------------------------------------------------------
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 3-44 through 3-55 present detailed historical data
on the Medicare Program. Tables 3-44, 3-45, and 3-46 present
detailed enrollment data. Table 3-47 describes the percentage
of enrollees participating in a State buy-in agreement. Tables
3-48 and 3-49 show the distribution of Medicare payments by
type of coverage and by type of service. Tables 3-50 and 3-51
show the number of persons served and the average reimbursement
per person served and per enrollee. Tables 3-52 shows the
utilization of hospital services. Table 3-53 presents Medicare
utilization and reimbursement by State. Table 3-54 shows the
number of participating institutions and organizations.

                                                              TABLE 3-44.--NUMBER OF MEDICARE ENROLLEES BY TYPE OF COVERAGE AND TYPE OF ENTITLEMENT, SELECTED YEARS 1968-94
                                                                                                             [In thousands]
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                Year                                                                             Average annual rate of
                                                     ---------------------------------------------------------------------------------------------------------------------------------------------------------      growth (percent)
          Type of entitlement and coverage                                                                                                                                                                    --------------------------
                                                        1968     1975     1980     1981     1982     1983     1984     1985     1986     1987     1988     1989     1990     1991     1992     1993     1994   1968-75  1975-83  1984-94
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total:
  HI \1\ and/or SMI \2\.............................   19,821   24,959   28,478   29,010   29,494   30,026   30,456   31,083   31,750   32,411   32,980   33,579   34,203   34,870   35,579   36,306   36,935     3.3      2.3      2.2
Total HI:                                              19,770   24,640   28,067   28,590   29,069   29,587   29,996   30,589   31,216   31,853   32,413   33,040   33,719   34,429   35,153   35,904   36,543     3.2      2.3      2.2
  HI only...........................................    1,016    1,054    1,079    1,069    1,082    1,052    1,040    1,094    1,160    1,241    1,363    1,481    1,574    1,633    1,645    1,694    1,768     0.5      0.0      6.1
  Total SMI.........................................   18,805   23,905   27,400   27,941   28,412   28,975   29,416   29,989   30,590   31,170   31,617   32,099   32,629   33,237   33,933   34,612   35,167     3.5      2.4      2.0
  SMI Only..........................................       51      318      411      420      425      439      460      493      534      558      567      539      484      441      425      425      392    29.9      4.1     -1.8
Aged:
  HI and/or SMI.....................................   19,821   22,790   25,515   26,011   26,540   27,109   27,571   28,176   28,791   29,380   29,879   30,409   30,948   31,485   32,010   32,462   32,801     2.0      2.2      1.9
  Total HI..........................................   19,770   22,472   25,104   25,591   26,115   26,670   27,112   27,683   28,257   28,822   29,312   29,869   30,464   31,043   31,584   32,060   32,409     1.8      2.2      2.0
  HI only...........................................    1,016      845      835      829      833      816      807      865      928      998    1,098    1,192    1,263    1,300    1,297    1,315    1,353    -2.6     -0.4      5.9
  Total SMI.........................................   18,805   21,945   24,680   25,182   25,707   26,292   26,765   27,311   27,863   28,382   28,780   29,216   29,686   30,185   30,712   31,147   31,447     2.2      2.3      1.8
  SMI Only..........................................       51      318      411      420      425      439      459      493      534      558      567      539      484      441      425      401      392    29.9      4.1     -1.7
All disabled:
  HI and/or SMI.....................................    (\4\)    2,168    2,963    2,999    2,954    2,918    2,884    2,907    2,959    3,031    3,102    3,171    3,255    3,385    3,568    3,844    4,135      NA      3.8      4.1
  Total HI..........................................    (\4\)    2,168    2,963    2,999    2,954    2,918    2,884    2,907    2,959    3,031    3,101    3,171    3,255    3,385    3,568    3,844    4,135      NA      3.8      4.1
  HI Only...........................................    (\4\)      209      244      239      249      235      233      229      232      243      265      288      311      333      348      378      807      NA      1.5     14.8
  Total SMI.........................................    (\4\)    1,959    2,719    2,759    2,705    2,682    2,651    2,678    2,727    2,788    2,837    2,883    2,943    3,052    3,220    3,466    3,720      NA      4.0      3.8
  SMI Only \3\......................................    (\4\)  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......
ESRD \5\ only:
  HI and/or SMI.....................................    (\4\)       13       28       27       27       28       30       31       39       47       53       58       65       69       72      226      235      NA     10.1     25.2
  Total HI..........................................    (\4\)       13       28       27       27       28       30       31       39       47       53       58       65       69       72      224      233      NA     10.1     25.0
  HI Only...........................................    (\4\)        1        1        1        2        2        2        2        3        3        4        5        6        6        7       11       10      NA      9.1     20.9
  Total SMI.........................................    (\4\)       12       27       26       26       26       28       29       36       44       49       54       59       62       65      215      225      NA     10.1     25.4
  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 3-45.--GROWTH IN NUMBER OF AGED MEDICARE ENROLLEES BY SEX AND AGE, SELECTED YEARS 1968-94
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               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     1994   1968-75  1975-84  1986-94   1994 \1\   population
                                                                                                                                                                                         1994
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
All persons........................................   19,496   22,548   25,515   27,571   28,791   30,948   31,485   32,011   32,462   32,801      2.1      2.3      1.6     33,702        97.3
  65-69............................................    6,551    7,642    8,459    8,784    9,163    9,695    9,690    9,692    9,683    9,594      2.2      1.6      0.6      9,930        96.6
  70-74............................................    5,458    5,950    6,756    7,300    7,564    7,951    8,163    8,373    8,509    8,706      1.2      2.3      1.8      8,824        98.7
  75-79............................................    3,935    4,313    4,809    5,327    5,573    6,058    6,175    6,261    6,369    6,399      1.3      2.4      1.7      6,759        94.7
  80-84............................................    2,249    2,793    3,081    3,382    3,559    3,957    4,065    4,166    4,257    4,367      3.1      2.2      2.6      4,510        96.8
  85 and over......................................    1,303    1,850    2,410    2,778    2,932    3,286    3,393    3,519    3,643    3,734      5.1      4.6      3.1      3,680       101.5
Males..............................................    8,177    9,201   10,268   11,044   11,525   12,416   12,650   12,886   13,095   13,262      1.7      2.0      1.8     13,780        96.2
  65-69............................................    2,944    3,420    3,788    3,942    4,109    4,352    4,358    4,374    4,386    4,364      2.2      1.6      0.8      4,514        96.7
  70-74............................................    2,322    2,504    2,841    3,088    3,214    3,406    3,505    3,604    3,670    3,762      1.1      2.4      2.0      3,834        98.1
  75-79............................................    1,596    1,669    1,854    2,061    2,160    2,382    2,441    2,485    2,542    2,564      0.6      2.4      2.2      2,782        92.2
  80-84............................................      864    1,005    1,062    1,161    1,221    1,369    1,411    1,454    1,495    1,544      2.2      1.6      3.0      1,635        94.4
  85 and over......................................      450      604      722      793      822      906      934      968    1,003    1,029      4.3      3.1      2.8      1,034        99.5
Females............................................   11,319   13,347   15,247   16,526   17,266   18,532   18,835   19,125   19,367   19,539      2.4      2.4      1.6     19,922        98.1
  65-69............................................    3,606    4,222    4,671    4,842    5,054    5,343    5,332    5,317    5,298    5,230      2.3      1.5      0.4      5,416        96.6
  70-74............................................    3,136    3,446    3,914    4,212    4,350    4,545    4,657    4,769    4,839    4,945      1.4      2.3      1.6      4,989        99.1
  75-79............................................    2,338    2,644    2,954    3,266    3,414    3,676    3,734    3,776    3,827    3,835      1.8      2.4      1.5      3,997        95.9
  75-84............................................    1,386    1,788    2,019    2,222    2,339    2,588    2,653    2,713    2,762    2,824      3.7      2,4      2.4      2.874        98.3
  85 and over......................................      853    1,246    1,689    1,985    2,110    2,380    2,459    2,551    2,640    2,705      5.6      5.3      3.2      2,646       102.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Total aged population data reflect U.S. residents.

