A DATA BOOK 

Healthcare Spending 

and the 

Medicare Program 

J UNE 2006
A DATA BOOK 

Healthcare Spending 

and the 

Medicare Program 

J UNE 2006

iii 

Introduction 

MedPAC’s Data Book is the result of discussions with Congressional staff members regarding 

ways that MedPAC can better support them. It contains the type of information that MedPAC 

provides in publications like the March or June reports; it also combines data from other sources, 

such as CMS. The format is condensed into tables and figures with brief discussion. Web site 

links to MedPAC publications or other websites are included on a “Web links” page at the end of 

each section. 

The Data Book provides information on national health care and Medicare spending, as well as 

Medicare beneficiary demographics, dual eligible beneficiaries, quality and access in the 

Medicare program, and Medicare beneficiary and other payer liability. It also examines provider 

settings—such as hospitals or post-acute care—and presents data on Medicare spending, percent 

of beneficiaries using the service, number of providers, volume, length of stay, and margins, if 

applicable. In addition, it covers the Medicare Advantage program and prescription drug 

coverage for Medicare beneficiaries, including Part D. 

Limited printed copies are being distributed. This report is, however, available through the 

MedPAC website: www.medpac.gov. 

v 

Table of contents 

Introduction...............................................................................................................................iii

Sections 

1 National health care and Medicare spending ..............................................................1 

1-1 Medicare made up about one-fifth of spending on personal health care in 2004 ........................... 3

1-2 Medicare’s share of total spending varies by type of service, 2004 ............................................... 4

1-3 Health care spending has grown more rapidly than GDP, with public financing 

making up nearly half of all funding............................................................................................... 5

1-4 Trustees project Medicare spending to increase as a share of GDP ............................................... 6

1-5 Changes in spending per enrollee, Medicare and private health insurance .................................... 7

1-6 Trustees and CBO project Medicare spending to grow at an annual average rate of 

7 percent to 8 percent over the next 10 years.................................................................................. 8

1-7 Medicare spending is concentrated in certain services and has shifted over time .......................... 9

1-8 FFS program spending is highly concentrated in a small group of beneficiaries, 2002 ...............10

1-9 Medicare HI trust fund is projected to be insolvent in 2018.........................................................11

1-10 Medicare faces serious challenges with long-term financing .......................................................12

1-11 Average monthly SMI benefits, premiums, and cost sharing are projected to 

grow faster than the average monthly Social Security benefit......................................................13

1-12 Medicare FFS providers: Number and spending ..........................................................................14

Web links ......................................................................................................................................15

2 Medicare beneficiary demographics........................................................................... 17 

2-1 Aged beneficiaries account for the greatest share of the Medicare population 

and program spending, 2003.........................................................................................................19

2-2 Medicare spending rises as beneficiaries age, 2003 .....................................................................20

2-3 Beneficiaries who report being in poor health account for a disproportionate 

share of Medicare spending, 2003 ................................................................................................21

2-4 Enrollment in the Medicare program is projected to grow fastest in the next 30 years................22

2-5 Characteristics of the Medicare population, 2003 ........................................................................23

2-6 Characteristics of the Medicare population, by rural and urban residence, 2003 .........................24

2-7 Arthritis and hypertension are the most common diseases reported 

by Medicare beneficiaries, 2002 ...................................................................................................25

Web links ......................................................................................................................................26

3 Dual-eligible beneficiaries............................................................................................ 27 

3-1 Dual-eligible beneficiaries account for a disproportionate share of Medicare spending, 2003....29

3-2 Dual eligibles are more likely than nondual eligibles to be disabled or over 85 years old, 2003.30

3-3 Dual eligibles are more likely than nondual eligibles to report poorer health status, 2003 ..........31

3-4 Demographic differences between dual eligibles and nondual eligibles, 2003 ............................32

3-5 Differences in spending and service use between dual eligibles and 

nondual eligibles, 2003 .................................................................................................................33
vi 

3-6 Both Medicare and total spending are concentrated among dual-eligible beneficiaries, 2003.....34

3-7 Dual-eligible beneficiaries report generally good access to care..................................................35

Web links ......................................................................................................................................36

4 Quality of care in the Medicare program................................................................... 37 

4-1 Hospital mortality decreased from 2000 to 2004..........................................................................39 

4-2 Hospital processes of care improving, but many rates still low, 2001–2004................................40 

4-3 Safety of care: Adverse events affect many hospitalized beneficiaries, 2000–2004 ....................41 

4-4 Rates of potentially avoidable admissions, 2002−2004................................................................42

4-5 Most ambulatory care indicators show improvement or stability, 2002−2004.............................43

4-6 Patient-centeredness of care: Beneficiaries rate interactions with health care providers highly ..44

4-7 Share of home health patients achieving positive outcomes continues to increase ......................45

4-8 The quality of dialysis care has generally improved.....................................................................46

4-9 Changes in safety of care for long-term care hospital patients, 2003–2004 .................................47

4-10 IRF patients’ improvement in function has remained stable ........................................................48

4-11 Medicare Advantage plans improve, but rates are still low on some measures, 2001–2004........49

4-12 MA and FFS patient experience scores are similar.......................................................................50

Web links ......................................................................................................................................51

5 Access to care in the Medicare program .................................................................... 53 

5-1 Beneficiaries’ reports of difficulties obtaining care, 1994–2004..................................................55

5-2 Fewer aged beneficiaries delayed or failed to obtain care due to cost, 

compared with younger Americans ..............................................................................................56

5-3 Access to physicians is similar for Medicare beneficiaries and privately insured people ............57

5-4 Percent of physicians accepting new patients, by type of insurance, 2003–2004.........................58

5-5 Physician acceptance of new Medicare patients has stabilized ....................................................59

5-6 Most beneficiaries had little or no problem accessing home health and special therapy services ...60

5-7 Ethnic and racial disparities in delaying or failing to obtain care, 2004.......................................61

5-8 Beneficiaries differ in their reports of obtaining needed, urgent, or routine care, 2004 ...............62

Web links ...................................................................................................................................... 63

6 Medicare beneficiary and other payer financial liability ......................................... 65 

6-1 Sources of supplemental coverage among noninstitutionalized Medicare beneficiaries, 2003....67

6-2 Sources of supplemental coverage among noninstitutionalized Medicare beneficiaries, by 

 beneficiaries’ characteristics, 2003...............................................................................................68

6-3 Total spending on health care services for noninstitutionalized FFS Medicare beneficiaries, 

by source of payment, 2003..........................................................................................................69

6-4 Per capita total spending on health care services among noninstitutionalized FFS 

beneficiaries, by source of payment, 2003....................................................................................70

6-5 Variation in and composition of total spending among noninstitutionalized FFS 

beneficiaries by type of supplemental coverage, 2003 .................................................................71

6-6 Out-of-pocket spending for premiums and health services per beneficiary, by insurance and 

health status, 2003.........................................................................................................................72

Web links .....................................................................................................................................73
vii 

7 Acute inpatient services ............................................................................................... 75 

Short–term hospitals 

7-1 Growth in Medicare’s payments for hospital inpatient and outpatient services continues, 

1994–2004 ....................................................................................................................................77

7-2 Diagnosis related groups with highest volume, fiscal year 2004..................................................78

7-3 Number of acute care hospitals and Medicare discharges, by hospital group, 2004 ....................79

7-4 Cumulative change in total admissions and total outpatient visits, 1994–2004............................80

7-5 Trends in Medicare and total hospital length of stay, 1994–2004 ................................................81

7-6 Hospital occupancy rates, 1994–2004 ..........................................................................................82

7-7 Cumulative change in Medicare inpatient days per beneficiary and discharges 

per beneficiary, 1994–2003 ..........................................................................................................83

7-8 Simulated Medicare inpatient payments, by component and hospital group, 

reflecting 2006 payment policy ....................................................................................................84

7-9 Cumulative change in Medicare acute inpatient PPS payments and costs per case, 

and operating update, 1994–2004 .................................................................................................85

7-10 Medicare acute inpatient PPS margin, 1994–2004 .......................................................................86

7-11 Medicare acute inpatient PPS margins, by urban and rural location, 1994–2004 ........................87

7-12 Medicare acute inpatient PPS margins, by teaching status, 1994–2004 .......................................88

7-13 Overall Medicare margin, 1997–2004 ..........................................................................................89

7-14 Overall Medicare margins, by urban and rural location, 1997–2004 ...........................................90

7-15 Overall Medicare margins, by teaching status, 1997–2004 ..........................................................91

7-16 Hospital total margin, 1994–2004.................................................................................................92

7-17 Total hospital margin, by urban and rural location, 1994–2004...................................................93

7-18 Total hospital margin, by teaching status, 1994–2004..................................................................94

7-19 Hospitals with consistently negative overall Medicare margins tend to have 

above-average costs ......................................................................................................................95

7-20 Hospitals with consistently negative overall Medicare margins have a poor 

competitive position in their market areas ....................................................................................96

7-21 Relationship of acute inpatient PPS and overall Medicare margins, 2004 ...................................97

7-22 Relationship of overall Medicare and total margins, 2004 ...........................................................98

7-23 Consistently high-cost hospitals have Medicare margins that are far below average...................99

7-24 Change in Medicare hospital inpatient costs per discharge and private payer 

payment-to-cost ratio, 1986−2004 ..............................................................................................100

7-25 Markup of charges over costs for all patient care services, 1994–2004 .....................................101

7-26 Number of critical access hospitals, 1999–2006.........................................................................102

Specialty psychiatric facilities

7-27 Medicare payments to inpatient psychiatric facilities, 1996–2005.............................................103

7-28 Inpatient psychiatric facilities, 1996–2005 .................................................................................104

Web links ....................................................................................................................................105

8 Ambulatory care ........................................................................................................ 107 

Physicians

8-1 FFS Medicare spending and payment updates for physician services, 1996–2010....................109

8-2 Medicare spending per FFS beneficiary on physician services, 1995–2015 ..............................110
viii 

8-3 Number of physicians billing Medicare is increasing steadily, 1999–2004 ...............................111

8-4 Spending growth varies by type of service, 2004−2005.............................................................112

8-5 Volume grew more rapidly in 2004 than in previous years........................................................113

8-6 Medicare Economic Index input categories, weights, and projected price changes for 2007 ....114

8-7 Quarterly changes in professional liability insurance premiums, 1993–2005 ............................115

8-8 Work GPCI before the MMA established a floor of 1.00...........................................................116

Hospital outpatient services

8-9 Spending on all hospital outpatient services, 1995–2005 ...........................................................117

8-10 Most hospitals provide outpatient services .................................................................................118

8-11 Payments and volume of services under the Medicare hospital outpatient PPS, 

by type of service, 2004..............................................................................................................119

8-12 Hospital outpatient services with the highest Medicare expenditures, 2004 ..............................120

8-13 Medicare coinsurance rates, by type of hospital outpatient service, 2004..................................121

8-14 Transitional corridor payments as a share of Medicare hospital outpatient 

payments, 2002–2004 .................................................................................................................122

8-15 Medicare hospital outpatient, inpatient, and overall Medicare margins, 1998–2004 .................123

Ambulatory surgical centers

8-16 Number of Medicare-certified ASCs increased over 60 percent, 1999–2005 ............................124

Imaging services

8-17 Medicare spending for imaging services, by type of service, 2004............................................125

8-18 Radiologists received almost half of Medicare payments for imaging services, 2004...............126

Web links ....................................................................................................................................127

9 Post-acute care ........................................................................................................... 129 

9-1 The number of post-acute care providers generally continues to grow ......................................131

9-2 Spending for post-acute care has risen in each setting, 1999–2005............................................132

Skilled nursing facilities

9-3 Medicare spending for SNF services generally has increased but growth 

has moderated since the PPS was implemented..........................................................................133

9-4 Medicare skilled nursing facility use increased between 1999 and 2003 ...................................134

9-5 Characteristics of skilled nursing facilities, 2003 .......................................................................135

9-6 Medicare costs per day in freestanding SNFs grew at an average 

annual rate of 3.7 percent between 2000 and 2004.....................................................................136

9-7 Freestanding skilled nursing facility Medicare margin, by facility group, 2004 ........................137

9-8 The highest percentage of Medicare-covered freestanding SNF days were in 

 “very high” and “high” rehabilitation RUG–III groups in 2004................................................138

Home health agencies

9-9 Spending for home health care, 1992–2005................................................................................139

9-10 Medicare home health care use, 1992–2003...............................................................................140

9-11 The home health product changed after the prospective payment system started ......................141

9-12 Aggregate Medicare margins for all freestanding home health agencies

remain in double digits, 2004......................................................................................................142
ix 

Long-term care hospitals

9-13 The top 15 LTC–DRGs in 2004 made up almost two-thirds of LTCH discharges ....................143

9-14 The number of long-term care hospitals has grown rapidly since 1990 .....................................144

9-15 Volume of cases and Medicare spending increased under the LTCH 

prospective payment system .......................................................................................................145

9-16 Comparison of changes in LTCHs’ Medicare payments and costs per case, 1999–2004 ..........146

9-17 Long-term care hospitals’ PPS Medicare margin, by group, 2002–2004 ...................................147

Inpatient rehabilitation facilities

9-18 Distribution of most common types of cases in inpatient rehabilitation facilities, 2004............148

9-19 The number of all types of inpatient rehabilitation facilities has grown.....................................149

9-20 Volume of care and Medicare spending increased under the IRF 

prospective payment system .......................................................................................................150

9-21 IRFs’ Medicare payments have risen faster than their costs, post-PPS ......................................151

9-22 Inpatient rehabilitation facilities’ PPS Medicare margins, by group, 2002–2004 ......................152

Web links ....................................................................................................................................153

10 Medicare Advantage.................................................................................................. 155 

10-1 Counties with MA plans, 2006 ...................................................................................................157

10-2 Enrollment in MA plans, 1994–2006..........................................................................................158

10-3 County benchmarks for MA plans, 2006....................................................................................159

10-4 Benefits available to beneficiaries in MA plans, by type of plan ...............................................160

10-5 MA Regions................................................................................................................................161 

10-6 Special needs plans have grown quickly.....................................................................................162

10-7 Number of organizations offering special needs plans, by county, 2006 ...................................163

Web links ....................................................................................................................................164

11 Drugs ........................................................................................................................... 165 

11-1 Medicare spending and annual growth rates for Part B drugs ....................................................167

11-2 Top 10 drugs covered by Medicare Part B, by share of expenditures, 2004 ..............................168

11-3 Part D enrollment and other sources of drug coverage in early 2006.........................................169

11-4 Characteristics of Medicare PDPs in 2006 .................................................................................170

11-5 Distribution of PDP and MA–PD premiums for basic and enhanced plans in 2006 ..................171

11-6 PDPs offered in 2006 by organizations with at least one nationwide plan.................................172

11-7 “Near-national” organizations with 30 or more PDPs among the 34 regions.............................174

11-8 Premiums and cost-sharing requirements among PDPs in 2006 ................................................175

11-9 Geographic distribution of PDPs in 2006 ...................................................................................176

11-10 Characteristics of MA–PDs’ drug benefits in 2006 ....................................................................177

11-11 Premiums and cost-sharing requirements among MA–PD drug benefits in 2006......................178

11-12 Distribution of Part D enrollees by organization ........................................................................179

11-13 Most Part D plans distinguish between preferred and nonpreferred brands 

and include specialty tiers ............................................................................................................180

11-14 Part D plans typically list about 1,000 drugs: PDPs ...................................................................181
x 

11-15 Part D plans typically list about 1,000 drugs: MA–PDs.................................................................182

11-16 The share of drugs listed in a therapeutic category depends on category size and regulation....183

11-17 Part D plans concentrate prior authorization in selected categories ...........................................184

Web links ....................................................................................................................................185

12 Other services ............................................................................................................. 187 

Dialysis

12-1 Total number of dialysis facilities is growing; for profit and freestanding 

are increasing over time..............................................................................................................189

12-2 Medicare spending for outpatient dialysis services furnished by freestanding 

dialysis facilities, 1996 and 2004................................................................................................190

12-3 Dialysis facilities’ capacity increased steadily between 1995 and 2004.....................................191

12-4 Characteristics of beneficiaries vary somewhat according to the dialysis facility’s 

business status in 2001 and 2002 ................................................................................................192

12-5 The ESRD population is growing, and most ESRD patients undergo dialysis...........................193

12-6 Diabetics and the elderly are among the fastest growing segments of the ESRD population ....194

12-7 Aggregate margins vary by type of freestanding dialysis facility, 2003.....................................195

Hospice

12-8 Use of hospice among Medicare beneficiaries increased from 2000 to 2004.............................196

12-9 Long hospice stays are getting longer, but short stays persist ....................................................197

12-10 Average length of stay in hospice by state, 2004........................................................................198

12-11 Hospice use has grown for all Medicare decedents, but use remains higher among 

those in managed care.................................................................................................................199

12-12 An increase in freestanding agencies fueled growth in the number of hospice 

providers, 2001–2005 .................................................................................................................200

Clinical laboratory

12-13 Medicare spending for clinical laboratory services, in billions, FY 1994–2004 ........................201

12-14 Hospital and independent laboratories account for most ambulatory test volume .....................202

12-15 Highest volume laboratory tests, 2003........................................................................................203

Outpatient therapy

12-16 Outpatient therapy is furnished by many different entities.........................................................204

12-17 Medicare spending on outpatient therapy services has almost doubled since 2000 ...................205

12-18 Outpatient therapy users and service have increased since 2000................................................206

12-19 Medicare spending on therapists in private practice grew faster than that 

for other providers, 2000–2004....................................................................................................207

12-20 Per user spending on outpatient therapy varied threefold across settings, 2004.........................208

12-21 Since 2000 the number of outpatient therapy users grew 8 percent a year.................................209

Web links ....................................................................................................................................210
S E C T I O N 

National health care and 

Medicare spending 

 A Data Book: Healthcare spending and the Medicare program, June 2006 3

Chart 1-1. Medicare made up about one-fifth of spending on 

personal health care in 2004 

Medicare

19%

Medicaid and all SCHIP

18%

Other public

7%

Private health insurance

37%

Out of pocket

15%

Other private

4%

Total = $1.56 trillion

a

b

Note: SCHIP (State Children’s Health Insurance Program). Out-of-pocket spending includes cost sharing for both privately and 

publicly insured individuals. Personal health care spending includes spending for clinical and professional services 

received by patients. It excludes administrative costs and profits. Premiums are included with each program (e.g., 

Medicare, private insurance), rather than in the out-of-pocket category. 

a

 Includes industrial in-plant, privately funded construction, and nonpatient revenues, including philanthropy. b

 Includes programs such as workers’ compensation, public health activity, Department of Defense, Department of 

 Veterans Affairs, Indian Health Service, state and local government hospital subsidies, and school health. 

Source: CMS, Office of the Actuary, National Health Expenditure Accounts, 2006. 

• Of the $1.56 trillion spent on personal health care in the United States in 2004, Medicare 

accounted for about 19 percent, or $300 billion. Spending by all public programs—including 

Medicare, Medicaid, State Children’s Health Insurance Program, and others—accounted for 

44 percent of health care spending. Medicare is the largest single purchaser of health care 

in the United States. Thirty-seven percent of spending was financed through private health 

insurance payers (employers and plans) and 15 percent was from consumer out-of-pocket 

spending. 

• Medicare and private health insurance spending includes premium contributions from 

enrollees. 
4 National health care and Medicare spending 

Chart 1-2. Medicare’s share of total spending varies by 

 type of service, 2004 

Hospital Physician and 

clinical services

Home health Nursing home Durable medical 

equipment

Service type

0

20

40

60

80

100

Share

of spend ni g (percent)

29%

20%

38%

14%

28%

18%

7%

32%

44%

54%

72%

30%

42%

72%

Medicare Medicaid and all SCHIP Other*

0.3%

Note: SCHIP (State Children’s Health Insurance Program). Personal health spending includes spending for clinical and 

professional services received by patients. It excludes administrative costs and profits. 

 Totals may not sum to 100 percent due to rounding. 

 *Other includes private health insurance, out-of-pocket, and other private and public spending. 

Source: CMS, Office of the Actuary, National Health Expenditure Accounts, 2006. 

• The level and distribution of spending differ between Medicare and other payers, largely 

because Medicare covers an older, sicker population, and did not cover services such as 

outpatient prescription drugs and long-term care during this time period. 

• In 2004, Medicare accounted for 29 percent, 38 percent, and 28 percent of spending on 

hospital care, home health services, and durable medical equipment, respectively. By 

comparison, Medicare paid for 14 percent of nursing home care. 
 A Data Book: Healthcare spending and the Medicare program, June 2006 5

Chart 1-3. Health care spending has grown more rapidly than 

GDP, with public financing making up nearly half of 

all funding 

Note: GDP (gross domestic product). Total health spending is the sum of all private and public spending. Medicare spending 

 is one component of all public spending. 

Source: CMS, Office of the Actuary, National Health Expenditure Accounts, 2006. 

• Total health spending consumes an increasing proportion of national resources, accounting 

for a double-digit share of gross domestic product (GDP) annually since 1982. 

• As a share of GDP, total health spending has increased from about 6 percent in 1965 to 

more than 16 percent in 2004. It is projected to reach 20 percent of GDP in 2015. Health 

spending’s share of GDP was stable throughout much of the 1990s due to slower spending 

growth associated with greater use of managed care techniques and larger enrollment in 

managed plans as well as a strong economy. 

• Medicare spending has also grown as a share of the economy from less than 1 percent 

when it was started in 1965 to about 3 percent today. Projections suggest that Medicare 

spending will make up nearly 4 percent of GDP by 2015. 

• In 2004, public spending made up about 45 percent of total health care spending and private 

spending made up 55 percent. By 2015, those percentages are projected to be 48 percent 

and 52 percent, respectively. 

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Health spending as a percent of GDP

Actual Projected

Total health spending 

All private spending 

All public 

spending 

Medicare 

spending 
6 National health care and Medicare spending 

Chart 1-4. Trustees project Medicare spending to increase 

 as a share of GDP 

1970 1980 1990 2000 2003 2010 2020 2030 2040 2050 2060 2070 2080

0

2

4

6

8

10

12

Share

of G

D

P (p

erc

ent)

Part A

Part B

Part D

0.7

1.3

1.9 2.3

2.7

3.5

4.7

6.5

8.0

9.0

11.0

9.8

10.5

Note: GDP (gross domestic product). These projections are based on the trustees’ intermediate set of assumptions. 

Source: 2006 Annual Report of the Boards of Trustees of the Medicare Trust Funds. 

• Over time, Medicare spending has accounted for an increasing share of gross domestic 

product (GDP). From less than 1 percent in 1970, it is projected to reach 11 percent of GDP 

in 2080. 

• With a 9.3 percent annual average rate of growth, nominal Medicare spending grew 

considerably faster over the period from 1980 to 2004 than nominal growth in the economy, 

which averaged 6.5 percent per year. For the future, Medicare spending is projected to 

continue growing faster than GDP, but at a rate somewhat closer to GDP growth, averaging 

6.2 percent per year between 2004 and 2080 compared with an annual average growth rate 

of 4.5 percent for the economy as a whole. In other words, Medicare spending is projected 

to continue rising as a share of GDP, but at a slower pace. 

