prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 1.

Report 1: Medicare is a federal program that pays for covered health care services of qualified beneficiaries  It was established in 1965 under Title XVIII of the Social Security Act to provide health insurance to individuals 65 and older, and has been expanded over the years to include permanently disabled individuals under 65  The program is administered by the Centers for Medicare & Medicaid Services (CMS), within the U S  Department of Health and Human Services (HHS)  Medicare consists of four distinct parts: Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled nursing care, hospice care, and some home health services  The HI trust fund is mainly funded by a dedicated payroll tax of 2 9% of earnings, shared equally between employers and workers  Since 2013, workers with income of more than $200,000 per year for single tax filers (or more than $250,000 for joint tax filers) pay an additional 0 9% on income over those amounts  Part B (Supplementary Medical Insurance, or SMI) covers physician services, outpatient services, and some home health and preventive services  The SMI trust fund is funded through beneficiary premiums (set at 25% of estimated program costs for the aged) and general revenues (the remaining amount, approximately 75%)  Part C (Medicare Advantage, or MA) is a private plan option for beneficiaries that covers all Parts A and B services, except hospice  Individuals choosing to enroll in Part C must also enroll in Part B  Part C is funded through the HI and SMI trust funds  Part D covers outpatient prescription drug benefits  Funding is included in the SMI trust fund and is financed through beneficiary premiums, general revenues, and state transfer payments  Medicare serves approximately one in six Americans and virtually all of the population aged 65 and older  In 2019, the program will cover an estimated 61 million persons (52 million aged and 9 million disabled)  The Congressional Budget Office (CBO) estimates that total Medicare spending in 2019 will be about $772 billion; of this amount, approximately $749 billion will be spent on benefits  About 28% of Medicare benefit spending is for hospital inpatient and hospital outpatient services (see Figure 1 )  CBO also estimates that federal Medicare spending (after deduction of beneficiary premiums and other offsetting receipts) will be about $637 billion in 2019, accounting for about 14% of total federal spending and 3% of GDP  Medicare is required to pay for all covered services provided to eligible persons, so long as specific criteria are met  Spending under the program (except for a portion of administrative costs) is considered mandatory spending and is not subject to the appropriations process  Medicare is expected to be a high-priority issue in the current Congress  The program has a significant impact on beneficiaries and other stakeholders as well as on the economy in general through its coverage of important health care benefits for the aged and disabled, the payment of premiums and other cost sharing by those beneficiaries, its payments to providers who supply those health care services, and its interaction with other insurance coverage  Projections of future Medicare expenditures and funding indicate that the program will place increasing financial demands on the federal budget and on beneficiaries  In response to these concerns, Congress may consider a range of Medicare reform options, from making changes within the current structure, including modifying provider payments and revising existing oversight and regulatory mechanisms, to restructuring the entire program  The committees of jurisdiction for the mandatory spending (benefits) portion of Medicare are the Senate Committee on Finance, the House Committee on Ways and Means, and the House Committee on Energy and Commerce  The House and Senate Committees on Appropriations have jurisdiction over the discretionary spending used to administer and oversee the program  Medicare was enacted in 1965 (P L  89-97) in response to the concern that only about half of the nation's seniors had health insurance, and most of those had coverage only for inpatient hospital costs  The new program, which became effective July 1, 1966, included Part A coverage for hospital and posthospital services and Part B coverage for doctors and other medical services  As is the case for the Social Security program, Part A is financed by payroll taxes levied on current workers and their employers; persons must pay into the system for 40 quarters to become entitled to premium-free benefits  Medicare Part B is voluntary, with a monthly premium required of beneficiaries who choose to enroll  Payments to health care providers under both Part A and Part B were originally based on the most common form of payment at the time, namely "reasonable costs" for hospital and other institutional services or "usual, customary and reasonable charges" for physicians and other medical services  Medicare is considered a social insurance program and is the second-largest such federal program, after Social Security  The 1965 law also established Medicaid, the federal/state health insurance program for the poor; this was an expansion of previous welfare-based assistance programs  Some low-income individuals qualify for both Medicare and Medicaid  In the ensuing years, Medicare has undergone considerable change  P L  92-603, enacted in 1972, expanded program coverage to certain individuals under 65 (the disabled and persons with end-stage renal disease (ESRD)), and introduced managed care into Medicare by allowing private insurance entities to provide Medicare benefits in exchange for a monthly capitated payment  This law also began to place limitations on the definitions of reasonable costs and charges in order to gain some control over program spending which, even initially, exceeded original projections  During the 1980s and 1990s, a number of laws were enacted that included provisions designed to further stem the rapid increase in program spending through modifications to the way payments to providers were determined, and to postpone the insolvency of the Medicare Part A trust fund  This was typically achieved through tightening rules governing payments to providers of services and limiting the annual updates in such payments  The program moved from payments based on reasonable costs and reasonable charges to payment systems under which a predetermined payment amount was established for a specified unit of service  At the same time, beneficiaries were given expanded options to obtain covered services through private managed care arrangements, typically health maintenance organizations (HMOs)  Most Medicare payment provisions were incorporated into larger budget reconciliation bills designed to control overall federal spending  This effort culminated in the enactment of the Balanced Budget Act of 1997 (BBA 97; P L  105-33 )  This law slowed the rate of growth in payments to providers and established new payment systems for certain categories of providers, including establishing the sustainable growth rate (SGR) methodology for determining the annual update to Medicare physician payments  It also established the Medicare+Choice program, which expanded private plan options for beneficiaries and changed the way most of these plans were paid  BBA 97 further expanded preventive services covered by the program  Subsequently, Congress became concerned that the BBA 97 cuts in payments to providers were somewhat larger than originally anticipated  Therefore, legislation was enacted in both 1999 (Balanced Budget Refinement Act of 1999, or BBRA; P L  106-113 ) and 2000 (Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, or BIPA; P L  106-554 ) to mitigate the impact of BBA 97 on providers  In 2003, Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA; P L  108-173 ), which included a major benefit expansion and placed increasing emphasis on the private sector to deliver and manage benefits  The MMA included provisions that (1) created a new voluntary outpatient prescription drug benefit to be administered by private entities; (2) replaced the Medicare+Choice program with the Medicare Advantage (MA) program and raised payments to plans in order to increase their availability for beneficiaries; (3) introduced the concept of income testing into Medicare, with higher-income persons paying larger Part B premiums beginning in 2007; (4) modified some provider payment rules; (5) expanded covered preventive services; and (6) created a specific process for overall program review if general revenue spending exceeded a specified threshold  During the 109 th Congress, two laws were enacted that incorporated minor modifications to Medicare's payment rules  These were the Deficit Reduction Act of 2005 (DRA; P L  109-171 ) and the Tax Relief and Health Care Act of 2006 (TRHCA; P L  109-432 )  In the 110 th Congress, additional changes were incorporated in the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA; P L  110-173 ) and the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA; P L  110-275 )  In the 111 th Congress, comprehensive health reform legislation was enacted that, among other things, made statutory changes to the Medicare program  The Patient Protection and Affordable Care Act (ACA; P L  111-148 ), enacted on March 23, 2010, included numerous provisions affecting Medicare payments, payment rules, covered benefits, and the delivery of care  The Health Care and Education Affordability Reconciliation Act of 2010 (the Reconciliation Act, or HCERA; P L  111-152 ), enacted on March 30, 2010, made changes to a number of Medicare-related provisions in the ACA and added several new provisions  Included in the ACA, as amended, are provisions that (1) constrain Medicare's annual payment increases for certain providers; (2) change payment rates in the MA program so that they more closely resemble those in fee-for-service; (3) reduce payments to hospitals that serve a large number of low-income patients; (4) create an Independent Payment Advisory Board (IPAB) to make recommendations to adjust Medicare payment rates; (5) phase out the Part D prescription drug benefit "doughnut hole"; (6) increase resources and enhance activities to prevent fraud and abuse; and (7) provide incentives to increase the quality and efficiency of care, such as creating value-based purchasing programs for certain types of providers, allowing accountable care organizations (ACOs) that meet certain quality and efficiency standards to share in the savings, creating a voluntary pilot program that bundles payments for physician, hospital, and post-acute care services, and adjusting payments to hospitals for readmissions related to certain potentially preventable conditions  In the 112 th and 113 th Congresses, the American Taxpayer Relief Act of 2012 (ATRA; P L  112-240 ), the Continuing Appropriations Resolution of 2014 ( P L  113-67 ), and the Protecting Access to Medicare Act of 2014 (PAMA; P L  113-93 ) primarily made short-term modifications to physician payment updates and payment adjustments for certain types of providers  PAMA also established a new skilled nursing facility (SNF) value-based purchasing program and a new system for determining payments for clinical diagnostic laboratory tests  The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT; P L  113-185 ) required that post-acute care providers—defined in the law as long-term care hospitals (LTCHs), inpatient rehabilitation facilities (IRFs), SNFs, and home health agencies (HHAs)—report standardized patient assessment data and data on quality measures and resource use  IMPACT also modified the annual update to the hospice aggregate payment cap and required that hospices be reviewed every three years to ensure that they are compliant with existing regulations related to patient health and safety and quality of care  In the 114 th Congress, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA; P L  114-10 ) repealed the SGR formula for calculating updates to Medicare payment rates to physicians and other practitioners and established an alternative set of methods for determining the annual updates   MACRA also introduced alternatives to the current fee-for-service (FFS) based physician payments by creating a new merit-based incentive payment system (MIPS) and put in place processes for developing, evaluating, and adopting alternative payment models (APMs)  Additionally, MACRA reduced updates to hospital and post-acute care provider payments, extended several expiring provider payment adjustments, made adjustments to income-related premiums in Parts B and D, and prohibited using Social Security numbers on beneficiaries' Medicare cards  Among other changes, the Increasing Choice, Access, and Quality in Health Care for Americans Act (Division C of the 21 st Century Cures Act; P L  114-255 ) made adjustments to LTCH reimbursement and modified the average length of stay criteria, which determines whether a hospital qualifies as an LTCH  It also delayed payment reductions and required the Secretary of Health and Human Services (the Secretary) to make changes to how payments are determined for certain durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS)  Lastly, it allowed beneficiaries with ESRD to enroll in MA beginning January 1, 2021  In the 115 th Congress, the Bipartisan Budget Act of 2018 (BBA 18; P L  115-123 ) made a number of changes to federal health care programs, including Medicare  For example, BBA 18 included provisions designed to expand care for beneficiaries with chronic health conditions, such as promoting team-based care by providers, increasing the use of telehealth services, and expanding certain MA supplemental benefits  In addition, BBA 18 extended for five years a number of existing Medicare provisions that were set to expire (or that had temporarily expired), including the Medicare dependent hospital program and add-on payments for low-volume hospitals, rural home health services, and certain ambulance services  BBA 18 also specified payment updates for the Medicare physician fee schedule, SNFs, and home health services; reduced payments for non-emergency ambulance transports; and required modification of the home health prospective payment system starting in 2020  In addition, the act provided for indefinite authority for MA special needs plans, repealed limits on outpatient therapy services, and eliminated the IPAB  Starting in 2019, the act will require that pharmaceutical manufacturers participating in Medicare Part D provide a larger discount on brand-name drugs purchased by enrollees in the coverage gap and will create a new high-income premium category under Parts B and D  Most persons aged 65 or older are automatically entitled to premium-free Part A because they or their spouse paid Medicare payroll taxes for at least 40 quarters (about 10 years) on earnings covered by either the Social Security or the Railroad Retirement systems  Persons under the age of 65 who receive cash disability benefits from Social Security or the Railroad Retirement systems for at least 24 months are also entitled to Part A  (Since there is a five-month waiting period for cash payments, the Medicare waiting period is effectively 29 months ) The 24-month waiting period is waived for persons with amyotrophic lateral sclerosis (ALS, "Lou Gehrig's disease")  Individuals of any age with ESRD who receive dialysis on a regular basis or a kidney transplant are generally eligible for Medicare  Medicare coverage for individuals with ESRD usually starts the first day of the fourth month of dialysis treatments  In addition, individuals with one or more specified lung diseases or types of cancer who lived for six months during a certain period prior to diagnosis in an area subject to a public health emergency declaration by the Environmental Protection Agency (EPA) as of June 17, 2009, are also deemed entitled to benefits under Part A and eligible to enroll in Part B  Persons over the age of 65 who are not entitled to premium-free Part A may obtain coverage by paying a monthly premium ($437 in 2019) or, for persons with at least 30 quarters of covered employment, a reduced monthly premium ($240 in 2019)  In addition, disabled persons who lose their cash benefits solely because of higher earnings, and subsequently lose their extended Medicare coverage, may continue their Medicare enrollment by paying a premium, subject to limitations  Generally, enrollment in Medicare Part B is voluntary  All persons entitled to Part A (and persons over the age of 65 who are not entitled to premium-free Part A) may enroll in Part B by paying a monthly premium  In 2019, the monthly premium is $135 50; however, about 3 5% of Part B enrollees pay less, due to a "hold-harmless" provision in the Social Security Act  Since 2007, higher-income Part B enrollees pay higher premiums  (See " Part B Financing  ") Although enrollment in Part B is voluntary for most individuals, in most cases, those who enroll in Part A by paying a premium also must enroll in Part B  Additionally, ESRD beneficiaries and Medicare Advantage enrollees (discussed below) also must enroll in Part B  Together, Parts A and B of Medicare comprise "original Medicare," which covers benefits on a fee-for-service basis  Beneficiaries have another option for coverage through private plans, called the Medicare Advantage (MA or Part C) program  When beneficiaries first become eligible for Medicare, they may choose either original Medicare or they may enroll in a private MA plan  Each fall, there is an annual open enrollment period during which time Medicare beneficiaries may choose a different MA plan, or leave or join the MA program  Beneficiaries are to receive information about their options to help them make informed decisions  In 2019, the annual open enrollment period runs from October 15 to December 7 for plan choices starting the following January  Since 2012, MA plans with a 5-star quality rating have been allowed to enroll Medicare beneficiaries who are either in traditional Medicare or in an MA plan with a lower quality rating at any time  Finally, each individual enrolled in either Part A or Part B is also entitled to obtain qualified prescription drug coverage through enrollment in a Part D prescription drug plan  Similar to Part B, enrollment in Part D is voluntary and the beneficiary pays a monthly premium  Since 2011, some higher-income enrollees pay higher premiums, similar to enrollees in Part B  Generally, beneficiaries enrolled in an MA plan providing qualified prescription drug coverage (MA-PD plan) must obtain their prescription drug coverage through that plan  In general, individuals who do not enroll in Part B or Part D during an initial enrollment period (when they first become eligible for Medicare) must pay a permanent penalty of increased monthly premiums if they choose to enroll at a later date  Individuals who do not enroll in Part B during their initial enrollment period may enroll only during the annual general enrollment period, which occurs from January 1 to March 31 each year  Coverage begins the following July 1  However, the law waives the Part B late enrollment penalty for current workers who have primary coverage through their own or a spouse's employer-sponsored plan  These individuals have a special enrollment period once their employment ends; as long as they enroll in Part B during this time, they will not be subject to penalty  Individuals who do not enroll in Part D during their initial enrollment period may enroll during the annual open enrollment period, which corresponds with the Part C annual enrollment period—from October 15 to December 7, with coverage effective the following January  Individuals are not subject to the Part D penalty if they have maintained "creditable" drug coverage through another source, such as retiree health coverage offered by a former employer or union  However, once employees retire or have no access to "creditable" Part D coverage, a penalty will apply unless they sign up for coverage during a special enrollment period  Finally, for persons who qualify for the low-income subsidy for Part D, the delayed-enrollment penalty does not apply  Medicare Parts A, B, and D each cover different services, with Part C providing a private plan alternative for all Medicare services covered under Parts A and B, except hospice  The Parts A-D covered services are described below, along with a description of Medicare's payments  Part A provides coverage for inpatient hospital services, posthospital skilled nursing facility (SNF) services, hospice care, and some home health services, subject to certain conditions and limitations  Approximately 20% of fee-for-service enrollees use Part A services during a year  Medicare inpatient hospital services include (1) bed and board; (2) nursing services; (3) use of hospital facilities; (4) drugs, biologics, supplies, appliances, and equipment; and (5) diagnostic and therapeutic items and services  (Physicians' services provided during an inpatient stay are paid under the physician fee schedule and discussed below in the " Physicians and Nonphysician Practitioner Services " section ) Coverage for inpatient services is linked to an individual's benefit period or "spell of illness" (defined as beginning on the day a patient enters a hospital and ending when he or she has not been in a hospital or skilled nursing facility for 60 days)  An individual admitted to a hospital more than 60 days after the last discharge from a hospital or SNF begins a new benefit period  Coverage in each benefit period is subject to the following conditions: Days 1-60  Beneficiary pays a deductible ($1,364 in 2019)  Days 61-90  Beneficiary pays a daily co-payment charge ($341 in 2019)  Days 91-150  After 90 days, the beneficiary may draw on one or more of 60 lifetime reserve days, provided they have not been previously used  (Each of the 60 lifetime reserve days can be used only once during an individual's lifetime ) For lifetime reserve days, the beneficiary pays a daily co-payment charge ($682 in 2019); otherwise the beneficiary pays all costs  Days 151 and over  Beneficiary pays for all costs for these days  Inpatient mental health care in a psychiatric facility is limited to 190 days during a patient's lifetime  Cost sharing is structured similarly to that for stays in a general hospital (above)  Medicare makes payments to most acute care hospitals under the inpatient prospective payment system (IPPS), using a prospectively determined amount for each discharge  Medicare's payments to hospitals is the product of two components: (1) a discharge payment amount adjusted by a wage index for the area where the hospital is located or where it has been reclassified, and (2) the weight associated with the Medicare severity-diagnosis related group (MS-DRG) to which the patient is assigned  This weight reflects the relative costliness of the average patient in that MS-DRG, which is revised annually, generally effective October 1 st of each year  Additional payments are made to hospitals for cases with extraordinary costs (outliers), for indirect costs incurred by teaching hospitals for graduate medical education, and to disproportionate share hospitals (DSH) which provide a certain volume of care to low-income patients  Additional payments may also be made for qualified new technologies that have been approved for special add-on payments  Medicare also makes payments outside the IPPS system for direct costs associated with graduate medical education (GME) for hospital residents, subject to certain limits  In addition, Medicare pays hospitals for 65% of the allowable costs associated with beneficiaries' unpaid deductible and co-payment amounts as well as for the costs for certain other services  IPPS payments may be reduced by certain quality-related programs based on a hospital's quality performance  These quality-related programs include the Hospital Readmissions Reduction Program, the Hospital-Acquired Condition Reduction Program, and the Hospital Value-Based Purchasing Program  Further, hospitals may receive Medicare payment reductions for failing to demonstrate meaningful use of certified electronic health record (EHR) technology  Additional payment adjustments or special treatment under the IPPS may apply for hospitals meeting one of the following designations: (1) sole community hospitals (SCHs), (2) Medicare dependent hospitals, (3) rural referral centers, and (4) low-volume hospitals  Certain hospitals or distinct hospital units are exempt from IPPS and paid on an alternative basis, including (1) inpatient rehabilitation facilities, (2) long-term care hospitals, (3) psychiatric facilities including hospitals and distinct part units, (4) children's hospitals, (5) cancer hospitals, and (6) critical access hospitals  Medicare covers up to 100 days of posthospital care for persons needing skilled nursing or rehabilitation services on a daily basis  The SNF stay must be preceded by an inpatient hospital stay of at least 3 consecutive calendar days, and the transfer to the SNF typically must occur within 30 days of the hospital discharge  Medicare requires SNFs to provide services for a condition the beneficiary was receiving treatment for during his or her qualifying hospital stay (or for an additional condition that arose while in the SNF)  There is no beneficiary cost sharing for the first 20 days of a Medicare-covered SNF stay  For days 21 to 100, beneficiaries are subject to daily co-payment charges ($170 50 in 2019)  The 100-day limit begins again with a new spell of illness  SNF services are paid under a prospective payment system (PPS), which is based on a per diem urban or rural base payment rate, adjusted for case mix (average severity of illness) and area wages  The per diem rate generally covers all services, including room and board, provided to the patient that day  The case-mix adjustment is made using the resource utilization groups (RUGs) classification system, which uses patient assessments to assign a beneficiary to one of 66 groups that reflect the beneficiary's expected use of services  Patient assessments are done at various times during a patient's stay and a beneficiary's designated RUG category can change with changes in the beneficiary's condition  Extra payments are not made for extraordinarily costly cases ("outliers")  The Medicare hospice benefit covers services designed to provide palliative care and management of a terminal illness; the benefit includes drugs and medical and support services  These services are provided to Medicare beneficiaries with a life expectancy of six months or less for two 90-day periods, followed by an unlimited number of 60-day periods  The individual's attending physician and the hospice physician must certify the need for the first benefit period, but only the hospice physician needs to recertify for subsequent periods  Since January 1, 2011, a hospice physician or nurse practitioner must have a face-to-face encounter with the individual to determine continued eligibility prior to the 180 th day recertification, and for each subsequent recertification  Hospice care is provided in lieu of most other Medicare services related to the curative treatment of the terminal illness  Beneficiaries electing hospice care from a hospice program may receive curative services for illnesses or injuries unrelated to their terminal illness, and they may disenroll from the hospice at any time  Nominal cost sharing is required for drugs and respite care  Payment for hospice care is based on one of four prospectively determined rates (which correspond to four different levels of care) for each day a beneficiary is under the care of the hospice  The four rate categories are routine home care, continuous home care, inpatient respite care, and general inpatient care  Payment rates are adjusted to reflect differences in area wage levels, using the hospital wage index  Payments to a hospice are limited by two caps; the first limits the number of days of inpatient care to 20% or less of total patient care days, and the second limits the average annual payment per beneficiary  Home health services and services for individuals with end-stage renal disease are covered under both Parts A and B of Medicare  Medicare covers visits by participating home health agencies for beneficiaries who (1) are confined to home and (2) need either skilled nursing care on an intermittent basis or physical or speech language therapy  After establishing such eligibility, the continuing need for occupational therapy services may extend the eligibility period  Covered services include part-time or intermittent nursing care, physical or occupational therapy or speech language pathology services, medical social services, home health aide services, and medical supplies and durable medical equipment  The services must be provided under a plan of care established by a physician, and the plan must be reviewed by the physician at least every 60 days  There is no beneficiary cost sharing for home health services (though some other Part B services provided in connection with the visit, such as durable medical equipment, may be subject to cost-sharing charges)  Home health services are covered under both Medicare Parts A and B  There are special eligibility requirements and benefit limits for home health services furnished under Part A to beneficiaries who are enrolled in both Parts A and B  For such a beneficiary, Part A pays for only postinstitutional home health services furnished for up to 100 visits during a spell of illness, while Part B covers any medically necessary home health services that exceed the 100-visit limit, as well as medically necessary home health services that do not qualify as "postinstitutional " For beneficiaries enrolled in only Part A or only Part B, the requirements described above do not apply  Part A or Part B, as applicable, covers all medically necessary episodes of home health care, without a visit limit, regardless of whether the episode follows a hospitalization  Regardless of whether the beneficiary is enrolled in Part A only, in Part B only, or in both parts, the scope of the Medicare home health benefit is the same, Medicare's payments to HHAs are calculated using the same methods, and beneficiaries have no cost-sharing  Home health services are paid under a home health PPS, based on 60-day episodes of care; a patient may have an unlimited number of episodes  The physician's certification of an initial 60-day episode of home health must be supported by a face-to-face encounter with the patient related to the primary reason that the patient needs home health services  Under the PPS, for episodes with five or greater visits, a nationwide base payment amount is adjusted by differences in wages (using the hospital wage index)  This amount is then adjusted for case mix using the applicable Home Health Resource Group (HHRG) to which the beneficiary has been assigned  The HHRG applicable to a beneficiary is determined following an assessment of the patient's condition and care needs using the Outcome and Assessment Information Set (OASIS); there are 153 HHRGs  For episodes with four or fewer visits, the PPS reimburses the provider for each visit performed  Further payment adjustments may be made for services provided in rural areas, outlier visits (for extremely costly patients), a partial episode for beneficiaries that have an intervening event during their episode, or an agency's failure to submit quality data to CMS  Since January 1, 2016, home health agencies in nine states are being reimbursed under a home health value-based purchasing (HHVBP) model  These home health agencies can receive increased or decreased home health reimbursements depending on their performance across certain quality measures  Individuals with end-stage renal disease (ESRD) are eligible for all services covered under Parts A and B  Kidney transplantation services, to the extent they are inpatient hospital services, are subject to the inpatient hospital PPS and are reimbursed by both Parts A and B  However, kidney acquisition costs are paid on a reasonable cost basis under Part A  Dialysis treatments, when an individual is admitted to a hospital, are covered under Part A  Part B covers their dialysis services, drugs, biologicals (including erythropoiesis stimulating agents used in treating anemia as a result of ESRD), diagnostic laboratory tests, and other items and services furnished to individuals for the treatment of ESRD  In effect since January 1, 2011, the ESRD prospective payment system (PPS) makes no payment distinction as to the site where renal dialysis services are provided  With the implementation of the ESRD PPS, Medicare dialysis payments provide a single "bundled" payment for Medicare renal dialysis services that includes (1) items and services included in the former payment system's base rate as of December 31, 2010; (2) erythropoiesis stimulating agents (ESAs) for the treatment of ESRD; (3) other drugs and biologicals for which payment was made separately (before bundling); and (4) diagnostic laboratory tests and other items and services furnished to individuals for the treatment of ESRD  The system is case-mix adjusted based on factors such as patient weight, body mass index, comorbidities, length of time on dialysis, age, race, ethnicity, and other appropriate factors as determined by the Secretary  Under the ESRD Quality Incentive Program, dialysis facilities that fail to meet certain performance standards receive reduced payments  Medicare Part B covers physicians' services, outpatient hospital services, durable medical equipment, and other medical services  Initially, over 98% of the eligible population voluntarily enrolled in Part B, but in recent years the percentage has fallen to about 91%  About 89% of enrollees in original (FFS) Medicare use Part B services during a year  The program generally pays 80% of the approved amount (most commonly, a fee schedule or other predetermined amount) for covered services in excess of the annual deductible ($185 in 2019)  The beneficiary is liable for the remaining 20%  Most providers and practitioners are subject to limits on amounts they can bill beneficiaries for covered services  For example, physicians and some other practitioners may choose whether or not to accept "assignment" on a claim  When a physician signs a binding agreement to accept assignment for all Medicare patients, the physician accepts the Medicare payment amount as payment in full and can bill the beneficiary only the 20% coinsurance plus any unmet deductible  The physician agrees to accept assignment on all Medicare claims in a given year and is referred to as a "participating physician " There are several advantages to being a participating provider, including higher payment under the Medicare fee schedule, a lower beneficiary co-payment, and automatic forwarding of Medigap claims  Physicians who do not agree to accept assignment on all Medicare claims in a given year are referred to as nonparticipating physicians  Nonparticipating physicians may or may not accept assignment for a given service  If they do not, they may charge beneficiaries more than the fee schedule amount on nonassigned claims; however, these "balance billing" charges are subject to certain limits  Alternatively, physicians may choose not to accept any Medicare payment and enter into private contracts with their patients where no Medicare restrictions on payment or balance billing apply; however, this requires that physicians "opt out" of Medicare for two years  For some providers, such as nurse practitioners and physician assistants, assignment is mandatory; these providers can only bill the beneficiary the 20% coinsurance and any unmet deductible  For other Part B services, such as durable medical equipment, assignment is optional; for these services, applicable providers may bill beneficiaries for amounts above Medicare's recognized payment level and may do so without limit  Medicare Part B covers medically necessary physician services and medical services provided by some nonphysician practitioners  Covered nonphysician practitioner services include, but are not limited to, those provided by physician assistants, nurse practitioners, certified registered nurse anesthetists, and clinical social workers  Certain limitations apply for services provided by chiropractors and podiatrists  Beneficiary cost sharing is typically 20% of the approved amount, although most preventive services require no coinsurance from the beneficiary  A number of Part B services are paid under the Medicare physician fee schedule (MPFS), including services of physicians, nonphysician practitioners, and therapists  There are over 7,000 service codes under the MPFS  The fee schedule assigns relative values to each service code  These relative values reflect physician work (based on time, skill, and intensity involved), practice expenses (e g , overhead and nonphysician labor), and malpractice expenses  The relative values are adjusted for geographic variations in the costs of practicing medicine  These geographically adjusted relative values are converted into a dollar payment amount by a national conversion factor  Annual updates to payments are determined through changes in the conversion factor  MACRA made several fundamental changes to how Medicare pays for physician and practitioner services by (1) changing the methodology for determining the annual updates to the conversion factor, (2) establishing a merit-based incentive payment system (MIPS) to consolidate and replace several existing incentive programs and to apply value and quality adjustments to the MPFS, and (3) establishing the development of, and participation in, alternative payment models (APMs)  Prior to MACRA, the SGR system, which had been in place since BBA 97, tied annual updates to the Medicare fee schedule to cumulative Part B expenditure targets  MACRA repealed the SGR methodology, established annual fee schedule updates in the short term, and put in place a new method for determining updates thereafter  As a result of the MACRA changes, the update to physician payments under the MPFS was 0% from January 2015 through June 2015; for the remainder of that year—July 2015 through December 2015—the payments were increased by 0 5%  In each of the next four years, 2016 through 2019, the payments were to increase by 0 5% each year; however, the BBA 18 reduced the 2019 update to 0 25%  For the next six years, from 2020 through 2025, the payment update will be 0%  In addition to changes to the annual update, MACRA established two pathways for payment reform, collectively referred to as the Quality Payment Program (QPP)  Medicare payment to all physicians and other practitioners will be determined by which conditions of the QPP, either MIPS or APM, the participant satisfies  The MIPS is a new program that remains based on FFS rates but combines four categories of performance measures (quality of care, cost/resource use, clinical practice improvement activities, and promoting interoperability) into a single adjustment to the base MPFS payment  Following several years of data collection and feedback on measures, the MIPS adjustments will affect actual payments for the first time in 2019  In contrast, qualified advanced APMs are intended to be alternatives to FFS, incorporating new approaches to paying for medical care that reward quality and efficiency while de-emphasizing the number of services billed (volume of care)  Proposed advanced APMs are evaluated by an ad hoc committee (the Physician-Focused Payment Models Technical Advisory Committee), which provides comments and recommendations to the Secretary as to whether new payment models meet the criteria of APMs  For 2019, there are 13 advanced APMs under the QPP, though not all are available to all physicians and practitioners, as some are restricted to certain special services (e g , oncology care, joint replacement) or geographic locations (e g , Vermont's Medicare ACO Initiative, Maryland's Total Cost of Care Model)  MACRA established incentives to make APMs more attractive than MIPS  First, qualifying participants in advanced APMs are eligible for an annual prepaid bonus (paid 2019-2024)  Second, beginning in 2026, there will be two update factors, one for items and services furnished by a participant in an advanced APM and another for those electing to remain in the modified FFS payment system (MIPS) that do not participate in an advanced APM  The update factor for the advanced APM participants will be 0 75%, and the update factor for MIPS will be 0 25%, causing a difference between the payment levels that will grow over time  Medicare covers medically necessary outpatient physical and occupational therapy and speech-language pathology services  Beginning in 1997 and for many years subsequently but intermittently, beneficiaries faced limits ( therapy caps ) on how much Medicare would pay for outpatient therapy services in a calendar year  BBA 18 permanently repealed the outpatient therapy caps beginning January 1, 2018, and established a requirement that therapy services exceeding $3,000 would trigger a manual medical review (MMR) of the medical necessity of these services, in years 2018-2028  Beginning with 2029, the annual MMR threshold limit is to be increased by the percentage increase in the MEI, and it is to be applied separately for (1) physical therapy services and speech-language pathology services combined and (2) occupational therapy services  Medicare statute prohibits payments for covered items and services that are "not reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member," which would effectively exclude the coverage of preventive and screening services  However, Congress has explicitly added and expanded Medicare coverage for a number of such services through legislation, including through MMA, MIPPA, and ACA  Under current law, if a preventive service is recommended for use by the U S  Preventive Services Task Force (USPSTF, an independent evidence-review panel) and Medicare covers the service, all cost sharing must be waived  Also, the Secretary may add coverage of a USPSTF-recommended service that is not already covered  Coverage for preventive and screening services currently includes, among other services, (1) a "welcome to Medicare" physical exam during the first year of enrollment in Part B and an annual visit and prevention plan thereafter; (2) flu vaccine (annual), pneumococcal vaccine, and hepatitis B vaccine (for persons at high risk); (3) screening tests for breast, cervical, prostate, and colorectal cancers; (4) screening for other conditions such as depression, alcohol misuse, heart disease, glaucoma, and osteoporosis; and (5) intensive behavioral therapy for heart disease and for obesity  Payments for these services are provided under the physician fee schedule and/or the clinical laboratory fee schedule  Part B covers outpatient clinical laboratory tests, such as certain blood tests, urinalysis, and some screening tests, provided by Medicare-participating laboratories  These services may be furnished by labs located in hospitals and physician offices, as well as by independent labs  Beneficiaries have no co-payments or deductibles for covered clinical lab services  From 1984 until recently, payments for outpatient clinical laboratory services were made on the basis of the Medicare clinical laboratory fee schedule (CLFS), which set payment amounts as the lesser of the amount billed, the local fee for a geographic area, or a national limit amount  Most clinical lab services were paid at the national limit amount  The national limits were set at a percentage (74%) of the median of all local fee schedule amounts for each laboratory test code; therefore, fee schedule amounts may differ by region  In general, annual increases in clinical lab fees have been based on the percentage change in the CPI-U  However, since 1987, Congress has specified lower updates  Beginning in 2014, with certain exceptions, laboratory tests provided in hospital outpatient departments are no longer paid separately under the CLFS and are instead included in the OPPS payments  PAMA introduced a new method for determining clinical laboratory payments and required CMS to base Medicare CLFS reimbursement on reported private insurance payment amounts  Medicare has been using weighted median private insurer rates to calculate Medicare payment rates for laboratory tests paid under the CLFS since January 1, 2018  These payment rates are national and do not vary by geographic area  Part B also covers diagnostic nonlaboratory x-ray tests and other diagnostic tests, as well as x-ray, radium, and radioisotope therapy  Generally, these services are paid for under the physician fee schedule, with beneficiaries responsible for a 20% coinsurance payment  Medicare covers a wide variety of equipment and devices under the heading of durable medical equipment (DME), prosthetics, and orthotics (PO) if they are medically necessary and are prescribed by a physician  DME is defined as equipment that (1) can withstand repeated use, (2) has an expected life of at least three years (effective for items classified as DME after January 1, 2012), (3) is used primarily to serve a medical purpose, (4) is not generally useful in the absence of an illness or injury, and (5) is appropriate for use in the home  DME includes such items as hospital beds, wheelchairs, blood glucose monitors, and oxygen and oxygen equipment  It also includes related supplies (S), such as drugs and biologics that are necessary for the effective use of the product  Prosthetics (P) are items that replace all or part of a body organ or its function, such as colostomy bags, pacemakers, and artificial eyes, arms, or legs  Orthotics (O) are braces that support a weak or deformed body member, such as leg or back braces  Except in competitive bidding areas (CBAs, described below), Medicare pays for most durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) based on fee schedules  Medicare pays 80% of the lower of the supplier's charge for the item or the fee schedule amount  The beneficiary is responsible for the remaining 20%  In general, fee schedule amounts are updated each year by a (1) measure of price inflation, and (2) a measure of economy-wide productivity, which may result in lower fee schedule amounts from one year to the next  Since 2016, the fee schedule rates that applied outside of competitive bidding areas for certain DMEPOS have been reduced based on price information from the competitive bidding program  The reductions were phased in during 2016, and fully phased in starting in January 2017  In response to concerns that the adjusted rates were too low, the Secretary again applied the phase-in rate for rural and noncontiguous areas not subject to competitive bidding starting in June 2018  Currently, two different fee schedules apply outside of CBAs  First, in rural or noncontiguous areas, the fee schedule is a 50/50 blend of the fee schedule with and without the reductions based on information from competitive bidding (i e , the phase-in methodology)  Second, in nonrural and contiguous areas, the fee schedule amounts are fully adjusted by information from the competitive bidding program  Numerous studies and investigations indicated that Medicare paid more for certain items of DME and PO than some other health insurers and some retail outlets  Such overpayments were attributed, in part, to the fee schedule mechanism of payment  MMA required the Secretary to establish a Competitive Acquisition Program for certain DMEPOS in specified areas  Instead of paying for medical equipment based on a fee schedule established by law, payment for items in competitive bidding areas was based on the supplier bids  The program started in 9 metropolitan areas in January 2011 and had expanded to 130 competitive bidding areas in 2018  However, the program has been suspended while a new bidding methodology is established  During the gap, the payments for previously competitively bid items in competitive bidding areas will be the amounts that applied on December 31, 2018, increased, yearly, by a measure of inflation  Certain specified outpatient prescription drugs and biologics are covered under Medicare Part B  (However, most outpatient prescription drugs are covered under Part D, discussed below ) Covered Part B drugs and biologics include drugs furnished incident to physician services, immunosuppressive drugs following a Medicare-covered organ transplant, erythropoietin for treatment of anemia for individuals with ESRD when not part of the ESRD composite rate, oral anticancer drugs (provided they have the same active ingredients and are used for the same indications as chemotherapy drugs that would be covered if