Source: Health Care Financing Administration, Bureau of Data Management and Strategy; and U.S. Department of Commerce, Bureau of the Census.

                              TABLE 3-46.--GROWTH IN NUMBER OF DISABLED MEDICARE ENROLLEES WITH HI COVERAGE BY TYPE OF ENTITLEMENT AND AGE, SELECTED YEARS 1975-94
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              Year                                                       Average annual percent
                                                          ------------------------------------------------------------------------------------------------------------        growth rate
               Type of entitlement and age                                                                                                                            --------------------------
                                                              1975        1980        1984        1988        1990        1991        1992        1993        1994     1975-82  1982-88  1982-94
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
All disabled persons.....................................   2,058,424   2,425,231   2,884,410   3,101,482   3,254,983   3,385,439   3,568,625   3,844,178   4,134,604      2.3      4.3      4.6
    Under age 35.........................................     238,070     193,392     388,240     471,129     483,262     494,285     512,495     545,644     574,003     -2.7     15.7      9.4
    35-44................................................     251,142     258,374     422,207     572,408     654,953     711,364     762,759     834,426     908,076      1.0     13.4     10.7
    45-54................................................     508,345     572,823     584,214     670,131     741,193     790,435     874,797     974,589   1,083,945      0.7      3.9      6.1
    55-64................................................   1,060,967   1,400,642   1,489,749   1,397,814   1,375,575   1,389,355   1,418,574   1,489,519   1,568,580      4.2     -0.2      0.8
All disabled workers.....................................   1,638,662   2,396,897   2,309,866   2,456,135   2,579,097   2,693,502   2,856,517   3,100,532   3,367,187      5.5      0.5      2.9
    Under age 35.........................................     100,439     184,619     193,094     249,291     257,760     268,392     286,486     317,876     345,322      9.3      4.9      5.2
    35-44................................................     164,439     253,186     290,395     414,749     482,071     530,417     576,549     642,386     710,431      7.0      7.8      8.6
    45-54................................................     426,451     565,846     485,378     552,442     612,692     657,358     731,713     823,552     926,390      3.0      0.8      4.8
    55 to 64.............................................     947,333   1,393,246   1,340,999   1,239,653   1,226,574   1,237,335   1,261,769   1,316,718   1,385,044      5.9     -2.1     -0.2
Adults disabled as children..............................     324,864     409,072     459,620     519,009     542,416     553,388     566,336     580,439     595,750      4.4      2.8      2.6
    Under age 35.........................................     151,708     173,684     186,003     207,311     208,901      208516     208,710     210,760     212,944      2.4      2.2      1.1
    35-44................................................      84,508     105,092     126,252     146,460     158,725     165,569     170,363     176,182     182,861      4.8      3.8      3.8
    45-54................................................      71,484      80,381      87,380      99,444     107,092     110,279     117,333     122,435     127,622      2.4      2.8      3.5
    55-64................................................      45,164      49,910      59,985      65,774      67,698      69,004      69,930      71,062      72,323      3.2      2.7      2.1
Widows and widowers......................................      83,771     110,785      85,227      73,101      68,793      69,753      74,157      91,643     101,247      2.5     -5.0      0.3
    Under age 35.........................................           1           0  ..........  ..........  ..........  ..........  ..........  ..........  ..........  .......  .......  .......
    35-44................................................  ..........           1  ..........  ..........  ..........  ..........  ..........  ..........  ..........  .......  .......  .......
    45-54................................................       7,445       7,576       4,608       5,685       5,615       6,112       7,399       9,811      11,458     -3.5     -0.4      5.8
    55-64................................................      76,325     103,208      80,618      67,416      63,178      63,641      66,758      81,832      91,789      2.9     -5.3     -0.2
End-stage renal disease only.............................      11,127      28,334      29,697      53,237      64,677      68,796      71,615      71,564      68,420     13.7     11.7      7.9
    Under age 35.........................................       3,729       8,773       9,143      14,507      16,601      17,357      17,299      17,008      15,737     12.3      9.5      5.4
    35-44................................................       2,187       5,188       5,559      11,199      14,157      15,378      15,847      15,858      14,784     12.3     14.7      9.6
    45-54................................................       2,966       6,977       6,848      12,560      15,794      16,686      18,352      18,791      18,475     12.2     11.2      8.9
    55 to 64.............................................       2,245       7,396       8,147      14,971      18,125      19,375      20,117      19,907      19,424     18.6     12.5      8.4
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.