• During the 1990s, Medicare’s share of the economy grew more slowly than it did in other 

periods. This was due to payment reductions enacted in 1997, combined with faster 

economic growth. Beginning in 2010, the aging of the baby boom generation, an expected 

increase in life expectancy, and the Medicare drug benefit are all likely to increase the 

proportion of economic resources devoted to Medicare. Additional factors such as 

innovation in medical technology and interaction between the use of technology and 

insurance coverage will also contribute to rapid increases in health care spending. 
 A Data Book: Healthcare spending and the Medicare program, June 2006 7

Chart 1-5. Changes in spending per enrollee, Medicare and 

private health insurance 

1970 1975 1980 1985 1990 1995 2000

0%

5%

10%

15%

20%

25%

P

er enrolle

e change (percent)

Medicare (average annual growth = 9.1%)

PHI (average annual growth = 10.1%)

Note: PHI (private health insurance). Chart compares services covered by Medicare and PHI, including hospital services, 

physician and clinical services, and durable medical products. 

Source: CMS, Office of the Actuary, National Health Statistics Group, 2004. 

• Although rates of growth in per capita spending for Medicare and private insurance often differ 

from year to year, over the long term they have been quite similar. When comparing spending for 

benefits that private insurance and Medicare have had in common—notably excluding 

prescription drugs—Medicare’s per enrollee spending has grown at a rate that is about 1 

percentage point lower than that for private insurance over the period from 1970 to 2002. 

• This comparison is sensitive to the end points of time one uses for calculating average growth 

rates. Also, private insurers and Medicare do not buy the same mix of services, and Medicare 

covers an older population that tends to be more costly. In addition, the data do not allow 

analysis of the extent to which these spending trends were affected by changes in the generosity 

of covered benefits and, in turn, changes in enrollees’ out-of-pocket spending. 

• Differences appear to be more pronounced since 1985, when Medicare began introducing the 

prospective payment system for hospital inpatient services. Some analysts believe that since the 

mid-1980s, Medicare has had greater success at containing cost growth than private payers by 

using its larger purchasing power. Others maintain that since the 1970s, benefits offered by 

private insurers have expanded and cost-sharing requirements declined. In addition, enrollment 

in managed care plans grew during the 1990s. These factors make the comparison problematic, 

since Medicare’s benefits changed little over the same period. 
8 National health care and Medicare spending 

Chart 1-6. Trustees and CBO project Medicare spending to 

grow at an annual average rate of 7 percent to 

8 percent over the next 10 years 

0

200

400

600

800

1000

1200

1980 1985 1990 1995 2000 2005 2010 2015

Dollars (in billions)

Trustees - high

Trustees - intermediate

CBO

Trustees - low

Actual Projected

Note: CBO (Congressional Budget Office). All data are nominal, gross program outlays (mandatory plus administrative 

expenses) by calendar year. 

Source: Medicare Trustees Report 2006. CBO March 2006 baseline. 

• Medicare spending has grown about ninefold, from $37 billion in 1980 to $336 billion in 

2005. 

• Medicare spending will increase significantly in 2006 and in subsequent years with 

introduction of Part D, the new voluntary outpatient prescription drug benefit. 

• The Congressional Budget Office projects that mandatory spending for Medicare will grow at 

an average annual rate of about 8 percent from 2006 to 2015. The Medicare Trustees’ 

intermediate projections for 2006 to 2015 assume about 7 percent average annual growth. 

Forecasts of future Medicare spending are inherently uncertain, and differences can stem 

from different assumptions about the economy (which affect provider payment annual 

updates) and about growth in the volume and intensity of services delivered to Medicare 

beneficiaries, among other factors. 
 A Data Book: Healthcare spending and the Medicare program, June 2006 9

Chart 1-7. Medicare spending is concentrated in certain 

services and has shifted over time 

Private plans

7%

Other feefor-service

settings

11%

b

Home 

health

9%

Hospital

inpatient

46%

Hospital

outpatient

5%

Skilled 

nursing

facility

5%

Physician

17%

Hospital

inpatient

37%

Hospital

outpatient

Physician 6%

18%

Skilled 

nursing

facility

6%

Home 

health

4%

Other fee- b

for-service

settings

15%

Private plans

14%

Total spending 1995 = $181 billion Total spending 2005 = $329 billion 

a

 a

b

Note: Spending amounts are gross outlays, meaning that they include spending financed by beneficiary premiums but do not 

include spending by beneficiaries (or spending on their behalf) for cost sharing requirements of Medicare-covered 

services. Values are reported on a calendar year, incurred basis and do not include spending on program administration. 

Totals may not sum to 100 percent due to rounding. 

a

 Includes all hospitals—those paid under the prospective payment system (PPS) and PPS-exempt hospitals. b

 Includes hospice, outpatient laboratory, durable medical equipment, physician-administered drugs, ambulance services, 

ambulatory surgical centers, dialysis, rural health clinics, federally qualified health centers, and outpatient rehabilitation 

facilities. 

 

Source: CMS, Office of the Actuary, 2006. 

• Medicare spending is concentrated on certain services, and the distribution among services 

and settings can vary substantially over time. 

• In 2005, Medicare spent about $329 billion, or $8,080 per enrollee. Inpatient hospital 

services were by far the largest spending category (37 percent), followed by 

physicians (18 percent), managed care (14 percent), and other fee-for-service 

settings (15 percent). 

• Although inpatient hospital services still made up the largest spending category, spending 

for those services was a smaller share of total Medicare spending than it was in 1995, 

falling from 46 percent to 37 percent. Spending on beneficiaries enrolled in private plans 

has grown rapidly over the past several years, and current enrollment is higher than it was a 

decade ago. 
10 National health care and Medicare spending 

Chart 1-8. FFS program spending is highly concentrated in a 

small group of beneficiaries, 2002 

Percent of beneficiaries Percent of program spending

0

10

20

30

40

50

60

70

80

90

100

Percent

9%

21%

19%

3%

29%

Top 1%

Bottom 

half

Second

quartile

88%

19%

Next 15%

Next 5%

Next 4%

Note: FFS (fee-for-service). 

Source: Direct Research, LLC, based on a 0.1 percent sample of Medicare fee-for-service enrollees and their claims. 

• Medicare fee-for-service (FFS) spending is concentrated among a small number of 

beneficiaries. In 2002, the costliest 5 percent of beneficiaries accounted for 48 percent of 

annual Medicare FFS spending and the costliest quartile accounted for 88 percent. By 

contrast, the least costly half of beneficiaries accounted for only 3 percent of FFS spending. 

• Costly beneficiaries tend to include those who have multiple chronic conditions, those using 

inpatient hospital care, and those who are in the last year of life. 
A Data Book: Healthcare spending and the Medicare program, June 2006 11

Chart 1-9. Medicare HI trust fund is projected to be 

 insolvent in 2018 

 Year costs Year HI trust 

Estimate exceed income fund assets exhausted

High 2007 2013 

Intermediate 2010 2018 

Low N/A 2041 

Note: HI (hospital insurance), N/A (not available). Income includes taxes (payroll and Social Security benefits taxes, railroad

retirement tax transfer), income from the fraud and abuse program, and interest from trust fund assets. 

Source: 2006 Annual Report of the Boards of Trustees of the Medicare Trust Funds; CMS, Office of the Actuary. 

• The Medicare program is financed through two trust funds: one for Hospital Insurance (HI), 

which covers services provided by hospitals and other providers such as skilled nursing 

facilities, and one for Supplementary Medical Insurance (SMI) services, such as physician 

visits and Medicare’s new prescription drug benefit. Dedicated payroll taxes on current 

workers largely finance HI spending and are held in the HI trust fund. The HI trust fund can 

be exhausted if spending exceeds payroll tax revenues and fund reserves. General 

revenues finance roughly 75 percent of SMI services, and beneficiary premiums finance 

about 25 percent. (General revenues are federal tax dollars that are not dedicated to a 

particular use, but are made up of income and other taxes on individuals and corporations.) 

• Since the SMI trust fund is financed with general revenues and beneficiary premiums, it 

cannot be exhausted. However, some analysts believe that the levels of premiums and 

general revenues required to finance projected spending for SMI services would impose a 

significant burden on Medicare beneficiaries and on growth in the U.S. economy. 

• Under high cost assumptions, the HI trust fund could be exhausted as early as 2013. 

Under low cost assumptions, it would remain solvent until 2041. 
12 National health care and Medicare spending 

Chart 1-10. Medicare faces serious challenges with long-term 

 financing 

0%

3%

6%

9%

12%

1966 1976 1986 1996 2006 2016 2026 2036 2046 2056 2066 2076

Tax on benefits Payroll taxes

Premiums

General revenue transfers

State transfers

Total expenditures

Actual Projected

HI deficit

Percent of GDP

Note: GDP (gross domestic product), HI (hospital insurance). These projections are based on the trustees’ intermediate set of 

assumptions. Tax on benefits refers to a portion of income taxes that higher income individuals pay on Social Security 

benefits that is designated for Medicare. State transfers (often called the Part D “clawback”) refer to payments called for 

within the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 from the states to Medicare for 

assuming primary responsibility for prescription drug spending. 

Source: 2006 Annual Report of the Boards of Trustees of the Medicare Trust Funds. 

• Under an intermediate set of assumptions, trustees project that Medicare spending will grow 

rapidly, from about 3 percent of GDP today to 7.5 percent by 2036 and 11 percent by 2080. 

 

• Medicare trustees project that under intermediate assumptions, the HI trust fund will be 

exhausted in 2018. 

• Medicare’s problems with long-term financing will become more prominent to policymakers over 

the next few years because of a warning system set up in the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003. Each year, the trustees are required to project the 

share of Medicare outlays that is financed with general revenues in the current and six 

succeeding fiscal years. If two consecutive annual reports project that general revenue will fund 

45 percent or more of Medicare outlays in any given year, then the President must propose and 

the Congress must consider legislation to bring Medicare’s spending below this threshold. In 

their 2006 report, the Medicare trustees projected that the program would hit this 45 percent 

trigger in 2012—the last year of the seven-year projection window. If the trustees have a similar 

finding in their 2007 report, policymakers will be called upon to consider broad changes to 

Medicare’s benefits and financing in the spring of 2008. 
A Data Book: Healthcare spending and the Medicare program, June 2006 13

Chart 1-11. Average monthly SMI benefits, premiums, and cost 

sharing are projected to grow faster than the 

average monthly Social Security benefit 

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

$0

$500

$1,000

$1,500

$2,000

$2,500

M

onth yl a

m

ounts per person ni 2005 dol al rs

Actual Projected

Average SMI benefit

Average Social

Security benefit

Average SMI premium

plus cost sharing

Note: SMI (Supplementary Medical Insurance). Average SMI benefit and average SMI premium plus cost-sharing values are for 

 a beneficiary enrolled in Part B and (after 2006) Part D. Beneficiary spending on outpatient prescription drugs prior to 

 2006 is not shown. 

Source: 2006 Annual Report of the Boards of Trustees of the Medicare Trust Funds. 

• Between 1970 and 2005, the average monthly Social Security benefit (adjusted for inflation) 

increased by an annual average rate of 1.6 percent. Over the same period, average Supplementary 

Medical Insurance (SMI) premiums plus cost sharing and average SMI benefits grew by more than 

4 percent annually. Under current hold-harmless policies, Medicare Part B premiums cannot 

increase by a larger dollar amount than the cost-of-living increase in a beneficiary’s Social Security 

benefit. Recent Part B premium increases have offset about 30 percent to 40 percent of the dollar 

increase in the average Social Security benefit. Part D premium increases are not subject to a holdharmless provision. 

• Most beneficiaries who enroll in Medicare’s new prescription drug benefit will see lower out-ofpocket (OOP) spending. Beneficiaries’ OOP spending on prescription drugs prior to 2006 is not 

shown in this figure. 

• Even with the expansion of Medicare’s benefits, including prescription drugs, growth over time in 

Medicare premiums and cost sharing will continue to outpace growth in Social Security income. 

Medicare trustees project that between 2006 and 2036, the average Social Security benefit will 

grow by just over 1 percent annually (after adjusting for inflation), compared with about 2.5 percent 

annual growth in average SMI premiums plus cost sharing. 
14 National health care and Medicare spending 

Chart 1-12. Medicare FFS providers: Number and spending 

 Number of Projected spending 

 providers FY 2005 

Provider 2005 (billions) 

 

Inpatient hospitals 6,111a $ 121.6 

Hospital outpatient PPS 3,944b

 19.6 

Physicians 618,183 57.3 

Skilled nursing facilities 15,625 18.1 

Home health agencies 8,082 12.5 

Hospices 2,852 8.3 

Ambulatory surgical centers 4,506 2.8 c 

Free-standing dialysis facilities 3,898 7.3 

Outpatient clinical laboratories 192,533 6.4 

Durable medical equipment suppliers ~140,000 d 7.8 

 

Note: FFS (fee-for-service), FY (fiscal year), PPS (prospective payment system). Data include program spending only and do 

not include cost sharing or administrative expenses. aShort-stay and nonshort-stay hospitals. bData are for first quarter of 2006. Analysis does not include alcohol and drug abuse hospitals and critical access 

hospitals, but does include psychiatric, rehabilitation, and children’s hospitals that bill under the outpatient PPS. c

Preliminary. 

d

Data are for 2006. Many suppliers do not file a claim every year. For example, in a sample of 2004 claims, about 70,000 

suppliers filed claims for reimbursement. 

Source: Number of providers comes from a variety of CMS databases, including the Office of Research, Development, and 

Information 2005 Wallet Card of CMS program data; the Provider of Services file; the Online Survey, Certification, and 

Reporting system; Standard Analytic files; the Dialysis Facility Compare file; the CMS Clinical Laboratory Improvement 

Act database; and unpublished CMS data. 

• The most numerous Medicare providers are physicians, followed by outpatient laboratories 

and durable medical equipment suppliers. 
A Data Book: Healthcare spending and the Medicare program, June 2006 15

Web links. National health care and Medicare spending 

• The Trustees’ Report provides information on the financial operations and actuarial status of 

the Medicare program. 

 http://www.cms.hhs.gov/ReportsTrustFunds/ 

• The National Health Expenditure Accounts developed by the Office of the Actuary at CMS 

provide information for health care in the United States. 

http://cms.hhs.gov/NationalHealthExpendData/ 

• The CMS chart series provides information on the U.S. health care system and Medicare 

program spending. 

http://www.cms.gov/TheChartSeries/ 

• The Congressional Budget Office provides projections of Medicare spending. 

http://www.cbo.gov/budget/factsheets/2006b/medicare.pdf 

• Chapter 1 of MedPAC’s March 2006 Report to the Congress provides an overview of 

Medicare and U.S. health care spending. 

 http://www.medpac.gov/publications/congressional_reports/mar06_ch01.pdf 

S E C T I O N 

Medicare beneficiary 

demographics 

A Data Book: Healthcare spending and the Medicare program, June 2006 19

Chart 2-1. Aged beneficiaries account for the greatest 

share of the Medicare population and program 

spending, 2003 

 Percent of enrollees Percent of spending 

ESRD

0.4%

ESRD

2.7%

Disabled 

11.4%

Disabled 

13.9%

Aged

85.6%

Aged

85.6%

 

Note: ESRD (end-stage renal disease) refers to beneficiaries under age 65 with ESRD. The disabled category refers to 

beneficiaries under age 65 without ESRD. The aged category refers to beneficiaries age 65 and older. Totals may not 

sum to 100 percent due to rounding. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• The highest percentage of Medicare expenditures is for aged beneficiaries, reflecting their 

greater share of the Medicare population. 

• A disproportionate share of Medicare expenditures is devoted to Medicare beneficiaries who 

are eligible due to end-stage renal disease (ESRD). On average, ESRD beneficiaries cost at 

least five times as much as beneficiaries in other categories: $6,367 is spent per aged 

beneficiary, $5,419 per (non-ESRD) disabled beneficiary, and $43,057 per ESRD 

beneficiary. On average, Medicare spending per beneficiary is $6,602. 
20 Medicare beneficiary demographics 

Chart 2-2. Medicare spending rises as beneficiaries age, 2003 

 Percent of enrollees Percent of spending 

 

Note: Totals may not sum to 100 percent due to rounding. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• Per capita expenditures increased by about $2,000 for each age group over 65: Per capita 

expenditures were $5,042 for those ages 65 to 74, $7,789 for those 75 to 84, and $9,243 for 

those 85 and older. Per capita expenditures for Medicare beneficiaries under age 65, 

enrolled due to disability (both end-stage renal disease and non-ESRD), were $6,513. On 

average, Medicare spending per beneficiary was $6,602. 

• In each age group, much of the spending is concentrated among people with chronic 

conditions and those who die. 

Under 65

14%

65-74

43%

75-84

31%

85+

12%

Under 65

14%

65-74

32%

75-84

37%

85+

16%
A Data Book: Healthcare spending and the Medicare program, June 2006 21

Chart 2-3. Beneficiaries who report being in poor health 

account for a disproportionate share of Medicare 

spending, 2003 

 Percent of enrollees Percent of spending 

Poor

9% Poor

21%

Excellent or 

very good

20%

Excellent or 

very good

39%

Good or fair

51%

Good or fair

57%

 

 

Note: Totals may not sum to 100 percent due to rounding. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• Most beneficiaries report relatively good health. Less than 10 percent report poor health. 

• Medicare spending is strongly associated with self-reported health status. Per capita 

expenditures for those with excellent health are $3,455; $7,478 for those with good or fair 

health; and $14,689 for those with poor health. On average, Medicare spending per 

beneficiary is $6,602. 
22 Medicare beneficiary demographics 

Chart 2-4. Enrollment in the Medicare program is projected 

 to grow fastest in the next 30 years 

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

0

10

20

30

40

50

60

70

80

90

100

110

Beneficiaries ( ni mill oi ns)

Historical Projected

Note: Enrollment numbers are based on Part A enrollment only. Beneficiaries enrolled only in Part B are not included. 

Source: MedPAC analysis of the Social Security Administration 2006 Trustees Report, Intermediate Assumptions. 

• The total number of people enrolled in the Medicare program will nearly double between 

2000 and 2030, from about 40 million to 79 million beneficiaries. 

• The rate of increase in Medicare enrollment will accelerate around 2010 when members of 

the “baby boom” generation start to become eligible and will slow around 2030 when the 

entire baby boom generation has become eligible. 
A Data Book: Healthcare spending and the Medicare program, June 2006 23

Chart 2-5. Characteristics of the Medicare population, 2003 

 Percent of the Percent of the 

Characteristic Medicare population Characteristic Medicare population 

Total (41,808,391*) 100% 

Sex Education 

 Male 44 No high school diploma 30% 

 Female 56 High school diploma only 30 

 Some college or more 39 

Race/ethnicity 

 White, non-Hispanic 78 Income status 

 African American, non-Hispanic 10 Below poverty 19 

 Hispanic 8 100–125% of poverty 11 

 Other 4 125–200% of poverty 21 

Age 200–400% of poverty 29

 < 65 17 Over 400% of poverty 20 

 65–74 35 

 75–84 32 Supplemental insurance status 

85+ 16 Medicare only 10 

Health status Managed care 13

 Excellent or very good 37 Employer 33 

 Good or fair 53 Medigap 21 

 Poor 10 Medigap/employer 4 

Residence Medicaid 16 

 Urban 73 Other 2 

 Rural 27 

Living arrangement 

 Institution 8 

 Alone 29 

 Spouse 44 

 Other 19 

 

 

Note: Urban indicates beneficiaries living in metropolitan statistical areas (MSAs). Rural indicates beneficiaries living outside 

MSAs. In 2003, poverty was defined as $8,825 for people living alone and as $11,133 for married couples. Totals may not 

sum to 100 percent due to rounding. 

 *Based on a representative sample of the Medicare population. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• The Medicare population tends to be female, white, between the ages of 65 and 84, in good 

or fair health, and living with a spouse. Most beneficiaries live in urban areas, have 

graduated from high school, and have some form of supplemental insurance coverage. Half 

have incomes under 200 percent of poverty. 
24 Medicare beneficiary demographics 

Chart 2-6. Characteristics of the Medicare population, by rural 

and urban residence, 2003 

 Percent of urban Percent of rural 

Characteristics Medicare population Medicare population 

Total 100% 100% 

 Urban 73% 

 Rural 27% 

Sex 

 Male 44 46 

 Female 56 54 

Race/ethnicity 

 White, non-Hispanic 76 86 

 African American, non-Hispanic 10 7 

 Hispanic 9 3 

 Other 4 4 

Age 

 < 65 14 16 

 65–74 43 43 

 75–84 32 29 

85+ 12 11 

Health status 

 Excellent or very good 40 36 

 Good or fair 51 51 

 Poor 8 12 

 

Income status 

 Below poverty 15 19 

 100–125% of poverty 10 12 

 125–200% of poverty 20 23 

 200–400% of poverty 30 31 

 Over 400% of poverty 25 16 

Note: Urban indicates beneficiaries living in metropolitan statistical areas (MSAs). Rural indicates beneficiaries living outside 

MSAs. In 2003, poverty was defined as $8,825 for people living alone and as $11,133 for married couples. Totals may not 

sum to 100 percent due to rounding. 

 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• Close to one-fourth of all beneficiaries reside in rural areas. 

• Rural Medicare beneficiaries are more likely to be white (86 vs. 76 percent), to report being 

in poor health (12 vs. 8 percent), and to have income below 125 percent of poverty (31 vs. 

25 percent), compared to urban beneficiaries. 
A Data Book: Healthcare spending and the Medicare program, June 2006 25

Chart 2-7. Arthritis and hypertension are the most common 

diseases reported by Medicare beneficiaries, 2002 

62

60

29

19

14

17

15

48

54

6

21 20

16 16

Arthritis Hypertension Osteoporosis Diabetes Skin cancer Other cancer Pulmonary 

disease

0

10

20

30

40

50

60

70

P

ercent of benefic ai ries with dise

ase/condit oi n

Female

Male

Source: CMS, Office of Research, Development, and Information. 

• Arthritis, hypertension, osteoporosis, and diabetes are among the most prevalent chronic 

conditions reported by Medicare beneficiaries. 

• Female beneficiaries live longer, and the risk of chronic disease increases with age. Female 

beneficiaries are more likely than male beneficiaries to have arthritis, hypertension, or 

osteoporosis. 
26 Medicare beneficiary demographics 

Web links. Medicare beneficiary demographics 

• The CMS Chart series provides a profile of Medicare beneficiaries. 

http://www.cms.gov/TheChartSeries/downloads/Sec3b_p.pdf 

• The CMS Data Compendium contains historic, current, and projected data on Medicare 

enrollment. 

http://www.cms.hhs.gov/DataCompendium/02_2003_Data_Compendium.asp#TopofPage 

• The CMS website provides information on Medicare enrollment by state. 

http://www.cms.hhs.gov/MedicareEnRpts 

• The CMS website provides information about the Medicare Current Beneficiary Survey, a 

resource on the demographic characteristics of Medicare beneficiaries. 

http://www.cms.hhs.gov/mcbs/ 
S E C T I O N 

Dual-eligible 

beneficiaries 

A Data Book: Healthcare spending and the Medicare program, June 2006 29

Chart 3-1. Dual-eligible beneficiaries account for a 

disproportionate share of Medicare spending, 2003 

 Percent of enrollees Percent of spending 

Dual eligible

16%

Nondual eligible

84%

Dual eligible

24%

Nondual eligible

76%

 

Note: Dual eligibles are designated as such if the months they qualify for Medicaid exceed months they qualify for other 

supplemental insurance. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• Dual-eligible beneficiaries are those who qualify for both Medicare and Medicaid. Medicaid 

is a joint federal and state program designed to help low-income persons obtain needed 

health care. 