furnished incident to physician services), certain vaccines under selected conditions, and drugs administered through DME  Generally, Medicare reimburses physicians and other providers, such as hospital outpatient clinics, for covered Part B drugs and biologics at 106% of the volume weighted average sales price of all drugs billed under the same billing code, although some Part B drugs, such as those administered through DME, are reimbursed at 95% of the drug's average wholesale price  Health care providers also are paid separately for administering Medicare Part B drugs  Medicare pays 80% of the amount paid to providers, and beneficiaries are responsible for the remaining 20%  A hospital outpatient is a person who has not been admitted by the hospital as an inpatient but is registered on the hospital records as an outpatient  Generally, payments under the hospital outpatient prospective payment system (OPPS) cover the operating and capital-related costs that are directly related and integral to performing a procedure or furnishing a service on an outpatient basis  These payments cover services such as the use of an operating suite, treatment, procedure, or recovery room; use of an observation bed as well as anesthesia; certain drugs or pharmaceuticals; incidental services; and other necessary or implantable supplies or services  Payments for services such as those provided by physicians and other professionals as well as therapy and clinical diagnostic laboratory services, among others, are separate  Under the OPPS, the unit of payment for acute care hospitals is the individual service or procedure as assigned to an ambulatory payment classification (APC)  To the extent possible, integral services and items (excluding physician services paid under the physician fee schedule) are bundled within each APC  Specified new technologies are assigned to "new technology APCs" until clinical and cost data are available to permit assignment into a "clinical APC " Medicare's hospital outpatient payment is calculated by multiplying the relative weight associated with an APC by a conversion factor  For most APCs, 60% of the conversion factor is geographically adjusted by the wage index used for the inpatient prospective payment system  Except for new technology APCs, each APC has a relative weight that is based on the median cost of services in that APC  The OPPS also includes pass-through payments for new technologies (specific drugs, biologicals, and devices) and payments for outliers  The Medicare Payment Advisory Commission (MedPAC) has recommended site-neutral payment policies that base payments on the resources needed to provide high-quality care in the most efficient setting  The Bipartisan Budget Act of 2015 (BBA 15; P L  114-74 ) gave CMS the authority to add new restrictions on Medicare payments for services furnished in provider-based off-campus hospital outpatient departments (HOPDs) to address discrepancies between payments under the MPFS and the OPPS for similar services  In its 2019 OPPS Final Rule, CMS explicitly applies the site-neutral policy to clinic visits, the most commonly billed service in hospital outpatient departments  An ambulatory surgical center (ASC) is a distinct entity that furnishes outpatient surgical procedures to patients who do not require an overnight stay after the procedure  According to MedPAC, most ASCs are freestanding facilities rather than part of a larger facility, such as a hospital  Medicare covers surgical and medical services performed in an ambulatory surgical center that are (1) commonly performed on an inpatient basis but may be safely performed in an ASC; (2) not of a type that are commonly performed or that may be safely performed in physicians' offices; (3) limited to procedures requiring a dedicated operating room or suite and generally requiring a postoperative recovery room or short-term (not overnight) convalescent room; and (4) not otherwise excluded from Medicare coverage  Medicare pays for surgery-related facility services provided in ASCs using a prospective payment system based on the OPPS  (Associated physician fees are paid for separately under the physician fee schedule ) Each of the approximately 3,500 procedures approved for payment in an ASC is classified into an APC group on the basis of clinical and cost similarity  The ASC system primarily uses the same payment groups as the OPPS; however, ASC payment rates are generally lower  The ASC weights are scaled (reduced) to account for the different mix of services in an ASC, and the ASC conversion factor (the base payment amount) is lower  A different payment method is used to set ASC payment for office-based procedures, separately payable radiology services, separately payable drugs, and device-intensive procedures  In addition, separate payments are made for certain ancillary items and services when they are integral to surgical procedures, including corneal tissue acquisition, brachytherapy sources, certain radiology services, many drugs, and certain implantable devices  The application of the site-neutral payment policy to clinic visits also affects such payments to ASCs (see discussion above)  Medicare Part B covers emergency and nonemergency ambulance services to or from a hospital, a critical access hospital, a skilled nursing facility, or a dialysis facility for End-Stage Renal Disease (ESRD) beneficiaries who require dialysis when other modes of transportation could endanger the Medicare beneficiary's health  In most cases, the program covers 80% of the allowed amount for the service, and the beneficiary is responsible for the remaining 20%  Generally, ambulance services are covered if (1) transportation of the beneficiary occurs; (2) the beneficiary is taken to an appropriate location (generally, the closest appropriate facility); (3) the ambulance service is medically necessary (other forms of transportation are contraindicated); (4) the ambulance provider or supplier meets state licensing requirements; and (5) the transportation is not part of a Medicare Part A covered stay  Medicare covers both scheduled and nonscheduled nonemergency transports if the beneficiary is bed-confined or meets other medical necessity criteria  Medicare may also cover emergency ambulance transportation by airplane or helicopter if the beneficiary's location is not easily reached by ground transportation or if long distance or obstacles, such as heavy traffic, would prevent the individual from obtaining needed care  Medicare pays for ambulance services according to a national fee schedule  The fee schedule establishes seven categories of ground ambulance services and two categories of air ambulance services  Medicare pays for different levels of ambulance services, which reflect the staff training and equipment required to meet the patient's medical condition or health needs  Generally, basic life support is provided by emergency medical technicians (EMTs)  Advanced life support is provided by EMTs with advanced training or by paramedics  Some rural ground and air ambulance services may qualify for increased payments  Also, ambulance providers that are CAHs, or that are entities that are owned and operated by a CAH, are paid on a reasonable-cost basis rather than the fee schedule if they are the only ambulance provider within a 35-mile radius  Medicare covers Part B services in rural health clinics (RHCs) and federally qualified health centers (FQHCs) provided by (1) physicians and specified nonphysician practitioners; (2) visiting nurses for homebound patients in home health shortage areas; (3) registered dieticians or nutritional professionals for diabetes training and medical nutrition therapy; and (4) others, as well as certain drugs administered by a physician or nonphysician practitioner  RHCs are paid based on an "all-inclusive" cost-based rate per beneficiary visit subject to a per visit upper limit, adjusted annually for inflation  For cost-reporting periods that began on or after October 1, 2014, FQHCs are paid a base payment rate per visit (with a limit, in most cases, of one billable visit per day) under a PPS methodology  Each FQHC's PPS rate is adjusted based on the location where the service is furnished using geographic adjustment factors, which are the geographic practice cost indices (GPCI) used in Medicare's physician fee schedule (MPFS)  This rate is increased by 34% for new patients (those not seen in the FQHC organization within the past three years)  The 34% increase also applies when a beneficiary receives a comprehensive initial Medicare visit (an initial preventive physician examination or an initial annual wellness visit) or a subsequent annual wellness visit  Effective January 1, 2017, the FQHC PPS base rate is updated annually using an FQHC-specific market basket  Medicare's payment to the FQHC is equal to 80% of the lesser of the adjusted PPS rate or the FQHC's actual charges associated with the visit, and the beneficiary is responsible for a 20% coinsurance  Medicare Advantage (MA) is an alternative way for Medicare beneficiaries to receive covered benefits  Under MA, private health plans are paid a per-person amount to provide all Medicare covered benefits (except hospice) to beneficiaries who enroll in their plan  Medicare beneficiaries who are eligible for Part A, enrolled in Part B, and do not have ESRD are eligible to enroll in an MA plan if one is available in their area  Some MA plans may choose their service area (local MA plans), while others agree to serve one or more regions defined by the Secretary (regional MA plans)  In 2019, nearly all Medicare beneficiaries have access to an MA plan and approximately a third of beneficiaries are enrolled in one  Private plans may use different techniques to influence the medical care used by enrollees  Some plans, such as health maintenance organizations (HMOs), may require enrollees to receive care from a restricted network of medical providers; enrollees may be required to see a primary care physician who will coordinate their care and refer them to specialists as necessary  Other types of private plans, such as private fee-for-service (PFFS) plans, may look more like original Medicare, with fewer restrictions on the providers an enrollee can see and minimal coordination of care  In general, MA plans offer additional benefits or require smaller co-payments or deductibles than original Medicare  Sometimes beneficiaries pay for these additional benefits through a higher monthly premium, but sometimes they are financed through plan savings  The extent of extra benefits and reduced cost sharing varies by plan type and geography  However, MA plans are seen by some beneficiaries as an attractive alternative to more expensive supplemental insurance policies found in the private market  By contract with CMS, a plan agrees to provide all required services covered in return for a capitated monthly payment adjusted for the demographics and health history of their enrollees  The same monthly payment is made regardless of how many or few services a beneficiary actually uses  In general, the plan is at-risk if costs, in the aggregate, exceed program payments; conversely, the plan can retain savings if aggregate costs are less than payments  Payments to MA plans are based on a comparison of each plan's estimated cost of providing Medicare covered services (a bid) relative to the maximum amount the federal government will pay for providing those services in the plan's service area (a benchmark)  If a plan's bid is less than the benchmark, its payment equals its bid plus a rebate  The size of the rebate is dependent on plan quality and ranges from 50% to 70% of the difference between the bid and the benchmark  The rebate must be returned to enrollees in the form of additional benefits, reduced cost sharing, reduced Part B or Part D premiums, or some combination of these options  If a plan's bid is equal to or above the benchmark, its payment will be the benchmark amount and each enrollee in that plan will pay an additional premium, equal to the amount by which the bid exceeds the benchmark  The MA benchmarks are determined through statutorily specified formulas that have changed over time  Since BBA 97, formulas have increased the benchmark amounts, in part, to encourage plan participation in all areas of the country  As a result, however, the benchmark amounts (and plan payments) in some areas have been higher than the average cost of original FFS Medicare  The ACA changed the way benchmarks are calculated by tying them closer to (or below) spending in FFS Medicare, and adjusting them based on plan quality  In a recent analysis, MedPAC found that "over the past few years, plan bids and payments have come down in relation to FFS spending while MA enrollment continues to grow  The pressure of lower benchmarks has led to improved efficiencies and more competitive bids that enable MA plans to continue to increase enrollment by offering benefits that beneficiaries find attractive " In 2006, the MA program began to offer MA regional plans  Regional MA plans must agree to serve one or more regions designated by the Secretary  There are 26 MA regions consisting of states or groups of states  Regional plan benchmarks include two components: (1) a statutorily determined amount (comparable to benchmarks described above) and (2) a weighted average of plan bids  Thus, a portion of the benchmark is competitively determined  Similar to local plans, plans with bids below the benchmark are given a rebate, while plans with bids above the benchmark require an additional enrollee premium  In general, MA eligible individuals may enroll in any MA plan that serves their area  However, some MA plans may restrict their enrollment to beneficiaries who meet additional criteria  For example, employer-sponsored MA plans are generally only available to the retirees of the company sponsoring the plan  In addition, Medicare Special Needs Plans (SNPs) are a type of coordinated care MA plan that exclusively enrolls, or enrolls a disproportionate percentage of, special needs individuals  Special needs individuals are any MA eligible individuals who are either institutionalized as defined by the Secretary, eligible for both Medicare and Medicaid, or have a severe or disabling chronic condition and would benefit from enrollment in a specialized MA plan  Medicare Part D provides coverage of outpatient prescription drugs to Medicare beneficiaries who choose to enroll in this optional benefit  (As previously discussed, Part B provides limited coverage of some outpatient prescription drugs ) In 2019, about 47 million (about 77%) of eligible Medicare beneficiaries are estimated to be enrolled in a Part D plan  Prescription drug coverage is provided through private prescription drug plans (PDPs), which offer only prescription drug coverage, or through Medicare Advantage prescription drug plans (MA-PDs), which offer prescription drug coverage that is integrated with the health care coverage they provide to Medicare beneficiaries under Part C  Plans must meet certain minimum requirements; however, there are significant variations among them in benefit design, including differences in premiums, drugs included on plan formularies, and cost sharing for particular drugs  Part D prescription drug plans are required to offer either "standard coverage" or alternative coverage that has actuarially equivalent benefits  In 2019, "standard coverage" has a $415 deductible and a 25% coinsurance for costs between $415 and $3,820  From this point, there is reduced coverage until the beneficiary has out-of-pocket costs of $5,100 (an estimated $8,139 54 in total spending); this coverage gap has been labeled the "doughnut hole " Once the beneficiary reaches the catastrophic limit, the program pays all costs except for the greater of 5% coinsurance or $3 40 for a generic drug and $8 50 for a brand-name drug  As required by the ACA, in 2010, Medicare sent a tax-free, one-time $250 rebate check to each Part D enrollee who reached the doughnut hole  Additionally, starting in 2011, the coverage gap is being gradually reduced each year  Under the ACA, the coverage gap for both brand-name and generic drugs was to be eliminated in 2020, but Congress moved up the date to 2019 for brand-name drugs as part of BBA 18  In 2019, a 70% discount is provided by drug manufacturers and Medicare pays an additional 5% of the cost of brand-name drugs dispensed during the coverage gap  In 2019, Medicare also pays 63% of the cost of generic drugs dispensed during the coverage gap and enrollees pay 37%  (See Figure 2  ) By 2020, through a combination of manufacturer discounts and increased Medicare coverage, Part D enrollees will be responsible for 25% of the costs for brand-name and generic drugs in the coverage gap (the same as during the initial coverage period)  Most plans offer actuarially equivalent benefits rather than the standard package, including alternatives such as reducing or eliminating the deductible, or using tiered cost sharing with lower cost sharing for generic drugs  Medicare's payments to plans are determined through a competitive bidding process, and enrollee premiums are tied to plan bids  Plans are paid a risk-adjusted monthly per capita amount based on their bids during a given plan year  Part D plan sponsors determine payments for drugs and are expected to negotiate prices  The federal government is prohibited from interfering in the price negotiations between drug manufacturers, pharmacies, and plans (the so-called "non-interference clause")  Part D also provides enhanced coverage for low-income enrolled individuals, such as persons who previously received drug benefits under Medicaid (known as "dual eligibles"—enrollees in both Medicare and Medicaid)  Additionally, certain persons who do not qualify for Medicaid, but whose incomes are below 150% of poverty, may also receive assistance for some portion of their premium and cost-sharing charges  The MMA included significant incentives for employers to continue to offer coverage to their retirees by providing a 28% federal subsidy  In 2019, the maximum potential subsidy per covered retiree is $2,264 for employers or unions offering drug coverage that is at least actuarially equivalent (called "creditable" coverage) to standard coverage  Employers or unions may select an alternative option (instead of taking the subsidy) with respect to Part D, such as electing to pay a portion of the Part D premiums  They may also elect to provide enhanced coverage, though this has some financial consequences for the employer or union  Alternatively, employers or unions may contract with a PDP or MA-PD to offer the coverage or become a Part D plan sponsor themselves for their retirees  A variety of public and private entities are involved in carrying out Medicare administrative and oversight functions  CMS, an agency within HHS, has primary operational responsibilities  Such responsibilities include managing program finances, developing policies and regulations, setting payment rates, and developing the program's information-technology infrastructure  CMS conducts its activities through its headquarters and 10 regional offices  The Social Security Administration, however, enrolls beneficiaries into the program and issues Medicare beneficiary cards  CMS also contracts with various private entities, including private health insurance companies, to help administer the program  For example, Medicare Administrative Contractors (MACs) process and pay Parts A and B reimbursement claims, enroll providers and suppliers, educate providers and suppliers on billing requirements, support appeal processes, and answer provider and supplier inquiries through call centers, as well as other activities  Qualified Independent Contractors (QICs) perform second-level reviews on appeals initially reviewed by MACs  Medicare's quality assurance activities are primarily handled by State Survey Agencies and Quality Improvement Organizations (QIOs), which operate in all states and the District of Columbia, Puerto Rico, and the U S  Virgin Islands  The State Survey Agencies are responsible for inspecting Medicare provider facilities (e g , nursing homes, home health agencies, and hospitals) to ensure that they are in compliance with federal safety and quality standards referred to as Conditions (or Requirements) of Participation  Alternatively, some types of providers, including hospitals, may receive certification through private accrediting agencies, such as the Joint Commission  QIOs are mostly private, not-for-profit organizations that monitor the quality of care delivered to Medicare beneficiaries and educate providers on the latest quality-improvement techniques  Medicare program integrity activities, such as audits, provider education, medical review, and predictive data analysis, also are carried out by a variety of government and private entities  For example, the Center for Program Integrity within CMS works together with the U S  Department of Justice (DOJ) and the HHS Office of Inspector General (OIG) to identify and prevent fraud, waste, and abuse in Medicare  CMS also works with private contractors to carry out certain program-integrity functions  Unified Program Integrity Contractors (UPICs) perform integrity-related activities including data analysis to identify potentially fraudulent claims (bills) for Medicare Parts A and B, home health and hospice services, and DME  Similarly, the National Benefit Integrity Medicare Drug Integrity Contractor (MEDIC) is responsible for identifying and investigating fraud, waste, and abuse in Medicare Advantage and Part D  When appropriate, the UPICs and MEDIC work with and refer cases to law enforcement, including OIG and DOJ  In addition, Recovery Audit Contractors (RACs) are responsible for identifying improper Medicare payments, including both underpayments and overpayments, and for recouping any overpayments made to providers  Each year, the Comprehensive Error Rate Testing (CERT) program quantifies a national improper Medicare payment rate by examining a random sample of claims  In turn, the Supplemental Medical Review Contractor targets medical reviews in areas where OIG, RACs, and CERT have identified vulnerabilities and/or questionable billing patterns to identify ways to lower improper payment rates  As required by the ACA, the Center for Medicare and Medicaid Innovation (CMMI) was established in January 2011 to test and evaluate innovative payment and service delivery models to reduce program expenditures under Medicare  Examples of these models include providing payment incentives for groups of doctors, hospitals, and other health care providers (Accountable Care Organizations, or ACOs) to coordinate the services they provide to Medicare beneficiaries; bundling payments for services provided in different settings during a beneficiary's episode of care; and reimbursing health providers based on the quality of care rather than on the volume of services  CMMI also plays an important role in developing and implementing the new physician payment models required by MACRA  Medicare beneficiary education and outreach duties are shared between CMS and the Social Security Administration  Each year, CMS mails out a "Medicare and You" handbook to beneficiaries, which provides information on their benefits for the upcoming year  Additional educational materials and responses to frequently asked questions may be found on the CMS-maintained "Medicare gov" website, and beneficiaries may call a CMS-operated 1-800 number for assistance with specific questions and help with selecting and enrolling in a Medicare Advantage and/or Part D plan  A Medicare beneficiary ombudsman is also available to provide assistance to Medicare consumers with their complaints, grievances, and requests  The Social Security Administration is responsible for notifying low-income Medicare beneficiaries about programs that may be able to assist them with their medical and prescription drug expenses  The Social Security Administration also provides general Medicare eligibility and enrollment information on its webpage and on Social Security benefit statements  Finally, CMS partners with community-based organizations, such as State Health Insurance Assistance Programs, in every state to provide educational resources and personalized assistance to Medicare beneficiaries  Medicare's financial operations are accounted for through two trust funds