    TABLE 3-47.--MEDICARE ENROLLMENT: NUMBER AND PERCENTAGE OF INDIVIDUALS ENROLLED IN SUPPLEMENTARY MEDICAL
 INSURANCE UNDER STATE BUY-IN AGREEMENTS BY TYPE OF BENEFICIARY AND BY YEAR OF 1994 AREA OF RESIDENCE, SELECTED
                                                  YEARS 1968-94
----------------------------------------------------------------------------------------------------------------
                                                       All persons              Aged               Disabled
                                                  --------------------------------------------------------------
          Year of 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
Area of residence: \1\
  United States..................................      4,624      13.3      3,242      10.4      1,382      37.8
    Alabama......................................        124      20.5         86      16.4         31      37.8
    Alaska.......................................          6      21.4          4      16.7          2      50.0
    Arizona......................................         46       8.6         29       5.9         14      28.0
    Arkansas.....................................         83      20.5         57      16.2         20      37.7
    California...................................        783      22.9        548      17.7        195      60.7
    Colorado.....................................         49      12.8         31       9.1         15      37.5
    Connecticut..................................         45       9.3         28       6.3         17      45.9
    Delaware.....................................          6       6.5          4       4.8          3      33.3
    District of Columbia.........................         15      19.2         11      16.5          4      57.1
    Florida......................................        284      11.6        202       8.9         68      37.4
    Georgia......................................        170      22.0        117      17.6         43      40.6
    Hawaii.......................................         18      13.2         13      10.3          4      44.4
    Idaho........................................         14      10.1          8       6.3          5      41.7
    Illinois.....................................        144       9.1         86       6.0         49      34.3
    Indiana......................................         84      10.6         51       7.2         27      32.5
    Iowa.........................................         53      11.4         33       7.7         17      45.9
    Kansas.......................................         36       9.7         24       7.0         11      37.9
    Kentucky.....................................        101      18.2         65      13.8         31      37.3
    Louisiana....................................        114      20.7         78      16.5         31      39.7
    Maine........................................         29      16.3         18      10.7         11      52.4
    Maryland.....................................         64      11.3         42       8.1         17      34.7
    Massachusetts................................        122      13.6         77       9.5         43      51.8
    Michigan.....................................        145      11.3         71       6.2         48      34.0
    Minnesota....................................         67       9.4         33       5.9         20      40.8
    Mississippi..................................        111      29.4         78      24.5         28      48.3
    Missouri.....................................         77       9.6         46       6.4         25      30.5
    Montana......................................         11       8.9          6       5.5          4      30.8
    Nebraska.....................................         17       7.0          9       4.0          7      38.9
    Nevada.......................................         15       9.3          9       6.2          4      26.7
    New Hampshire................................          6       4.1          3       2.3          2      15.4
    New Jersey...................................        127      11.3         87       8.4         35      38.0
    New Mexico...................................         31      16.1         22      12.9          9      40.9
    New York.....................................        313      12.2        220       9.5         97      39.4
    North Carolina...............................        177      18.8        124      15.0         43      36.8
    North Dakota.................................          6       5.9          3       3.2          2      25.0
    Ohio.........................................        173      10.8        111       7.8         47      28.3
    Oklahoma.....................................         65      13.9         44      11.0         16      36.4
    Oregon.......................................         45      10.1         27       6.6         14      36.8
    Pennsylvania.................................        166       8.2        103       5.6         60      36.4
    Rhode Island.................................         15       9.3          9       6.1          6      40.0
    South Carolina...............................        103      22.0         69      17.1         28      43.8
    South Dakota.................................         13      11.5          8       7.7          4      44.4
    Tennessee....................................        150      20.8        101      16.1         45      47.9
    Texas........................................        322      16.7        240      13.8         68      37.6
    Utah.........................................         15       8.8          8       5.1          6      40.0
    Vermont......................................         12      15.6          7      10.0          5      62.5
    Virginia.....................................        110      14.5         72      10.7         30      35.7
    Washington...................................         76      11.8         44       7.5         26      44.1
    West Vriginia................................         40      12.6         25       9.3         14      29.8
    Wisconsin....................................         86      11.7         48       7.2         30      44.1
    Wyoming......................................          5       9.1          3       6.0          2      40.0
    Puerto Rico..................................          0       0.0          0       0.0          0       0.0
    Guam and Virgin Islands \2\..................          1      11.8          1      12.5          0       6.3
                                                  --------------------------------------------------------------
  All areas......................................      4,625      13.2      3,243      10.3      1,382      37.2
----------------------------------------------------------------------------------------------------------------
\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 3-48A.--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE AND TYPE OF SERVICE, SELECTED YEARS 1975-94
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Amount in millions and distribution of payments for all enrollees
  Type of coverage and type of   ---------------------------------------------------------------------------------------------------------------------------------------------------------------
             service                 1975                1980                1981                1982                1983                1984                1985                1986
                                    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total payment...................    $15,588    100.0    $35,686    100.0    $43,442    100.0    $51,086    100.0    $57,443    100.0    $62,870    100.0    $70,391    100.0    $75,844    100.0
Hospital insurance..............    $11,315     72.6    $25,051     70.2    $30,329     69.8    $35,631     69.7    $39,337     68.5    $43,209     68.7    $47,444     67.4    $49,605     65.4
  Inpatient.....................    $10,877     69.8    $24,116     67.6    $29,161     67.1    $33,947     66.5    $37,252     64.9    $40,878     65.0    $44,940     63.8    $47,008     62.0
  Skilled nursing facility......       $254      1.6       $395      1.1       $410      0.9       $484      0.9       $543      0.9       $544      0.9       $548      0.8       $575      0.8
  Home health agency............       $104      0.7       $540      1.5       $758      1.7     $1,200      2.3     $1,542      2.7     $1,779
                                                                                                                                             $8      2.8
                                                                                                                                                     0.0     $1,913
                                                                                                                                                                $43      2.7
                                                                                                                                                                         0.1     $1,945
                                                                                                                                                                                    $77      2.6
                                                                                                                                                                                             0.1
Supplementary medical insurance.     $4,273     27.4    $10,635     29.8    $13,113     30.2    $15,455     30.3    $18,106     31.5    $19,661     31.3    $22,947     32.6    $26,239     34.6
  Physicians \1\................     $3,416     21.9     $8,187     22.9    $10,086     23.2    $11,893     23.3    $14,062     24.5    $15,434     24.5    $17,312     24.6    $19,213     25.3
  Outpatient hospital...........       $643      4.1     $1,897      5.3     $2,406      5.5     $2,994      5.9     $3,385      5.9     $3,452      5.5     $4,319      6.1     $5,157      6.8
  Home health agency............        $95      0.6       $234      0.7       $193      0.4        $54      0.1        $25      0.0        $30      0.0        $38      0.1        $31      0.0
  Group practice plan...........        $80      0.5       $203      0.6       $274      0.6       $335      0.7       $410      0.7       $464      0.7       $720      1.0     $1,113      1.5
  Independent laboratory........        $39      0.3       $114      0.3       $154      0.4       $179      0.4       $224      0.4       $281      0.4       $558      0.8       $725      1.0
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Includes other services.