• A disproportionate share of Medicare expenditures is spent on dual-eligible beneficiaries: 

Dual eligibles account for 16 percent of Medicare beneficiaries and 24 percent of Medicare 

spending. 

• Dual eligibles cost Medicare about 1.6 times as much as nondual eligibles: $9,595 is spent 

per dual-eligible beneficiary, and $6,023 is spent per nondual-eligible beneficiary. 

• Total spending⎯which includes spending by Medicare, Medicaid, supplemental insurance, 

and out-of-pocket across all payers⎯for dual eligibles averaged about $20,941 per person 

in 2003, almost twice the amount for other Medicare beneficiaries. 
30 Dual-eligible beneficiaries

Chart 3-2. Dual eligibles are more likely than nondual eligibles 

to be disabled or over 85 years old, 2003 

 Dual eligibles Nondual eligibles

65-74

26%

75-84

22%

85+

14%

65-74

46%

75-84

33%

85+

11%

Under 65

(disabled)

37%

Under 65

(disabled)

10%

Note: Beneficiaries who are under age 65 qualify for Medicare because they are disabled. Once disabled beneficiaries reach 

age 65, they are counted as aged. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• More than one-third of dual eligibles are disabled, compared with only 10 percent of the 

nondual-eligible population. Dual eligibles are also somewhat more likely than nondual 

eligibles to be age 85 or older. 
A Data Book: Healthcare spending and the Medicare program, June 2006 31

Chart 3-3. Dual eligibles are more likely than nondual eligibles 

to report poorer health status, 2003 

 Dual eligibles Nondual eligibles 

Poor

21%

Good or fair

61%

Poor

7%

Good or fair

49%

Excellent or 

very good

43%

Excellent or 

very good

18%

 

Note: Totals may not sum to 100 percent due to missing responses. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

 

• Relative to nondual eligibles, dual eligibles report poorer health status. The majority report 

good or fair status, but about 20 percent of the dual-eligible population report being in poor 

health (compared with less than 10 percent of the nondual-eligible population). 

• Dual eligibles are more likely to suffer from cognitive impairment and mental disorders, and 

they have higher rates of diabetes, pulmonary disease, stroke, and Alzheimer’s disease 

than do nondual eligibles. 

• Nineteen percent of dual eligibles reside in institutions, compared with 2 percent of nondual 

eligibles. 
32 Dual-eligible beneficiaries

Chart 3-4. Demographic differences between dual eligibles and 

nondual eligibles, 2003 

 Percent of dual- Percent of nondualCharacteristic eligible beneficiaries eligible beneficiaries 

Sex 

 Male 37% 45% 

 Female 63 55 

Race/ethnicity 

 White, non-Hispanic 54 83 

 African American, non-Hispanic 22 7 

 Hispanic 16 6 

 Other 8 3 

ADLs 

 No ADLs 46 70 

 1–2 ADLs 23 19 

 3–6 ADLs 31 10 

Residence 

 Urban 72 77 

 Rural 28 23 

Living arrangement 

 Institution 19 2 

 Alone 30 28 

 Spouse 18 55 

 Children, nonrelatives, others 32 14 

Education 

 No high school diploma 57 25 

 High school diploma only 23 31 

 Some college or more 17 43 

Income status 

 Below poverty 57 8 

 100–125% of poverty 21 8 

 125–200% of poverty 15 21 

 200–400% of poverty 4 35 

 Over 400% of poverty 1 27 

Supplemental insurance status 

 Medicare or Medicare/Medicaid only 91 12 

 Medicare managed care 1 15 

 Employer 1 40 

 Medigap 1 25 

 Medigap/employer 0 5 

 Other* 7 2 

Note: ADL (activity of daily living). Dual eligibles are designated as such if the months they qualify for Medicaid exceed the 

 months they qualify for other supplemental insurance. Urban indicates beneficiaries living in metropolitan statistical areas 

 (MSAs). Rural indicates beneficiaries living outside MSAs. In 2003, poverty was defined as $8,825 for people living alone 

 and $11,133 for married couples. Totals may not sum to 100 percent due to rounding. 

 *Includes public programs such as the Department of Veterans Affairs and state-sponsored drug plans. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• Dual eligibles qualify for Medicaid due to low incomes: Fifty-seven percent live below the 

poverty level, and 93 percent live below 200 percent of poverty. Compared to nonduals, dual 

eligibles are more likely to: be female, African American, or Hispanic; lack a high school 

diploma; have greater limitations in activities of daily living; reside in a rural area; and live in 

an institution, alone, or with persons other than a spouse. 
A Data Book: Healthcare spending and the Medicare program, June 2006 33

Chart 3-5. Differences in spending and service use between 

 dual eligibles and nondual eligibles, 2003 

 Dual-eligible Nondual-eligible 

 Service beneficiaries beneficiaries 

Average Medicare payment for all beneficiaries 

Total Medicare payments $9,595 $6,023 

Inpatient hospital 4,224 2,250 

Physiciana

 2,640 1,584 

Outpatient hospital 1,149 520 

Home health 564 206 

Skilled nursing facilityb

 697 257 

Hospice 204 131 

 

Percent of beneficiaries using service 

Percent using any type of service 92.5% 87.8% 

 

Inpatient hospital 27.2 16.3 

Physiciana

 90.5 74.2 

Outpatient hospital 72.2 54.0 

Home health 10.8 5.7 

Skilled nursing facilityb

 8.1 3.1 

Hospice 2.3 1.5 

Note: aIncludes a variety of medical services, equipment, and supplies. b

Individual short-term facility (usually skilled nursing facility) stays for the Medicare Current Beneficiary Survey population.

 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2003, which updates the previous 

analysis by Liu et al. in 1998. 

• Average per capita spending for dual eligibles is 53 percent higher than for nondual 

eligibles⎯$9,595 compared to $6,023. 

• For each type of service, average Medicare per capita payments are higher for duals than 

nonduals. The largest percentage difference between the two groups is in skilled nursing 

facility (SNF) and home health services, for which Medicare spends over twice as much on 

duals as on nonduals. 

• Higher average per capita spending for duals is a function of both a higher proportion of 

duals using services than nonduals, as well as greater volume or intensity of use among 

those using services. A higher proportion of duals than nonduals use at least one Medicarecovered service⎯93 versus 88 percent. 

• Duals are more likely to use each type of Medicare-covered service than nonduals; for 

example, duals are more than twice as likely to use SNF services. 
34 Dual-eligible beneficiaries

Chart 3-6. Both Medicare and total spending are concentrated 

among dual-eligible beneficiaries, 2003

Medicare spending for 

dual eligibles

Share of 

dual eligibles

Total spending for 

dual eligibles

0

10

20

30

40

50

60

70

80

90

100

P

ercent

3%

50%

8%

19%

30%

27%

39%

15%

38%

39%

5%

27%

Note: Total spending includes Medicare, Medicaid, supplemental insurance, and out-of-pocket spending. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use files, 2003. 

• Annual Medicare spending is concentrated among a small number of dual-eligible 

beneficiaries. The costliest 20 percent of duals accounts for 78 percent of Medicare 

spending on duals; in contrast, the least costly 50 percent of duals accounts for only 

3 percent of Medicare spending on duals. Of the 1 percent of all beneficiaries for whom 

Medicare spending is the highest, one-third are dual eligible. Similarly, of the costliest 

5 percent of beneficiaries, a quarter are dual eligible. 

• The distribution of total spending for dual eligibles is similar, but somewhat less 

concentrated than the distribution of Medicare spending. For example, the top 5 percent of 

duals accounts for 27 percent of total spending, which includes Medicare, Medicaid, 

supplemental insurance, and out-of-pocket spending (compared with 39 percent of Medicare 

spending). 

• On average, total spending for duals is almost twice as high as that for nonduals—$20,941 

compared to $11,377. 
A Data Book: Healthcare spending and the Medicare program, June 2006 35

Chart 3-7. Dual-eligible beneficiaries report generally good 

access to care 

Question Dual-eligible 

beneficiaries 

Nondual-eligible 

beneficiaries 

Do you have a personal doctor or nurse? 

Yes 83.1% 90.4% 

In the last 6 months, if you needed care right 

away, did you usually or always get care as 

soon as you wanted? 

Yes 87.8 93.0 

In the last 6 months, if you made any 

appointments with a doctor or health care 

provider, how often did you get an 

appointment as soon as you wanted? 

Usually or always 

85.8 92.2 

Source: MedPAC analysis of CAHPS (Consumer Assessment of Health Plans Survey) for fee-for-service Medicare, 2004. 

• Dual-eligible beneficiaries often possess characteristics associated with needing care⎯

limitations in activities of daily living and poor health status, for example⎯as well as having 

difficulty obtaining care⎯such as being poor and poorly educated. 

• Survey results indicate that most duals report generally good access to care, although 

somewhat lower than beneficiaries with other sources of supplemental insurance. 
36 Dual-eligible beneficiaries

Web links. Dual-eligible beneficiaries 

• Chapter 3 of the MedPAC June 2004 Report to the Congress provides further information on 

dual-eligible beneficiaries. 

http://www.medpac.gov/publications/congressional_reports/June04_ch3.pdf 

• The Kaiser Family Foundation provides information on dual-eligible beneficiaries. 

http://kff.org 

• The CMS Medicaid Chartbook provides information on the Medicaid program. 

http://www.cms.hhs.gov/thechartseries/downloads/2tchartbk.pdf 
S E C T I O N 

Quality of care in the 

Medicare program 

A Data Book: Healthcare spending and the Medicare program, June 2006 39

Chart 4-1. Hospital mortality decreased from 2000 to 2004 

 Risk-adjusted rates per 10,000 

 Percent change Number of 

Diagnosis or procedure 2000 2002 2004 2000–2004 cases in 2004 

 

In-hospital mortality 

 Pneumonia 1,012 949 789 −22.0% 66,100 

 AMI 1,414 1,309 1,110 –21.4 36,548 

Stroke 1,212 1,159 1,019 −15.9 34,387 

CHF 541 474 358 –33.9 35,218 

GI hemorrhage 400 355 264 –34.0 10,365 

CABG 482 427 355 –26.4 7,119 

Craniotomy 986 930 814 –17.4 3,281 

AAA repair 1,161 1,130 956 –17.7 1,595 

30-day mortality

Pneumonia 1,377 1,557 1,452 5.5 118,367 

AMI 1,627 1,690 1,570 –3.5 50,839 

Stroke 1,620 1,807 1,767 9.1 57,128 

CHF 818 907 834 2.0 72,265 

GI hemorrhage 590 649 587 –0.5 20,593 

CABG 441 412 366 –17.1 7,078 

Craniotomy 1,123 1,182 1,094 –2.6 4,321 

AAA repair 1,069 1,072 912 –14.7 1,534

Note: AMI (acute myocardial infarction), CHF (congestive heart failure), GI (gastrointestinal), CABG (coronary artery bypass 

graft), AAA (abdominal aortic aneurysm). Rate is for discharges eligible to be counted in the measure. 

Source: MedPAC analysis of MedPAR discharges using Agency for Healthcare Research and Quality indicators and methods. 

• Rates of in-hospital mortality generally decreased between 2000 and 2004 on all conditions 

and procedures measured. The most substantial improvements occurred for congestive 

heart failure, gastrointestinal hemorrhage, and coronary artery bypass graft. 

• Thirty-day mortality (as measured from admission) has also generally decreased, though the 

rate of mortality following pneumonia, stroke, and congestive heart failure rose over the 

period. 
40 Quality of care in the Medicare program

Chart 4-2. Hospital processes of care improving, but many 

 rates still low, 2001–2004 

 Average state rate 

 Baseline 

Indicator 2001 Q1–Q3 2004 Q4 Difference 

AMI

 Aspirin at arrival 81.4% 87.6% 6.2% 

 Aspirin prescribed at discharge 84.0 91.8 7.8 

 ACEI or ARB for LVSD* ** 63.5 71.6 8.1 

 Adult smoking cessation advice/counseling 42.2 74.7 32.5 

 Beta blocker prescribed at discharge 71.1 90.7 19.6 

 Beta blocker at arrival 61.4 82.3 20.9 

 Mean time to thrombolysis (in minutes) N/A 58.5 N/A 

 Thrombolytic agent received within 30 minutes 

 of hospital arrival 28.9 37.7 8.8 

 Mean time to PCI (in minutes) N/A 196.5 N/A 

 PCI received within 120 minutes of hospital arrival 29.2 56.2 27.0 

Heart failure

 Discharge instructions 3.8 20.7 16.9 

 LVF assessment 70.2 83.8 13.6 

 ACEI or ARB for LVSD* ** 68.3 65.8 –2.5 

 Adult smoking cessation advice/counseling 29.1 59.7 30.6 

Pneumonia

 Initial antibiotic received within 4 hours of hospital arrival 61.5 71.0 9.5 

 Initial antibiotic selection for community-acquired pneumonia 

in immunocompetent patient 58.9 75.0 16.1 

 Blood culture performed within 24 hours prior to or 

after hospital arrival 63.7 71.9 8.2 

 Blood culture performed before first antibiotic received in hospital 81.1 83.8 2.7 

 Influenza vaccination 13.8 43.8 30.0 

 Pneumococcal vaccination 16.5 50.1 33.6 

 Adult smoking cessation advice/counseling N/A 57.1 N/A 

 Oxygenation assessment 94.6 99.0 4.4 

SIP

 Prophylactic antibiotic received within 1 hour prior to surgical 47.6 69.7 22.1 

 Prophylactic antibiotic selection for surgical patients 91.4 92.2 0.8 

 Prophylactic antibiotics discontinued within 24 hours after surgery 40.7 52.9 12.2 

 

Note: AMI (acute myocardial infarction), ACEI (angiotensin-converting enzyme inhibitor), ARB (angiotensin receptor blocker), 

LVSD (left ventricular systolic dysfunction), LVF (left ventricular function), N/A (not available), PCI (percutaneous coronary 

intervention), SIP (surgical infection prevention). The rates are means of state rates. 

 *During this time clinicians began to use another drug therapy for this condition, replacing ACEIs in some cases. 

**Measure revised to incorporate ARBs November 2004. 

Source: MedPAC analysis of CMS data from the quality improvement organization program. 

• The rates reflect the percentage of beneficiaries receiving clinically indicated services (100 

percent is the goal on most measures). Many of the rates remain too low. 

• Of the measures that had rates for both periods, 21 out of 22 improved. One of the measures 

(ACEI for LVSD for heart failure) may have decreased due to a change in clinical practice. 
A Data Book: Healthcare spending and the Medicare program, June 2006 41

Chart 4-3. Safety of care: Adverse events affect many 

 hospitalized beneficiaries, 2000–2004 

 Observed 

 Risk-adjusted rates per 10,000 Difference adverse 

 2000 2002 2004 2000–2004 events, 2004 

 

Decubitus ulcer 225 251 276 51 156,961 

Failure to rescue 1,450 1,330 1,114 –336 67,098 

Postoperative PE 

or DVT 71 86 98 27 42,105 

Accidental puncture/ 

laceration 32 36 34 2 38,258 

Infection due to 

medical care 20 24 25 5 32,408 

Iatrogenic 

pneumothorax 8 8 8 0 10,953 

Postoperative 

respiratory failure 34 46 53 19 10,914 

Postoperative sepsis 97 111 131 34 8,600 

Postoperative hemorrhage 

or hematoma 20 17 17 –3 7,365 

Postoperative physiologic 

and metabolic derangement 5 6 8 3 2,643 

Postoperative wound 

dehiscence 14 15 12 –2 1,911 

Postoperative hip fracture 3 3 3 0 1,127 

Note: PE (pulmonary embolism), DVT (deep vein thrombosis). Rate is for discharges eligible to be counted in the measure. 

Source: MedPAC analysis of 100 percent of MedPAR discharges using Agency for Healthcare Research and Quality indicators 

 and methods. 

• From 2000 to 2004, 7 of 12 rates of adverse events experienced by Medicare beneficiaries 

increased. 

• Four of the indicators have seen decreasing rates; these include failure to rescue, one of the 

most common and—because it results in death—most severe. 
42 Quality of care in the Medicare program

Chart 4-4. Rates of potentially avoidable admissions, 

 2002−2004 

 Rates per 10,000 beneficiaries 

 2002 2004 Difference 

 

Congestive heart failure 1,054 1,085 31* 

COPD/Asthma 771 710 –61 

Diabetes long-term complications 191 168 –23 

Diabetes short-term complications 40 31 –9 

Hypertension 10 10 0 

Unstable angina/ED** 10 7 –3 

Note: COPD (chronic obstructive pulmonary disease). ED (emergency department). The group studied excludes those under 

65, those in Medicare Advantage plans, hospice users, anyone not continuously enrolled for one of two time periods 

(2001–2002 or 2003–2004), and those living outside the United States. 

 *Not a statistically significant result. All others are statistically significant at a 95 percent confidence level (p<0.05). 

 **This measures visits to the emergency department, not admissions. 

Source: MedPAC analysis of 5 percent sample of beneficiaries’ outpatient and inpatient claims for 2002 and 2004. 

• Potentially avoidable admissions are admissions that high-quality ambulatory care has been 

shown to prevent. The populations measured are those with a diagnosis previous to the 

admission for the condition, not the overall population. For example, this table counts the 

percent of Medicare beneficiaries with congestive heart failure who were admitted to the 

hospital. 

• Four out of six rates of potentially avoidable admissions (for persons with these conditions) 

decreased. 

• Notable, given the amount of emphasis CMS and others have placed on improving diabetes 

care, is the decrease in potentially avoidable admissions for beneficiaries with diabetes, 

both for long- and short-term complications. 

• Among these conditions, rates of potentially avoidable admissions are highest for 

congestive heart failure. 
A Data Book: Healthcare spending and the Medicare program, June 2006 43

Chart 4-5. Most ambulatory care indicators show improvement 

 or stability, 2002−2004 

Number of indicators 

Indicators by condition Improved Stable Worsened Total 

All 20 15 3 38 

Anemia and GI bleed 3 1 0 4 

CAD 3 1 0 4 

Cancer 0 4 3 7 

CHF 5 3 0 8 

COPD 2 0 0 2 

Depression 0 1 0 1 

Diabetes 6 1 0 7 

Hypertension 0 1 0 1 

Stroke 1 3 0 4 

Note: GI (gastrointestinal), CAD (coronary artery disease), CHF (congestive heart failure), COPD (chronic obstructive 

pulmonary disease). 

Source: MedPAC analysis of Medicare Ambulatory Care Indicators for the Elderly from the Medicare 5 percent Standard 

Analytic Files. 

• The Medicare Ambulatory Care Indicators for the Elderly (MACIEs) track the provision of 

necessary care and rates of potentially avoidable hospitalizations. 

• Out of 38 indicators, 20 improved, 15 did not change, and 3 worsened from 2002 to 2004. 

• This finding suggests that in 2004 beneficiaries with these conditions were somewhat more 

likely to receive necessary care and avoid hospitalizations. 

• For several conditions, declines in potentially avoidable hospitalizations occur concurrently 

with the provision of necessary clinical care for that condition. 
44 Quality of care in the Medicare program

Chart 4-6. Patient-centeredness of care: Beneficiaries rate 

 interactions with health care providers highly 

Question 2000 2002 2004 

Do you have a personal doctor or nurse? N/A 89.0% 90.0% 

Yes 

Care 

(Percent who rated provider 8 or higher 

on a scale of 0 to 10) 

How would you rate your personal 

doctor or nurse? 84.7% 83.7 84.7 

How would you rate the specialist you 

saw most often in the last 6 months, including 

a personal doctor if he or she is a specialist? 85.5 84.4 85.1* 

How would you rate all the health care you 

got in the last 6 months from all doctors and 

other health providers? 85.4 85.2 86.4* 

Quality of interactions 

In the last 6 months, how often did doctors or 

other health providers: 

 Usually or always listen carefully to you? 94.8 94.6 94.6* 

 Usually or always explain things in a way 

 you could understand? 93.4 93.8 93.9* 

 Usually or always show respect for what 

 you had to say? 94.9 94.8 94.8 

 Usually or always spend enough time with you? 91.1 90.6 90.9 

Note: N/A (not available). 

*Indicates a statistically significant change between 2000 and 2004, at a 95 percent confidence level (p<0.05). 

Source: MedPAC analysis of Consumer Assessment of Health Plans Survey (CAHPS) for fee-for-service Medicare, 2000–2004. 

• More than 80 percent of beneficiaries gave a rating of 8 or higher on a scale of 0 to 10 (10 

being the highest) to their personal doctor or nurse and the specialist that they saw most 

often in the last 6 months. The same was true for all the health care they received in the last 

6 months. 

• They also highly rate the quality of interactions with their doctor or other health provider. For 

example, in 2004, between 93 percent and 95 percent of beneficiaries reported that their 

doctors or other health care providers usually or always listened carefully to them, explained 

things in a way that they could understand, and showed respect for what they had to say. 
A Data Book: Healthcare spending and the Medicare program, June 2006 45

Chart 4-7. Share of home health patients achieving positive 

outcomes continues to increase 

 

June 2002– June 2003– June 2004– 

Measure May 2003 May 2004 May 2005 

Improvement in: 

 Walking around 34% 36% 38% 

 Getting out of bed 49 51 52 

 Bathing 57 60 61 

 Managing oral medications 35 38 39 

Patients have less pain 57 59 61 

Any hospital admissions 28 28 28 

Any unplanned ER use 21 21 21 

Note: ER (emergency room). 

Source: MedPAC analysis of CMS Home Health Compare data. 

• Each measure of quality from CMS’s public website Home Health Compare has shown 

small improvement. 
46 Quality of care in the Medicare program

Chart 4-8. The quality of dialysis care has generally improved 

Outcome measure 2000 2001 2002 2003 

Percent of in-center hemodialysis patients: 

 Receiving adequate dialysis 91% 92% 92% 94% 

 With anemia under control 71 75 78 81 

 Dialyzed with an AV fistula 30 31 33 35 

 Not malnourished 80 82 81 81 

 

Percent of peritoneal dialysis patients: 

 Receiving adequate CAPD 69 68 71 70 

 Receiving adequate CCPD 62 70 66 65 

 With anemia under control 75 76 81 83 

 Not malnourished 56 61 60 63 

Note: AV (arteriovenous), CAPD (continuous ambulatory peritoneal dialysis), CCPD (continuous cycler-assisted peritoneal 

dialysis). Data on dialysis adequacy, use of fistulas, and anemia management represent percent of patients meeting 

CMS’s clinical performance criteria. Not malnourished includes patients with a serum albumin >3.5/3.2 g/dL. 

Source: Compiled by MedPAC from 2000–2004 Annual Reports for ESRD Clinical Performance Measures Project from CMS. 

 

• The quality of dialysis care has improved on these measures. Between 2000 and 2003, the 

proportion of both hemodialysis and peritoneal patients receiving adequate dialysis and 

whose anemia was under control increased. 

• Nutritional care is a clinical area in which substantial improvements in quality are needed. 

The proportion of hemodialysis and peritoneal dialysis patients who are malnourished has 

remained relatively constant during this time. 