maintained by the Department of the Treasury—the Hospital Insurance (HI) trust fund for Part A and the Supplementary Medical Insurance (SMI) trust fund for Parts B and D  For beneficiaries enrolled in Medicare Advantage (Part C), payments are made on their behalf in appropriate portions from the HI and SMI trust funds  HI is primarily funded by payroll taxes, while SMI is primarily funded through general revenue transfers and premiums  (See Figure 3  ) The HI and SMI trust funds are overseen by a Board of Trustees that provides annual reports to Congress  The trust funds are accounting mechanisms  Income to the trust funds is credited to the fund in the form of interest-bearing government securities  Expenditures for services and administrative costs are recorded against the fund  These securities represent obligations that the government has issued to itself  As long as a trust fund has a balance, the Department of the Treasury is authorized to make payments for it from the U S  Treasury  Medicare expenditures are primarily paid for through mandatory spending—generally Medicare pays for all covered health care services provided to beneficiaries  Aside from certain constraints in HI described below, the program is not subject to spending limits  Additionally, most Medicare expenditures (aside from premiums paid by beneficiaries) are paid for by current workers through income taxes and dedicated Medicare payroll taxes, that is, current income is used to pay current expenditures  Medicare taxes paid by current workers are not set aside to cover their future Medicare expenses  The primary source of funding for Part A is payroll taxes paid by employees and employers  Each pays a tax of 1 45% on the employee's earnings; the self-employed pay 2 9%  Beginning in 2013, some higher-income employees pay higher payroll taxes  Unlike Social Security, there is no upper limit on earnings subject to the tax  Other sources of income include (1) interest on federal securities held by the trust fund, (2) a portion of federal income taxes that individuals pay on their Social Security benefits, and (3) premiums paid by voluntary enrollees who are not automatically entitled to Medicare Part A  Income for Part A is credited to the HI trust fund  Part A expenditures for CY2019 are estimated to reach approximately $330 billion  Revenue to the trust fund is expected to consist of about $285 billion in payroll tax income and another $38 billion in interest and other income  The Medicare Trustees project that in CY2019, the HI trust fund will incur a deficit of approximately $7 billion  As long as the HI trust fund has a balance, the Treasury Department is authorized to make payments for Medicare Part A services  To date, the HI trust fund has never run out of money (i e , become insolvent), and there are no provisions in the Social Security Act that govern what would happen if that were to occur  Part A expenditures exceeded HI income each year from 2008 through 2015, and the assets credited to the trust fund were drawn down to make up the deficit in those years  Although the HI trust fund accumulated small surpluses in 2016 and 2017, the Medicare Trustees estimate that, beginning in 2018, expenditures will outpace income in all future years, and project that the HI trust fund will become insolvent in 2026 (i e , the balance of the trust fund will reach $0)  At that time there would no longer be sufficient funds to fully cover Part A expenditures  Medicare Part B is financed primarily from federal general revenues and from beneficiary premiums, which are set at 25% of estimated per capita program costs for the aged  (The disabled pay the same premium as the aged ) Income for Part B is credited to the SMI trust fund  Total spending for Part B is estimated to reach about $368 billion in CY2019, with premiums financing about $98 billion of that amount and general revenues financing most of the rest  Most beneficiaries who enroll in Medicare Part B pay a monthly premium  Individuals receiving Social Security benefits have their Part B premium payments automatically deducted from their Social Security benefit checks  Due to a "hold-harmless" provision in the Social Security Act, an individual's Social Security check cannot decrease from one year to the next as a result of the annual Part B premium increase (except in the case of higher-income individuals subject to income-related premiums)  The 2019 monthly Part B premium is $135 50  However, about 3 5% of Medicare enrollees are protected by the hold-harmless provision and pay lower premium amounts because the dollar amount of the 2019 cost-of-living increase in their Social Security benefits was not sufficient to cover the full premium increase  Since 2007, higher-income Part B enrollees have paid higher premiums  In 2019, individuals whose modified adjusted gross income (AGI) exceeds $85,000 and each member of a couple filing jointly whose modified AGI exceeds $170,000 are subject to higher premium amounts  These higher-income premiums range from 35% to 85% of the value of Part B and affect about 5% of Medicare enrollees  (See Appendix B for 2019 Part B premiums and high-income thresholds ) Payments for spending under the Medicare Advantage program are made in appropriate portions from the HI and SMI trust funds  There is no separate trust fund for Part C  Medicare Part D is financed through a combination of beneficiary premiums and federal general revenues  In addition, certain transfers are made from the states  These transfers, referred to as "clawback payments," represent a portion of the amounts states could otherwise have been expected to pay for drugs under Medicaid if drug coverage for the dual eligible population had not been transferred to Part D  Part D revenues are credited to a separate Part D account within the SMI trust fund  In CY2019, total spending for Part D is estimated to reach approximately $98 billion, with about $71 billion of that amount paid for by general revenues, $16 billion from beneficiary premiums, and $12 billion from state transfers  In 2019, the base beneficiary premium is $33 19; however, beneficiaries pay different premiums depending on the plan they have selected and whether they are entitled to low-income premium subsidies  Additionally, beginning in 2011, higher income Part D enrollees pay higher premiums  (The income thresholds are the same as for Part B, as described above ) On average, beneficiary premiums are set at 25 5% of expected total Part D costs for basic coverage  The Budget Control Act of 2011 (BCA; P L  112-25 ) provided for increases in the debt limit and established procedures designed to reduce the federal budget deficit, including the creation of a Joint Select Committee on Deficit Reduction  The failure of the Joint Committee to propose deficit reduction legislation by its mandated deadline triggered automatic spending reductions ("sequestration" of mandatory spending and reductions in discretionary spending) in fiscal years 2013 through 2021  The American Taxpayer Relief Act of 2012 (ATRA; P L  112-240 ) delayed the automatic reductions by two months, while the Bipartisan Budget Act of 2013 (BBA; P L  113-67 ) extended sequestration for mandatory spending for an additional two years—through FY2023  In 2014, the President signed into law an amended version of S  25 ( P L  113-82 ), which included a provision to extend BCA's sequester of mandatory spending through FY2024  BBA 15 extended the sequestration of mandatory spending another year, through FY2025  Most recently, BBA 18 extended the BCA mandatory spending sequester through FY2027  Section 256(d) of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA; P L  99-177 ) contains special rules for the Medicare program in the event of a sequestration  Among other things, it specifies that for Medicare, sequestration is to begin the month after the sequestration order has been issued  Therefore, as the sequestration order was issued March 2013, Medicare sequestration began April 1, 2013, and will continue through March 31, 2028  Under sequestration, Medicare's benefit structure generally remains unchanged; however, benefit related payments are subject to 2% reductions  In other words, most Medicare payments to health care providers, as well as to MA and Part D plans, are being reduced by 2%  Certain Medicare payments are exempt from sequestration and therefore not reduced  These exemptions include (1) Part D low-income subsidies, (2) the Part D catastrophic subsidy, and (3) Qualified Individual (QI) premiums  Some non-benefit related Medicare expenses, such as administrative and operational spending, are subject to higher reductions, 6 2% in 2019  While Medicare provides broad protection against the costs of many, primarily acute care, services, the program does not cover all services that may be used by its aged and disabled beneficiaries  In general, Medicare does not cover eyeglasses, hearing aids, dentures, or most long-term care services  Further, unlike most private insurance policies, it does not include an annual "catastrophic" cap on out-of-pocket spending on cost-sharing charges for services covered under Parts A and B (except for persons enrolled in Medicare Advantage plans)  Most Medicare beneficiaries have some coverage in addition to Medicare  The following are the main sources of additional coverage for Medicare enrollees: Medicare Advantage  Many MA plans offer services in addition to those covered under original Medicare, reduced cost sharing, or reduced Part B or D premiums  All MA plans have a catastrophic cap  Employer Coverage  Coverage may be provided through a current or former employer  In recent years, a number of employers have cut back on the scope of retiree coverage  Some have dropped such coverage entirely, particularly for future retirees  As noted earlier, the MMA attempted to stem this trend, at least for prescription drug coverage, by offering subsidies to employers who offer drug coverage, at least as good as that available under Part D  Medigap  Individual insurance policies that supplement fee-for-service Medicare are referred to as Medigap policies  Beneficiaries with Medigap insurance typically have coverage for a portion of Medicare's deductibles and coinsurance; they may also have coverage for some items and services not covered by Medicare  Individuals select from a set of standardized plans, though not all plans are offered in all states  Medicaid  Certain low-income Medicare beneficiaries also may be eligible for full or partial benefits under their state's Medicaid program  Individuals eligible for both Medicare and Medicaid are referred to as dual eligibles  The lowest-income dual eligibles qualify for full Medicaid benefits, so that the majority of their health care expenses are paid by either Medicare or Medicaid; Medicare pays first, with Medicaid picking up most of the remaining costs  In addition to full-benefit dual eligibles, state Medicaid programs pay Medicare premiums and some cost sharing for other partial dual eligibles, who have higher income than full-benefit dual eligibles but are still considered to have low income  Other Public Sources  Individuals may have additional coverage through the Department of Veterans Affairs, or TRICARE for military retirees eligible for Medicare (and enrolled in Part B)  In 2015, about 87% of Medicare beneficiaries had some form of additional coverage  Some persons may have had more than one type of additional coverage  Appendix A  Abbreviations Appendix B  2019 Medicare Beneficiary Costs


Report 2: Banks play a central role in the financial system by connecting borrowers to savers and allocating available funds across the economy  As a result, banking is vital to the U S  economy's health and growth  Nevertheless, banking is an inherently risky activity involving extending credit and undertaking liabilities  Therefore, banking can generate tremendous societal and economic benefits, but banking panics and failures can create devastating losses  Over time, a regulatory system designed to foster the benefits of banking while limiting risks has developed, and both banks and regulatio n have coevolved as market conditions have changed and different risks have emerged  For these reasons, Congress often considers policies related to the banking industry  The last decade has been a transformative period for banking  The 2007-2009 financial crisis threatened the total collapse of the financial system and the real economy  Many assert only huge and unprecedented government interventions staved off this collapse  Others argue that government interventions were unnecessary or potentially exacerbated the crisis  In addition, many argue the crisis revealed that the financial system was excessively risky and the regulatory regime governing the financial system had serious weaknesses  Policymakers responded to the perceived weaknesses in the pre-crisis financial regulatory regime by implementing numerous changes to financial regulation, including to bank regulation  Most notably, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act; P L  111-203 ) in 2010 with the intention of strengthening regulation and addressing risks  In addition, U S  bank regulators have implemented changes under their existing authorities, many of which generally adhere to the Basel III Accords—an international framework for bank regulation agreed to by U S  and international bank regulators—that called for making certain bank regulations more stringent  In the ensuing years, some observers raised concerns that the potential benefits of those regulatory changes (e g , better-managed risks, increased consumer protection, greater systemic stability, potentially higher economic growth over the long term) were outweighed by the potential costs (e g , compliance costs incurred by banks, reduced credit availability for consumers and businesses, potentially slower economic growth)  In response to these concerns, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCP Act; P L  115-174 )  Among other things, the law modified certain (1) regulations facing small banks; (2) regulations facing banks large enough to be subjected to Dodd-Frank enhanced regulation but still below the size thresholds exceeded by the very largest banks; and (3) mortgage regulations facing lenders including banks  In addition, federal banking regulatory agencies—the Federal Reserve (the Fed), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC)—have proposed further changes in regulation  Implementing the regulatory changes prescribed in the aftermath of the crisis and made pursuant to the Dodd-Frank Act occurred over the course of years  In recent years—a period in which the leadership of the regulators has transferred from Obama Administration to Trump Administration appointees—the banking regulators have expressed the belief that, after having viewed the effects of the regulations, they now have the necessary information to determine which regulations may be ineffective or inefficient as currently implemented  Recently, these regulators have made of number of proposals with the aim of reducing regulatory burden  A key issue surrounding regulatory relief made pursuant to the EGRRCP Act and regulator-initiated changes is whether regulatory burden can be reduced without undermining the goals and effectiveness of the regulations  Meanwhile, market trends and economic conditions continue to affect the banking industry coincident with the implementation of new regulation  Some of the more notable conditions include the development of new technologies used in financial services (known as "fintech") and a rising interest rate environment following an extraordinarily long period of very low rates  This report provides a broad overview of selected banking-related issues, including issues related to "safety and soundness" regulation, consumer protection, community banks, large banks, what type of companies should be able to establish banks, and recent market and economic trends  This report is not an exhaustive look at all bank policy issues, nor is it a detailed examination of any one issue  Rather, it provides concise background and analyses of certain prominent issues that have been the subject of recent discussion and debate  In addition, this report provides a list of Congressional Research Service reports that examine specific issues  Banks face a number of regulations intended to increase the likelihood that banks are profitable without being excessively risky and prone to failures; decrease the likelihood that bank services are used to conceal the proceeds of criminal activities; and to protect banks and their customers' data from cyberattacks  This section provides background on these "safety and soundness" regulations and analyzes selected issues related to them, including prudential regulation related to capital requirements and the Volcker Rule (which restricts proprietary trading); requirements facing banks related to anti-money laundering laws, such as the Bank Secrecy Act (P L  91-508); and challenges related to cybersecurity  Bank failures can inflict large losses on stakeholders, including taxpayers via government "safety nets" such as deposit insurance and Federal Reserve lending facilities  Failures can cause systemic stress and sharp contraction in economic activity if they are large or widespread  To make such failures less likely—and to reduce losses when they do occur—regulators use prudential regulation designed to ensure banks are safely profitable and to reduce the likelihood of bank failure  In addition, banks are subject to regulations intended to reduce the prevalence of crime  Some of those are anti-money laundering measures aimed at stopping criminals from using the banking system to conduct or hide illegal operations  Others are cybersecurity regulations aimed at protecting banks and their customers from becoming victims of cybercrime, such as denial-of-service attacks or data theft  Banks profit in part because their assets are generally riskier, longer term, and more illiquid than their liabilities, which allows the banks to earn more interest on their assets than they pay on their liabilities  The practice is usually profitable, but does expose banks to risks that can potentially lead to failure  Failures can be reduced if (1) banks are better able to absorb losses or (2) they are less likely to experience unsustainably large losses  One tool regulators use to increase a bank's ability to absorb losses is to require banks to hold a minimum level of capital  Another tool regulators use to reduce the likelihood and size of potential losses is to prohibit banks from engaging in activities that could create excessive risks  For example, the Volcker Rule prohibits banks from engaging in proprietary trading —the buying and selling of securities that the bank itself owns with the aim of profiting from price changes  The EGRRCP Act mandated certain changes to these prudential regulations, and regulators have proposed changes under existing authorities  Regulators are to promulgate these changes through the rulemaking process in the coming months and years  In addition, whether policymakers have calibrated these regulations such that their benefits and costs are appropriately balanced is likely to be an area of ongoing debate  For these reasons, prudential regulation issues will likely continue to draw congressional attention  A bank's balance sheet is composed of assets, liabilities, and capital  Assets are largely the value of loans owed to the bank and securities owned by the bank  To make loans and buy securities, a bank secures funding by either issuing liabilities or raising capital  A bank's liabilities are largely the value of deposits and borrowings the bank owes savers and creditors  Capital is raised through various methods, including issuing equity to shareholders or special types of bonds that can be converted into equity  Banking is an inherently risky activity, because banks may suffer losses on assets but face rigid obligations on the liabilities owed to depositors and creditors  In contrast to liabilities, capital generally does not obligate the bank to repay or distribute a specified amount of money at a specified time  This characteristic means that, in the event a bank suffers losses, capital gives the bank the ability to absorb some amount of losses while meeting its obligations  Thus, banks can avoid failures if they hold sufficient capital  Banks are required to satisfy several requirements to ensure they hold enough capital  In the United States, these requirements are generally aligned with the Basel III standards developed as part of a nonbinding agreement between international bank regulators  In general, these are expressed as minimum ratios between certain balance sheet items that banks must maintain  A detailed examination of how these ratios are calculated and what levels must be met is beyond the scope of this report  This examination of policy issues only requires noting that capital ratios fall into one of two main types—a leverage ratio or a risk-weighted ratio  A leverage ratio treats all assets the same, requiring banks to hold the same amount of capital against assets regardless of how risky each asset is  A risk-weighted ratio assigns a risk weight—a percentage based on the riskiness of the asset that the asset value is multiplied by—to account for the fact that some assets are more likely to lose value than others  Riskier assets receive a higher risk weight, which requires banks to hold more capital to meet the ratio requirement  Whether the benefits of capital requirements (e g , increased bank and financial system stability) are generally outweighed by the potential costs (e g , reduced credit availability) is an issue subject to debate  Capital is typically a more expensive source of funding for banks than liabilities  Thus, requiring banks to hold higher levels of capital may make funding more expensive, and so banks may choose to reduce the amount of credit available  Some studies indicate this could slow economic growth  However, no economic consensus exists on this issue, because a more stable banking system with fewer crises and failures may lead to higher long-run economic growth  In addition, estimating the value of regulatory costs and benefits is subject to considerable uncertainty, due to difficulties and assumptions involved in complex economic modeling and estimation  Lack of consensus also surrounds questions over whether or under what circumstances risk-weighted ratios are necessary, effective, and efficient  Proponents of risk-based measures assert that it is important to use both risk-weighted and leverage ratios because each addresses weaknesses of the other  For example, riskier assets generally offer a greater rate of return to compensate the investor for bearing more risk  Without risk weighting, banks would have an incentive to hold riskier assets because the same amount of capital must be held against risky and safe assets  However, the use of risk-weighted ratios could be problematic for a number of reasons  Risk weights assigned to particular classes of assets could potentially be an inaccurate estimation of some assets' true risk, which could incent banks to misallocate available resources across asset classes  For example, banks held a high level of seemingly low-risk, mortgage-backed securities (MBSs) before the crisis, in part because those assets offered a higher rate of return than other assets with the same risk weight  MBSs then suffered unexpectedly large losses during the crisis  Another criticism is that the risk-weighted requirements involve "needless complexity" and their use is an example of regulatory micromanagement  The complexity could benefit the largest banks that have the resources to absorb the added regulatory cost compared with small banks that could find compliance costs more burdensome  (Small or "community" bank compliance issues will be covered in more detail in the " Regulatory Burden on Community Banks " section later in the report ) Section 201 of the EGRRCP Act is aimed at addressing concerns over the complexity of risk-weighted ratios and the costs they impose on community banks  This provision created an option for banks with less than $10 billion in assets to meet a higher leverage ratio—the Community Bank Leverage Ratio (CBLR)—in order to be exempt from having to meet the risk-based ratios described