Source: Health Care Financing Administration, Bureau of Data Management and Strategy.

                                     TABLE 3-48B.--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE AND TYPE OF SERVICE, SELECTED YEARS 1975-94
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Amount in millions and distribution of payments for all enrollees
  Type of coverage and type of   ---------------------------------------------------------------------------------------------------------------------------------------------------------------
             service                 1987                1988                1989                1990                1991                1992                1993                1994
                                    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent    amount   Percent
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total payments..................    $80,162    100.0    $86,317    100.0    $98,097    100.0   $108,518    100.0   $118,653    100.0   $132,951    100.0   $147,269    100.0   $161,711    100.0
Hospital insurance..............    $49,342     61.6    $52,347     60.6    $59,803     61.0    $66,050     60.9    $71,317     60.1    $83,691     62.9    $93,290     63.3   $103,093     63.8
  Inpatient.....................    $46,905     58.5    $49,265     57.1    $54,221     55.3    $59,383     54.7    $62,640     52.8    $71,000     53.4    $76,182     51.7    $81,517     50.4
  Skilled nursing facility......       $635      0.8       $848      1.0     $2,879      2.9     $2,620      2.4     $2,632      2.2     $4,051      3.0     $5,797      3.9     $7,596      4.7
  Home health agency............     $1,690      2.1     $2,078      2.4     $2,465      2.5     $3,689      3.4     $5,484      4.6     $7,760      5.8    $10,252      7.0    $12,559      7.8
  Hospice.......................       $112      0.1       $156      0.2       $238      0.2       $358      0.3       $561      0.5       $880      0.7     $1,059      0.7     $1,421      0.9
Supplementary medical insurance.    $30,820     38.4    $33,970     39.4    $38,294     39.0    $42,468     39.1    $47,336     39.9    $49,260     37.1    $53,979     36.7    $58,618     36.2
  Physicians \1\................    $22,618     28.2    $24,372     28.2    $27,056     27.6    $29,609     27.3    $32,313     27.2    $32,394     24.4    $35,282     24.0    $37,435     23.1
  Outpatient hospital...........     $5,916      7.4     $6,549      7.6     $7,676      7.8     $8,482      7.8     $9,783      8.2    $10,990      8.3    $11,539      7.8    $13,497      8.3
  Home health agency............        $40      0.0        $47      0.1        $60      0.1        $74      0.1        $65      0.1        $71      0.1       $112      0.1       $144      0.1
  Group practice plan...........     $1,361      1.7     $2,019      2.3     $2,308      2.4     $2,827      2.6     $3,531      3.0     $3,933      3.0     $5,002      3.4     $5,465      3.4
  Independent laboratory........       $885      1.1       $983      1.1     $1,194      1.2     $1,476      1.4     $1,644      1.4     $1,872      1.4     $2,044      1.4     $2,077     1.3
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Includes other services.

Source: Health Care Financing Administration, Bureau of Data Management and Strategy.

    TABLE 3-49.--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE, TYPE OF SERVICE, AND TYPE OF
                                                 ENROLLEE, 1994
----------------------------------------------------------------------------------------------------------------
                                                                    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
----------------------------------------------------------------------------------------------------------------
Total payments.......................   $161,711       100.0     $141,710       100.0      $20,001       100.0
Hospital insurance...................    103,093        70.0       91,097        64.3       11,996        60.0
  Inpatient..........................     81,517        55.4       70,861        50.0       10,656        53.3
  Skilled nursing facility...........      7,596         5.2        7,294         5.1          302         1.5
  Home health agency.................     12,559         8.5       11,592         8.2          967         4.8
  Hospice............................      1,421         1.0        1,350         1.0           71         0.4
Supplementary medical insurance......     58,618        39.8       50,613        35.7        8,005        40.0
  Physicians \1\.....................     37,435        25.4       33,252        23.5        4,183        20.9
  Outpatient hospital................     13,497         9.2       10,528         7.4        2,969        14.8
  Home health agency.................        144         0.1          144         0.1            0         0.0
  Group practice plan................      5,465         3.7        4,855         3.4          610         3.0
  Independent laboratory.............      2,077         1.4        1,834         1.3          243         1.2
----------------------------------------------------------------------------------------------------------------
\1\ Includes other services.