• All hemodialysis patients require vascular access—the site on the patient’s body where 

blood is removed and returned during dialysis. Vascular access care is another clinical area 

in which substantial improvements in quality are needed. Use of arteriovenous (AV) fistulas, 

considered the best type of vascular access, increased from 30 percent to 35 percent of 

hemodialysis patients between 2000 and 2003. However, this rate still falls short of 

recommended care. Clinical guidelines recommend that at least 40 percent of all 

hemodialysis patients have an AV fistula. 
A Data Book: Healthcare spending and the Medicare program, June 2006 47

Chart 4-9. Changes in safety of care for long-term care 

 hospital patients, 2003–2004 

Risk-adjusted rates per 1,000 eligible discharges Observed Total 

Patient safety adverse number 

indicator 2003 2004 Change in rate events 2004 of patients 

Decubitus ulcer 128.6 148.3 15% 14,624 94,368 

Infection due to 

 medical care 19.9 28.9 45 3,129 108,458 

Postoperative 

 PE or DVT 53.5 54.1 1 747 13,801 

Postoperative 

 sepsis 125.3 164.0 31 1,378 8,016 

Note: PE (pulmonary embolism), DVT (deep vein thrombosis). 

Source: MedPAC analysis of 100 percent of long-term care hospital MedPAR data from CMS. 

• These rates suggest that for three of the four patient safety indicators (PSIs), safety for longterm care hospital (LTCH) patients has deteriorated. The rates for all four indicators 

increased from 2003 to 2004. 

• Nevertheless, we need to be cautious about interpretation of the PSIs since they were not 

developed for LTCHs. 

• We used selected PSIs developed by the Agency for Healthcare Research and Quality to 

assess potentially avoidable adverse events resulting in acute hospital care for patients 

treated in LTCHs in 2003 and 2004. These PSIs had enough observations for the two years 

and were thought to be relevant to the type of care LTCHs deliver. 

• To distinguish patients who developed a PSI diagnosis in the LTCH, we included in the 

analysis only patients who did not have the pertinent diagnosis in the acute care hospital. 

Therefore, changes in these rates should not be a result of LTCHs admitting more patients 

who had these conditions in the acute care hospital. 

• The PSIs are risk adjusted so these indicators should not reflect a changing LTCH patient 

population over time. 
48 Quality of care in the Medicare program

Chart 4-10. IRF patients’ improvement in function has 

remained stable 

21.7 21.8 21.8

24.6 24.6 24.8

2002 2003 2004

0

5

10

15

20

25

30

A

v

erage difference be

wt e

en adm si s oi n and discharge function scores

All patients

Patients discharged home

Note: IRF (inpatient rehabilitation facility). CMS changed instructions on how IRFs should measure patients’ functioning at 

discharge as of April 1, 2004; therefore, data reflect measurement before that date. 

Source: MedPAC analysis of IRF–Patient Assessment Instrument data from CMS. 

• Our indicators of the quality of care—average difference between admission and discharge 

function scores—provided by inpatient rehabilitation facilities shows small improvement from 

2002 to 2004. 
A Data Book: Healthcare spending and the Medicare program, June 2006 49

Chart 4-11. Medicare Advantage plans improve, but rates are 

still low on some measures, 2001–2004 

Measure 2001 2002 2003 2004 

Advising smokers to quit 60.8% 61.5% 63.3% 64.7%* 

Beta-blocker treatment after heart attack 92.9 93.0 92.9 94.0 

Breast cancer screening 75.3 74.5 74.0 74.0 

Cholesterol management 

 Control 58.4 62.3 66.7 69.8* 

 Screening 75.5 77.7 81.0 82.1* 

Controlling high blood pressure 53.6 56.9 61.4 64.6* 

Comprehensive diabetes care 

 Eye examsa

 66.0 68.4 64.9 67.1

 HbA1c testing 85.7 85.0 87.9 89.1* 

 Lipid control 57.5 62.6 67.7 71.4* 

 Lipid profile 85.7 87.9 91.1 93.5* 

 Monitoring diabetic nephropathy 51.9 57.3c

 53.6 58.5*

 Poor HbA1c controlb 26.8 24.5 23.4 22.5* 

Antidepressant medication managementc 

 Acute phase 51.3 52.1 53.3 56.3* 

 Continuation phase 36.8 37.7 39.2 42.1* 

 Contacts 11.9 10.8 10.5 11.9 

 

Follow-up after hospitalization for mental illness 

 Less than 7 days 37.2 38.7 38.8 40.2 

 Less than 30 days 60.6 60.6 60.3 60.7 

Note: HbA1c (hemoglobin A1c). Rates refer to patients for whom the treatments were clinically indicated. 

 * The changes between 2001 and 2004 on these indicators are statistically significant. a The definition of these measures changed in 2003, making comparisons difficult. b

 Lower rates are better than higher ones for this measure. 

c

 Acute phase refers to the percent of patients receiving effective treatment after a new episode. Continuation refers to the 

percent of patients remaining on antidepressant continuously for six months after initial diagnosis. Contacts refers to the 

percent of patients who received at least 3 follow-up office visits in a 12-week acute phase. 

 Source: National Committee For Quality Assurance 2005, The State of Health Care Quality. Washington, DC: NCQA. 

• Twelve out of the 17 measures improved between 2001 and 2004. Changes in four were not 

statistically significant and one remained at the same rate. 

• Because many Medicare beneficiaries in Medicare Advantage plans are still not receiving 

clinically indicated services, opportunities for further improvement exist. 
50 Quality of care in the Medicare program

Chart 4-12. MA and FFS patient experience scores are similar 

 

 MA FFS 

Measure 2002 2003 2004 2002 2003 2004 

 

No or small problem getting care when needed 93% 94% 95% 95% 95% 96% 

Usually or always got care without long waits 81 83 83 81 84 83 

Doctors in health plan usually or always 

 communicate well 93 93 93 94 94 93 

None or small problem seeing a specialist 92 92 93 95 95 94 

Rated health care overall 8–10 84 84 84 85 86 86 

Rated health plan 8–10 76 70 74 77 69 72 

Note: MA (Medicare Advantage), FFS (fee-for-service). The ratings on the last two indicators show the percentage of 

beneficiaries who gave ratings of 8 or higher on a scale of 0 to 10. 

Source: 2002–2004 Consumer Assessment of Healthcare Providers and Systems (CAHPS) data for Medicare Advantage plans 

and the fee-for-service program from CMS. 

• Fee-for-service (FFS) beneficiaries were asked to rate Medicare as a health plan, while 

Medicare Advantage (MA) beneficiaries were asked to rate the plan in which they were 

enrolled. 

• Beneficiaries’ ratings of satisfaction with FFS and MA are generally similar and are stable 

over time. 

 

• Most beneficiaries report obtaining care when they need it and do not report long waits. 
A Data Book: Healthcare spending and the Medicare program, June 2006 51

Web links. Quality of care in the Medicare program 

• Chapter 2 of the MedPAC June 2006 Report to the Congress discusses care coordination 

for Medicare beneficiaries and its implications for quality of care. 

http://www.medpac.gov/publications/congressional_reports/Jun06_Ch02.pdf 

• Chapter 2 of the MedPAC March 2006 Report to the Congress includes further information

 on quality in hospitals and outpatient dialysis services. 

 http://www.medpac.gov/publications/congressional_reports/Mar06_Ch02.pdf 

• Chapter 4 of the MedPAC March 2006 Report to the Congress includes further information 

on quality in skilled nursing facilities, home health agencies, long-term care hospitals, and 

inpatient rehabilitation facilities. 

http://www.medpac.gov/publications/congressional_reports/Mar06_Ch04.pdf 

• Chapter 4 of the MedPAC March 2005 Report to the Congress outlines strategies to 

improve care through pay-for-performance incentives and information technology. 

 http://www.medpac.gov/publications/congressional_reports/Mar05_Ch04.pdf 

• Chapter 2 of the MedPAC March 2004 Report to the Congress includes and discusses in 

further detail information similar to that included in many of these charts. 

 http://www.medpac.gov/publications/congressional_reports/Mar04_Ch2.pdf 

• The CMS website provides further information on CMS quality initiatives, including those for 

dialysis care. 

 http://cms.hhs.gov/quality 

• More information about Medicare’s quality initiatives for dialysis care can be found on the 

CMS website. 

http://www.cms.hhs.gov/ESRDqualityImproveInit/ 

• Medicare provides information about home health agency outcomes on its consumer website.

www.medicare.gov/Hhcompare/Home.asp 

• The Commonwealth Fund published a chart book with information on Medicare quality in the 

spring of 2005. 

 http://www.cmwf.org 

S E C T I O N 

Access to care in the 

Medicare program 

 A Data Book: Healthcare spending and the Medicare program, June 2006 55

Chart 5-1. Beneficiaries’ reports of difficulties obtaining care, 

 1994–2004 

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

5

10

15

P

ercent of benef ci ai r ei s

10.2

7.4

8.8

7.3

5.5

4.7

3.8 3.9 4.3

Delayed health care due to cost

Did not see doctor

Trouble getting health care

a

b

 c

Note: These data reflect the answers given by noninstitutionalized beneficiaries. a Answered “yes” when asked if they delayed seeking medical care because they were worried about the cost. b Answered “yes” when asked if they had a serious health problem or condition about which they should have seen a 

doctor or other medical person, but did not. 

c Answered “yes” when asked if they had any trouble getting health care that they wanted or needed. 

 

Source: CMS analysis of Medicare Current Beneficiary Survey, Access to Care file, 2004. 

• In 2004, more than 90 percent of beneficiaries reported good access to care, regardless of 

the question asked. 

• When asked whether they delayed health care due to cost, 8.8 percent of beneficiaries 

answered yes in 2004, compared to 10.2 percent in 1994. 

• Similarly, the percentage reporting that they did not see a doctor (when they needed to) 

declined from 7.3 percent to 4.7 percent in 2004. 

• The percentage of beneficiaries who reported trouble getting health care has remained 

relatively stable since 2000. However, since 1994, the beneficiaries who reported trouble 

getting health care increased from 3.8 percent to 4.3 percent in 2004. 

 
56 Access to care in the Medicare program

Chart 5-2. Fewer aged beneficiaries delayed or failed to obtain 

care due to cost, compared with younger Americans 

Delayed getting care due to cost 

7.7

8.3

10.0

3.9 3.6

4.1

2000 2002 2004

0

2

4

6

8

10

P

erc

ent of b

enef ci ai r ei s

45-64 65+

*

Failed to obtain care due to cost 

5.5

6.1

7.2

2.4 2.5 2.6

2000 2002 2004

0

2

4

6

8

P

erc

ent of b

enef ci ai r ei s

45-64 65+

Note: Medicare beneficiaries in the sample are over 65 years old and living in the community. 

 *Statistically significant change from 2000. 

Source: National Center for Health Statistics, Centers for Disease Control and Prevention: National Health Interview Survey, 2000, 

2002, 2004. 

 

• About 4 percent of persons over 65 years old delayed care and fewer than 3 percent failed 

to obtain care due to cost over the three time periods. These rates were much lower than 

problems reported by persons 45 to 64 years old. Changes in reported problems for 

Medicare beneficiaries are not statistically significant. 

* 
 A Data Book: Healthcare spending and the Medicare program, June 2006 57

Chart 5-3. Access to physicians is similar for Medicare 

beneficiaries and privately insured people 

 

 Medicare 

Age 65 and older 

 Private insurance 

Age 50–64 

Survey question 2004 2005 2004 2005 

Unwanted delay in getting an appointment: Among those who had an appointment, “How often did you 

have to wait longer than you wanted to get a doctor’s appointment?” 

 For routine care 

 Never 73%* 74%* 66%* 67%* 

 Sometimes 21* 21 26* 25 

 Usually 4 3 5 5 

 Always 2 2 3 3 

 For illness or injury 

 Never 83* 83* 77* 75* 

 Sometimes 13* 15 19* 19 

 Usually 2 1 3 3 

 Always 2 1 2 2 

 

Getting a new physician: Among those who tried to get an appointment with a primary care physician or a 

specialist, “How much of a problem was it finding a primary care doctor/specialist who would treat you? Was it...” 

 Primary care physician 

 No problem 77 75 73 75 

 Small problem 11 12 15 16 

 Big problem 11 13 13 9 

 Specialist 

 No problem 89 89 83 86 

 Small problem 5 6 8 7 

 Big problem 5 5 8 6 

 

Not accessing a doctor for medical problems: “In the past year, do you think you should have seen a 

doctor for a medical problem, but did not?” 

 6* 7* 11* 12* 

Note: Numbers may not sum to 100 percent due to rounding. Missing responses are not presented. For the 2004 survey, 

n=4,122 (2,087 Medicare; 2,035 privately insured); for the 2005 survey n=4,021 (2,012 Medicare; 2,009 privately insured). 

For each survey question, there is no statistical difference between years, at a 95 percent confidence level. 

 *Indicates a statistically significant difference between the Medicare and privately insured populations, at a 95 percent 

confidence level. 

 

Source: MedPAC-sponsored telephone surveys conducted August–September 2004 and 2005. 

• Medicare beneficiaries and privately insured people age 50 to 64 reported very similar experiences 

accessing physicians. For some indicators, Medicare beneficiaries enjoyed slightly better access than 

their privately insured counterparts. 

• Most Medicare beneficiaries and people age 50 to 64 did not have a delay getting an appointment 

due to scheduling issues. For both groups, appointment scheduling was easier for illness or injury 

appointments than for routine care. 

• Both Medicare beneficiaries and privately insured individuals reported more difficulty finding a primary 

care physician than a specialist, but most were able to access either type with little or no problem. 

• In 2005, 7 percent of Medicare beneficiaries and 12 percent of privately insured individuals said they 

think they should have seen a doctor for a medical problem in the past year, but did not. Respondents 

indicated that physician availability issues (e.g., appointment time, finding a doctor) were less 

common reasons for not seeing a doctor than other reasons, such as cost. 
58 Access to care in the Medicare program

Chart 5-4. Percent of physicians accepting new patients, 

by type of insurance, 2003–2004 

0 10 20 30 40 50 60 70 80 90 100

Any patients

Self-pay 

Medicare 

Non-capitated private

insurance

Medicaid

Capitated private

insurance

No charge/charity

Type of coverage

Percent of physicians accepting new patients

2003

2004

` Noncapitated private

insurance

Capitated private

insurance

Note: Estimates include only physicians for whom at least 10 percent of their revenues come from Medicare. Office-based 

physicians exclude the specialties of anesthesiology, radiology, and pathology. 

Source: Unpublished data from the National Ambulatory Medical Care Survey, 2003–2004. 

• The share of physicians accepting new Medicare fee-for-service patients remained high in 

2003 and 2004—above 90 percent. 

• Although acceptance of capitated private insurance is lower than noncapitated private 

insurance, physician acceptance of both increased a little between 2003 and 2004. 

• Specialists and surgeons are more likely to accept new Medicare patients than primary care 

physicians. The share of primary care physicians who accept new patients declined slightly, 

at about the same rate for both Medicare and privately insured patients between 1999 and 

2002 (not shown in table). 
 A Data Book: Healthcare spending and the Medicare program, June 2006 59

Chart 5-5. Physician acceptance of new Medicare patients 

has stabilized 

 

 Percentage of physicians accepting new patients 

Patients 1996–1997 2001–2002 2004–2005 

New Medicare 

 All 75% 71%* 73% 

 Most 13 15* 14 

 Some 10 10 10 

 None 3 4* 3 

 

New privately insured 

 All 71 68* 72** 

 Most 16 17 15 

 Some 10 10 9 

 None 4 5* 4 

Note: Medicare rates exclude pediatricians, pediatric specialists, nephrologists, and physicians accepting no new privately 

insured patients. 

*Change from 1996–1997 is statistically significant at p<.05. 

**Change from 2000–2001 is statistically significant at p<.05. 

 

Source: Cunningham, P., A. Staiti, and P. B. Ginsburg. 2006. Physician acceptance of new Medicare patients stabilizes in 2004–

05. Tracking report no. 12. Washington, DC: Center for Studying Health System Change. January. 

• The large majority of physicians in the United States are willing to accept new Medicare 

beneficiaries, and this share remains steady, according to survey findings from The Center 

for Studying Health System Change (HSC). 

• Only 3 percent of physicians with practices open to private patients completely closed their 

practice to new Medicare patients. In contrast, 73 percent of physicians with practices open 

to private patients reported that they accepted all new Medicare patients; 14 percent said 

they accepted most new Medicare patients; and 10 percent said they accepted some new 

Medicare patients. 

• While there was a dip in acceptance of Medicare patients between 1996–1997 and 2000–

2001, the study authors suggest that the increases in the most recent survey (2004–2005) 

indicate stabilization. 

• Physician acceptance of new Medicare patients follows a similar trend as acceptance of 

new privately insured patients, suggesting that overall health system dynamics have played 

a larger role in physician decisions about accepting Medicare patients than have Medicare 

payment policies. 
60 Access to care in the Medicare program

Chart 5-6. Most beneficiaries had little or no problem 

 accessing home health and special therapy services 

 Home health Special therapy 

 2001 2002 2003 2004 2001 2002 2003 2004 

Did you experience a problem? 

 No problem 74% 76% 77% 78%* 84% 85% 85% 85%*

 A small problem 13 13 12 12* 9 8 8 8* 

 A big problem 12 12 11 11* 7 7 6 6 

Note: Percentages are proportions of those who answered the question. Missing responses were not included. Columns do not 

 total 100 percent due to rounding. 

 *The difference between 2001 and 2004 is significant at the p<.05 level. 

Source: MedPAC analysis of Consumer Assessment of Health Plans Survey, 2001–2004. 

• Most beneficiaries had little or no problem accessing home health services (90 percent) and 

special therapy services (93 percent—which includes physical and occupational therapies 

and speech-language pathology services). 

• In 2004, 78 percent of beneficiaries reported having no problems accessing home health 

services, a slight increase over the share in 2001. 

• In 2004, 85 percent of beneficiaries reported having no problems accessing special therapy 

services, a slight increase over the share in 2001. 
 A Data Book: Healthcare spending and the Medicare program, June 2006 61

Chart 5-7. Ethnic and racial disparities in delaying or failing 

 to obtain care, 2004 

Delayed getting care due to cost 

Failed to obtain care due to cost 

2.6

2.1

5.7 5.5

All White, non-Hispanic Black, non-Hispanic Hispanic

0

1

2

3

4

5

6

7

Percent of benef ci ai r ei s

Note: Beneficiaries in the sample are over 65 years old and living in the community. 

Source: National Center for Health Statistics, Centers for Disease Control and Prevention: National Health Interview Survey, 2004. 

 

• Few persons over 65, regardless of race or ethnicity, report delaying or failing to obtain care. 

• Hispanics were more likely to report problems and white, non-Hispanics were least likely to 

report problems. 

4.1

3.6

6.8 7.1

All White, non-Hispanic Black, non-Hispanic Hispanic

0

1

2

3

4

5

6

7

8

Percent of benef ci iaries
62 Access to care in the Medicare program

Chart 5-8. Beneficiaries differ in their reports of obtaining 

needed, urgent, or routine care, 2004

 No problem Always got care as 

 getting soon as wanted 

Beneficiary characteristic needed care Urgent Routine 

 

Overall 90% 73% 63% 

Aged (65 years and older) 92 76 64 

Disabled (Under 65) 83 63 56 

White 92 75 64 

African American 85 68 63 

Hispanic 81 61 55 

Medicare only 84 66 61 

Dually eligible 81 67 59 

Supplemental Insurance 93 76 64 

Source: Research Triangle Institute analysis of data from the Medicare Fee-for-Service National Implementation Subgroup 

Analysis 2004, submitted to CMS.

• The percentage of beneficiaries reporting no problem getting needed care is significantly 

higher than those who reported that they could get urgent or routine care as soon as they 

wanted it. This may seem inconsistent, but the last two questions add the dimension of 

timing into their responses. It appears that while most beneficiaries are able to get care, they 

may not get it as soon as they want it. 

• Disabled beneficiaries under 65 were more likely than aged beneficiaries to report problems 

receiving necessary, urgent, or routine care. 

• The presence and type of supplemental insurance also affected beneficiaries’ ability to 

obtain care with no problems. Sixty-seven percent of dually eligible beneficiaries reported 

they always got urgent care as soon as they wanted, compared with 73 percent of all 

beneficiaries. Seventy-six percent of beneficiaries with supplemental insurance reported the 

same experience. 

• Hispanics had a harder time than other ethnic or racial groups getting needed, urgent, and 

routine care. 
 A Data Book: Healthcare spending and the Medicare program, June 2006 63

Web links. Access to care in the Medicare program 

• Chapter 2B of the MedPAC March 2006 Report to the Congress provides more information 

on beneficiary access to physicians. 

http://www.medpac.gov/publications/congressional_reports/Mar06_Ch02b.pdf 

• Chapter 3 of the MedPAC March 2003 Report to the Congress provides a broad overview 

about beneficiary access to health care. 

http://www.medpac.gov/publications/congressional_reports/Mar03_Ch3.pdf 

• The Commonwealth Fund released a chart book in Spring 2005 which has further 

information on access in the Medicare program. 

http://www.cmwf.org 

• Additional information about physician acceptance of new Medicare patients can be found at 

http://www.hschange.org/CONTENT/811/ 

S E C T I O N 

Medicare beneficiary and 

other payer financial liability

A Data Book: Healthcare spending and the Medicare program, June 2006 67

Chart 6-1. Sources of supplemental coverage among 

 noninstitutionalized Medicare beneficiaries, 2003 

Medigap

29.1%

No supplemental

coverage

9.2%

Employer

sponsored

32.4%

Medicaid

13.5%

Other public

sector

1.9%

Medicare

managed care

13.9%

Note: Beneficiaries are assigned to the supplemental coverage category that applied for the most time in 2003. They could have 

had coverage in other categories throughout 2003. Other public sector includes federal and state programs not included in 

other categories. Analysis includes only beneficiaries living in the community. It excludes beneficiaries who were not in both 

Part A and Part B throughout their enrollment in 2003 or who had Medicare as a second payer. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• Most beneficiaries living in the community have coverage that supplements or replaces the 

Medicare benefit package. Ninety-one percent of beneficiaries have supplemental coverage 

or participate in Medicare managed care. 

• Sixty-one percent have private-sector supplemental coverage such as Medigap (29 percent) 

or employer-sponsored retiree coverage (32 percent). 

• Fifteen percent have public-sector supplemental coverage, primarily Medicaid. 