above  Bank regulators have issued a proposal to implement this provision wherein banks (1) below the threshold that (2) meet at least a 9% leverage ratio measure of equity and certain retained earnings to assets and (3) had limited off-balance sheet exposures and limited securities trading activity (among other requirements) would qualify for the exemption  The FDIC estimates that more than 80% of community banks will be eligible for the CBLR  However, this new optional exemption does not entirely settle the issue  One bank industry group has argued that 9% is set higher than is necessary, excluding deserving banks from the exemption  In addition, bills in the 115 th Congress, notably H R  10 , proposed a high-leverage-ratio option be available to banks regardless of size that would exempt qualifying banks from a wider range of prudential regulations  There are also specific policy issues relating to capital requirements for large banks, which are discussed in the " Regulator Proposals Related to Large Bank Capital Requirements " section below  Section 619 of Dodd-Frank—often referred to as the Volcker Rule—generally prohibits depository banks from engaging in proprietary trading or sponsoring a hedge fund or private equity fund  Proprietary trading refers to owning and trading securities for a bank's own portfolio with the aim of profiting from price changes  Put simply, if a bank is engaged in proprietary trading, it is itself an investor in stocks, bonds, and derivatives, which is commonly characterized as "playing the market" or "speculating " The rule includes exceptions for when bank trading is deemed appropriate—such as (1) when a bank is hedging against risks the bank has assumed as a part of its traditional business and (2) market-making (i e , buying available securities with the intention of quickly selling them to meet market demand)  Proprietary trading is an inherently risky activity, and banks have faced varying degrees of restrictions over engaging in this activity for a number of decades  Sections 16, 20, 21, and 32 of the Banking Act of 1933 (P L  73-66)—commonly referred to as the Glass-Steagall Act—generally prohibited certain deposit-taking banks from engaging in certain securities markets activities  Over time, regulator interpretation of Glass-Steagall and legislative changes expanded permissible activities for certain banks, allowing them to make certain securities investments and authorizing bank-holding companies to own depositories and securities firms within the same organization  The financial crisis increased debate over whether banks were engaging in unnecessarily risky activities  Ultimately, certain provisions in Dodd-Frank placed restrictions on permissible activities to reduce banks' riskiness, and the Volcker Rule was designed to prohibit proprietary trading by depository banking organizations  One of the Volcker Rule's proponents' main rationales for the separation of deposit-taking and certain securities investments is that when banks analyze and assume risks, they may be subject to moral hazard —the willingness to take on excessive risk due to some outside protection from losses  Deposits are an important source of bank funding and insured (up to a limit on each account) by the government  This arguably reduces depositors' incentive to monitor their banks' riskiness  Thus, a bank could potentially take on excessive risk without concern about losing this funding because, in the event of large losses that lead to failure, at least part of the losses will be borne by the FDIC's Deposit Insurance Fund (which is backed by the full faith and credit of the U S  government and so ultimately the taxpayer)  Thus, supporters of the Volcker Rule have characterized it as preventing banks from "gambling" in securities markets with taxpayer-backed deposits  However, critics of the Volcker Rule doubt its necessity and efficiency  In regard to necessity, they assert that proprietary trading at commercial banks did not play a substantive role in the financial crisis  They note the rule would not have prevented a number of the major events that played a direct role in the crisis—including failures or bailouts of large investment banks and insurers and losses on loans held by commercial banks  On this point, they also argue that proprietary trading risks are no greater than those posed by "traditional" banking activities, such as mortgage lending, and allowing banks to take on risks in different markets might diversify their risk profiles, making them less likely to fail  Debates relating to the efficiency of the Volcker Rule involve its complexity, compliance burden, and potential to lead banks to reduce their engagement in beneficial market activities  Recall that the Volcker Rule is not a ban on all trading, as banks are still allowed to trade to hedge risks or make markets  This poses practical supervisory problems  For example, how can regulators determine whether a broker-dealer is holding a security for market-making, as a hedge against another risk, or as a speculative investment? Differentiating among these motives creates the aforementioned complexity and compliance costs that could affect banks' trading behavior, and so could reduce financial market efficiency  Another criticism of the Volcker Rule in its original form was that it unnecessarily subjected all banks to the rule and their associated compliance costs  Critics of this aspect asserted that the vast majority of community banks are not involved in complex trading activity, but nevertheless must incur costs in evaluating the rule to ensure they are in compliance  Both Congress and regulators have recently taken actions in response to concerns over the complexity of the Volcker Rule and its compliance burden for small banks  Section 203 of the EGRRCP Act exempted banks with less than $10 billion in assets that fell below certain trading activity limits from the rule  Independent of that mandate, the agencies that implemented and enforced the Volcker Rule released and called for public comment on a proposal to simplify the rule in May 2018  Under the proposal, the agencies would clarify certain of the rule's definitions and criteria in an effort to reduce or eliminate uncertainties related to how certain trading activity can qualify for exemption  The proposal would also further tailor the compliance requirements facing banks based on the size of an institution's trading activity  Proponents of the Volcker Rule are generally wary of size-based exemptions  They contend that community banks typically do not face compliance obligations under the rule and do not face an excessive burden by being subject to it  They argue that community banks that are subject to compliance requirements can comply by having clear policies and procedures in place for review during the normal examination process  In addition, Volcker Rule supporters are generally critical of the regulators' proposal, asserting that the changes would undermine "the effective supervision and enforcement" of the rule  Anti-money laundering (AML) regulation refers to efforts to prevent criminal exploitation of financial systems to conceal the location, ownership, source, nature, or control of illicit proceeds  The U S  Department of the Treasury estimates domestic financial crime, excluding tax evasion, generates $300 billion in illicit proceeds that might involve money laundering  Despite robust AML efforts in the United States, the ability to counter money laundering effectively remains challenged by factors including (1) the diversity of illicit methods to move and store ill-gotten proceeds through the international financial system; (2) the introduction of new and emerging threats such as cyber-related financial crimes; (3) gaps in legal, regulatory, and enforcement regimes; and (4) the costs associated with financial institution compliance with global AML guidance and national laws  In the United States, the statutory foundation for domestic AML originated in 1970 with the Bank Secrecy Act (BSA; P L  91-508) and its major component, the Currency and Foreign Transaction Reporting Act  Amendments to the BSA and related provisions in the 1980s and 1990s expanded AML policy tools available to combat crime, particularly drug trafficking, and prevent criminals from laundering their illicitly derived profits  Key elements to the BSA/AML legal framework include requirements for customer identification, recordkeeping, reporting, and compliance programs intended to identify and prevent money laundering abuses  In general, banking regulators examine institutions for compliance with BSA/AML  When a regulator finds BSA violations or deficiencies in AML compliance programs, it may take informal or formal enforcement action, including possible civil fines  The BSA/AML policy framework is premised on banks and other covered financial entities filing a range of reports with the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN), when their clients either engage in suspicious financial transactions, large cash transactions, or certain other transactions  For example, a bank generally must file a Suspicious Activity Report (SAR) if, among other reasons, it conducts a transaction of $5,000 or more that the bank suspects involves money laundering or other criminal activity  A bank must file a Currency Transaction Report (CTR) if it conducts a currency (i e , cash) transaction of $10,000 or more as to which it has the same suspicions  The accurate, timely, and complete reporting of such activity to FinCEN flags situations that may warrant further investigation for law enforcement  Whether this regulatory framework adequately hinders criminals from using the banking system to launder their criminal proceeds and whether it does so efficiently without unduly burdening banks are debated issues  One aspect of this debate is whether current reporting requirements are inefficient and overly costly to the banking industry  Some industry observers—including officials from the OCC—have indicated that they believe certain areas of the current framework could be reformed in a way that reduces compliance costs without unduly weakening the ability to prevent money laundering  In contrast, officials from other agencies involved in AML and law enforcement—including FinCEN and the FBI—have stressed the importance of the information gathered under the current reporting requirements in combating money laundering  Another area of concern involves beneficial owners —that is, the natural person(s) who own or control a legal entity, such as a corporation or limited liability company  When such entities are set up without physical operations or assets, they are often referred to as shell companies   Shell companies can be used to conceal beneficial ownership and facilitate anonymous financial transactions  In recent years, policymakers have become increasingly concerned regarding potential risks posed by shell companies whose beneficial ownership is not transparent  This is due in part to a series of leaks to the media regarding the use of shell companies to facilitate criminal activity (such as "the Panama Papers") and sustained multilateral criticism of current U S  practices by the Financial Action Task Force, an international standard-setting body  In May 2018, a new FinCEN regulation came into effect that increased the requirements for banks to conduct customer due diligence (CDD) and ascertain the identity of beneficial owners in certain cases  Central to the CDD rule is a requirement for financial institutions to establish and maintain procedures to identify and verify beneficial owners of a legal entity opening a new account  If Congress decides that reporting requirements facing banks are not appropriately calibrated, it could pass legislation amending those requirements  For example, Congress could change the CTR or SAR reporting threshold or index the threshold levels to inflation  Certain bills introduced in the 115 th Congress would have increased financial transparency and reporting requirements for beneficial owners in other nonbank fields, such as real estate, but could potentially indirectly impact the banking industry as well  Cybersecurity is a major concern of banks, other financial services providers, and federal regulators  In many ways, it is an important extension of physical security  For example, banks are concerned about both physical and electronic theft of money and other assets, and they do not want their businesses shut down by weather events or electronic denial-of-service attacks  Maintaining the confidentiality, security, and integrity of physical records and electronic data held by banks is critical to sustaining the level of trust that allows businesses and consumers to rely on the banking industry to supply services on which they depend  The federal government has increasingly recognized the importance of cybersecurity in the financial services industry, as evidenced by the inclusion of financial services in the government's list of critical infrastructure sectors  The basic authority that federal regulators use to establish cybersecurity standards emanates from the organic legislation that established the agencies and delineated the scope of their authority and functions  As previously discussed, federal banking regulators are required to promulgate safety and soundness standards for all federally insured depository institutions to protect the stability of the nation's banking system  Some of these standards pertain to cybersecurity issues, including information security, data breaches, and destruction or theft of business records  In addition, certain laws (at both the state and federal levels) have provisions related to cybersecurity of financial services that are often performed by banks, including the Dodd-Frank Act, the Gramm-Leach-Bliley Act of 1999 (GLBA; P L  106-102 ), and the Sarbanes-Oxley Act of 2002 ( P L  107-204 )  For example, Section 501 of GLBA imposes obligations on financial institutions to "respect the privacy of     [their] customers and to protect the security and confidentiality of those customers' nonpublic personal information " Federal banking regulators require the entities that they regulate to protect customer privacy of physical and electronic records as mandated by the privacy title of GLBA  Federal bank regulators also issue guidance in a variety of forms designed to help banks evaluate their risks and comply with cybersecurity regulations  Regulators bring adjudicatory enforcement actions on a case-by-case basis related to banks' violations of cybersecurity protocols  Banks often view these actions as signaling how an agency interprets aspects of its regulatory authority  For example, a number of recent consent orders issued by the FDIC have directed banks to perform assessments or audits of information technology programs and management to identify risks and ensure compliance with cybersecurity requirements  Thus, oversight of financial services and bank cybersecurity reflects a complex and sometimes overlapping array of state and federal laws, regulators, regulations, and guidance  However, whether this framework is effective and efficient, resulting in adequate protection against cyberattacks without imposing undue cost burdens on banks, is an open question  The occurrence of successful hacks of banks and other financial institutions, wherein huge amounts of individuals' personal information are stolen or compromised, highlights the importance of ensuring bank cybersecurity  For example, in 2014, JPMorgan Chase, the largest U S  bank, experienced a data breach that exposed financial records of 76 million households  However, no consensus exists on how best to reduce the occurrence of such incidents  Financial products can be complex and potentially difficult for consumers to fully understand  Consumers seeking loans or financial services could be vulnerable to deceptive or unfair practices  To reduce the occurrence of bad outcomes, laws and regulations have been put in place to protect consumers  This section provides background on consumer financial protection and the Bureau of Consumer Financial Protection's (CFPB) authority  The section also analyzes related issues, including whether the CFPB has used its authorities and regulations of banking institutions appropriately; concerns relating to the lack of consumer access to banking services; and whether the Community Reinvestment Act as currently implemented is effectively and efficiently meeting its goal of ensuring banks provide credit to the areas in which they operate  Banks are subject to consumer compliance regulation, intended to ensure that banks are in compliance with relevant consumer-protection and fair-lending laws  Federal laws and regulations in this area take a variety of approaches and address different areas of concern  Certain laws provide disclosure requirements intended to ensure consumers adequately understand the costs and other features and terms of financial products  Other laws prohibit unfair, deceptive, or abusive acts and practices  Fair lending laws prohibit discrimination in credit transactions based upon certain borrower characteristics, including sex, race, religion, or age, among others  The financial crisis raised concerns among policymakers that regulators' mandates lacked sufficient focus on consumer protection  In response, the Dodd-Frank Act established the CFPB with the single mandate to implement and enforce federal consumer financial law, while ensuring consumers can access financial products and services  The CFPB also seeks to ensure the markets for consumer financial services and products are fair, transparent, and competitive  For banks with more than $10 billion in assets, the CFPB is the primary regulator for consumer compliance, whereas safety and soundness regulation continues to be performed by the prudential regulator  As a regulator of larger banks, the CFPB has rulemaking, supervisory, and enforcement authorities  A large bank, therefore, has different regulators for consumer protection and safety and soundness  For banks with $10 billion or less in assets, the rulemaking, supervisory, and enforcement authorities for consumer protection are divided between the CFPB and a prudential regulator  The CFPB may issue rules that apply to smaller banks, but the prudential regulators maintain primary supervisory and enforcement authority for consumer protection  The CFPB has limited supervisory and enforcement powers over small banks  Consumer protection and fair lending compliance continue to be important issues for banks for numerous reasons  Noncompliance can result in regulators taking enforcement actions that may involve substantial penalties  In addition, even in the absence of enforcement actions, an institution faces reputational risks if it comes to be perceived as dealing badly with customers  For example, the CFPB maintains a consumer complaints database that makes public consumer complaints against individual companies readily available, potentially affecting prospective customers' decisions on which companies to use for financial services  The recent public reaction to and enforcement actions pertaining to Wells Fargo's unauthorized opening of customer accounts show the importance of strong consumer protection compliance  Recently, banks and other nonbank financial institutions that provide financial products to consumers (e g , mortgages, credit cards, and deposit accounts) have been affected by the implementation of new CFPB regulations  For example, banks and other lenders have begun to comply with major new mortgage rules such as the Ability-to-Repay and Qualified Mortgage Standards Rule (ATR/QM) and Truth in Lending Act/Real Estate Settlement Act Integrated Disclosure Rule (TRID)  The ATR/QM encourages lenders to gather more information on prospective borrowers than they otherwise might have in order to reduce the likelihood that a borrower would receive an inappropriate loan  TRID requires lenders to provide borrowers with certain information about the mortgages for which they are applying  In addition to these and other new regulations, the CFPB also provides information on its supervisory activities related to banks, such as instances where its examiners found that certain financial institutions misrepresented service fees associated with deposit and checking accounts  Compliance with these new rules has increased banks' operational costs, which some argue potentially leads to higher costs for consumers in certain markets or a reduction in the availability of credit  Others stress that CFPB's regulatory, supervisory, and enforcement efforts reduce the likelihood of consumer harm in financial markets  Debates about how best to achieve the appropriate balance between consumer protection, credit access, and industry costs are unlikely to be resolved easily, and thus may continue to be an area of congressional interest  The banking sector provides valuable financial services for households that allow them to save, make payments, and access credit  Safe and affordable financial services allow households to avoid financial hardship, build assets, and achieve financial security  However, many U S  households (often those with low incomes, lack of credit histories, or credit histories marked with missed debt payments) do not use banking services  According to the FDIC's National Survey of Unbanked and Underbanked Households, in 2017, 6 5% of households in the United States were unbanked (i e , did not have an account at an insured institution) and 18 7% of households were underbanked (i e , obtained financial products and services outside of the banking system in the past year)  Lack of bank access leads some households to rely on alternative financial service providers and consumer credit products outside of the formal banking sector, such as payday or auto title loans  According to an FDIC estimate, 12 9% of households had unmet demand for mainstream small-dollar credit  Certain observers believe that financial outcomes for the unbanked and underbanked would be improved if banks—which may be more likely to be a stable source of relatively inexpensive financial services relative to certain alternatives—were more active in meeting this demand  For this reason, prudential regulators, like the OCC and the FDIC, are currently exploring ways to encourage banks to offer small-dollar credit products to consumers, and other policymakers and observers will likely continue to explore ways to make banking more accessible to a greater portion of the population  The Community Reinvestment Act of 1977 (CRA; P L  95-128 ) addresses how banking institutions meet the credit needs of the areas they serve, notably in low- and moderate-income (LMI) neighborhoods  The federal prudential banking regulators (the Fed, the OCC, and the FDIC) conduct examinations to evaluate how banks are fulfilling the objectives of the CRA  The regulators issue CRA credits, or points, where banks engage in qualifying activities—such as mortgage, consumer, and business lending; community investments; and low-cost services that would benefit LMI areas and entities—that occur within an assigned assessment area   These credits are then used to issue each bank a performance rating, from Outstanding to Substantial Noncompliance  The CRA requires regulators to take these ratings into account when banks request to merge with other banking institutions or otherwise expand their operations into new areas  Whether regulations as currently implemented are effectively and efficiently meeting the CRA's goals has been the subject of debate  The banking industry and other observers assert that CRA regulations can be altered in a way that would reduce regulatory burden while still meeting the law's goals  Recently, the OCC and Treasury have made proposals to address those concerns  However, consumer and community advocates argue that efforts to provide relief to banks may potentially be at the expense of communities that the CRA is intended to help  Treasury made a number of recommendations to the bank regulators for changes to CRA regulations in a memorandum it sent to those agencies in April 2018  Regarding the need for modernization, the memorandum recommends revisiting the approach for determining banks' assessment areas, given that geographically defined areas arguably may not fully reflect the community served by a bank because of technology developments  Treasury also recommends establishing clearer standards for CRA-eligible activities that provide flexibility and expand the types of loans, investments, and services that are eligible for CRA credit  Regarding aspects of CRA compliance that may be unnecessarily burdensome, Treasury recommends increasing the timeliness of the CRA performance examination process  Regarding improving the outcomes that the CRA was intended to encourage, such as increasing the availability of credit to LMI neighborhoods, Treasury recommendations include incorporating performance incentives that might result in more efficient lending activities  In September 2018, the OCC published an advance notice of proposed rulemaking (ANPR) seeking public comment on 31 questions pertaining to issues to consider and possible changes to CRA regulation  The OCC's ANPR does not propose specific changes, but its content and the questions posed suggest that the OCC is exploring the possibility of adopting a quantitative metric-based approach to CRA performance evaluation, changing how assessment areas are defined, expanding CRA-qualifying activities, and reducing the complexity, ambiguity, and burden of the regulations on the bank industry  The OCC received more than 1,300 comment letters in response to the ANPR that were alternatively supportive or critical of the various possible alterations to CRA regulation  Although some banks hold a very large amount of assets, are complex, and operate on a national or international scale, the vast majority of U S  banks are relatively small, have simple business models, and operate within a local area  This section provides background on these simpler banks—often called community bank s —and analyzes issues related to them, including regulatory relief for community banks and the long-term decline in the number of community banks  Although there is no official definition of a community bank, policymakers and the public generally recognize that the vast majority of U S