Source: Health Care Financing Administration, Bureau of Data Management and Strategy.

 TABLE 3-50.--PERSONS SERVED AND REIMBURSEMENTS FOR AGED MEDICARE ENROLLEES BY TYPE OF COVERAGE AND BY 1994 DEMOGRAPHIC CHARACTERISTICS, SELECTED YEARS
                                                                         1968-94
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    Hospital insurance and/or              Hospital insurance           Supplementary medical insurance
                                                 supplementary medical insurance  ----------------------------------------------------------------------
                                               -----------------------------------                 Reimbursements                     Reimbursements
                                                 Persons       Reimbursements       Persons  -------------------------  Persons  -----------------------
     Year, period, and 1994 characteristic        served  ------------------------   served                              served
                                                per 1,000                          per 1,000   Per person      Per     per 1,000  Per person      Per
                                                           Per person      Per                   served     enrollee                served     enrollee
                                                enrollees    served     enrollee   enrollees                           enrollees
--------------------------------------------------------------------------------------------------------------------------------------------------------
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
                                               =========================================================================================================

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
  1985-94.....................................        1.6        6.2         7.8        -0.1         7.5         7.4         1.7        6.9         8.7
                                               =========================================================================================================
Age:
  65 and 66 years.............................      818.6   $3,014.06   $2,467.31      134.0   $11,146.10   $1,493.82      893.6   $1,216.70   $1,087.20
  67 and 68 years.............................      749.3    3,735.35    2,798.73      141.6    11,820.17    1,674.16      792.3    1,532.80    1,214.86
  69 and 70 years.............................      773.4    3,929.28    3,038.79      157.2    11,784.69    1,852.45      809.5    1,568.08    1,269.35
  71 and 72 years.............................      801.1    4,280.82    3,429.51      175.9    12,135.43    2,135.10      828.1    1,655.06    1,370.48
  73 and 74 years.............................      809.5    4,628.87    3,746.84      192.0    12,232.54    2,348.54      829.1    1,770.49    1,467.95
  75-79 years.................................      857.1    5,173.87    4,434.61      234.9    12,242.76    2,875.92      869.4    1,868.11    1,624.22
  80-84 years.................................      890.2    5,823.22    5,183.68      300.7    11,795.31    3,546.93      901.1    1,904.48    1,716.14
  85 years and over...........................      910.3    6,416.43    5,840.81      376.4    11,196.61    4,214.11      947.3    1,860.01    1,762.06
Sex:
  Male........................................      789.5    5,125.14    4,046.50      213.7    12,354.05    2,640.54      828.5    1,823.24    1,510.64
  Female......................................      857.4    4,498.92    3,867.40      219.8    11,422.80    2,510.57      882.5    1,619.11    1,428.92
Race:
  White.......................................      837.7    4,611.30    3,862.70      216.0    11,558.04    2,496.00      866.0    1,659.52    1,437.14
  All other...................................      759.5    6,094.26    4,628.90      231.7    13,829.43    3,204.08      806.3    2,040.84    1,645.54
Census region:
  Northeast...................................      866.1    5,289.77    4,581.71      224.5    13,518.55    3,035.37      897.7    1,843.88    1,655.35
  North central...............................      883.2    4,247.31    3,751.08      224.4    10,701.87    2,401.46      904.1    1,552.54    1,403.72
  South.......................................      869.7    4,841.61    4,210.91      243.1    11,330.09    2,754.70      891.2    1,704.77    1,519.37
  West........................................      691.9    4,657.49    3,222.47      162.3    12,916.68    2,096.06      710.1    1,722.06    1,222.78
--------------------------------------------------------------------------------------------------------------------------------------------------------
NA--Not available.

Note.--Data for 1994 are considered preliminary.

Source: Health Care Financing Administration, Bureau of Data Management and Strategy.

  TABLE 3-51.--PERSONS SERVED AND REIMBURSEMENTS FOR DISABLED MEDICARE ENROLLEES BY TYPE OF COVERAGE AND BY 1994 DEMOGRAPHIC CHARACTERISTICS, SELECTED
                                                                      YEARS 1968-94
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                          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
                                   =====================================================================================================================

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.......................         1.37         5.08         6.52         -0.77         6.82         6.00         1.69         5.88         7.67
                                   =====================================================================================================================
Age:
  Under 35 years..................        735.8     6,091.87     4,482.52        202.4     13,489.71     2,730.36        798.4     2,403.11     1,918.64
  35-44 years.....................        724.7     5,868.13     4,252.89        197.1     13,017.77     2,565.49        801.0     2,351.40     1,883.38
  45-54 years.....................        727.8     5,908.27     4,300.19        199.0     12,909.59     2,569.46        811.5     2,403.36     1,950.37
  55-59 years.....................        764.8     6,187.13     4,728.57        220.5     13,168.69     2,904.09        841.1     2,411.60     2,028.35
  60-64 years.....................        828.7     6,119.86     5,071.49        245.6     13,030.39     3,200.74        901.0     2,281.53     2,055.62
Sex:
  Male............................        709.9     6,021.09     4,274.13        200.4     13,370.44     1,781.04        783.7     2,272.64     1,781.04
  Female..........................        826.5     6,020.49     4,975.73        231.3     12,700.66     2,247.98        904.2     2,486.05     2,247.98
Race:
  White...........................        756.9     5,433.16     4,112.61        204.4     12,468.61     1,739.90        833.8     2,086.60     1,739.90
  All other.......................        764.0     7,849.94     5,997.49        243.7     14,660.52     2,673.36        832.6     3,210.78     2,673.36
Census region:
  Northeast.......................        779.1     6,763.59     5,269.76        215.0     15,501.85     2,167.41        862.0     2,514.41     2,167.41
  North central...................        770.3     5,414.67     4,171.09        210.7     12,153.34     1,787.44        846.9     2,110.60     1,787.44
  South...........................        786.8     5,923.59     4,660.77        235.5     12,086.61     1,958.79        842.0     2,326.40     1,958.79
  West............................        699.1     6,535.07     4,568.62        179.2     15,100.23     2,051.13        763.1     2,687.84     2,051.13
--------------------------------------------------------------------------------------------------------------------------------------------------------
NA--Not available.