• Fourteen percent participate in Medicare managed care. This includes Medicare+Choice (now 

Medicare Advantage), cost, and health care prepayment plans. These types of arrangements 

generally replace Medicare coverage and often add to it. 
68 Medicare beneficiary and other payer financial liability

Chart 6-2. Sources of supplemental coverage among 

 noninstitutionalized Medicare beneficiaries, by 

 beneficiaries’ characteristics, 2003 

 Number of Employer- Medicare Other 

 beneficiaries sponsored Medigap managed public Medicare 

 (thousands) insurance insurance Medicaid care sector only 

All beneficiaries 36,154 32.4% 29.1% 13.5% 13.9% 1.9% 9.2% 

Age 

 < 65 4,686 15.2 6.1 46.2 7.6 2.9 22.0 

 65–69 8,202 39.0 27.7 9.5 12.7 1.9 9.3 

 70–74 7,702 37.1 30.1 8.1 15.6 1.6 7.6 

 75–79 6,926 31.9 34.6 8.5 17.2 2.1 5.8 

 80–84 4,893 33.2 37.1 8.0 13.9 1.7 6.1 

 85+ 3,745 29.3 38.5 9.2 15.1 1.4 6.5 

Income status 

 Below poverty 5,781 11.5 13.3 53.0 8.7 2.3 11.3 

 100–125% of poverty 3,451 15.6 26.8 28.1 14.2 3.2 12.2 

 125–200% of poverty 8,197 26.0 31.5 8.3 16.5 3.5 14.2 

 200–400% of poverty 10,338 41.8 32.4 1.0 15.5 1.2 8.1 

 Over 400% of poverty 8,355 48.5 34.7 0.5 12.8 0.6 2.9 

Eligibility status 

Aged 31,298 34.9 32.6 8.6 14.8 1.8 7.2 

 Disabled 4,541 15.0 6.3 45.7 7.8 3.0 22.3 

 ESRD 289 32.4 9.6 39.7 7.5 1.0 9.8 

Residence 

Urban 27,499 33.4 26.8 12.4 17.6 1.9 8.0 

 Rural 8,639 29.0 36.6 17.0 2.2 2.1 13.0 

Sex 

 Male 15,947 34.7 25.7 11.9 13.1 2.1 12.5 

 Female 20,207 30.5 31.8 14.8 14.6 1.8 6.6 

Health status 

 Excellent/very good 14,697 35.4 33.5 6.5 15.6 1.3 7.7 

 Good/fair 18,188 31.6 27.7 16.1 13.1 2.4 9.1 

 Poor 3,056 22.3 16.0 32.5 10.5 2.4 16.3 

Note: ESRD (end-stage renal disease). Beneficiaries are assigned to the supplemental coverage where they spent the most time 

in 2003. They could have had coverage in other categories throughout 2003. Medicare managed care includes 

Medicare+Choice, cost, and health care prepayment plans. Other public sector includes federal and state programs not 

included in other categories. In 2003, poverty was defined as $8,825 for people living alone and as $11,133 for married 

couples. Urban indicates beneficiaries living in metropolitan statistical areas (MSAs). Rural indicates beneficiaries living 

outside MSAs. Analysis includes only beneficiaries living in the community. It excludes beneficiaries who were not in both 

Part A and Part B throughout their enrollment in 2003 or had Medicare as a second payer. In previous editions of the Data 

Book, this analysis was based on beneficiaries only in Part A or Part B. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• Beneficiaries most likely to have employer-sponsored supplemental coverage are those who are age 65 to 84, 

higher income (above 200 percent of poverty), eligible due to age or end-stage renal disease (ESRD), urban 

dwelling, and male, and who report excellent or very good health. 

• Medigap is most common among those who are “older” aged (age 80 or older), middle or high income (above 

125 percent of poverty), eligible due to age, rural dwelling, female, and who report excellent or very good health. 

• Medicaid coverage is most common among those who are under 65, low income (below 125 percent of poverty), 

eligible due to disability or ESRD, rural dwelling, female, and who report poor health. 

• Medicare managed care is most common among those who are age 65 or older, have incomes between 125 

and 400 percent of poverty, are eligible due to age, are urban dwelling, and report excellent or very good health. 

• Lack of supplemental coverage (Medicare coverage only) is most common among beneficiaries who are under 

age 65, with income below 200 percent of poverty, eligible due to disability, rural dwelling, male, and who report 

poor health. 
A Data Book: Healthcare spending and the Medicare program, June 2006 69

Chart 6-3. Total spending on health care services for 

 noninstitutionalized FFS Medicare beneficiaries, 

 by source of payment, 2003 

Medicare

Private supplements

Per capita total spending = $10,680

Beneficiaries' 

direct spending

16%

11%

19%

55%

Public supplements

 

Note: FFS (fee-for-service). Private supplements include employer-sponsored plans and individually purchased coverage. Public 

supplements include Medicaid, Department of Veterans Affairs, and other public coverage. Direct spending is on Medicare 

cost sharing and noncovered services but not supplemental premiums. Analysis includes only FFS beneficiaries living in the 

community. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• Among fee-for-service (FFS) beneficiaries living in the community, the total cost of health care 

services (defined as beneficiaries’ direct spending as well as expenditures by Medicare, other 

public-sector sources, and all private-sector sources on all health care goods and services) 

averages $10,680. Medicare is the largest source of payment; it pays 55 percent of the health 

care costs for FFS beneficiaries living in the community, or an average of $5,822 per 

beneficiary. 

• Private sources of supplemental coverage—primarily employer-sponsored retiree coverage 

and Medigap—pay 19 percent of beneficiaries’ costs, or an average of $1,985 per beneficiary.

• Beneficiaries pay 16 percent of their health care costs out of pocket, with an average of 

$1,742 of spending per beneficiary.

• Public sources of supplemental coverage—primarily Medicaid—pay 11 percent of 

beneficiaries’ health care costs, or an average of $1,130 per beneficiary.
70 Medicare beneficiary and other payer financial liability

Chart 6-4. Per capita total spending on health care services 

 among noninstitutionalized FFS beneficiaries, by 

 source of payment, 2003 

< 10 10-25 25-50 50-75 75-90 > 90

Groups of beneficiaries ranked by total spending (percentile ranges)

0

10,000

20,000

30,000

40,000

50,000

60,000

Dol al rs

Medicare

Supplemental payers

Direct spending

Note: FFS (fee-for-service). Analysis includes fee-for-service beneficiaries living in the community. Direct spending is on Medicare 

cost sharing and noncovered services. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• Total spending on health care services varies dramatically among fee-for-service (FFS) 

beneficiaries living in the community. Per capita spending for the 10 percent of beneficiaries 

with the highest total spending averages $51,400. Per capita spending for the 10 percent of 

beneficiaries with the lowest total spending averages $271. 

• Among FFS beneficiaries living in the community, Medicare pays a larger percentage as total 

spending increases, and beneficiaries’ direct spending is a smaller percentage as total 

spending increases. For example, Medicare pays 55 percent of total spending for all 

beneficiaries, but 70 percent of total spending for the 10 percent of beneficiaries with the 

highest total spending. Beneficiaries’ direct spending covers 16 percent of total spending for 

all beneficiaries, but only 10 percent of total spending for the 10 percent of beneficiaries with 

the highest total spending. 
A Data Book: Healthcare spending and the Medicare program, June 2006 71

Chart 6-5. Variation in and composition of total spending 

 among noninstitutionalized FFS beneficiaries, 

 by type of supplemental coverage, 2003 

5,780 5,902 5,338

8,992

4,274

5,490

3,072

1,424 3,108

380

819

425

3,606

891

3,368

1,695

1,950

1,758

1,072

2,099

2,125

Employer 

sponsored

Medigap Medigap & 

employer

Medicaid No 

supplemental 

coverage

Other public 

sector

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Dol al rs

Direct spending Public supplemental Private supplemental Medicare

 9

47

66

Note: FFS (fee-for-service). Beneficiaries are assigned to the supplemental coverage category that applied for the most time in

2003. They could have had coverage in other categories throughout 2003. Other public sector includes federal and state 

programs not included in the other categories. Private supplements include employer-sponsored plans and individually 

purchased coverage. Public supplements include Medicaid, Department of Veterans Affairs, and other public coverage. 

 Analysis includes only FFS beneficiaries living in the community. It excludes beneficiaries who were not in both Part A and 

 Part B throughout their enrollment in 2003 or had Medicare as a second payer. Direct spending is on Medicare cost sharing 

and noncovered services but not supplemental premiums. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2003. 

• The level of total spending (defined as beneficiaries’ out-of-pocket spending as well as 

expenditures by Medicare, other public-sector sources, and all private-sector sources on all 

health care goods and services) among fee-for-service beneficiaries living in the community 

varies by the type of supplemental coverage they have. Total spending is much lower for 

those beneficiaries with no supplemental coverage than for those beneficiaries who have 

supplemental coverage. Beneficiaries with Medicaid coverage have the highest level of total 

spending, 87 percent higher than those with no supplemental coverage. 

• Medicare is the largest source of payment for beneficiaries in each supplemental insurance 

category, but the second largest source of payment differs. Among those with supplemental 

coverage, that coverage—public and private combined—is the second largest source of 

payment. However, among those with Medicare only, beneficiaries’ direct spending is the 

second largest source of payment. 
72 Medicare beneficiary and other payer financial liability

 Chart 6-6. Out-of-pocket spending for premiums and health 

services per beneficiary, by insurance and health 

status, 2003 

661

1,452

2,374 2,486

752

2,980

2,427

2,727 2,438

1,321

2,520

717

1,532

2,561 2,800

688

1,540

1,465

1,744 1,579

808

1,887

Medicare only ESI Medigap Medigap & 

employer

Medicaid Other

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

Dollars

Out-of-pocket spending by beneficiaries

Premiums paid by beneficiaries

80

 - +

 − Beneficiaries who report they are in fair or poor health

 + Beneficiaries who report they are in good, very good, or excellent health

Health - + - +

Status

 - + - + - +

107

Note: ESI (employer-sponsored supplemental insurance). 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use File, 2003. 

• Insurance that supplements Medicare does not shield beneficiaries from all out-of-pocket costs. 

Beneficiaries who report being in fair or poor health spend more out of pocket for health services 

than those reporting good, very good, or excellent health, regardless of the type of coverage they 

have to supplement Medicare. 

• What beneficiaries actually pay out of pocket varies by type of supplemental coverage. For those 

with Medigap, out-of-pocket spending generally reflects the premiums and costs of prescription 

drugs and other services not covered by Medicare. Beneficiaries with ESI usually pay less out of 

pocket for prescription drugs than those with Medigap, but may pay more in Medicare deductibles 

and cost sharing. 

• Reductions in coverage and benefits offered under ESI plans, changes to Medicare benefits, and 

increases in premiums for all supplemental insurance since 2003 are not reflected in these data. 
A Data Book: Healthcare spending and the Medicare program, June 2006 73

Web links. Medicare beneficiary and other payer 

financial liability 

• Chapter 1 of the MedPAC 2006 Report to the Congress provides more information on 

Medicare program spending. 

 http://www.medpac.gov/publications/congressional _reports/Mar06_Ch01.pdf 

• Chapter 1 of the MedPAC March 2005 Report to the Congress provides more information on 

Medicare program spending. 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch01.pdf 

• Appendix B of the MedPAC June 2004 Report to the Congress and Chapter 1 of the MedPAC 

June 2002 Report to the Congress provide more information on Medicare beneficiary and 

other payer financial liability. 

http://www.medpac.gov/publications/congressional_reports/June04_AppB.pdf 

http://www.medpac.gov/publications/congressional_reports/Jun2_Ch1.pdf 

• Chapter 1 of the MedPAC March 2004 Report to the Congress provides more information on 

beneficiary and Medicare program spending as well as information about supplemental 

insurance. 

http://www.medpac.gov/publications/congressional_reports/Mar04_Ch1.pdf 

• Chapter 1 of the MedPAC March 2003 Report to the Congress provides more information on 

beneficiary and program spending. 

http://www.medpac.gov/publications/congressional_reports/Mar03_Ch1.pdf 

S E C T I O N 

Acute inpatient services 

Short-term hospitals 

Specialty psychiatric facilities 

A Data Book: Healthcare spending and the Medicare program, June 2006 77

Chart 7-1. Growth in Medicare’s payments for hospital 

inpatient and outpatient services continues, 

 1994–2004 

85 89 93 94 93 95 96 105 114 120 127

14 15 16 17 16 18 18

21

21

23

26

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Calendar year

0

20

40

60

80

100

120

140

160

180

Bill oi ns of dol al rs

Outpatient

Inpatient

 Notes: Analysis includes inpatient services covered by the acute inpatient prospective payment system (PPS); psychiatric, 

rehabilitation, long-term care, cancer, and children’s hospitals and units; outpatient services covered by the outpatient 

PPS; and other outpatient services. Payments include both program outlays and cost sharing incurred by beneficiaries. 

Source: CMS, Office of the Actuary. 

• Medicare hospital inpatient spending increased 50 percent (4.1 percent per year) and outpatient 

spending 91 percent (6.7 percent per year) from 1994 to 2004. 

• A freeze in inpatient payment rates in the Balanced Budget Act of 1997 (BBA), combined with 

lower Medicare discharges, reduced inpatient spending in 1998. Higher Medicare discharges, a 

higher update, case-mix change, and expansion of disproportionate share hospital payments 

increased inpatient spending in 2001 and 2002. In 2003 and 2004, slower Medicare discharge 

growth, slower case-mix change, and lower outlier spending led to slight moderation in inpatient 

spending growth. 

• Outpatient spending fell in 1998, reflecting the BBA’s elimination of inadvertent overpayments. 

Transitional corridor and new technology payments in the outpatient prospective payment 

system, along with volume increase, increased outpatient spending in 2001 and 2002. Slower 

volume growth and changes in pass-through payments led to slower expenditure growth in 2003. 

Payment for certain outpatient drugs on an average wholesale price basis increased payments 

in 2004. 

• Aggregate Medicare inpatient spending was $127 billion and outpatient spending was $26 billion 

in 2004. 
78 Acute inpatient services

Chart 7-2. Diagnosis related groups with highest volume, 

 fiscal year 2004 

 

 Percentage Percentage 

DRG DRG of of 

number name discharges payments 

 127 Heart failure and shock 6% 4% 

 89 Simple pneumonia and pleurisy age >17 with CC 5 3 

 209 Major joint and limb reattachment procedures of lower extremity 4 5 

 88 Chronic obstructive pulmonary disease 3 2

 182 Esophagitis, gastroenteritis, and miscellaneous digestive 

 disorders age >17 with CC 2 1 

174 GI hemorrhage with CC 2 1 

 296 Nutritional and miscellaneous metabolic disorders age >17 with CC 2 1 

 143 Chest pain 2 1 

 416 Septicemia age >17 2 2 

 14 Intracranial hemorrhage or stroke with infarct 2 2 

Note: DRG (diagnosis related group), CC (complication or comorbidity), GI (gastrointestinal). 

Source: MedPAC analysis of MedPAR data from CMS. 

• In fiscal year 2004, 10 diagnosis related groups (DRGs) accounted for 30 percent of 

discharges and 21 percent of payments at hospitals paid under the acute inpatient 

prospective payment system. 

• In fiscal year 2006, Medicare inpatient cases are assigned to 524 DRGs based on discharge 

diagnoses, procedures performed, age, sex, discharge destination, and presence of 

complications or comorbidities. 
A Data Book: Healthcare spending and the Medicare program, June 2006 79

Chart 7-3. Number of acute care hospitals and Medicare 

 discharges, by hospital group, 2004 

 Hospitals Medicare discharges 

 Number 

Hospital group Number Share of total (thousands) Share of total 

 

All PPS and critical 

access hospitals 4,450 100.0% 12,741 100.0% 

PPS hospitals 3,575 80.3 11,501 90.3 

 Urban 2,482 55.8 9,694 76.1 

 Rural 1,093 24.6 1,807 14.2 

 Large urban 1,373 30.9 5,288 41.5 

 Other urban 1,109 24.9 4,405 34.6 

 Rural referral 137 3.1 486 3.8 

 Sole community 450 10.1 707 5.5 

 Small rural Medicare- 

 dependent 165 3.7 178 1.4 

 Other rural <50 beds 132 3.0 94 0.7 

 Other rural >50 beds 209 4.7 342 2.7 

 Voluntary 2,147 48.2 8,280 65.0 

 Proprietary 770 17.3 1,800 14.1 

 Government 652 14.7 1,418 11.1 

 Major teaching 297 6.7 1,734 13.6 

 Other teaching 783 17.6 3,980 31.2 

 Nonteaching 2,495 56.1 5,787 45.4 

 

Critical access hospitals 875 19.7% 1,241 9.7% 

Note: PPS (prospective payment system). Analysis includes all hospitals covered by Medicare’s inpatient prospective payment 

system along with critical access hospitals. Maryland hospitals are excluded. Large urban areas have populations of more 

than 1 million. Major teaching hospitals are defined by a ratio of interns and residents to beds of at least .25. Other 

teaching hospitals have a ratio of below .25. 

Source: MedPAC analysis of impact file and Medicare cost report data (August 2004) from CMS. 

• In 2004, 3,575 hospitals provided 11.5 million discharges under Medicare’s acute inpatient 

PPS and 875 critical access hospitals provided another 1.2 million discharges. 

• About 17 percent of acute care hospitals (21 percent of PPS hospitals) are covered by 

special payment provisions intended to help rural facilities that do not become critical access 

hospitals (rural referral, sole community, and small rural Medicare-dependent hospitals); 

these facilities provide 11 percent of all discharges. 

• See Chart 7-26 for more information about critical access hospitals. 
80 Acute inpatient services

Chart 7-4. Cumulative change in total admissions and total 

outpatient visits, 1994–2004 

8.1

14.5

17.0

23.5

29.0

35.8

39.8

44.5

46.8 48.5

0.0

14.3 13.0 12.0

9.9

7.3

4.6

2.3 2.7

0.6 0.8

0

10

20

30

40

50

60

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Percent

Total admissions

Total outpatient visits

Note: Cumulative change is the total percent increase from 1994 through the year indicated. Data are admissions to and 

outpatient visits at approximately 5,000 community hospitals, excluding nursing home units. 

Source: American Hospital Association Annual Survey of Hospitals. 

• Hospital outpatient service use has grown much more rapidly than inpatient service use. 

Total hospital outpatient visits increased 49 percent from 1994 to 2004, while total 

admissions grew just 14 percent. 

• There were 577 million outpatient visits and 35 million admissions to community hospitals 

in 2004. 
A Data Book: Healthcare spending and the Medicare program, June 2006 81

Chart 7-5. Trends in Medicare and total hospital length of stay, 

 1994–2004 

7.3

6.8

6.4 6.1

5.9 5.9 5.8 5.7 5.7 5.6 5.5

5.0

4.7 4.7 4.6 4.6 4.6 4.5 4.5 4.5 4.5 4.5

0

1

2

3

4

5

6

7

8

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Fiscal year

Days

Medicare

Total

Note: Length of stay is calculated from discharges and patient days for approximately 3,600 hospitals covered by the acute 

inpatient prospective payment system. Excludes critical access hospitals. 

Source: MedPAC analysis of Medicare cost report data from CMS. 

• Length of stay for all hospital discharges fell 11 percent from 5.0 days in 1994 to 4.5 days in 

2004, dropping at an average annual rate of 2.6 percent from 1994 to 1997 and 0.6 percent 

from 1997 to 2004. 

• Length of stay for Medicare inpatients fell 25 percent from 7.3 days in 1994 to 5.5 days in 

2004, dropping at an average annual rate of 5.8 percent from 1994 to 1997 and 1.5 percent 

from 1997 to 2004. 
82 Acute inpatient services

Chart 7-6. Hospital occupancy rates, 1994–2004 

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

10

20

30

40

50

60

70

Occupancy rate (percent)

59 58

56 57 58 59

61

63 64 64 64

44 44 43 43 43 44 45 46 46 46 47

57 56 55 55 56 57 58

60 61 62 62

Urban

Rural

All PPS hospitals

Note: PPS (prospective payment system). Hospital occupancy rate is measured as total inpatient days as a percent of total 

available bed days in the hospital over the cost reporting period. Theoretically, bed days available are staffed beds that 

are available for inpatient service (i.e., the units are open and operating), but the beds may not be staffed for a full patient 

load in that unit on any given day. Analysis excludes critical access hospitals. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• Hospitals’ occupancy rates have been rising since 1996, with the aggregate occupancy rate 

climbing from 55 percent in 1996 to 62 percent in 2004. 

• Occupancy rates in aggregate are much higher in urban than rural hospitals; in 2004, 

occupancy rates stood at 64 percent for urban hospitals and 47 percent for rural hospitals, a 

17 percentage point difference. The occupancy rate in major teaching hospitals was 75 

percent in 2004, the highest of all hospital groups. 

• Since 1997, occupancy rates have gone up more for urban hospitals than rural hospitals, 

climbing 8 percentage points for urban hospitals and 4 percentage points for rural hospitals. 

• Hospitals with lower occupancy rates (those in the bottom quartile) have lower Medicare and 

total (all payer) margins than hospitals in the top quartile of hospital occupancy rates. For 

example, in 2004, the aggregate overall Medicare margin for hospitals in the bottom quartile 

of occupancy was 7.0 percent lower than for hospitals in the top quartile. 
A Data Book: Healthcare spending and the Medicare program, June 2006 83

Chart 7-7. Cumulative change in Medicare inpatient days 

per beneficiary and discharges per beneficiary, 

1994–2003 

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Calendar year

-20

-15

-10

-5

0

5

10

15

20

P

ercent

0.0

1.5 3.0

5.4 6.0

9.0 8.4 9.3 9.0 8.4

0.0

-5.5

-9.7

-11.0

-12.9

-11.8

-13.6 -13.7 -14.2

-15.5

Number of discharges per beneficiary

Total days of care per beneficiary

Note: Cumulative change is the total percent increase from 1994 through the year indicated. Data are short-stay hospital 

Medicare patient days and discharges. Rate is per beneficiary enrolled in Part A. The statistics do not reflect managed 

care enrollment. 

Source: MedPAC analysis of claims file and enrollment data from CMS. 

• While discharges per beneficiary have increased, length of stay has fallen. Medicare 

hospital use rates increased from 1994 to 2003, with 8.4 percent more hospital discharges 

per enrollee at the end of the period. However, declining length of stay led to 15.5 percent 

fewer days of inpatient care for each enrollee in 2003 compared to 1994. 

• There were 363 Medicare hospital discharges and 2,126 patient days per 1,000 

beneficiaries enrolled in Part A in calendar year 2003. 
84 Acute inpatient services

Chart 7-8. Simulated Medicare inpatient payments, by 

component and hospital group, reflecting 2006 

payment policy 

 Percent of total payments 

 Total 

 Additional rural payments 

Hospital group Base IME DSH Outlier hospital* (millions) 

All hospitals 81.5% 4.9% 7.7% 4.0% 1.9% $107,856 

Urban 81.5 5.5 8.1 4.4 0.5 94,613 

Rural 81.0 0.5 4.8 1.5 12.3 13,243 

Large urban 79.9 6.7 8.7 4.7 0.1 53,955 

Other urban 83.7 3.9 7.4 4.0 1.0 40,658 

Rural referral 88.4 1.6 7.3 2.8 0.0 3,661 

Sole community 70.3 0.2 2.0 0.7 26.9 6,005 

Small rural Medicare- 

 dependent 93.2 0.1 4.6 0.9 1.3 997 

Other rural <50 beds 91.6 0.0 7.5 0.9 0.0 509 

Other rural ≥50 beds 90.6 0.1 7.6 1.7 0.0 2,071 

Voluntary 82.3 5.3 6.8 4.1 1.6 78,898 

Proprietary 83.5 1.5 9.8 3.5 1.6 15,289 

Government 74.2 6.3 10.9 4.5 4.1 13,642 

Major teaching 67.3 16.2 10.5 5.9 0.1 23.818 

Other teaching 83.9 3.6 7.6 3.9 1.0 38,278 

Nonteaching 86.8 0.0 6.4 3.2 3.7 45,760

Note: IME (indirect medical education), DSH (disproportionate share). Analysis includes all hospitals covered by Medicare’s 

acute inpatient prospective payment system (PPS). Includes both operating and capital payments but excludes graduate 

medical education (GME) payments. Simulated payments reflect 2006 payments rules applied to actual number of cases 

in 2004. Actual payments in 2006 will likely be higher than shown due to growth in number of cases. 