ground_truth: Medicare is a federal program that pays for covered health care services of qualified beneficiaries. It was established in 1965 under Title XVIII of the Social Security Act to provide health insurance to individuals 65 and older, and has been expanded over the years to include permanently disabled individuals under the age of 65. Medicare, which consists of four parts (A-D), covers hospitalizations, physician services, prescription drugs, skilled nursing facility care, home health visits, and hospice care, among other services. Generally, individuals are eligible for Medicare if they or their spouse worked for at least 40 quarters in Medicare-covered employment, are 65 years old, and are a citizen or permanent resident of the United States. Individuals may also qualify for coverage if they are a younger person who cannot work because they have a medical condition that is expected to last at least one year or result in death, or have end-stage renal disease (permanent kidney failure requiring dialysis or transplant). The program is administered by the Centers for Medicare & Medicaid Services (CMS) within the Department of Health and Human Services (HHS) and by private entities that contract with CMS to provide claims processing, auditing, and quality oversight services. In FY2019, the program is expected to cover approximately 61 million persons (52 million aged and 9 million disabled) at a total cost of about $772 billion. Spending under the program (except for a portion of administrative costs) is considered mandatory spending and is not subject to the annual appropriations process. Services provided under Parts A and B (also referred to as "original" or "traditional" Medicare) are generally paid directly by the government on a "fee-for-service" basis, using different prospective payment systems or fee schedules. Under Parts C and D, private insurers are paid a monthly "capitated" amount to provide enrollees with required benefits. Medicare is required to pay for all covered services provided to eligible persons, so long as specific criteria are met. Since 1965, the Medicare program has undergone considerable change. For example, during the 111th Congress, the Patient Protection and Affordable Care Act (ACA; P.L. 111-148 and P.L. 111-152) made numerous changes to the Medicare program that modified provider reimbursements, provided incentives to increase the quality and efficiency of care, and enhanced certain Medicare benefits. In the 114th Congress, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA; P.L. 114-10) changed the method for calculating updates to Medicare payment rates to physicians and altered how physicians and other practitioners will be paid in the future. Projections of future Medicare expenditures and funding indicate that the program will place increasing financial demands on the federal budget and on beneficiaries. For example, the Hospital Insurance (Part A) trust fund is projected to become insolvent in 2026. Additionally, although the Supplementary Medical Insurance (Parts B and D) trust fund is financed in large part through federal general revenues and cannot become insolvent, associated spending growth is expected to put increasing strains on the country's competing spending priorities. As such, Medicare is expected to be a high-priority issue in the current Congress, and Congress may consider a variety of Medicare reform options ranging from further modifications of provider payment mechanisms to redesigning the entire program. This report provides a general overview of the Medicare program including descriptions of the program's history, eligibility criteria, covered services, provider payment systems, and program administration and financing. A list of commonly used acronyms, as well as information on beneficiary cost sharing, may be found in the appendixes.

prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 2.



Report 2:  banks differ substantially from a relatively small number of very large and complex banking organizations in a number of ways  Community banks tend to hold a relatively small amount of assets (although asset size alone need not be a determining factor); be more concentrated in core bank businesses of making loans and taking deposits and less involved in other, more complex activities; and operate within a smaller geographic area, making them generally more likely to practice relationship lending wherein loan officers and other bank employees have a longer standing and perhaps more personal relationship with borrowers  Therefore, community banks may serve as particularly important credit sources for local communities and underserved groups of which large banks may have little familiarity  In addition, relative to large banks, community banks generally have fewer employees, less resources to dedicate to regulatory compliance, and individually pose less of a systemic risk to the broader financial system  Congress often faces policy issue questions related to community banks  Community bank advocates often assert the tailoring of regulations currently in place does not adequately balance the benefits and costs of the regulations when applied to community banks  Concerns have also been raised about the three-decade decline in the number and market presence of these institutions, and the predominant cause of that decline is a matter of debate  In recent decades, community banks, under almost any common definition, have seen their numbers decline and their collective share of banking industry assets fall in the United States  Overall, the number of FDIC-insured institutions fell from a peak of 18,083 in 1986 to 5,477 in 2018  The number of institutions with less than $1 billion in assets fell from 17,514 to 4,704 during that time period, and the share of industry assets held by those banks fell from 37% to 7%  Meanwhile, the number of banks with more than $10 billion in assets rose from 38 to 138, and the share of total banking industry assets held by those banks increased from 28% to 84%  The decrease in the number of community banks occurred mainly through three methods: mergers, failures, and lack of new banks  Most of the decline in the number of institutions in the past 30 years was due to mergers, which averaged more than 400 a year from 1990 to 2016  Failures were minimal from 1999 to 2007, but played a larger role in the decline during the late 1980s and following the 2007-2009 financial crisis and subsequent recession  As economic conditions have improved, failures have declined, but the number of n ew r eporters —new chartered institutions providing information to the FDIC for the first time—has been extraordinarily small in recent years  For example, in the 1990s, an average of 130 new banks reported data to the FDIC per year  Through September 30, five new banks reported data to the FDIC in 2018  Observers have cited several possible causes for this industry consolidation  Some observers argue the decline indicates that the regulatory burden on community banks is too onerous, driving smaller banks to merge to create or join larger institutions, an argument covered in more detail in the following section, " Regulatory Burden on Community Banks  " However, mergers—the largest factor in consolidation—could occur for a variety of reasons  For example, a bank that is struggling financially may look to merge with a stronger bank to stay in business  Alternatively, a community bank that has been outperforming its peers may be bought by a larger bank that wants to benefit from its success  In addition, other fundamental changes besides regulatory burden in the banking system could be driving consolidation, making it difficult to isolate the effects of regulation  Through much of the 20 th century, federal and state laws restricted banks' ability to open new branches and banking across state lines was restricted  Thus, many more banks were needed to serve every community  Branching and banking across state lines was not substantially deregulated at the federal level until 1997 through the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ( P L  103-328 )  When these restrictions were relaxed, it became easier for community banks to consolidate or for mid-size and large banks to spread operations to other markets  In addition, there may be economies of scale, not only in compliance, but in the business of banking in general  Furthermore, the economies of scale may be growing over time, which would also drive industry consolidation  For example, information technology has become more important in banking (e g , cybersecurity and mobile banking), and certain information technology systems may be subject to economies of scale  Finally, the slow growth coming out of the most recent recession, and macroeconomic conditions more generally (such as low interest rates), may make it less appealing for new firms to enter the banking market  Community banks receive special regulatory consideration to minimize their regulatory burden  For example, many regulations—including a number of regulations implemented pursuant to the Dodd-Frank Act—include exemptions for community banks or are otherwise tailored to reduce compliance costs for community banks  Title I and Title II of the EGRRCP Act contained numerous provisions that provided new exemptions to community banks or raised the thresholds for existing exemptions, such as the Community Bank Leverage Ratio and Volcker Rule exemptions discussed above in the " Prudential Regulation " section  In addition, bank regulators are required to consider the effect of rules on community banks during the rulemaking process pursuant to provisions in the Regulatory Flexibility Act ( P L  96-354 ) and the Riegle Community Development and Regulatory Improvement Act ( P L  103-325 )  Supervision is also structured to pose less of a burden on small banks than larger banks, such as by requiring less-frequent bank examinations for certain small banks and less intensive reporting requirements  However, Congress often faces questions related to whether tailoring in general or tailoring provided in specific regulations is sufficient to ensure that an appropriate trade-off has been struck between the benefits and costs of regulations facing community banks  Advocates for further regulatory relief argue that certain realized benefits are likely to be relatively small, whereas certain realized costs are likely to be relatively large  One area where the benefits of regulation may be relatively small for community banks relative to large banks is regulations aimed at improving systemic stability, because community banks individually pose less of a risk to the financial system as a whole than a large, complex, interconnected bank  Many recent banking regulations were implemented at least in part in response to the systemic nature of the 2007-2009 crisis  Some community bank proponents argue that because small banks did not cause the crisis and pose less systemic risk, they need not be subject to new regulations made in response to the crisis  Opponents of these arguments note that systemic risk is only one of the goals of regulation, along with prudential regulation and consumer protection, and that community banks are exempted from many of the regulations aimed at systemic risk  They note that hundreds of small banks failed during and after the crisis, suggesting the prudential regulation in place prior to the crisis was not stringent enough  Another potential rationale for easing regulations on community banks would be if there are economies of scale to regulatory compliance costs, meaning that regulatory compliance costs may increase as bank size does but decrease as a percentage of overall costs or revenues  Put another way, as regulatory complexity increases, compliance may become relatively more costly for small institutions  Empirical evidence on whether compliance costs are subject to economies of scale is mixed, thus consider this illustrative example to show the logic behind the argument  Imagine a bank with $100 million in assets and 25 employees and a bank with $10 billion in assets and 1,250 employees each determine they must hire an extra employee to ensure compliance with new regulations  The relative burden is larger on the small institution that expands its workforce by 4% than on the large bank that expands by less than 0 1%  From a cost-benefit perspective, if regulatory compliance costs are subject to economies of scale, then the balance of costs and benefits of a particular regulation will differ depending on the size of the bank  For the same regulatory proposal, economies of scale could potentially result in costs outweighing benefits for smaller banks  Due to a lack of empirical evidence of the exact benefits and costs of each individual regulation at each individual bank (and even lack of consensus over which banks should qualify as community banks), debates over the appropriate level of tailoring of regulations is a debate over calibration involving qualitative assessments  Where should the lines be drawn? Should exemption thresholds be set high so that regulations apply only to the very largest, most complex banks? Should thresholds be set relatively low, so that only very small banks are exempt? At what point does a bank cease to have the characteristics associated with community banks? Often at issue in this debate are the so-called regional banks —banks that are larger and operate across a greater geographic market than the community banks but are also smaller and less complex than the largest, most complex organizations with hundreds of billions or trillions of dollars in assets  Should regulators provide regional banks the same exemptions as those provided to community banks? Policymakers, in the 116 th Congress, continue to face these and other questions concerning community banks  Along with the thousands of relatively small banks operating in the United States, there are a handful of banks with hundreds of billions of dollars of assets  The 2007-2009 financial crisis highlighted the problem of "too big to fail" (TBTF) financial institutions—the concept that the failure of a large financial firm could trigger financial instability, which in several cases prompted extraordinary federal assistance to prevent the failure of certain of these institutions  In response to the crisis, policymakers took a number of steps through the Dodd-Frank Act and the Basel III Accords to eliminate the TBTF problem, including subjecting the largest banks to enhanced prudential regulations, a new resolution regime to unwind these banks in the event of failure, and higher capital requirements  This section provides background on these large banks and examines issues related to them, including reductions in the application of enhanced prudential regulations facing certain large banks made pursuant to P L  115-174 and changes to capital requirements proposed by regulators that would reduce the amount of capital certain large banks would have to hold  As regulators implement these statutory changes and their proposed rules move forward, Congress faces questions about whether relaxing these regulations appropriately eases overly stringent requirements or unnecessarily increases the likelihood that large banks take on excessive risks  Some bank holding companies (BHCs) have hundreds of billions or trillions of dollars in assets and are deeply interconnected with other financial institutions  A bank may be so large that its leadership and market participants may believe that the government would save it if it became distressed  This belief could arise from the determination that the institution is so important to the country's financial system—and that its failure would be so costly to the economy and society—that the government would feel compelled to avoid that outcome  An institution of this size and complexity is said to be TBTF  In addition to fairness issues, economic theory suggests that expectations that a firm will not be allowed to fail creates moral hazard —if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm's riskiness because they are shielded from the negative consequences of those risks  As a result, TBTF institutions may have incentives to be excessively risky, gain unfair advantages in the market for funding, and expose taxpayers to losses  Several market forces likely drive banks and other financial institutions to grow in size and complexity, thereby potentially increasing efficiency and improving financial and economic outcomes  For example, marginal costs can be reduced through economies of scale; risk can be diversified by spreading exposures over multiple business lines and geographic markets; and a greater array of financial products could be offered to customers allowing a bank to potentially attract new customers or strengthen relationships with existing ones  These market forces and the relaxation of certain interstate banking and branching regulations described in the " Reduction in Community Banks " section may have driven some banks to become very large and complex in the years preceding the crisis  At the end of 1997, two insured depository institutions held more than $250 billion in assets, and together accounted for about 9 3% of total industry assets  By the end of 2007, six banks held more than $250 billion in assets, accounting for 40 9% of industry assets  The trend has generally continued, and as of the third quarter of 2018, nine banks held more than $250 billion in assets, accounting for 49 5% of industry assets  Many assert that the worsening of the financial crisis in fall 2008 was a demonstration of TBTF-related problems  Large institutions had taken on risks that resulted in large losses, causing the institutions to come under threat of failure  In some cases, the U S  government took actions to stabilize the financial system and individual institutions  Wachovia and Washington Mutual were large institutions that were acquired by other institutions to avoid their failure during the crisis  Bank of America and Citigroup received extraordinary assistance through the Troubled Asset Relief Program (TARP) to address financial difficulties  Other large (and small) banks participated in emergency government programs offered by the Treasury (TARP), the Federal Reserve, and the FDIC  In response, the Dodd-Frank Act attempted to end TBTF through (1) a new regulatory regime to reduce the likelihood that large banks would fail; (2) a new resolution regime to make it easier to safely wind down large bank holding companies that are at risk of failing; and (3) new restrictions on regulators' use of emergency authority to prevent "bail outs" of failing large banks  In addition, the Federal Reserve imposed additional capital requirements on the largest banks that largely aligned with proposed standards set out by the Basel III Accords, with some exceptions  To make it less likely that large banks would fail, certain large banks are now subject to an enhanced prudential regulatory regime administered by the Federal Reserve  Under this regime, large banks are subject to more stringent safety and soundness standards than other banks  They must comply with higher capital and liquidity requirements, undergo stress tests, produce living wills and capital plans, and comply with counterparty limits and risk management requirements  To make it easier to wind down complex BHCs with nonbank subsidiaries, the Dodd-Frank Act created the Orderly Liquidation Authority (OLA), a resolution regime administered by the FDIC that is similar to how the FDIC resolves bank subsidiaries  This replaced the bankruptcy process, focused on the rights of creditors, with an administrative process, focused on financial stability, for winding down such firms  To date, OLA has never been used  The Dodd-Frank Act initially applied enhanced prudential regulation requirements to all BHCs with more than $50 billion in assets, although more stringent standards were limited to banks with more than $250 billion in assets or $10 billion in foreign exposure, and the most stringent standards were limited to U S  globally systemically important banks (G-SIBs), the eight most complex U S  banks  Subsequent to the enactment of Dodd-Frank, critics of the $50 billion asset threshold argued that many banks above that size are not systemically important and that Congress should raise the threshold  In particular, critics distinguished between regional banks (which tend to be at the lower end of the asset range and, some claim, have a traditional banking business model comparable to community banks) and Wall Street banks ( a term applied to the largest, most complex organizations that tend to have significant nonbank financial activities)  Opponents of raising the threshold disputed this characterization, arguing that some regional banks are involved in sophisticated activities, such as being swap dealers, and have large off-balance-sheet exposures  In response to concerns that the enhanced prudential regulation threshold was set too low, P L  115-174 exempted banks with between $50 billion and $100 billion in assets from enhanced prudential regulation, leaving them to be regulated in general like any other bank  Under the proposed rule implementing the P L  115-174 changes, the Fed has increased the tiering of enhanced regulation for banks with more than $100 billion in assets  The proposed rule would create four categories of banks based on size and complexity, and impose increasingly stringent requirements on each category  From most to least stringent, Category I would currently include the eight G-SIBs, Category II would include one bank, Category III would include four banks, and Category IV would include 11 banks  Compared with current policy, banks in all categories would face reduced regulatory requirements under this rule, other proposed rules, and forthcoming rules required by Section 402 of P L  115-174 , if finalized  In addition, P L  115-174 created new size-based exemptions from various regulations, increasing the tendency to subject larger banks to more stringent requirements than smaller banks  These changes include exemptions from the Volcker Rule and risk-weighted capital requirements for banks with less than $10 billion in assets (meeting certain criteria)  Proponents of the changes assert they provide necessary and targeted regulatory relief  Opponents argue they needlessly pare back