Note.--Data for 1994 are considered preliminary.

Source: Health Care Financing Administration, Bureau of Data Management and Strategy.

       TABLE 3-52.--USE OF SHORT-STAY HOSPITAL SERVICES BY MEDICARE EMPLOYEES BY YEAR AND 1994 DEMOGRAPHIC CHARACTERISTICS, SELECTED YEARS 1975-94
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               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      Per      covered     Per
                                                   in     thousands  enrollees  thousands  discharge  enrollees     in     discharge   day of   enrollee
                                               thousands                                                         millions               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 \1\.................................     33,681     11,471        341     85,734        7.5      2,545    70,623      6,157       824     2,097
                                              ==========================================================================================================
Annual percentage change in period:
    1975-1984................................        2.4        4.8        2.4        1.0       -2.8       -1.5      18.7       14.2      17.6      15.8
    1984-1994................................        1.8       -1.3       -3.1       -1.2       -1.7       -2.3       6.3        5.7       7.5       5.0
    1975-1994 \1\............................        0.4        2.5        2.1       -0.2       -2.1       -1.8      11.0        8.9      11.2       9.2
                                              ==========================================================================================================
Age:
    Less than 65 years.......................      4,028      1,489        370     11,508        7.7      2,857     8,929      5,997       776     2,217
    65-69 years..............................      8,695      2,096        241     14,506        6.9      1,668    13,776      6,573       950     1,584
    70-74 years..............................      7,812      2,250        288     16,039        7.1      2,053    14,581      6,480       909     1,866
    75-79 years..............................      5,753      2,116        368     15,983        7.6      2,778    13,385      6,326       837     2,327
    80-84 years..............................      3,955      1,761        445     13,737        7.8      3,473    10,331      5,867       752     2,612
    85 years or over.........................      3,438      1,759        512     13,961        7.9      4,061     9,621      5,470       689     2,798
Sex:
    Male.....................................     14,414      5,075        352     37,411        7.4      2,595    32,929      6,488       880     2,285
    Female...................................     19,267      6,396        332     48,323        7.6      2,508    37,694      5,893       780     1,956
Race: \2\
    White....................................     29,268      9,797        335     71,649        7.3      2,448    59,346      6,058       828     2,028
    All other................................      4,150      1,516        365     12,886        8.5      3,105    10,323      6,809       801     2,487
Census region:
    Northeast................................      7,381      2,549        345     23,603        9.3      3,198    18,098      7,100       767     2,452
    North central............................      8,327      2,903        349     20,257        7.0      2,433    17,033      5,867       841     2,046
    South....................................     11,483      4,275        372     31,058        7.3      2,705    24,531      5,738       790     2,136
    West.....................................      6,254      1,628        260      9,725        6.0      1,555    10,575      6,496     1,087     1,691
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Does not reflect discharges for beneficiaries who received covered services but for whom program payments were reported during the year; e.g.,
  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 3-53.--MEDICARE UTILIZATION AND REIMBURSEMENT: 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 (persons served per 1,000             Annual percent change          Year (reimbursement per person served)           Annual percent change
                                                     enrolled)               -------------------------------------------------------------------------------------------------------------------
      Census division and State      ----------------------------------------
                                       1967    1985    1990    1993    1994   1967-85  1985-90  1990-93  1993-94   1967     1985     1990     1993     1994   1967-85  1985-90  1990-93  1993-94
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total, all areas \1\................   366.5   722.1   801.6   825.4   830.0      3.8      2.1      1.0      0.6    $592   $2,762   $3,578   $4,264   $4,740      8.9      5.3      6.0     11.2
United States \2\...................   370.9   731.2   810.5   834.2   838.7      3.8      2.1      1.0      0.5     593    2,772    3,592    4,280    4,750      8.9      5.3      6.0     11.0
New England.........................   380.4   767.4   829.0   864.7   871.7      4.0      1.6      1.4      0.8     680    2,708    3,573    4,527    5,018      8.0      5.7      8.2     10.8
  Maine.............................   330.1   756.1   868.8   916.9   920.0      4.7      2.8      1.8      0.3     586    2,369    2,744    3,304    3,704      8.1      3.0      6.4     12.1
  New Hampshire.....................   391.6   739.7   810.5   871.3   874.3      3.6      1.8      2.4      0.3     467    2,374    2,974    3,524    3,820      9.5      4.6      5.8      8.4
  Vermont...........................   411.7   742.8   841.0   875.1   888.8      3.3      2.5      1.3      1.6     515    1,990    2,569    3,201    3,494      7.8      5.2      7.6      9.2
  Massachusetts.....................   394.2   766.5   813.6   848.1   851.8      3.8      1.2      1.4      0.4     708    2,971    4,029    5,182    5,891      8.3      6.3      8.8     13.7
  Rhode Island......................   375.4   829.6   853.6   840.9   849.2      4.5      0.6     -0.5      1.0     625    2,619    3,236    4,451    4,563      8.3      4.3     11.2      2.5