 *Payments received by sole community and Medicare-dependent hospitals beyond what would have been received 

under PPS. A few sole community hospitals are located in urban areas. 

Source: MedPAC analysis of claims and impact file data from CMS. 

• If the discharges that hospitals covered by the acute inpatient prospective payment system 

furnished in 2004 had been paid for under 2006 payment policies, then Medicare would 

have spent $108 billion. This figure is less than actual Medicare spending on hospital care in 

2006 because it does not reflect increases in admissions from 2004 to 2006 and because it 

excludes payments made to critical access, rehabilitation, psychiatric, and long-term care 

hospitals as well as hospitals in Maryland and the U.S. territories. 

• Special payments—which include disproportionate share (DSH), indirect medical education 

(IME) and outlier payments, as well as additional payments to rural hospitals through the 

sole community and Medicare-dependent programs—account for 19 percent of all inpatient 

payments. This proportion is slightly lower for urban than rural hospitals, although urban 

hospitals get most of their assistance from DSH, IME, and outlier payments while rural 

programs account for most of rural facilities’ extra funds. Major teaching hospitals have the 

largest share of payments coming from special payments, about 33 percent. 
A Data Book: Healthcare spending and the Medicare program, June 2006 85

Chart 7-9. Cumulative change in Medicare acute inpatient PPS 

payments and costs per case, and operating update, 

1994–2004 

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

-5

0

5

10

15

20

25

30

35

P

ercent

0.0

4.2

10.0

12.9

11.3 11.1 11.8

15.1

19.3

21.4

25.7

0.0

5.6 6.1

7.3

10.9 14.0

17.4

0.0

-1.4

-2.6 -3.2

-2.1

0.4

2.9

8.0

17.0

24.3

31.8

Medicare payments per discharge

Update

Medicare costs per discharge

3.5

5.6

21.3

2.0

Note: PPS (prospective payment system). Analysis includes all hospitals covered by Medicare’s acute inpatient PPS. 

Cumulative change is the total percent increase from 1994 to the year indicated. 

Source: MedPAC analysis of Medicare cost report data and market basket data from CMS. 

• From 1994 through 2002, cumulative growth in payments per case exceeded growth in 

costs per case. In recent years, however, hospitals’ costs have increased much faster than 

the hospital market basket, due in part to the lack of financial pressure from private payers 

(see Chart 7-24). 

• The cumulative update increased the inpatient operating payment rates 21.3 percent from 

1994 to 2004, 10.5 percentage points less than the growth in hospitals’ costs per discharge. 

However, hospitals’ payment increases have exceeded the updates, due mostly to 

increases in case mix. 
86 Acute inpatient services

Chart 7-10. Medicare acute inpatient PPS margin, 1994–2004 

3.6

9.0

14.7

17.8

15.7

13.4

11.8

10.1

6.1

2.0

-0.3

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

-5

0

5

10

15

20

25

30

M

argin (percent)

Note: PPS (prospective payment system). A margin is calculated as revenue minus costs, divided by revenue. Data are based 

on Medicare-allowable costs and exclude critical access hospitals. Medicare acute inpatient margin includes services 

covered by the acute care inpatient PPS. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• Medicare’s acute inpatient margin reflects payments and costs for services covered by 

Medicare’s inpatient hospital prospective payment system (PPS). The inpatient margin may 

be influenced by how hospitals allocate overhead costs across service lines. Only by 

combining data for all major services can we estimate Medicare costs without the influence 

of how overhead costs are allocated. 

• The Medicare inpatient margin increased steadily from 3.6 percent in 1994 to a record high 

of 17.8 percent in 1997. After implementation of the Balanced Budget Act of 1997, however, 

inpatient margins fell. In 2004, the margin was –0.3 percent, the lowest level since 1992. 

• Medicare inpatient margins vary widely. In 2004, one quarter of hospitals had Medicare 

inpatient margins that were 10.0 percent or higher, and another quarter had margins that 

were –14.5 percent or lower. Between 1997 and 2003, this difference between the top and 

bottom quarter widened from 19 percent to 25 percent. About 47 percent of hospitals 

treating 41 percent of Medicare cases had positive inpatient Medicare margins in 2004. 
A Data Book: Healthcare spending and the Medicare program, June 2006 87

Chart 7-11. Medicare acute inpatient PPS margins, by urban and 

rural location, 1994–2004 

9.5

15.3

18.6

16.6

14.3

12.8

10.9

6.8

2.4

-0.2

-0.3

4.4

9.7

11.4

8.3

6.0

4.1 3.8

0.6

-1.5 -1.4

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

-10

-5

0

5

10

15

20

25

30

M

argin (percent)

Urban

Rural

4.0

 Note: PPS (prospective payment system). A margin is calculated as revenue minus costs, divided by revenue. Data are based 

on Medicare-allowable costs and exclude critical access hospitals. Medicare acute inpatient margin includes services 

covered by the acute care inpatient PPS. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• Medicare inpatient margins have consistently been higher for urban hospitals than for rural 

hospitals. A large part of this difference in financial performance can be explained by 

disproportionate share and indirect medical education adjustments that go primarily to urban 

hospitals. 

• The gap between urban and rural hospitals’ inpatient margins grew between 1994 and 2000. 

One factor in this divergence is that urban hospitals had greater success in controlling cost 

growth, at least partly in response to pressures from managed care. From 2001 through 

2004, this difference narrowed substantially, as payment policies targeted at raising rural 

hospital payments were implemented. 
88 Acute inpatient services

Chart 7-12. Medicare acute inpatient PPS margins, by teaching 

status, 1994–2004 

13.4

18.8

24.2

27.1

25.4

23.4 22.9

21.6

19.0

14.2

12.5

2.6

7.6

13.4

16.5

14.8

12.6

11.1

9.0

5.0

1.0

-1.5

-1.3

4.3

10.2

13.4

10.9

8.1

6.0

4.3

-4.2 -3.9

-6.5

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

-10

-5

0

5

10

15

20

25

30

Margin (percent)

Major teaching

Other teaching

Nonteaching

Note: PPS (prospective payment system). Major teaching hospitals are defined by a ratio of interns and residents to beds of 

0.25 or greater, while other teaching hospitals have a ratio of less than 0.25. A margin is calculated as revenue minus 

costs, divided by revenue. Data are based on Medicare-allowable costs and exclude critical access hospitals. Medicare 

acute inpatient margin includes services covered by the acute inpatient PPS. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• Major teaching hospitals have consistently had higher inpatient prospective payment system 

(PPS) margins than other teaching hospitals and nonteaching hospitals. Major and other 

teaching hospitals’ better financial performance is due largely to the additional payments 

they receive from the indirect medical education and disproportionate share adjustments. 

• Margins rose substantially for all groups through 1997, peaking at 27.1 percent for major 

teaching hospitals and 13.4 percent for nonteaching hospitals. Since then, inpatient margins 

have fallen less for major teaching hospitals than for nonteaching hospitals, dropping 14.6 

and 19.9 percentage points, respectively, primarily reflecting lower growth in per case costs 

for major teaching hospitals. 
A Data Book: Healthcare spending and the Medicare program, June 2006 89

Chart 7-13. Overall Medicare margin, 1997–2004 

11.5

8.2

6.1

5.2 5.0

2.3

-1.4

-3.0

1997 1998 1999 2000 2001 2002 2003 2004

-5

0

5

10

15

20

Marg ni (percent)

Note: A margin is calculated as revenue minus costs, divided by revenue. Data are based on Medicare-allowable costs and 

exclude critical access hospitals. Overall Medicare margins cover the costs and payments of acute inpatient, outpatient, 

inpatient psychiatric and rehabilitation unit, skilled nursing facility, and home health services, as well as graduate medical 

education and bad debts. Data on overall Medicare margins before 1997 are unavailable. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• The overall Medicare margin incorporates payments and costs for acute inpatient, 

outpatient, skilled nursing, home health, and inpatient psychiatric and rehabilitative services, 

as well as graduate medical education and bad debts. The overall margin is available only 

since 1997, but it follows a trend similar to that of the inpatient margin. 

• The overall Medicare margin peaked in 1997 at 11.5 percent. In fiscal year 2004, it was 

–3.0 percent. 

• In 2004, one quarter of hospitals had overall Medicare margins of 5.5 percent or higher, and 

another quarter had overall margins of –14.5 percent or lower. Between 1997 and 2004, the 

difference in performance between the top and bottom quartile widened from 14 percent to 

20 percent. About 39 percent of hospitals had positive overall Medicare margins in 2004, 

accounting for 34 percent of Medicare inpatient discharges. 

• We estimate that the overall Medicare margin in 2006—reflecting 2007 payment policies 

other than updates—will be –2.2 percent. 
90 Acute inpatient services

Chart 7-14. Overall Medicare margins, by urban and rural 

location, 1997–2004 

12.4

9.2

7.1

6.3 6.0

2.9

-0.9 -2.7

6.0

1.6

-1.5

-2.6

-0.5

-2.9

-5.4

-4.6

1997 1998 1999 2000 2001 2002 2003 2004

-10

-5

0

5

10

15

20

M

arg ni (percent)

Urban

Rural

 

Note: A margin is calculated as revenue minus costs, divided by revenue. Data are based on Medicare-allowable costs and 

exclude critical access hospitals. Overall Medicare margins cover the costs and payments of acute hospital inpatient, 

outpatient, inpatient psychiatric and rehabilitation unit, skilled nursing facility, and home health services, as well as 

graduate medical education and bad debts. Data on overall Medicare margins before 1997 are unavailable. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• As with inpatient margins, overall Medicare margins have been consistently higher for urban 

hospitals than for rural hospitals. 

• The difference in margins between the two groups grew between 1997 and 2000 but has 

since narrowed. In 1997, the overall margin for urban hospitals was 12.4 percent, compared 

with 6.0 percent for rural hospitals. In 2004, the overall margin for urban hospitals was –2.7 

percent, compared with –4.6 percent for rural hospitals. Policy changes made in the 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 targeted to rural 

hospitals helped to narrow the difference in overall Medicare margins between urban and 

rural hospitals. 

• A large part of the difference in financial performance between urban and rural hospitals is 

attributable to urban hospitals receiving more disproportionate share and indirect medical 

education payments. 
A Data Book: Healthcare spending and the Medicare program, June 2006 91

Chart 7-15. Overall Medicare margins, by teaching status, 

1997–2004 

19.1

16.3

14.4 14.3 13.7

11.5

7.1

6.1

11.0

8.1

5.9

5.0 4.7

1.7

-1.9

-3.5

8.2

4.2

1.4

0.4 0.9

-2.5

-5.8

-7.5

1997 1998 1999 2000 2001 2002 2003 2004

-10

-5

0

5

10

15

20

M

argin (percent)

Major teaching

Other teaching

Nonteaching

Note: Major teaching hospitals are defined by a ratio of interns and residents to beds of 0.25 or greater, while other teaching

hospitals have a ratio of less than 0.25. A margin is calculated as revenue minus costs, divided by revenue. Data are 

based on Medicare-allowable costs and exclude critical access hospitals. Overall Medicare margins cover the costs and 

payment of acute hospital inpatient, outpatient, inpatient psychiatric and rehabilitation unit, skilled nursing facility, and 

home health services, as well as graduate medical education and bad debts. Data on overall Medicare margins before 

1997 are unavailable. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• Major teaching hospitals consistently have had higher overall Medicare margins than other 

teaching hospitals and nonteaching hospitals primarily because of the additional payments 

they receive through the indirect medical education and disproportionate share adjustments 

under the acute inpatient payment system. 

• In 2004, overall Medicare margins for major teaching hospitals were 6.1 percent, compared 

with –3.5 percent for other teaching and –7.5 percent for nonteaching hospitals. 

• The difference in overall Medicare margins between major teaching hospitals and 

nonteaching hospitals grew from about 11 percentage points in 1997 to 14 percentage 

points in 2000, reflecting in part the lower cost growth of major teaching hospitals. 
92 Acute inpatient services

Chart 7-16. Hospital total margin, 1994–2004 

4.6

5.8 5.9

6.4

4.7

3.6 3.8 3.6 3.6

4.4 4.3

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

5

10

15

M

argin (percent)

 

Note: A margin is calculated as revenue minus costs, divided by revenue. Total margin includes all patient care services funded

by all payers, plus nonpatient revenue. Analysis excludes critical access hospitals. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• The total hospital margin for all payers⎯Medicare, Medicaid, other government and private 

payers⎯reflects the relationship of all hospital revenues to all hospital costs, including 

inpatient, outpatient, post-acute, and nonpatient services. 

• The total hospital margin gradually climbed from 4.6 percent in 1994 to 6.4 percent in 1997, 

before declining to between 3.6 percent and 3.8 percent in the 1999 to 2002 period. In 2003, 

the total hospital margin climbed to 4.4 percent, its highest level in five years. 

• The fall in total margins from 1997 to 1999 reflected a drop in both Medicare and private 

payer margins. Medicare overall margins from 1997 through 2001 were higher than the total 

margin. 

• In 2004, 72 percent of hospitals had positive total margins. These hospitals accounted for 66 

percent of all hospital discharges and 68 percent of Medicare discharges. 

• The total margin varies much less than the Medicare inpatient or overall Medicare margin. In 

2004, one quarter of PPS hospitals had total margins that were 7.3 percent or higher, while 

another quarter had margins that were –0.7 percent or lower, a spread of just 8 percentage 

points, compared to a 20 percentage point spread for overall Medicare margins and a 25 

percentage point spread for Medicare inpatient margins. 
A Data Book: Healthcare spending and the Medicare program, June 2006 93

Chart 7-17. Total hospital margin, by urban and rural location, 

1994–2004 

5.5

6.8

7.2

7.9

5.6

5.2 5.0

4.5

3.9

4.3

5.0

4.5

5.7 5.8

6.2

4.6

3.5 3.7 3.5 3.6

4.4 4.2

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

5

10

15

M

argin (percent)

Rural

Urban

Note: A margin is calculated as revenue minus costs, divided by revenue. Total margin includes all patient care services funded 

by all payers, plus nonpatient revenue. Analysis excludes critical access hospitals. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• Until 2002, total margins for rural hospitals were consistently about 1 percentage point 

higher than total margins for urban hospitals. 

• In 2004, total margins for rural hospitals were 5.0 percent, and for urban hospitals they were 

4.2 percent. 
94 Acute inpatient services

Chart 7-18. Total hospital margin, by teaching status, 1994–2004 

5.4

6.8 7.0 6.8

5.1

4.5 4.5

4.9 4.7

5.1

4.7

4.8

6.1

6.7

7.1

5.3

4.1 4.2 4.0 4.0

4.8 4.8

3.4

4.0

3.4

5.3

3.4

1.7

2.4

1.4 1.5

2.9 3.2

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

5

10

15

Margin (percent)

Nonteaching

Other teaching

Major teaching

Note: Major teaching hospitals are defined by a ratio of interns and residents to beds of 0.25 or greater, while other teaching

hospitals have a ratio of less than 0.25. A margin is calculated as revenue minus costs, divided by revenue. Total margin 

includes all patient care services funded by all payers, plus nonpatient revenue. Analysis excludes critical access 

hospitals. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• The pattern of total margins by teaching status is the opposite of the pattern for the 

Medicare inpatient and overall Medicare margins. The total margins of major teaching 

hospitals have consistently been lower than those for other teaching and nonteaching 

hospitals. In 2004, the total margin for nonteaching hospitals stood at 4.7 percent compared 

with 3.2 percent for major teaching hospitals. 

• The difference in margins between major teaching and nonteaching hospitals narrowed to 

only 1.5 percentage points in 2004, the smallest difference in over a decade. 
A Data Book: Healthcare spending and the Medicare program, June 2006 95

Chart 7-19. Hospitals with consistently negative overall 

Medicare margins tend to have above-average costs 

Negative Medicare Positive Medicare All 

Hospital characteristic margin hospitals margin hospitals hospitals 

Hospitals in group 986 828 2,923 

(Share of total) 34% 28% 100% 

Occupancy rate 52 58 55 

Annual change in length of stay 

(1994–2004) 

 Medicare –2.4 –2.9 –2.6 

 All payers –1.2 –1.5 –1.3 

Standardized Medicare costs per 

discharge* $5,428 $4,578 $5,053 

Annual change in Medicare costs per 

discharge (2001–2004)* 6.6% 5.6% 6.4% 

Note: Values shown are medians for all hospitals with positive or negative margins for four consecutive years, 2001–2004. Data 

are for 2004 unless otherwise noted. 

*Standardized for differences in case mix and severity of illness (using all patient refined diagnosis related groups), outlier

cases, wage index, teaching intensity, and disproportionate share of low-income patients. 

Source: MedPAC analysis of impact file, MedPAR, and Medicare Cost Report files from CMS. 

• Between 2001 and 2004, about 34 percent of hospitals had consistently negative overall 

Medicare margins while 28 percent had consistently positive overall Medicare margins. 

• About 3 percent of hospitals had consistently negative Medicare and consistently negative 

total (all payer) margins. 

• Hospitals with consistently negative margins tended to have lower occupancy rates (52 

percent) and smaller declines in length of stay (–2.4 percent). The lower occupancy rates 

should translate into higher unit costs because fixed costs are spread over fewer units of 

output. 

• Medicare standardized costs per discharge were substantially above average for the 

negative margin hospital group ($5,428) and substantially below average for the positive 

margin group ($4,578). 

• Medicare costs per discharge increased more slowly in positive margin hospitals than in 

negative margin hospitals over the four years analyzed, contributing to a widening 

gap in performance. 
96 Acute inpatient services

Chart 7-20. Hospitals with consistently negative overall 

 Medicare margins have a poor competitive position 

 in their market areas 

 Occupancy Cost per 

Variable rate 2004 discharge 2004* 

 

Hospitals with consistently negative 

 Medicare and total margins 44% $5,276 

Competitors within 15 miles 60 5,099 

 

Hospitals with consistently negative 

 Medicare margins only 52 5,428 

Competitors within 15 miles 59 5,220 

 

Hospitals with consistently positive 

 Medicare margins 58 4,578 

Competitors with 15 miles 60 4,908

Note: Hospitals with mixed performance are excluded from this table. Values shown are medians for all hospitals with 

consistently positive or negative margins for four consecutive years, 2001–2004. 

*Costs per discharge are Medicare costs, standardized for differences in case mix and severity of illness (using all patient 

refined diagnosis related groups), outlier cases, wage index, teaching intensity, and disproportionate share of low-income 

patients. 

Source: MedPAC analysis of impact file, MedPAR, and Medicare cost report data from CMS. 

• Hospitals with consistently negative overall Medicare margins from 2001 through 2004 had 

poorer competitive positions in their market, with lower occupancy rates and higher costs 

per discharge than competitors within 15 miles. 

• Hospitals with both negative overall Medicare margins and negative total margins had even 

lower occupancy rates (44 percent) than those with negative Medicare margins alone (52 

percent). These hospitals only account for about 3 percent of providers. 

• Hospitals with consistently positive margins had close to the same occupancy rate but lower 

costs than their neighboring facilities. 
A Data Book: Healthcare spending and the Medicare program, June 2006 97

Chart 7-21. Relationship of acute inpatient PPS and overall 

 Medicare margins, 2004 

Note: PPS (prospective payment system). A margin is calculated as revenue minus costs, divided by revenue. Data are based 

on Medicare-allowable costs. Analysis excludes critical access hospitals. The Medicare acute inpatient PPS margin 

includes services covered by the acute care inpatient PPS. Overall Medicare margins cover the costs and payments of 

acute inpatient, outpatient, inpatient psychiatric and rehabilitation units, skilled nursing facilities, and home health 

services, as well as graduate medical education and bad debts. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• The Medicare inpatient and overall margins are strongly correlated (R2

=0.776). The 

Medicare overall and inpatient PPS margins are closely related in part because inpatient 

payments make up about three-quarters of total Medicare payments. 

• The Medicare overall margin tends to be lower than the inpatient margin, which may be 

overstated due to cost allocation bias. 

-60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60

Medicare acute inpatient PPS margin (percent)

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

M

e

dic

are

o

v

erall m

arg ni (p

erc

ent)

Hospital
98 Acute inpatient services

Chart 7-22. Relationship of overall Medicare and total 

 margins, 2004 

Note: A margin is calculated as revenue minus costs, divided by revenue. Data are based on Medicare-allowable costs and 

imputed for hospitals for which 2000 cost reports were not available. Analysis excludes critical access hospitals. Overall 

Medicare margins cover the costs and payments of acute inpatient, outpatient, inpatient psychiatric and rehabilitation 

units, skilled nursing facility, and home health services, as well as graduate medical education and bad debts. Total 

margin includes all patient care services funded by all payers, plus nonpatient revenues. 

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• There is little relationship between hospitals’ overall Medicare margins and total (all payer) 

margins (R2

=0.006). That is, hospitals’ performance in Medicare is not a good predictor of 

their performance across all payers and vice versa. 

• Hospitals with negative Medicare margins and those with positive Medicare margins were 

almost equally likely to have positive total margins: 73 percent of hospitals with negative 

overall Medicare margins had positive total margins, while 71 percent of hospitals with 

positive Medicare margins had positive total margins. 

• Hospitals in the upper right quadrant of the graph (28 percent) had positive overall Medicare 

margins and positive total margins in 2004, whereas hospitals in the lower left quadrant (17 

percent) had negative overall Medicare margins and negative total margins. 

-60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60

Total hospital margin (percent)

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

O

v

erall M

edicare

m

argin (percent)

Hospital
A Data Book: Healthcare spending and the Medicare program, June 2006 99

Chart 7-23. Consistently high-cost hospitals have Medicare 

 margins that are far below average 

 Percent of 2002 to 2004 2004 overall 

 hospitals annual cost growth Medicare margin 

Hospitals with consistently high costs 14% 6.6% –16.6% 

All hospitals 100 6.1 –3.0 

Hospitals with consistently low costs 15 5.7 12.3 

Note: Analysis includes all hospitals covered by Medicare’s acute inpatient prospective payment system (PPS). Hospitals with 

consistently high or low costs are defined as in the highest or lowest quarter of all hospitals (ranked by standardized 

Medicare costs per discharge) in both 2002 and 2004. Costs were standardized for differences in case mix and patient 

severity (using all patient refined diagnosis related groups), outlier cases, wage index, teaching intensity, and 

disproportionate share of low-income patients. 

Source: MedPAC analysis of impact file, MedPAR, and Medicare Cost Report data from CMS. 

• About 14 percent of the hospitals covered by the acute inpatient prospective payment 

system (PPS) had consistently high costs, defined as being in the top quarter of all hospitals 

on a measure of standardized costs per case in both 2002 and 2004. About 15 percent of 

hospitals had consistently low costs, defined as being in the bottom quarter of all hospitals 

on the same measure in 2002 and 2004. 

• Hospitals with consistently high costs have a substantial impact on the industry’s financial 

performance under Medicare. These hospitals had an aggregate overall Medicare margin of 

–16.6 percent of 2004, substantially below the industry-wide figure of –3.0 percent. 