important Dodd-Frank protections to the benefit of large and profitable banks  As discussed in the " Capital Requirements " section, all banks must hold enough capital to meet certain capital ratio requirements  Broadly, those requirements take two forms—risk-weighted requirements and unweighted leverage requirements  In addition, a small subset of very large and very complex banks also face additional capital ratio requirements implemented by the U S  federal bank regulators  The Federal Reserve has made two proposals to simplify and relax certain aspects of these additional requirements, and these proposals are subject to debate  All banks must hold additional high-quality capital on top of the minimum required levels—called the capital conservation buffer (CCB)—to avoid limitations on their capital distributions, such as dividend payments  In addition, certain large banks are subject to the Federal Reserve's stress tests, the results of which can lead to restrictions on the bank's capital distributions  Stress tests are intended to ensure that banks hold enough capital to withstand a hypothetical market stress scenario, but arguably have the effect of acting as additional capital requirements with which banks must comply  Advanced approaches banks must maintain a fixed minimum supplementary leverage ratio (SLR), an unweighted capital requirement that is more stringent than the leverage ratio facing smaller banks because it incorporates off-balance sheet exposures  A Congressional Research Service (CRS) analysis of large holding companies' regulatory filings indicates that, currently, 19 large and complex U S  bank or thrift holding companies are classified as advanced approaches banks  G-SIBs must meet fixed enhanced SLR (eSLR) requirements, which sets the SLR higher for these banks  In addition, the G-SIBs are subject to an additional risk-weighted capital surcharge (on top of other risk-weighted capital requirements that all banks must meet) of between 1% and 4 5% based on the systemic importance of the institution  Whether these requirements are appropriately calibrated is a debated issue  Proponents of recalibrating some of these capital requirements argue that those requirements set at a fixed number—including the CCB and eSLR—are inefficient, because they do not reflect varying levels of risk posed by individual banks  Recalibration proponents also argue that compiling with these requirements in addition to stress test requirements is unnecessarily burdensome for banks  Opponents of proposals to relax current capital requirements facing large and profitable banks assert that doing so needlessly pares back important safeguards against bank failures and systemic instability  In response to concerns that fixed requirements do not adequately account for risk differences between institutions, the Fed has issued two proposals for public comment that would link individual large banks' requirements with other risk measures  One proposal would make bank CCB requirements a function of their stress tests results, and the other proposal would link large banks' eSLR requirements with individual G-SIB systemic importance scores  The Fed estimates that the new CCB requirement would generally reduce the amount of capital large banks would have to hold, but that some G-SIBs would see their required capital levels increase  The Fed estimates that the new eSLR requirement would generally reduce the amount of capital held by G-SIB parent companies by $400 million and the amount held by insured depository subsidiaries by $121 billion  To legally operate as a bank and perform the relevant activities, an institution generally must have a charter granted by either the OCC at the federal level or a state-level authority  In addition, to engage in certain activities, the institution must have federal deposit insurance granted by the FDIC  Currently, these requirements raise a number of policy questions, including whether companies established primarily as financial technology companies should be able to receive a national bank charter, as has been offered by the OCC; and whether the application process and determinations made by the FDIC as they relate to institutions seeking a specific type of state charter, called an industrial loan company (ILC) charter, is overly restrictive  An institution that makes loans and takes deposits—the core activities of traditional commercial banking—must have a government issued charter  Numerous types of charters exist, including national bank charters; state bank charters; federal savings association charters, and state savings association charters (saving associations are also referred to as thrifts )  Each charter type determines what activities are permissible for the institution, what activities are restricted, and which agency will be the institution's primary federal regulator (see Table 1 )  One of the main rationales for this system is that it gives institutions with different business models and ownership arrangements the ability to choose a regulatory regime appropriately suited to the institution's business needs and risks  The differences between institution business models and the attendant regulations are numerous, varied, and beyond the scope of this report  The issues examined in this section arise from each charter's granting an institution the right to engage in certain banking related activities, and thus generating the potential benefits and risks of those activities  Broadly, these issues relate to questions over whether companies that differ from traditional banks should be allowed to engage in traditional banking activities given the types and magnitudes of benefits and risks the companies might present  Recent advances in technology, including the proliferation of available data and internet access, have altered the way financial activities are performed in many ways  These innovations in financial technology, or fintech, have created the opportunity for certain activities that have traditionally been the business of banks to instead be performed by technology-focused, nonbank companies  Lending and payment processing are prominent examples  This development has raised questions over how these fintech companies should be regulated, and the appropriate federal and state roles in that regulation  One possible, though contested, proposal for addressing a number of these questions would be to make an OCC national bank charter available to certain fintech companies  Many nonbank fintech companies performing bank-like activities are regulated largely at the state level  They may have to obtain lending licenses or register as money transmitters in every state they operate and may be subject to the consumer protection laws of that state, such as interest rate limits  Proponents of fintech companies argue that subjecting certain technology companies to 50 different state level regulatory regimes is unnecessarily burdensome and hinders companies that hope to achieve nationwide operations quickly using the internet  In addition, a degree of uncertainty surrounding the applicability of certain laws and regulations to certain fintech firms and activities has arisen  For example, whether federal preemption of state interest rate limits apply to loans made through a marketplace lender —that is, online-only lenders that exclusively use automated, algorithmic underwriting—but originated by a bank faces legal uncertainty due to certain court decisions, including Madden v Midlands   One possible avenue to ease the state-by-state regulatory burdens and resolve the uncertainties facing some fintech firms would be to allow those firms that perform bank-like activities to apply for and (provided they meet necessary requirements) to grant them national bank charters  First proposed in 2016 by then-Comptroller of the Currency Thomas Curry, and following subsequent examination of the issue and review of public comments, the OCC announced in July 2018 that it would consider "applications for special purpose bank charters from financial technology (fintech) companies that are engaged in the business of banking but do not take deposits " OCC argues that companies with such a charter would be explicitly subject to all laws and regulations (including those that preempt state law, a contentious issue addressed below) applicable to national banks  The OCC stated that fintech firms granted the charter "will be subject to the same high standards of safety and soundness and fairness that all federally chartered banks must meet," and also that the OCC "may need to account for differences in business models and activities, risks, and the inapplicability of certain laws resulting from the uninsured status of the bank " Thus, the argument goes, establishing a fintech charter would mean a new set of innovative companies would no longer face regulatory uncertainty and could safely and efficiently provide beneficial financial services, perhaps to populations and market-niches that banks with traditional cost structures do not find cost-effective to serve  Until the OCC actually grants such charters and fintech firms operate under the national bank regime for some amount of time, how well this policy fosters potential innovations and benefits while guarding against risks is the subject of debate  Proponents of the idea generally view the charter as a mechanism for freeing companies from what they assert is the unnecessarily onerous regulatory burden of being subject to numerous state regulatory regimes  They further argue that this would be achieved without overly relaxing regulations, as the companies would become subject to the OCC's national bank regulatory regime and its rulemaking, supervisory, and enforcement authorities  Opponents generally assert both that the OCC does not have the authority to charter these types of companies, as discussed below, and that doing so would inappropriately allow marketplace lenders to circumvent important state-level consumer protections  The OCC's assertion that it has the authority to grant such charters has been challenged  Shortly after the initial 2016 announcements that the OCC was examining the possibility of granting the charters, the Conference of State Bank Supervisors and the New York State Department of Financial Services sued the OCC to prevent it from issuing the charters on the grounds that it lacked the authority to do so  A federal district court dismissed the case after concluding that because the OCC had not yet issued charters to nonbanks, the plaintiffs (1) lacked standing to challenge the OCC's purported decision to move forward with chartering nonbanks, and (2) had alleged claims that were not ripe for adjudication  Subsequent to the OCC's July 2018 announcement, state regulators have again filed lawsuits  Industrial loan companies (ILCs) hold a particular type of charter offered by some states that generally allows ILCs to engage in certain banking activities  Depending on the state, those activities can include deposit-taking, but only if they are granted deposit insurance by the FDIC  Thus, ILCs that take deposits are state regulated with the FDIC acting as the primary federal regulator  Importantly, a parent company that owns an ILC that meets certain criteria is not necessarily considered a BHC for legal and regulatory purposes  This means ILC charters create an avenue for commercial firms (i e , companies not primarily focused on the financial industry, such as manufacturers, retailers, or possibly technology companies) to own a bank  Nonfinancial parent companies of ILCs generally are not subject to Fed supervision and other regulations pursuant to the Bank Holding Company Act of 1956 (P L  84-511)  A commercial firm may want to own a bank for a number of economic reasons  For example, an ILC can provide financing to the parent company's customers and clients and thus increase sales for the parent  In recent decades, household-name manufacturers have owned ILCs, including but not limited to General Motors, Toyota, Harley Davidson, and General Electric  However, while they can generate profits and potentially increase credit availability, ILCs pose a number of potential risks  The United States has historically adopted policies to generally separate commerce and banking, because allowing a single company to be involved in both activities could potentially result in a number of bad outcomes  A mixed organization's banking subsidiary could make decisions based on the interests of the larger organization, such as making overly risky loans to customers of a commerce subsidiary or providing funding to save a failing commerce subsidiary  Such conflicts of interest could threaten the safety and soundness of the bank  Relatedly, some have argued that having a federally insured bank within a commercial organization is an inappropriate expansion of federal banking safety nets (such as deposit insurance)  Certain observers, including community banks, have concerns over whether purely commercial or purely banking organizations would be able to compete with combined organizations that could potentially use economies of scale and funding advantages to exercise market power  These arguments played a prominent role in the public debate that was sparked when Walmart and Home Depot made unsuccessful efforts to secure an ILC charter between 2005 and 2008  Amid this debate, the FDIC imposed a moratorium in 2006 on the acceptance, approval, or denial of ILC applications for deposit insurance while the agency reexamined its policies related to these companies  That moratorium ended in January 2008  Subsequently, concerns over ILCs led Congress to mandate another moratorium (this one lasting three years, ending in July 2013) on granting new ILCs deposit insurance in the Dodd-Frank Act  No consensus has been reached on the magnitude of these risks and validity of the concerns surrounding deposit-taking ILCs  Recently, two financial technology companies, Square and SoFi, have applied for ILC charters and renewed debates over ILCs  Even though the moratoriums on granting ILCs deposit insurance have expired, the FDIC has not approved any new ILC applications since the 2013 expiration  However, since becoming FDIC chairman in June 2018, Jelena McWilliams has made statements indicating that under her leadership the FDIC will again consider ILC applications  Given the interest in and debate surrounding this charter type, policymakers will likely examine questions over the extent to which ILCs create innovative sources of credit and financial services subject to appropriate safeguards or inadvisably allow commercial organizations to act as banks with federal safety nets while exempting them from certain bank regulation and supervision  In addition to regulation issues, market and economic conditions and trends continually affect the banking industry  This section analyzes such trends that may affect banks, including migration of financial activity from banks into nonbanks or the "shadow banking" system; increasing capabilities and market presence of financial technology or fintech; and a higher interest rate environment following a long period of extraordinarily low rates  Credit intermediation is a core banking activity and involves transforming short-term, liquid, safe liabilities into relatively long-term, illiquid, higher-risk assets  In the context of traditional banking, credit intermediation is performed by taking deposits from savers and using them to fund loans to borrowers  Nonbank institutions can also perform similar credit intermediation to banks—sometimes called shadow banking —using certain instruments such as money market mutual funds, short-term debt instruments, and securitized pools of loans  When illiquid assets are funded by liquid liabilities, an otherwise-solvent bank or nonbank might experience difficulty meeting short-term obligations without having to sell assets, possibly at "fire sale" prices  If depositors or other funding providers feel their money is not safe with an institution, many of them may withdraw their funds at the same time  Such a "run" could cause an institution to fail  Long-established government programs mitigate liquidity- and run-risk in the banking industry  The Federal Reserve is authorized to act as a "lender of last resort" for a bank experiencing liquidity problems, and the FDIC insures depositors against losses  Banks are also subject to prudential regulation—as discussed in the " Prudential Regulation " section  However, nonbank intermediation is performed without the government safety nets available to banks or the prudential regulation required of them  The lack of an explicit government safety net in shadow banking means that taxpayers are less explicitly or directly exposed to risk, but it also means that shadow banking may be more vulnerable to a panic that could trigger a financial crisis  Some argue that the increased regulatory burden placed on banks in response to the financial crisis—such as the changes in bank regulation mandated by Dodd-Frank or agreed to in Basel III—could result in a decreased role for banks in credit intermediation and an increased role for relatively lightly regulated nonbanks  Many contend the financial crisis demonstrated how risks to deposit-like financial instruments in the shadow banking sector—such as money market mutual funds and repurchase agreements—can create or exacerbate systemic distress  Money market mutual funds are deposit-like instruments that are managed with the goal of never losing principal and that investors can convert to cash on demand  Institutions can also access deposit-like funding by borrowing through short-term funding markets—such as by issuing commercial paper and entering repurchase agreements  These instruments can be continually rolled over as long as funding providers have confidence in the borrowers' solvency  During the crisis, all these instruments—which investors had previously viewed as safe and unlikely to suffer losses—experienced run-like events as funding providers withdrew from markets  Moreover, nonbanks can take on exposure to long-term loans through investing in mortgage-backed securities (MBS) or other asset-backed securities (ABS)  During the crisis, as firms faced liquidity problems, the value of these assets decreased quickly, possibly in part as a result of fire sales  Since the crisis, many regulatory changes have been made related to certain money market, commercial paper, and repurchase agreement markets and practices  For example, in the United States, certain money market mutual funds now must have a floating net asset value   Among other benefits, this may signal to fund investors that a loss of principal is possible and thus reduce the likelihood that investors would "run" at the first sign of possible small losses  However, some observers are still concerned that shadow banking poses risks, because the funding of relatively long-term assets with relatively short-term liabilities will inherently introduce run-risk absent certain safeguards  As discussed above, f intech usually refers to technologies with the potential to alter the way certain financial services are performed  Banks are affected by technological developments in two ways: (1) they face choices over how much to invest in emerging technologies and to what extent they want to alter their business models in adopting technologies, and (2) they potentially face new competition from new technology-focused companies  Such technologies include online marketplace lending, crowdfunding, blockchain and distributed ledgers, and robo-advising, among many others  Certain financial innovations may create opportunities to improve social and economic outcomes, but there is also potential to create risks or unexpected financial losses  Potential benefits from fintech are greater efficiency in financial markets that creates lower prices and increased customer and small business access to financial services  These can be achieved if innovative technology replaces traditional processes that are outdated or inefficient  For example, automation may be able to replace employees, and digital technology can replace physical systems and infrastructure  Cost savings from removing inefficiencies may lead to reduced prices, making certain services affordable to new customers  Some customers who previously did not have access to services—due to such things as the lack of information about creditworthiness or geographic remoteness—could also potentially gain access  Increased accessibility may be especially beneficial to traditionally underserved groups, such as low-income, minority, and rural populations  Fintech could also create or increase risks  Many fintech products have only a brief history of operation, so it can be difficult to predict outcomes and assess risk  It is possible certain technologies may not in the end function as efficiently and accurately as intended  Also, the stated aim of a new technology is often to bring a product directly to consumers and eliminate a "middle-man " However, that middle-man could be an experienced financial institution or professional that can advise consumers on financial products and their risks  In these ways, fintech could increase the likelihood that consumers engage in a financial activity and take on risks that they do not fully understand  Policymakers debate whether (and which) innovations can be integrated into the financial system without additional regulatory or policy action  Technology in finance largely involves reducing the costs or time involved in providing existing products and services, and the existing regulatory structure was developed to address risks from these financial products and activities  Existing regulation may be able to accommodate new technologies while adequately protecting against risks  However, there are two other possibilities  One is that some regulations may be stifling beneficial innovation  Another is that existing regulation does not adequately address risks created by new technologies  Some observers argue that regulation could potentially impede the development and introduction of beneficial innovation  For example, companies incur costs to comply with regulations  In addition, companies are sometimes unsure how regulators will treat the innovation once it is brought to market  A potential solution being used in other countries is to establish a regulatory "sandbox" or "greenhouse" wherein companies that meet certain requirements work with regulators as products are brought to market under a less onerous regulatory framework  In the United States, the CFPB has recently introduced a sandbox wherein companies can experiment with disclosure forms  Some are concerned that existing regulations may not adequately address certain risks posed by new technologies  Regulatory arbitrage—conducting business in a way that circumvents unfavorable regulations—may be a concern in this area  Fintech potentially could provide an opportunity for companies to claim they are not subject to certain regulations because of a superficial difference between how they operate compared with traditional banks  Another group of issues posed by fintech relates to cybersecurity (for general issues related to cybersecurity, see the " Cybersecurity " section above)  As financial activity increasingly uses digital technology, sensitive data are generated  Data can be used to accurately assess risks and ensure customers receive the best products and services  However, data can be stolen and used inappropriately, and there are concerns over privacy issues  This raises questions over ownership and control of the data—including the rights of consumers and the responsibilities of companies in accessing and using data—and whether companies that use and collect data face appropriate cybersecurity requirements  The Federal Reserve's monetary policy response to the financial crisis, the ensuing recession, and subsequent slow economic growth was to keep interest rates unusually low for an extraordinarily long time  It accomplished this in part using unprecedented monetary policy tools such as quantitative easing —large-scale asset purchases that significantly increased the size of the Federal Reserve's balance sheet  Recently, as economic conditions improved, the Federal Reserve took steps to normalize monetary policy such as raising its target interest rate and reducing the size of its balance sheet  A rising interest rate environment—especially following an extended period of unusually low rates achieved with unprecedented monetary policy tools—is an issue for banks because they are exposed to interest rate risk   A portion of bank assets have fixed interest rates with long terms until maturity, such as mortgages, and the rates of return on these assets do not increase as current market rates do  However, many bank liabilities are short term, such as deposits, and can be repriced quickly  So although certain interest revenue being collected by banks is slow to rise, the interest costs paid out by banks can rise quickly  In addition to putting stress on net income, rising interest rates can cause the market value of fixed-rate assets to fall  Finally, banks incur an opportunity cost when resources are tied up in long-term assets with low interest rates rather than being used to make new loans at higher interest rates  The magnitude of interest rate risks should not be overstated, as rising rates can potentially increase bank profitability if they result in a greater difference between long-term rates banks receive and short-term rates they pay—referred to as net interest margin   However, thus far into the Federal Reserve interest rate normalization process, this has not materialized  During 2018, the difference between long-term rates and short-term rates has generally decreased (known as a flattening of the yield curve )  Whatever changes may occur to various interest rates in the coming months and years, banks and regulators typically recognize the importance of managing interest rate risk, carefully examine the composition of bank balance sheets, and plan for different interest rate change scenarios  While banks are well-practiced at interest rate risk management through normal economic and monetary policy cycles, managing bank risk through a period of interest rate growth could be more challenging because rates have been so low for so long and achieved through unprecedented monetary policy tools  Because rates have been low for so long, many loans made in different interest rate environments that preceded the crisis have matured  Meanwhile, all new loans made in the past 10 years were made in a low interest rate environment  This presents challenges to banks seeking to hold a mix of loans with different rates  In addition, because the Federal Reserve has used new monetary policy tools and grown its balance sheet to unprecedented levels, accurately controlling the pace of interest rate growth may be challenging  