  Connecticut.......................   390.9   764.1   838.1   879.3   893.1      3.8      1.9      1.6      1.6     711    2,570    3,511    4,392    4,759      7.4      6.4      7.7      8.4
Middle Atlantic.....................   388.1   768.2   834.7   857.1   864.3      3.9      1.7      0.9      0.8     578    2,771    3,933    4,749    5,384      9.1      7.3      6.5     13.4
  New York..........................   406.9   765.7   830.4   835.7   841.3      3.6      1.6      0.2      0.7     610    2,533    4,119    4,799    5,347      8.2     10.2      5.2     11.4
  New Jersey........................   399.0   759.8   826.7   859.7   879.4      3.6      1.7      1.3      2.3     526    2,650    3,483    4,711    4,973      9.4      5.6     10.6      5.6
  Pennsylvania......................   365.0   776.4   844.7   882.2   884.2      4.3      1.7      1.5      0.2     533    3,147    3,948    4,712    5,657     10.4      4.6      6.1     20.1
East North Central..................   350.2   725.9   834.4   874.3   888.3      4.1      2.8      1.6      1.6     614    2,906    3,595    4,070    4,414      9.0      4.3      4.2      8.5
  Ohio..............................   353.6   718.4   846.3   880.8   897.4      4.0      3.3      1.3      1.9     585    2,792    3,824    4,078    4,368      9.1      6.5      2.2      7.1
  Indiana...........................   343.7   672.2   837.0   872.7   885.5      3.8      4.5      1.4      1.5     545    2,510    3,234    3,906    4,314      8.9      5.2      6.5     10.4
  Ilinois...........................   339.2   693.4   788.1   825.5   840.1      4.1      2.6      1.6      1.8     703    3,313    3,760    4,387    4,750      9.0      2.6      5.3      8.3
  Michigan..........................   379.5   804.3   871.4   914.9   929.3      4.3      1.6      1.6      1.6     532    2,991    3,749    4,258    4,675     10.1      4.6      4.3      9.8
  Wisconsin.........................   354.7   736.9   843.2   896.8   903.6      4.1      2.7      2.1      0.8     639    2,527    2,877    3,270    3,487      7.9      2.6      4.4      6.6
West North Central..................   363.2   693.4   979.7   858.8   871.9      3.7      7.2     -4.3      1.5     558    2,627    3,108    3,463    3,876      9.0      3.4      3.7     11.9
  Minnesota.........................   389.0   624.8   682.5   778.7   796.3      2.7      1.8      4.5      2.3     601    2,447    3,101    3,254    3,341      8.1      4.9      1.6      2.7
  Iowa..............................   365.9   715.3   850.6   915.1   918.8      3.8      3.5      2.5      0.4     505    2,282    2,753    3,121    3,226      8.7      3.8      4.3      3.4
  Missuori..........................   364.8   712.0   816.6   857.1   871.8      3.8      2.8      1.6      1.7     544    3,118    3,514    3,979    4,523     10.2      2.4      4.2     13.7
  North Dakota......................   441.2   730.7   853.4   907.8   917.7      2.8      3.2      2.1      1.1     492    2,466    2,949    3,103    3,514      9.4      3.6      1.7     13.2
  South Dakota......................   358.0   694.2   815.1   866.8   877.6      3.7      3.3      2.1      1.2     514    2,281    2,714    3,030    6,296      8.6      3.5      3.7    107.8
  Nebraska..........................   352.5   634.2   808.8   866.9   886.3      3.3      5.0      2.3      2.2     540    2,449    2,719    2,939    3,181      8.8      2.1      2.6      8.2
  Kansas............................   365.3   765.4   850.0   901.5   914.0      4.2      2.1      2.0      1.4     540    2,553    3,144    3,710    3,987      9.0      4.3      5.7      7.5
South Atlantic......................   350.5   740.4   827.7   856.6   862.3      4.2      2.3      1.2      0.7     554    2,531    3,438    4,248    4,705      8.8      6.3      7.3     10.8
  Delaware..........................   368.2   770.9   843.6   907.6   935.3      4.2      1.8      2.5      3.1     552    2,612    3,526    4,064    4,878      9.0      6.2      4.8     20.0
  Maryland..........................   349.4   757.6   838.3   868.4   875.6      4.4      2.0      1.2      0.8     564    2,975    4,190    5,075    5,498      9.7      7.1      6.6      8.3
  District of Columbia..............   452.8   739.4   772.7   774.3   784.3      2.8      0.9      0.1      1.3     570    3,774    5,019    6,053    6,553     11.1      5.9      6.4      8.3
  Virginia..........................   317.3   729.7   848.5   881.7   891.0      4.7      3.1      1.3      1.1     516    1,976    3,127    3,636    4,054      7.7      9.6      5.2     11.5
  West Virginia.....................   342.2   692.0   828.6   876.4   890.7      4.0      3.7      1.9      1.6     489    2,575    3,197    3,662    4,064      9.7      4.4      4.6     11.0
  North Carolina....................   324.0   727.9   852.3   898.1   908.1      4.6      3.2      1.8      1.1     515    1,982    2,799    3,478    3,691      7.8      7.1      7.5      6.1
  South Carolina....................   296.2   680.6   832.2   890.7   896.8      4.7      4.1      2.3      0.7     523    2,340    2,689    3,541    4,137      8.7      2.8      9.6     16.8
  Georgia...........................   320.2   743.5   843.8   890.2   899.5      4.8      2.6      1.8      1.0     474    2,479    3,456    4,427    4,848      9.6      6.9      8.6      9.5
  Florida...........................   420.9   759.1   805.8   813.7   813.5      3.3      1.2      0.3      0.0     588    2,773    3,709    4,665    5,223      9.0      6.0      7.9     12.0
East South Central..................   332.1   698.1   846.9   888.0   901.7      4.2      3.9      1.6      1.5     489    2,570    3,413    4,254    4,758      9.7      5.8      7.6     11.8
  Kentucky..........................   365.9   671.9   837.3   880.9   901.1      3.4      4.5      1.7      2.3     458    2,395    3,424    3,832    4,273      9.6      7.4      3.8     11.5
  Tennesse..........................   354.8   678.7   853.4   892.4   897.7      3.7      4.7      1.5      0.6     502    2,816    3,402    4,494    4,974     10.1      3.9      9.7     10.7
  Alabama...........................   322.7   743.8   848.9   890.4   906.6      4.7      2.7      1.6      1.8     490    2,502    3,596    4,379    4,959      9.5      7.5      6.8     13.2
  Mississippi.......................   283.2   699.9   845.1   886.6   902.6      5.2      3.8      1.6      1.8     471    2,480    3,122    4,188    4,711      9.7      4.7     10.3     12.5