Consistently low-cost hospitals, in contrast, had a 12.3 percent margin. 
100 Acute inpatient services

Chart 7-24. Change in Medicare hospital inpatient costs per 

discharge and private payer payment-to-cost ratio, 

1986−2004 

1987 1989 1991 1993 1995 1997 1999 2001 2003

-2

0

2

4

6

8

10

12

Chang

e in cost per discharg

e (in percent)

1.1

1.15

1.2

1.25

1.3

1.35

P

a

y

m

ent- ot -cost rat oi

9.6 9.2 9.1 9.4

8.6

6.9

5.3

3.0

0.8

-1.4 -1.2

0.6

1.1

2.6 2.4

5.0

8.3

6.3

6.0

1.16

1.2

1.22

1.22

1.27

1.3

1.31

1.29

1.24

1.24

1.22

1.18

1.12

1.13

1.16 1.18

1.24

Change in Medicare acute inpatient costs per discharge

Private payer payment-to-cost ratio

1.35

1.30

1.25

1.20

1.15

1.13

1.14

1.10

Note: Data are for community hospitals and cover all hospital services. Imputed values were used for missing data (about one 

third of observations). Most Medicare and Medicaid managed care patients are included in this private insurer category. 

Source: MedPAC analysis of Medicare Cost Report file from CMS and CMS’s rules for the acute inpatient prospective payment 

system, and American Hospital Association Annual Survey of Hospitals. 

• The pattern of growth in Medicare costs per discharge makes it clear that hospitals have 

responded strongly to the incentives posed by the rise and fall of financial pressure from 

private payers over three periods. 

• During the first period, 1986 through 1992, private payers’ payments rose much faster than 

the cost of treating their patients (seen in the chart as a steep increase in the payment-tocost ratio). This suggests an almost complete lack of pressure from private payers. Medicare 

costs per discharge rose 8.3 percent per year through these years, more than 3 percentage 

points a year above the increase in Medicare’s market basket index. 

• As HMOs and other private insurers exerted more pressure during the second period, 1993 

through 1999, the private payer payment-to-cost ratio dropped substantially. The rate of cost 

growth plummeted to only 0.8 percent, which was more than 2 percentage points a year 

below the increase in the market basket. 

• As pressure from private payers waned after 1999, the private payer payment-to-cost ratio 

has again risen sharply, and hospital cost growth has once again exceeded growth in the 

market basket by 2 percentage points a year. 
A Data Book: Healthcare spending and the Medicare program, June 2006 101

Chart 7-25. Markup of charges over costs for all patient care 

services, 1994–2004 

73.8

79.2

85.3 90.2

97.0

103.3

112.6

123.6

136.9

154.5

163.8

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

25

50

75

100

125

150

175

P

ercent

Note: Analysis includes all community hospitals. 

Source: American Hospital Association Annual Survey of Hospitals. 

• From 1994 through 2004, hospitals’ patient care costs (covering all services and all payers) 

increased 5.8 percent per year but their charges went up by 10.3 percent per year, nearly 

twice as much. Consequently, the markup of charges over costs rose from 74 percent in 

1994 to 164 percent in 2004. Charges are now more than two and a half times costs. In 

2002 and 2003, the growth in markup—about 15 percentage points per year—was the 

largest since Medicare’s acute inpatient PPS was implemented. The markup grew by 9 

percentage points in 2004. 

• Since few patients pay full charges, hospitals’ increasing their charges more than their costs 

may not have had much impact on their financial performance. Some are concerned, 

however, that uninsured individuals may be asked to pay full charges and may have 

collection proceedings applied against them. Faster growth rates for charges in recent 

years may have resulted from hospitals’ attempting to maximize revenue from private payers 

(who often structure their payments as a discount off charges) or their revenue from 

Medicare outlier payments. In 2003, Medicare revised its outlier policy in an attempt to curb 

hospitals’ opportunity to increase their outlier payments through excessive increases in their 

charges. 
102 Acute inpatient services

Chart 7-26. Number of critical access hospitals, 1999–2006 

41

139

341

563

722

875

1,055

1,280

1999 2000 2001 2002 2003 2004 2005 2006

0

200

400

600

800

1,000

1,200

1,400

Number of C

A

Hs

Note: Numbers of critical access hospitals are as of January 1 of each year. 

Source: The Rural Hospital Flexibility Tracking Project. Third-Year Findings, February 2003, and additional data from CMS. 

• The increase in critical access hospitals (CAHs) is in part due to a series of legislative 

changes that made conversion to CAH status easier and expanded the services that qualify 

for cost-based reimbursement. Currently, CAHs receive cost-based Medicare 

reimbursement for inpatient services, outpatient services (including laboratory and therapy 

services), and post-acute services in swing beds. 

• The number of CAHs has grown steadily over the last seven years, from 41 in 1999 to 1,280 

at the beginning of 2006. 

• Prior to 2006, hospitals could convert to CAH status if they were either (a) 35 miles by 

primary road from the nearest hospital or 15 miles by secondary road from the nearest 

hospital or (b) their state waived the distance requirement by declaring the hospital a 

“necessary provider.” Starting in 2006, states can no longer waive the distance requirement. 

While most existing CAHs fail the distance test, they are grandfathered into the program. 

Among small rural PPS hospitals that have not converted, most would not meet the distance 

requirement. Therefore, we expect the number of CAHs to remain fairly constant at between 

1,275 and 1,300 into 2007. 
A Data Book: Healthcare spending and the Medicare program, June 2006 103

Chart 7-27. Medicare payments to inpatient psychiatric 

 facilities, 1996–2005 

3.0 3.0 2.9 2.9 2.8 2.9

3.5

3.7

3.9

4.1

1996 1997 1998 1999 2000 2001 2002 2003* 2004* 2005*

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

D

ollars ( ni billions)

Note: *Estimated spending. 

Source: CMS, Office of the Actuary. 

• Medicare program spending for beneficiaries’ care in inpatient psychiatric facilities was 

relatively stable from 1996 to 2001. Between 2002 and 2005, however, CMS estimates that 

program spending will increase 9 percent per year, rising to 4.1 billion dollars. 

• Spending on inpatient psychiatric facilities makes up about 1 percent of Medicare’s total 

spending. 

• The inpatient psychiatric facility payment system started January 1, 2005. 
104 Acute inpatient services

Chart 7-28. Inpatient psychiatric facilities, 1996–2005 

 1996 1998 2000 2002 2004 2005 

Freestanding hospitals 642 627 582 503 478 470 

Hospital-based units 1,445 1,489 1,487 1,437 1,389 1,328 

Total 2,087 2,116 2,069 1,940 1,867 1,798 

Source: Online Survey, Certification, and Reporting system from CMS.

• Inpatient psychiatric facilities⎯both freestanding and hospital-based facilities⎯provide 

acute hospital care to beneficiaries with mental illnesses or alcohol- and drug-related 

problems. 

• From 1996 to 2005, the number of Medicare-certified freestanding inpatient psychiatric 

facilities decreased by 27 percent while the number of hospital-based units decreased by 8 

percent, with a total loss of 14 percent of psychiatric facilities. In 2005, there are 1,798 

inpatient psychiatric facilities—470 freestanding and 1,328 hospital-based units. 
A Data Book: Healthcare spending and the Medicare program, June 2006 105

Web links. Acute inpatient services 

Short-term hospitals 

• Chapter 2A of the MedPAC March 2006 Report to the Congress provides additional detailed 

information on hospital margins. 

http://www.medpac.gov/publications/congressional_reports/Mar06_Ch02a.pdf 

• Chapter 2A of the MedPAC March 2002 Report to the Congress provides information on the 

hospital market basket. 

http://www.medpac.gov/publications/congressional_reports/Mar02_Ch2A.pdf 

• MedPAC provides basic information about the acute inpatient prospective payment system. 

http://www.medpac.gov/publications/other_reports/Dec05_payment_basics_hospital.pdf 

• Additional information on the outlier payment issue can be found in the Medicare 2002 

Hospital Outlier Payment Policy. 

http://www.medpac.gov/publications/other_reports/outlier%20memo.pdf 

• CMS provides information on the hospital market basket. 

http://www.cms.hhs.gov/MedicareProgramRatesStats/04_MarketBasket.asp 

• CMS published the proposed acute inpatient PPS rule in the April 25, 2006 Federal Register. 

http://www.gpoaccess.gov/ 

Specialty psychiatric facilities 

• CMS provides information on the inpatient psychiatric facility (IPF) prospective payment 

system. 

http://cms.hhs.gov/inpatientpsychfacilPPS/ 

• CMS also provides information on the final rule for these facilities rate year 2007 starting 

July 1, 2006.

www.cms.hhs.gov/inpatientpsychiatricfacilPPS/downloads/CMS-1306-F5-01-06.pdf 

 

S E C T I O N 

Ambulatory care

Physicians 

Hospital outpatient services 

Ambulatory surgical centers 

Imaging services 

A Data Book: Healthcare spending and the Medicare program, June 2006 109

Chart 8-1. FFS Medicare spending and payment updates 

 for physician services, 1996–2010 

31.6 31.9 32.4 33.4

37.0

42.0 44.8

48.3

54.1

57.8

62.4 62.2 63.0 63.4 62.2

1.00 1.01 1.03 1.05

1.11

1.16

1.11 1.12 1.14 1.15 1.16

1.11

1.06

1.01

0.96

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0

10

20

30

40

50

60

70

Medicare spending (dollars in billions)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Cumulative upda

et s (ratio)

Medicare spending

Cumulative updates

Historical Projected

Note: FFS (fee-for-service). Dollars are Medicare spending only and do not include beneficiary coinsurance. 

Source: 2006 annual report of the Boards of Trustees of the Medicare trust funds. 

• Between 1996 and 1999, Medicare spending on physician services was relatively flat. 

More rapid growth occurred between 1999 and 2005—averaging almost 10 percent 

annually. 

• The sustainable growth rate system (SGR) requires that future payment increases for 

physician services be adjusted for past actual physician spending relative to a target 

spending level. To avoid reductions in 2004 and 2005 physician fee schedule rates due to 

the SGR, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 

established minimum payment updates for physician services of 1.5 percent for 2004 and 

2005. For 2006, the Deficit Reduction Act froze the physician fee schedule conversion 

factor. This freeze, combined with refinements to the relative value units, results in an 

update of 0.2 percent for 2006. Under current law, payments for physician services are 

slated to decline about 5 percent for nine consecutive years, beginning in 2007. 
110 Ambulatory care

Chart 8-2. Medicare spending per FFS beneficiary 

 on physician services, 1995–2015 

975 1,016

1,108

1,344

1,454

1,761

1,853 1,897

1,828

1,747

1,671

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

0

500

1,000

1,500

2,000

2,500

Spend ni g per beneficiary (dollars)

Historical Projected

Note: FFS (fee-for-service). Dollars are Medicare spending only and do not include beneficiary coinsurance. 

Source: 2006 annual report of the Boards of Trustees of the Medicare trust funds. 

• Fee-for-service (FFS) physician spending per beneficiary has increased annually since 

1995. 

• Under current law, FFS Medicare payments for physician services per beneficiary are 

projected to decline beginning in 2007 because of scheduled negative payment updates. 

The volume of physician services per beneficiary, however, is expected to continue to grow. 
A Data Book: Healthcare spending and the Medicare program, June 2006 111

Chart 8-3. Number of physicians billing Medicare is 

 increasing steadily, 1999–2004 

 Number of Medicare patients in caseload 

 ≥15 ≥50 ≥100 ≥200 

 

Number of physicians 

1999 432,355 386,720 338,344 261,218 

2000 444,187 398,905 351,012 274,059 

2001 457,292 411,424 364,023 286,862 

 2002 466,299 419,269 370,144 291,593 

2003 470,213 424,684 374,721 292,183 

 2004 483,945 440,462 393,730 315,398 

 Percent growth, 1999–2004 11.9% 13.9% 16.4% 20.7% 

 

Physicians per 1,000 beneficiaries 

1999 11.7 10.4 9.1 7.1 

2000 11.9 10.7 9.4 7.3 

2001 12.1 10.9 9.7 7.6 

2002 12.3 11.0 9.8 7.7 

2003 12.3 11.1 9.8 7.6 

 2004 12.5 11.3 10.1 8.1 

Note: Calculations include physicians (allopathic and osteopathic). Nurse practitioners, physician assistants, psychologists, and 

 other health care professionals are not included in these calculations. To calculate the ratios, Part B enrollment is used, 

which includes beneficiaries in fee-for-service Medicare and Medicare Advantage, on the assumption that physicians are 

providing services to both types of beneficiaries. To calculate physicians’ Medicare caseload size, only fee-for-service 

beneficiaries are included. 

Source: MedPAC analysis of Health Care Information System, 1999–2004, from CMS. 

• The number of physicians providing services to beneficiaries has more than kept pace with 

growth in the beneficiary population. From 1999 to 2004, the number of physicians who 

billed Medicare grew faster than Medicare Part B enrollment. During this time Part B 

enrollment grew 4.8 percent, while the number of physicians with at least 15 Medicare 

patients grew by 11.9 percent. The number of physicians with 200 or more Medicare 

patients grew even faster at 20.7 percent. This difference in growth rates led to an increase 

in the number of physicians per 1,000 beneficiaries, from 11.7 to 12.5. 

• The participation rate─that is, the percentage of physicians who can bill Medicare and who 

agree to accept assignment on all claims for payment during a year─has risen steadily over 

the past decade, reaching 92 percent in 2005. 

• When physicians accept assignment, they accept Medicare’s fee schedule amount as the 

service’s full charge (of which 20 percent is beneficiary coinsurance). In 2004, 99 percent of 

allowed charges for physician services were assigned. 
112 Ambulatory care

Chart 8-4. Spending growth varies by type of service, 

 2004−2005 

Types of Percent of Spending 

Services spending change 

Visits 37% 7% 

Procedures 26 9 

Imaging 14 16 

Laboratory and other tests 12 11 

Part B drugs 9 –3 

Other 1 20 

 

Total 100 8.5 

 

Note: Other includes supplies and equipment furnished incident to physicians’ services and medical nutritional therapy. In both

columns of numbers, percentages may not necessarily add to the total, due to rounding. The total spending increase is a 

weighted average, so the spending increases by type of service do not sum to the total. 

Source: Kuhn, H.B., CMS, Letter to MedPAC, April 7, 2006, and unpublished data from CMS. 

• Physician services can be classified by type of service. The visit category consists primarily 

of office visits but also includes consultations and visits to patients in facility settings. 

Procedures include major procedures such as open heart surgery, joint replacement, and 

back surgery and minor procedures such as colonoscopy, knee arthroscopy, and various 

eye procedures. Imaging includes x-rays of the chest, the musculoskeletal system, and 

other parts of the body as well as more advanced procedures, such as computed 

tomography and magnetic resonance imaging (MRI). Tests range from laboratory specimen 

analysis to electrocardiograms and cardiovascular stress tests. Part B drugs consist of 

covered drugs furnished in physician offices. 

• Growth in spending for physician services varies by type of service. Between 2004 and 

2005, growth was highest for imaging services and other services (e.g., supplies and 

equipment furnished incident to physicians’ services and medical nutritional therapy). 

• Spending on Part B drugs decreased between 2004 and 2005. CMS attributes much of the 

decrease to changes in Medicare’s payment methodology. 

• CMS attributes most of the overall rise in spending to growth in the volume and intensity of 

services. 
A Data Book: Healthcare spending and the Medicare program, June 2006 113

Chart 8-5. Volume grew more rapidly in 2004 than in 

 previous years 

4

7

10

4

7

3

9

11

3

10

Visits Minor procedures Imaging Major procedures Tests

Type of service

0

5

10

15

20

Percent change

Average annual volume growth, 1999-2003 Volume growth 2003-2004

Note: Volume is measured as the units of service multiplied by each service’s relative weight (relative value units) from the 

physician fee schedule. The measure thus accounts for changes in both the number of services and the complexity, or 

intensity, of those services. 

Source: MedPAC analysis of claims for 100 percent of Medicare beneficiaries in 1999–2004. 

• Across all services, volume grew 6.2 percent between 2003 and 2004. This growth is higher 

than the average annual volume growth of 5.4 percent seen between 1999 and 2003. Per 

capita volume for imaging grew the most. From 2003 to 2004, the imaging volume growth 

rate was 11.0 percent. 

• These estimates include only services paid for under the physician fee schedule. The 

estimates would be higher if they included the volume of other services in CMS’s broader 

definition of physician services, such as Medicare Part B drugs and laboratory services. The 

Commission had found, for example, that volume of chemotherapy drugs increased 12 

percent from 2003 to 2004 and erythropoietin (for patients with end-stage renal disease) 

grew 36 percent. 

• Volume growth for visits may be constrained by their greater dependence on actual 

physician time, compared with imaging and procedure-based services, which may rely more 

heavily on the aid of technology and nonphysician practitioners. Major surgical procedures 

are considerably less discretionary, and in some cases may be replaced by medical 

treatments or other procedures. 

• It is not clear whether volume growth contributes to better health outcomes. 
114 Ambulatory care

Chart 8-6. Medicare Economic Index input categories, weights, 

and projected price changes for 2007 

 Category Price changes 

Input component weight for 2007 

Total 100.0% 3.7% 

Physician work 52.5 3.7% 

 Wages and salaries 42.7 3.5 

 Fringe benefits (nonwage compensation) 9.7 4.5 

Physician practice expense 47.5 3.8

 Nonphysician employee compensation: 18.7 3.8 

 Wages and salaries 13.8 3.5 

 Fringe benefits (nonwage compensation) 4.8 4.6 

 Office expense 12.2 2.0 

 Professional liability insurance 3.9 8.6 

 Medical equipment 2.1 1.2 

 Drugs and supplies: 4.3 3.9 

 Pharmaceuticals 2.3 4.9 

 Medical materials and supplies 2.0 2.5 

 Other professional expense 6.4 2.4 

Note: Forecasted price changes for individual components are calculated by multiplying the component’s weight by its price 

proxy. Forecasted price changes are not adjusted for productivity. Numbers may not sum to 100 percent due to rounding. 

Source: Unpublished estimates from CMS, dated December 7, 2005. 

• An important factor in determining the payment update for physician services is the 

projected change in input prices for physician services as measured by the Medicare 

Economic Index (MEI). The MEI is a weighted average of price changes for physician time 

and effort (i.e., work) and practice expense. 

• CMS projects that input prices for physician work will increase 3.7 percent in 2007, based on 

increases of 3.5 percent in wages and salaries and 4.5 percent in nonwage compensation. 

Practice expenses are projected to increase 3.8 percent. This projection primarily reflects a 

3.8 percent increase in nonphysician employee compensation and a 2.0 percent increase in 

office expenses. 

• Professional liability insurance has the largest projected price change, 8.6 percent. 
A Data Book: Healthcare spending and the Medicare program, June 2006 115

Chart 8-7. Quarterly changes in professional liability insurance 

premiums, 1993–2005 

93 94 95 96 97 98 99 00 01 02 03 04 05

-10

-5

0

5

10

15

20

25

30

35

P

ercent

Source: MedPAC analysis of unpublished data from CMS. 

• Historically, the professional liability insurance (PLI) component of the Medicare Economic 

Index followed a strong cyclical pattern, illustrated by the changes in PLI premiums from 

1993 to 2001. The cycle was generally characterized by periods of low premiums, perhaps 

when insurers were building market share, and high premiums, perhaps when insurers were 

building reserves. 

• Since 2001, changes in PLI premiums have departed from this cyclical pattern. The increase 

in the fourth quarter of 2003, estimated at 30.3 percent, was the highest in over a decade. 

Since then, change in PLI premiums has slowed, falling to 11.7 percent in the third quarter 

of 2005, but still remains greater than in the pre-2001 period. 
116 Ambulatory care

Chart 8-8. Work GPCI before the MMA established a floor 

of 1.00 

Note: GPCI (geographic practice cost index), MMA (Medicare Prescription Drug, Improvement, and Modernization Act of 2003). 

Source: Geographic practice cost index from CMS. 

• Under Medicare’s physician fee schedule, geographic practice cost indexes (GPCIs) adjust 

payment rates to account for differences in the price of inputs used in furnishing physician 

services. There are three GPCIs, one corresponding to each component of the relative 

value scale: physician work, practice expense, and professional liability insurance (PLI). The 

three GPCIs are applied to determine rates for each of 89 payment areas. Of the 89 areas, 

34 are statewide. 

• Prior to the implementation of the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA), the work GPCI ranged from 0.94 to 1.09. The MMA 

temporarily reduced this variation by establishing a three-year floor for the work GPCI of 

1.00. 

• The work GPCI floor will expire on December 31, 2006, at which point it is expected that 

work GPCIs will again vary widely across the 89 payment areas nationwide. 

0.94–0.96 0.96–0.98 0.98–1.00 1.00–1.03 1.03–1.09
A Data Book: Healthcare spending and the Medicare program, June 2006 117

Chart 8-9. Spending on all hospital outpatient services, 

 1995–2005 

8.6 9.1 9.4 8.6 9.0 9.3

12.8 13.3

15.3

17.7

19.6

6.5

7.2 7.7 7.9

8.9 8.7

8.1 8.2

7.9

8.3

8.8

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*

0

5

10

15

20

25

30

D

ollars ( ni billions)

Beneficiary cost sharing

Program payments

Note: Spending amounts are for services covered by the Medicare outpatient prospective payment system and those paid on 

separate fee schedules (e.g., ambulance services or durable medical equipment) or those paid on a cost basis (e.g., 

organ acquisition or flu vaccines). They do not include payments for clinical laboratory services. 

* Estimate. 

 

Source: CMS, Office of the Actuary. 

• Overall spending by Medicare and beneficiaries on hospital outpatient services (excluding 

clinical laboratory services) almost doubled from calendar year 1995 to 2005, reaching $28.4 

billion. The Office of the Actuary projects continued growth in total spending, averaging 7.5 

percent per year from 2002 to 2007. 

• A prospective payment system (PPS) for hospital outpatient services was implemented in August 

2000. Services paid under the outpatient PPS represent about 90 percent of spending on all 

hospital outpatient services. 

• In 2001, the first full year of the outpatient PPS, spending under the PPS was $19.2 billion, 

including $11.4 billion by the program and $7.7 billion in beneficiary cost sharing. By 2005, 

spending under the outpatient PPS is expected to rise to $25.9 billion ($17.6 billion program 

spending; $8.3 billion beneficiary copayments). The outpatient PPS accounted for about 5 

percent of total Medicare spending by the program in 2005. 

• Beneficiary cost sharing under the outpatient PPS is generally higher than for other sectors, 

about 32 percent in 2005. Chart 8-13 provides more detail on coinsurance. 
118 Ambulatory care

Chart 8-10. Most hospitals provide outpatient services 

 Percent offering 

 Outpatient Outpatient Emergency 

Year Hospitals services surgery services 

1991 5,191 92% 79% 91% 

1997 4,976 93 81 92 

2001 4,347 94 84 93 

2002 4,210 94 84 93 

2003 4,079 94 86 93 

2004 3,882 94 86 92 

Note: Includes services provided or arranged by short-term hospitals. Excludes long-term, Christian Science, psychiatric, 

rehabilitation, children’s, critical access, and alcohol/drug hospitals. 