Report 2:  These guidelines inform the payload’s electrical power and mechanical designs  The principal guideline—echoed by the successful CHIRP demonstration in 2011—is that the hosted payload must “do no harm” to the mission performance of its host  Also, satellite interfaces can vary from company to company  Some commercial companies had experience with the task—and business opportunity—of integrating multiple customers’ payloads onto satellites since at least the 1990s  Air Force, HPO, and industry officials told us that, ideally, the payload should use the same spectrum allocation as the commercial host  They said that this is due in part to the lengthy satellite registration process that takes place in the United States and through the ITU that must be undertaken prior to placing a satellite on orbit  Some DOD officials added that the process for all new satellites from initial filing to ITU approval takes around 7 years  If a satellite owner registers for one frequency band of spectrum and later requires a different band, the owner has to begin the registration process from the beginning—restarting the 7-year timeline  This can be problematic for DOD payload owners seeking to match their military communications payload with an already-registered host satellite—particularly if the host satellite’s spectrum allocation is incompatible with the DOD payload  HPO and other DOD officials said that very different spectrum needs between payload and host would therefore preclude the match  Moreover, a need for military—as opposed to commercial—spectrum for communications payloads can introduce additional complications  Although a process exists for a commercial satellite owner to license military spectrum for use by a hosted payload, representatives from DOD’s Chief Information Officer’s (CIO) office could cite only one instance where this has happened  One possible explanation stems from a 2012 memorandum from DOD’s CIO that outlines various preferred processes for a commercial host satellite to host military communications payloads  Several industry officials we spoke to said that the various processes outlined in the 2012 memorandum would add to the already-lengthy process of spectrum registration  Further, the memorandum instructs that contractual terms between the payload and host satellite owners should restrict all military spectrum use exclusively to the U S  military  However, one industry official told us that international entities do not necessarily recognize U S  military spectrum, and commercial companies that obtain licenses through other countries are permitted to use those frequencies  For example, a senior official of one commercial company we met with stated that the company licensed U S  military spectrum through another North Atlantic Treaty Organization government after failing to successfully coordinate an FCC request with DOD and NTIA  DOD and industry representatives told us that from a business perspective, it makes little sense for a commercial company to seek hosting opportunities for DOD payloads that require U S  military spectrum  Government and industry officials we spoke with said that aligning the development and acquisition timelines of a government payload and commercial host satellite is a challenge  The timeline associated with developing government sensors is generally much longer than that of commercial satellites, potentially creating difficulties in scheduling and funding commercially hosted payload arrangements  For example, DOD satellite systems take, on average, over 7 years to develop and launch a first vehicle, while commercial satellite programs typically take between 2 and 3 years  DOD payload owners may find it challenging to accelerate development and acquisition schedules to match those of the commercial satellite host  Additionally, DOD officials we spoke with said that their budget and planning processes require funding commitments up to 2 years in advance of actually receiving those funds  This can further complicate alignment with commercial timelines because the development of a government sensor would need to be underway well in advance of a decision to fund a commercially hosted payload approach  Furthermore, federal law generally prohibits agencies from paying in advance for a future service or from obligating future appropriations  However, several DOD and other government agency officials we spoke with said that it is possible to align government and commercial timelines  For example, MDA adopted the commercial host’s schedule to ensure its Spacebased Kill Assessment payload was ready for integration and launch without delaying the host satellite or worse—missing its own ride to space  DARPA officials told us they were also able to align DARPA acquisition and development schedules with the commercial host  The Air Force’s Enhanced Polar System (EPS) Recapitalization program officials were able to leverage existing documents such as requirements documents and acquisition strategies from the predecessor program to speed up the acquisition process  According to Air Force officials, the EPS Recapitalization program had a unique opportunity to take advantage of the availability of a commercial host and had the support of a high ranking Air Force official that enabled the program to move forward using a commercially hosted payload approach  Some officials cited concerns with combining government and commercial space missions  For example, officials across DOD told us they were wary of losing control over a hosted payload should a commercial company’s needs change  They said that theoretically, a commercial provider could decide to turn off power to the government’s payload if the host satellite needed extra power to perform a certain function  Additionally, DOD space program officials expressed concern that commercial practices for ensuring the mission success of the payload may not be up to government standards—that commercial testing and integration standards may be less robust than those used by traditional government programs to ensure success, adding risk to the government payload  Furthermore, officials in one DOD program office expressed a distrust of commercial host motives in offering to support a government payload on their satellite, suggesting that a company could be intending to steal government technologies  However, industry officials we spoke with said that DOD can generally issue a solicitation that includes necessary stipulations  For example, including a condition to preserve the payload’s priority of mission and other terms to protect the government’s investment may provide some assurance to those officials that perceive security risks  Additionally, some officials we spoke to cited cybersecurity concerns  They cited loss of control over data security as a challenge to using hosted payloads  Officials told us the data could be vulnerable to eavesdropping or manipulation as it travels between government ground systems and the commercially hosted government payload  However, according to HPO officials, the Air Force overcame this challenge on the CHIRP mission by procuring a secure interface that provided a data link between the payload and dedicated transponder and ground terminal  As mentioned previously, the Hosted Payload Office is developing a hosted payload data interface unit to mitigate this challenge by securing payload data communications from the host satellite  DOD, at the department-wide level, has limited information on commercially hosted payloads—mostly due to a lack of experience in using hosted payloads and complexities associated with them  For example, acquisition officials in the Office of the Secretary of Defense told us that DOD needs more data and analysis of the potential costs and benefits  However, realistic cost modeling for commercially hosted DOD payloads is unavailable because costs can vary across potential hosts and DOD has minimal experience using commercial hosts  Similarly, the HPO performs market research and cost estimates based on data from commercial companies, but according to one official in the HPO, the costs tend to vary based on the supply and demand in the commercial satellite industry  Additionally, HPO officials said their cost savings analyses are based on only two real-world commercially hosted DOD payloads— CHIRP and REACH  HPO officials told us that with additional government data they could compare the costs of system architectures that include free-flier satellites with those that use commercially hosted payloads  Additionally, some potential benefits of using commercially hosted payloads, such as resilience, may be difficult to measure  In our 2014 report on disaggregation, we recommended that DOD define key measures related to disaggregation, including developing metrics to measure resilience  DOD is in the process of developing standard metrics for resilience  DOD’s knowledge of commercially hosted payloads is also fragmented across the agency  Several DOD offices are independently conducting activities related to commercially hosted payloads, such as pursuing commercially hosted payload arrangements, developing lessons learned, and determining demand for commercial hosts  For example, MDA officials told us they have developed cost and technical data and lessons learned based on MDA’s Spacebased Kill Assessment payload— launched earlier this year—but have not shared it across the agency  On the other hand, the Space Test Program, also housed within the Air Force’s SMC develops lessons learned on its payloads, which are government payloads on government host satellites and officials there told us they provide lessons learned to the HPO  In October 2017, SMC’s Launch Office sent a request for data on hosted payloads to DOD agencies, research laboratories, and universities, but the HPO was not an active participant in this request  Independent efforts within DOD to collect and analyze cost, schedule, and performance results from hosted payloads can create fragmentation in DOD’s knowledge base and can increase the risk of duplicative efforts within DOD  DOD does not collect or consolidate agency-wide knowledge on commercially hosted payloads and has no plans to do so  Agency officials stated that DOD does not require programs outside of SMC to consult the HPO when seeking commercially hosted payload arrangements  The Air Force established the HPO to facilitate commercially hosted payloads, however, the 2011 Program Management Directive that established the HPO states that the HPO will coordinate with SMC directorates for detailed implementation of hosted payloads but does not address coordination with agencies or directorates outside of SMC  According to an HPO official, programs are not required to use HPO expertise or tools as they pursue using hosted payloads  Further, this official stated that programs are not required to provide any data or lessons learned to the HPO, or any other central point within DOD, following the pursuit or completion of a hosted payload arrangement  The 2011 Program Management Directive directs the HPO to provide lessons learned to SMC directorates but does not direct SMC offices to share information— such as costs, technical data and lessons learned on completed commercially hosted payload efforts—with the HPO  An HPO official indicated that the HPO obtains data through informal communication with those programs using hosted payloads that are willing to share data  We found that limitations and fragmentation of data and knowledge are contributing to resistance within DOD to using hosted payloads  Several DOD acquisition and program officials we spoke with who did not have experience with hosted payloads generally stated that the potential risks to using hosted payloads outweighed the benefits, and that there was little evidence-based analysis to prove otherwise  They were not aware of existing tools that could assist them in making decisions even though the HPO has been developing these tools and has made efforts to share them within SMC  DOD acquisition and program officials consistently cited a preference for maintaining the acquisition status quo over introducing any perceived added risk to their programs  At the same time, however, officials who have used hosted payloads were able to overcome logistical and technical challenges and realize cost savings  However, according to an HPO official, there is currently no requirement in place to facilitate sharing their approaches to doing so  We have reported in the past that DOD’s culture has generally been resistant to changes in space acquisition approaches and that fragmented responsibilities for acquisitions have made it very difficult to coordinate and deliver interdependent systems  Moreover, our past studies of commercial strategic sourcing best practices have found that that leading companies centralize procurement decisions by aligning, prioritizing, and integrating procurement functions within the organization  Establishing the Hosted Payload Office is one step in this direction, but the office is organized under the Advanced Systems and Development Directorate—a research and development organization—under SMC  Moreover, the 2011 directive that established the HPO does not address coordination or responsibilities for agencies or directorates beyond SMC  Consolidating knowledge is important because it allows organizations to share information and data upon which to develop consistent procurement tactics, such as ways to overcome challenges in matching a government payload with a commercial host  As we found in our work on commercial strategic sourcing best practices, organizations that struggled with fragmented information in the past overcame this challenge in part by consolidating their data on costs and spending  While hosted payload acquisitions are not a typical service acquisition, successful organizations have found that these techniques work for highly specialized technical services for which few suppliers exist  As DOD considers new architectures and acquisition approaches, commercially hosted payloads have the potential to play a role in delivering needed capabilities on orbit more quickly and at a more affordable cost than traditional DOD space acquisitions  Placing DOD payloads on commercial satellites might also be an effective method by which to increase resiliency  However, DOD’s experience and the data collected so far are limited in informing decisions on the use of these payloads  DOD would benefit from leveraging the knowledge and information gained from each hosted payload experience  Centralized collection and assessment of agency-wide data would help enable DOD to mitigate the logistical challenges inherent in matching payloads to hosts, and better position DOD to make reasoned, evidence-based decisions on whether a hosted payload would be a viable solution to meet warfighter needs  Without such knowledge, and a way for interested programs to leverage it, DOD may not be fully informed about using hosted payloads and may risk missing opportunities to rapidly and affordably address emerging threats in space  The Secretary of Defense should require programs using hosted payloads to provide cost and technical data, and lessons learned to a central office  In implementing this recommendation, DOD should consider whether the Hosted Payload Office is the most appropriate office to centralize agency-wide knowledge  (Recommendation 1) We provided a draft of this report to the Department of Commerce, NASA, and DOD for comment  The Department of Commerce provided technical comments, which we incorporated as appropriate  NASA did not have comments on our draft report  In its written comments, DOD concurred with our recommendation and stated that SMC had initiated a major reorganization since we drafted our report and that under the new organizational construct, the Hosted Payload Office had changed and may not be the appropriate office for centralizing DOD-wide hosted payload knowledge  DOD’s comments are reproduced in appendix II  DOD also provided technical comments which we incorporated as appropriate  We are sending copies of this report to the appropriate congressional committees, the Secretary of Commerce, the Secretary of Defense, the Administrator of NASA, and other interested parties  In addition, the report is available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at (202) 512-4841 or by email at chaplainc@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report  GAO staff who made key contributions to this report are listed in appendix III  As shown in table 4, civil and other government agencies use commercially hosted payloads to enhance navigation systems, monitor environmental pollution, conduct scientific missions, and improve search and rescue systems  Officials from all of the agencies we spoke with cited cost savings and the ability to leverage existing commercial schedules and technologies among the reasons they use commercial host satellites  Cristina T  Chaplain (202) 512-4841 or chaplainc@gao gov  In addition to the contact named above, Rich Horiuchi (Assistant Director), Erin Cohen (Analyst in Charge), Claire Buck, Jon Felbinger, Stephanie Gustafson, Matthew Metz, Sylvia Schatz, and Roxanna Sun made key contributions to this report 

ground_truth: Regulation of the banking industry has undergone substantial changes over the past decade. In response to the 2007-2009 financial crisis, many new bank regulations were implemented pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act; P.L. 111-203) or under the existing authorities of bank regulators to address apparent weaknesses in the regulatory regime. While some observers view those changes as necessary and effective, others argued that certain regulations were unjustifiably burdensome. To address those concerns, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (P.L. 115-174) relaxed certain regulations. Opponents of that legislation argue it unnecessarily pared back important safeguards, but proponents of deregulation argue additional pare backs are needed. Meanwhile, a variety of economic and technological trends continue to affect banks. As a result, the 116th Congress faces many issues related to banking, including the following: Safety and Soundness. Banks are subject to regulations designed to reduce the likelihood of bank failures. Examples include requirements to hold a certain amount of capital (which enables a bank to absorb losses without failing) and the so-called Volcker Rule (a ban on banks' proprietary trading). In addition, anti-money laundering requirements aim to reduce the likelihood banks will execute transactions involving criminal proceeds. Banks are also required to take steps to avoid becoming victims of cyberattacks. The extent to which these regulations (i) are effective, and (ii) appropriately balance benefits and costs is a matter of debate. Consumer Protection, Fair Lending, and Access to Banking. Certain laws are designed to protect consumers and ensure that lenders use fair lending practices. The Consumer Financial Protection Bureau has authorities to regulate for consumer protection. No consensus exists on whether current regulations strike an appropriate balance between protecting consumers while ensuring access to credit and justifiable compliance costs. In addition, whether Community Reinvestment Act regulations as currently implemented effectively and efficiently encourage banks to provide services in their areas of operation is an open question. Large Banks and "Too Big To Fail." Regulators also regulate for systemic risks, such as those associated with very large and complex financial institutions that may contribute to systemic instability. Dodd-Frank Act provisions include enhanced prudential regulation for certain large banks and changes to resolution processes in the event one fails. In addition, bank regulators imposed additional capital requirements on certain large, complex banks. Subsequently, some argued that certain of these additional regulations were too broadly applied and overly stringent. In response, Congress reduced the applicability of the Dodd-Frank measures and regulators have proposed changes to the capital rules. Whether relaxing these rules will provide needed relief to these banks or unnecessarily pare back important safeguards is a debated issue. Community Banks. The number of small or "community" banks has declined substantially in recent decades. No consensus exists on the degree to which regulatory burden, market forces, and the removal of regulatory barriers to interstate branching and banking are causing the decline. What Companies Should Be Eligible for Bank Charters. To operate legally as a bank, an institution must hold a charter granted by a state or federal government. Traditionally, these are held by companies generally focused on and led by people with experience in finance. However, recently companies with a focus on technology are interested in having legal status as a bank, either through a charter from the Office of the Comptroller of the Currency or a state-level industrial loan company charter. Policymakers disagree over whether allowing these companies to operate as banks would create appropriately regulated providers of financial services or inappropriately extend government-backed bank safety nets and disadvantage existing banks. Recent Market and Economic Trends. Changing economic forces also pose issues for the banking industry. Some observers argue that increases in regulation could drive certain financial activities into a relatively lightly regulated "shadow banking" sector. Innovative financial technology may alter the way certain financial services are delivered. If interest rates rise, it could create opportunities and risks. Such trends could have implications for how the financial system performs and influence debates over appropriate banking regulations.