West South Central..................   374.8   687.4   825.0   852.2   863.7      3.4      3.7      1.1      1.3     504    2,811    3,624    4,434    5,163     10.0      5.2      7.0     16.4
  Arkansas..........................   319.3   715.4   862.9   883.1   897.2      4.6      3.8      0.8      1.6     466    2,550    3,155    3,681    4,211      9.9      4.3      5.3     14.4
  Louisiana.........................   343.4   653.5   821.1   858.7   877.1      3.6      4.7      1.5      2.1     446    3,167    4,368    5,235    6,208     11.5      6.6      6.2     18.6
  Oklahoma..........................   416.1   677.8   878.3   867.1   877.5      2.7      5.3     -0.4      1.2     486    2,482    3,127    3,957    4,507      9.5      4.7      8.2     13.9
  Texas.............................   393.7   693.2   805.1   840.7   850.2      3.2      3.0      1.5      1.1     522    2,860    2,652    4,489    5,232      9.9      5.0      7.1     16.6
Mountain............................   417.1   716.6   772.7   769.8   760.7      3.1      1.5     -0.1     -1.2     560    2,637    3,992    3,713    4,188      9.0      8.6     -2.4     12.8
  Montana...........................   416.5   679.7   823.5   875.8   895.1      2.8      3.9      2.1      2.2     505    2,348    3,000    3,343    4,122      8.9      5.0      3.7     23.3
  Idaho.............................   408.8   714.5   862.5   906.1   905.2      3.2      3.8      1.7     -0.1     467    2,384    2,556    3,104    3,320      9.5      1.4      6.7      7.0
  Wyoming...........................   395.0   681.7   782.7   846.8   877.7      3.1      2.8      2.7      3.6     432    2,804    3,182    3,943    3,932     11.0      2.6      7.4     -0.3
  Colorado..........................   475.4   704.0   740.8   775.3   778.0      2.2      1.0      1.5      0.3     578    2,521    3,223    3,834    4,167      8.5      5.0      6.0      8.7
  New Mexico........................   377.6   689.8   736.4   767.0   735.1      3.4      1.3      1.4     -4.2     513    2,462    3,154    3,115    3,552      9.1      5.1     -0.4     14.0
  Arizona...........................   431.7   758.1   774.3   695.6   670.5      3.2      0.4     -3.5     -3.6     612    2,896    3,692    4,006    4,781      9.0      5.0      2.8     19.3
  Utah..............................   346.0   713.1   808.2   846.6   865.8      4.1      2.5      1.6      2.3     580    2,225    2,799    3,549    3,556      7.8      4.7      8.2      0.2
  Nevada............................   414.9   688.9   721.2   707.2   687.2      2.9      0.9     -0.7     -2.8     532    3,243    3,903    4,299    5,023     10.6      3.8      3.3     16.8
Pacific.............................   468.9   739.7   713.8   687.7   665.4      2.6     -0.7     -1.2     -3.2     630    6,153    3,853    4,540    4,864     13.5     -8.9      5.6      7.1
  Washington........................   433.0   731.1   760.8   794.2   875.4      3.0      0.8      1.4     -1.1     507    2,522    3,218    3,555    3,738      9.3      5.0      3.4      5.1
  Oregon............................   392.6   716.2   707.8   712.9   701.7      3.4     -0.2      0.2     -1.6     583    2,459    2,833    3,162    3,288      8.3      2.9      3.7      4.0
  California........................   490.7   745.7   710.3   666.8   640.0      2.4     -1.0     -2.1     -4.0     653    3,379    4,138    5,001    5,416      9.6      4.1      6.5      8.3
  Alaska............................   307.2   678.4   759.0   806.8   818.2      4.5      2.3      2.1      1.4     376    3,554    4,007    4,111    4,463     13.3      2.4      0.9      8.6
  Hawaii............................   407.4   709.3   589.9   602.8   585.7      3.1     -3.6      0.7     -2.8     572    2,334    3,095    3,430    3,321      8.1      5.8      3.5    -3.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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 3-54.--MEDICARE PARTICIPATING INSTITUTIONS AND ORGANIZATIONS, 1984
                                AND 1995
------------------------------------------------------------------------
                                                          Year
          Institution or organization          -------------------------
                                                    1984         1995
------------------------------------------------------------------------
Hospitals.....................................        6,675        6,403
  Short stay..................................        6,038        5,271
  Long stay...................................          637        1,132
Skilled nursing facilities....................        5,952       13,122
Home health agencies..........................        4,684        8,258
Independent laboratories......................        3,801        7,532
Laboratories registered under the Clinic
 Laboratory Improvement Act (CLIAs)...........           NA      158,090
Outpatient physical therapy providers.........          791        2,190
Portable x ray suppliers......................          269          558
Rural health clinics..........................          420        1,879
Comprehensive outpatient rehab. facilities....           48          284
Ambulatory surgical centers...................          155        2,040
Hospices......................................          108        1,862
Facilities prov. svcs. to renal disease
 benefit......................................        1,335        2,863
  Hospital certified as both renal transplant
   and renal dialysis center..................          147          163
  Hospital certified as renal transplant
   centers....................................           16           73
  Hospital dialysis facilities................          117          244
  Nonhospital rental dialysis facilities......          645        2,000
  Dialysis centers only.......................          359          340
  Inpatient care..............................           51           43
Hospital and skilled nursing facility beds:
  Hospitals...................................    1,144,142    1,060,318
    Short stay................................    1,023,465      929,026
    Long stay.................................      120,677      131,292
  Skilled nursing facilities..................      530,403      652,357
------------------------------------------------------------------------
NA--Not available.

Source: Health Care Financing Administration, Bureau of Data Management
  and Strategy.

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