Source: Medicare Provider of Services files from CMS. 

• The number of hospitals that furnish services under Medicare’s outpatient prospective 

payment system has declined, largely due to growth in the number of hospitals converting to 

critical access hospital status, which allows payment on a cost basis. However, the percent 

of hospitals providing outpatient services and emergency services has remained stable, and 

the percent providing outpatient surgery has increased. 

• Almost all hospitals provide outpatient (94 percent) and emergency (92 percent) services. 

The vast majority (86 percent) provide outpatient surgery. 

• The share of hospitals providing outpatient services did not change after the introduction of 

the outpatient prospective payment system. 
A Data Book: Healthcare spending and the Medicare program, June 2006 119

Chart 8-11. Payments and volume of services under the 

Medicare hospital outpatient PPS, by type of 

service, 2004 

 Payments Volume 

Procedures

 46%

Tests

4%

Pass-through

 drugs

 2% Separately paid

drug/blood products

9%

Other

 1%

Evaluation 

and

management

 14%

Imaging

 24%

Procedures

 18%

Tests

 14%

Pass-through 

 drugs

 2%

Separately paid

 drugs/blood

 products

 24%

Other

 1%

Evaluation

 and

management

 19%

Imaging

 22%

Note: PPS (prospective payment system). Payments include both program spending and beneficiary cost sharing but do not 

include transitional corridor payments (see Chart 8-14 for further information regarding transitional corridor payments). 

Services are grouped into evaluation and management, procedures, imaging, tests, and other categories according to the 

Berenson-Eggers Type of Service classification developed by CMS. Pass-through drugs and separately paid drugs and 

blood products are classified by their payment status indicator. Percentages may not sum to 100 percent due to rounding. 

Source: MedPAC analysis of the 100 percent special analytic file of outpatient PPS claims for 2004 from CMS. 

• The volume of services is distributed differently than payments. For example, procedures 

account for 18 percent of the volume, but 46 percent of the payments. 

• Hospitals provide many different types of services in their outpatient departments, including 

emergency and clinic visits, imaging and other diagnostic services, laboratory tests, and 

ambulatory surgery. 

• Over 40 percent of the services provided in hospital outpatient departments are evaluation 

and management or imaging services. 

• Procedures (e.g., endoscopies, surgeries, skin and musculoskeletal procedures) account 

for the greatest share of spending on services (46 percent), followed by imaging services 

(24 percent), and evaluation and management (14 percent). 

• In 2004, separately paid drugs and blood products accounted for 9 percent of spending. 
120 Ambulatory care

Chart 8-12. Hospital outpatient services with the highest 

Medicare expenditures, 2004 

 Share of 

APC Title payments

Total 48 

0610, 0611, 0612 All emergency visits 7% 

0600, 0601, 0602 All clinic visits 4 

0246 Cataract procedures with IOL insert 4 

0283 CT with contrast material 4 

0080 Diagnostic cardiac catheterization 3 

0260 Level I plain film except teeth 3 

0143 Lower gastrointestinal endoscopy 3 

0332 CT and computerized angiography without contrast material 3 

0301 Level II radiation therapy 3 

0336 MRI and magnetic resonance angiography without contrast 2 

0337 MRI and magnetic resonance angiography without 

 contrast material followed by contrast material 2 

0280 Level III angiography and venography except extremity 2 

0141 Upper gastrointestinal procedures 2 

0120 Infusion therapy except chemotherapy 1 

0325 Group psychotherapy 1 

0333 Computerized axial tomography and computerized 

 angio w/o contrast material followed by contrast 1 

0377 Level III cardiac imaging 1 

0733 Non-ESRD epoetin alpha injection, 1,000 units 1 

0131 Level II laparoscopy 1 

0267 Level III diagnostic ultrasound except vascular 1 

0154 Hernia/hydrocele procedures 1 

 

Note: APC (ambulatory payment classification), IOL (intraocular lens), CT (computed tomography), MRI (magnetic resonance 

imaging), ESRD (end-stage renal disease). Payments include both program spending and beneficiary cost sharing. 

Source: MedPAC analysis of the 100 percent analytic file of outpatient prospective payment system claims for calendar 

 year 2004. 

• Although the outpatient prospective payment system covers thousands of services, 

expenditures are concentrated in a handful of categories that have high volume, high 

payment rates, or both. 
A Data Book: Healthcare spending and the Medicare program, June 2006 121

Chart 8-13. Medicare coinsurance rates, by type of hospital 

 outpatient service, 2004 

24

46

30

41

19 20

Evaluation and 

management

Imaging Procedures Tests Pass-through 

drugs

Separately paid 

drugs/blood 

Type of service products

0

10

20

30

40

50

60

Co ni surance rate

Note: Services were grouped into categories of evaluation and management, imaging, procedures, and tests according to the 

Berenson-Eggers Type of Service classification developed by CMS. Pass-through drugs and devices and separately paid 

drugs and blood products are classified by their payment status indicators. There is no beneficiary copayment for passthrough devices. 

Source: MedPAC analysis of 100 percent special analytic file of 2004 outpatient prospective payment system claims and payment 

rates. 

• Historically, beneficiary coinsurance payments for hospital outpatient services were based 

on hospital charges, while Medicare payments were based on hospital costs. As hospital 

charges grew faster than costs, coinsurance represented a large share of total payment 

over time. 

• In adopting the outpatient prospective payment system, the Congress froze the dollar 

amounts for coinsurance. Consequently, beneficiaries’ share of total payments will decline 

over time. 

• The coinsurance rate is different for each service. Some services, such as imaging, have 

very high rates of coinsurance—46 percent. Other services, such as clinic visits, have 

coinsurance rates of 20 percent. 

• In 2004, the overall coinsurance rate was about 33 percent. 
122 Ambulatory care

Chart 8-14. Transitional corridor payments as a share of 

 Medicare hospital outpatient payments, 2002–2004 

2002 2003 2004 

Hospital group 

Number of 

hospitals 

Share of 

payments 

from 

transitional 

corridors 

Number 

of 

hospitals 

Share of 

payments 

from 

transitional 

corridors 

Number of 

hospitals 

Share of 

payments 

from 

transitional 

corridors 

 

All hospitals 3,636 2.5% 3,621 2.4% 3,368 0.9% 

 

Urban 2,425 2.3 2,421 1.9 2,344 0.5 

Rural ≤ 100 beds 933 5.8 929 7.7 768 5.4 

Rural >100 beds 278 1.1 271 1.6 256 0.6 

 

Major teaching 289 5.0 284 3.6 279 0.9 

Other teaching 770 1.5 760 1.5 739 0.3 

Nonteaching 2,577 2.1 2,577 2.5 2,350 1.2 

Note: A small number of hospitals could not be classified due to missing data. 

Source: MedPAC analysis of Medicare Cost Report files from CMS. 

• When Medicare implemented the hospital outpatient prospective payment system (PPS) in 

2000, Medicare moved from paying hospitals based on their costs to a payment schedule 

based on average (median) costs for all hospitals. 

• Recognizing that some hospitals might receive lower payments under the outpatient PPS 

than they had under the earlier system, the Congress included a transition mechanism, 

called transitional corridor payments. The corridors were designed to make up part of the 

difference between payments that hospitals would have received under the old payment 

system and those under the new outpatient PPS. To provide incentives for efficiency, 

Medicare did not compensate the full difference, except for rural hospitals with 100 or fewer 

beds, cancer hospitals, and children’s hospitals. 

• Transitional corridor payments represented 2.5 percent of total outpatient PPS payments in 

2002, declining to 2.4 percent in 2003, then to 0.9 percent in 2004. The decline from 2003 to 

2004 is due to the expiration of transitional corridor payments for most hospitals on 

December 31, 2003. However, the payments continued for two more years—through 

December 31, 2005—for rural sole community hospitals and other rural hospitals with 100 or 

fewer beds. The Deficit Reduction Act of 2005 extended most of the transitional corridor 

payments for rural hospitals with 100 or fewer beds through December 31, 2008. 

• In 2004, rural hospitals with 100 or fewer beds received 5.4 percent of their payments from 

transitional corridor payments. 
A Data Book: Healthcare spending and the Medicare program, June 2006 123

Chart 8-15. Medicare hospital outpatient, inpatient, and 

 overall Medicare margins, 1998–2004 

Note: A margin is calculated as revenue minus costs, divided by revenue. Data are based on Medicare-allowable costs. 

Analysis excludes critical access hospitals. Overall Medicare margins cover the costs and payments of hospital inpatient, 

outpatient, psychiatric and rehabilitation (not paid under the prospective payment system), skilled nursing facilities, and 

home health services, as well as graduate medical education. 

Source: MedPAC analysis of Medicare cost report data from CMS. 

• Hospital outpatient margins vary. In 2004, while the aggregate margin was –10.9 percent, 

25 percent of hospitals had margins of –21.2 percent or lower, and 25 percent had margins 

of –1.8 percent or higher. 

• Given hospital accounting practices, margins for hospital outpatient services must be 

considered in the context of Medicare payments and hospital costs for the full range of 

services provided to Medicare beneficiaries. Hospitals allocate overhead to all services, so 

we generally consider costs and payments overall. 

• The improvement in outpatient margins from 1999 to 2001 is consistent with policies 

implemented under the outpatient prospective payment system that increased payments. 

Margins declined somewhat from 2001 to 2003. This may reflect the decline in the number 

of drugs and devices eligible for pass-through payments. The margin improved in 2004, 

perhaps due to many drugs becoming specified covered outpatient drugs (SCODS). In 2004 

and 2005, these drugs were paid on the basis of average wholesale price, which increased 

their payment rates. These additional payments were not budget neutral, so aggregate 

outpatient payments increased. 

15.7

13.4

11.8

10.1

6.1

2.0

-0.3

8.2

6.1 5.2 5.2

2.3

-1.4

-3.0

-14.9 -15.7 -14.1

-7.3

-8.6

-11.7 -10.9

1998 1999 2000 2001 2002 2003 2004

-20

-15

-10

-5

0

5

10

15

20

M

argin (percent)

Inpatient margin

Overall Medicare margin

Outpatient margin
124 Ambulatory care

Chart 8-16. Number of Medicare-certified ASCs increased over 

60 percent, 1999–2005 

 1999 2000 2001 2002 2003 2004 2005 

Medicare payments (billions of dollars) $1.2 $1.4 $1.6 $1.9 $2.2 $2.5 $2.8 

Number of centers 2,786 3,028 3,371 3,597 3,887 4,136 4,506 

 New centers 162 295 446 309 365 315 467 

 Exiting centers 20 53 103 83 75 66 97 

Net percent growth from previous year 5.4% 8.7% 11.3% 6.7% 8.1% 6.4% 8.9% 

 

Percent of all centers that are: 

 For profit 94 94 94 95 95 96 96 

 Nonprofit 6 6 5 5 5 4 4 

 Urban 89 88 88 87 87 87 87 

Rural 11 12 12 13 13 13 13 

Note: ASC (ambulatory surgical center), N/A (not available). Medicare payments include program spending and beneficiary cost 

sharing for ASC facility services. Payments for 2005 are preliminary and subject to change. Totals may not sum to 100 

percent due to rounding. 

Source: MedPAC analysis of provider of services files from CMS, 1999–2005. Payment data from CMS, Office of the Actuary. 

• Ambulatory surgical centers (ASCs) are entities that only furnish outpatient surgical services 

not requiring an overnight stay. To receive payments from Medicare, ASCs must meet 

Medicare’s conditions of coverage, which specify minimum facility standards. 

• Medicare uses a simple fee schedule to pay for ASC services. The fee schedule divides 

procedures into nine payment groups. CMS is required to implement a revised payment 

system no later than January 1, 2008. 

• Total Medicare payments for ASC services are growing rapidly. Payments increased by 15.3 

percent per year, on average, from 1999 through 2005. 

• The number of Medicare-certified ASCs grew at an average annual rate of 8.3 percent 

from 1999 through 2005. Each year from 1999 through 2005, an average of 337 new 

Medicare-certified facilities entered the market, while an average of 71 closed or merged 

with other facilities. 

• Most Medicare-certified ASCs are for-profit facilities and are located in urban areas. 
A Data Book: Healthcare spending and the Medicare program, June 2006 125

Chart 8-17. Medicare spending for imaging services, by type of 

service, 2004 

CT

16%

Standard

20%

MRI

19%

Nuclear medicine

15%

Echocardiography

14%

Other echography 

(ultrasound)

11%

Cardiac 

catheterization and 

related imaging

5%

Note: CT (computed tomography), MRI (magnetic resonance imaging). Cardiac catheterization includes placement of the 

catheter and the related imaging procedure, such as an angiogram. Medicare payments include program spending and 

beneficiary cost sharing for physician fee schedule imaging services. 

Source: MedPAC analysis of 100 percent physician/supplier procedure summary file from CMS, 2004. 

• Medicare spending for imaging services paid under the physician fee schedule nearly 

doubled between 1999 and 2004, from $5.7 billion to $10.9 billion. 

• The volume and complexity of imaging services grew by 9.9 percent per year, on average, 

between 1999 and 2003—nearly twice as fast as all physician services (5.4 percent per 

year). Imaging increased 11 percent from 2003 to 2004. These growth rates are adjusted for 

increases in the number of fee-for-service beneficiaries and changes in payment rates. 

• Spending for MRI, CT, and nuclear medicine has grown faster than for other imaging 

services. Thus, these categories represent an increasing share of total imaging spending. 

MRI spending grew by 162 percent between 1999 and 2004, nuclear medicine by 145 

percent, and CT by 118 percent. 
126 Ambulatory care

Chart 8-18. Radiologists received almost half of Medicare 

payments for imaging services, 2004 

Cardiology

25%

Surgical specialties

8%

IDTF

8%

Internal medicine

6%

Radiology

44%

Other specialty

5%

Other medical

4%

Note: IDTF (independent diagnostic testing facility). Medicare payments include program spending and beneficiary cost sharing 

for physician fee schedule imaging services. Total fee schedule imaging spending was $10.9 billion in 2004. Other 

specialty includes otolaryngology, pain management, osteopathic, physical medicine, nephrology, podiatry, cardiac 

surgery, oncology, and portable x-ray supplies. 

Source: MedPAC analysis of 100 percent physician/supplier procedure summary file from CMS, 2004. 

• Imaging services paid under the physician fee schedule involve two parts: the technical 

component, which covers the cost of the equipment, supplies, and nonphysician staff, and 

the professional component, which covers the physician’s work in interpreting the study and 

writing a report. A physician who both performs and interprets the study submits a global bill, 

which includes the technical and professional components. 

• Independent diagnostic testing facilities (IDTFs) are independent of a hospital and physician 

office and only provide outpatient diagnostic services. IDTFs’ share of Medicare imaging 

payments grew by 6 percent from 2003 to 2004. Medicare pays for IDTF services under the 

physician fee schedule at the same rates as services provided in physician offices. 
A Data Book: Healthcare spending and the Medicare program, June 2006 127

Web links. Ambulatory care 

Physicians 

• For more information on Medicare’s payment system for physician services, see MedPAC’s 

Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Dec05_payment_basics_physician.pdf

• Chapter 2B of the MedPAC March 2006 Report to the Congress and Appendix A of the 

June 2006 Report to the Congress provide additional information on physician services. 

 http://www.medpac.gov/publications/congressional_reports/Mar06_Ch02b.pdf 

http://www.medpac.gov/publications/congressional_reports/Jun06_AppA.pdf 

• More information on physician volume growth can be found in MedPAC’s December 

2004 report. 

 http://www.medpac.gov/publications/congressional_reports/Dec04_PhysVolume.pdf 

• Congressional testimony by the Chairman and Executive Director of MedPAC on 

February 10, 2005, March 17, 2005, and November 17, 2005, discusses payment for 

physician services in the Medicare program, including imaging. 

http://www.medpac.gov/publications/congressional_testimony/021005_WM_testimony.pdf 

http://www.medpac.gov/publications/congressional_testimony/031705_TestimonyImagingHou.pdf 

http://www.medpac.gov/publications/congressional_testimony/Testimony_111705_Phys_Pay.pdf 

• The 2006 Annual Report of the Boards of Trustees of the Hospital Insurance and 

Supplementary Medical Insurance Trust Funds provides details on historical and projected 

spending on physician services. 

http://www.cms.hhs.gov/ReportsTrustFunds/

Hospital outpatient services 

• For more information on Medicare’s payment system for hospital outpatient services, see 

MedPAC’s Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Dec05_payment_basics_OPD.pdf

• Section 2A of the MedPAC 2006 Report to the Congress provides information on the current 

status of “hold-harmless” payments and other special payments for rural hospitals. 

 http://www.medpac.gov/publications/congressional_reports/Mar06_Ch02a.pdf 
128 Ambulatory care

• Chapter 3A of the MedPAC March 2004 Report to the Congress provides additional 

information on hospital outpatient services, including outlier and transitional corridor 

payments. 

 http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3A.pdf 

• A description of coinsurance under the outpatient PPS can be found in Chapter 9 of the 

MedPAC March 2001 Report to the Congress. 

http://www.medpac.gov/publications/congressional_reports/Mar01%20Ch9.pdf 

• More information on new technology and pass-through payments can be found in Chapter 4 

of the MedPAC March 2003 Report to the Congress. 

http://www.medpac.gov/publications/congressional_reports/Mar03_Ch4.pdf 

Ambulatory surgical centers 

• For more information on Medicare’s payment system for ambulatory surgical centers, see 

MedPAC’s Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Dec05_payment_basics_ASC.pdf

• Chapter 3F of the MedPAC March 2004 Report to the Congress provides additional 

information on ambulatory surgical centers. 

http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3F.pdf
S E C T I O N

Post-acute care

Skilled nursing facilities 

Home health agencies 

Long-term care hospitals 

Inpatient rehabilitation facilities 

A Data Book: Healthcare spending and the Medicare program, June 2006 131

Chart 9-1. The number of post-acute care providers generally 

continues to grow 

 Percent change 

 1996 1998 2000 2002 2004 2005 1996−2005 

Skilled nursing 

facilities* 14,548 16,079 16,275 15,089 15,784 15,625 7.4% 

Home health 

agencies 9,808 9,284 7,317 6,888 7,148 8,082 –17.6 

Inpatient 

rehabilitation 

facilities 1,031 1,078 1,102 1,181 1,206 1,235 19.8 

Long-term care 

hospitals 183 209 240 286 307 375 105.0 

Note: *Includes swing bed hospitals. 

Source: Online Survey, Certification, and Reporting system from CMS. 

• The number of most types of post-acute care providers increased from 1996 to 2005. 

• The number of home health agencies reached its peak in 1996 and then dropped. This may 

be due to many factors, including the interim payment system, increased program integrity 

scrutiny, and surety bond requirements. The number has begun to increase again in the most 

recent periods, climbing 17 percent between 2002 and 2005. 

• Inpatient rehabilitation facilities increased by 20 percent from 1996 to 2005. 

• The number of long-term care hospitals doubled from 1996 to 2005. 
132 Post-acute care

Chart 9-2. Spending for post-acute care has risen in each 

setting, 1999–2005 

1999 2000 2001 2002 2003* 2004* 2005*

0

10

20

30

40

50

D

ol al rs ( ni bill oi ns)

25.0 25.4

28.0

32.9 34.1

38.9

42.1

8.4 8.8 8.7 9.9 9.9

11.3 12.3

10.9 10.8

13.2

15.2 14.7

17.2

18.5

4.0

4.1 4.2 5.3 6.4 6.6 6.7

1.7 2.5 3.1 3.8

4.6

All post-acute care

Home health

Skilled nursing facility

Inpatient rehabilitation

Long-term care hospitals

1.7 1.9

Note: These numbers are program spending only, and do not include beneficiary copayments. 

*Estimated by CMS. 

Source: Centers for Medicare & Medicaid Services, Office of the Actuary. 

• Medicare has prospective payment systems (PPSs) for the four post-acute care settings. CMS 

implemented these PPSs at the following times: skilled nursing facilities, July 1998; home health 

agencies, October 2000; inpatient rehabilitation facilities, January 2002; and long-term care 

hospitals, October 2002. Although CMS intended to use these payment systems to control 

Medicare spending for post-acute care, spending has increased an average of 7 percent per year 

since 1999. 

• From 1999 through 2005, Medicare spending for long-term care hospitals has increased the 

most⎯at 18 percent per year. During the same period, spending for both skilled nursing facilities 

and inpatient rehabilitation facilities increased 9 percent per year, and spending for home health 

agencies increased 7 percent per year. For 2005, CMS estimated that total spending for postacute care was $42 billion. 

• Post-acute care currently makes up about 13 percent of Medicare’s total spending. 
A Data Book: Healthcare spending and the Medicare program, June 2006 133

Chart 9-3. Medicare spending for SNF services generally has 

 increased but growth has moderated since the 

 PPS was implemented 

4,978

6,887

9,135

10,754

12,535 13,056

10,412

11,089

13,100

15,224 14,680

17,106

18,460

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

D

ol al rs ( ni mill oi ns)

Cost-based payment PPS

Note: Skilled nursing facility (SNF), prospective payment system (PPS). Spending is program spending for the calendar year. 

Source: CMS, Office of the Actuary, 2006. 

• Medicare program spending on skilled nursing facility (SNF) services grew an average of 21 

percent per year from 1993 through 1998, when Medicare paid SNFs based on their costs, 

subject to some limits. 

• In 1999, immediately following the implementation of the SNF prospective payment system, 

Medicare program spending on SNF services fell from $13.1 billion to $10.4 billion. 

• Between 2000 and 2005, SNF spending grew at a slower rate than before the prospective 

payment system (PPS), but still averaged 11 percent per year for the period. Factors 

contributing to the growth during this period include increases in the use of services and 

increases in the payment rates over the period. Payment rate changes occurred because of 

annual updates; market basket forecast error correction; and temporary payment add-ons, 

some of which expired in fiscal year 2003 and some of which expired in January 2006 (year 

not shown) when CMS changed the patient classification system. 
134 Post-acute care

Chart 9-4. Medicare skilled nursing facility use increased 

 between 1999 and 2003 

 

 Number of admissions Number of days Days per 

Year (thousands) (millions) admission 

 

1999 1,796 42.4 23.6 

2000 1,824 43.8 24.0 

2001 1,950 47.9 24.6 

 2002 2,223 54.7 24.6 

2003 2,385 59.4 24.9 

 

 Average annual increase 7% 9% 1% 

Note: Data include facilities in Puerto Rico, Virgin Islands, and “unknown.” Data do not include swing bed units. 

 

Source: Skilled nursing facility Medicare Provider Analysis and Review stay records from CMS, Office of Research, Development, 

and Information. 

• The number of Medicare admissions to skilled nursing facilities (SNFs) grew at an average 

annual rate of 7 percent between 1999 and 2003. Increased SNF use exceeds the rate of 

growth in the Medicare population; during this same period the average annual increase in the 

number of Part A enrollees was 1.2 percent. 

• The number of SNF admissions increased 7 percent between 2002 and 2003, the most recent 

years for which we have data. Similarly, the number of SNF days increased 9 percent 

between 2002 and 2003. 
A Data Book: Healthcare spending and the Medicare program, June 2006 135

Chart 9-5. Characteristics of skilled nursing facilities, 2003 

 Medicare Medicare-covered

Type of SNF Facilities payments stays 

 

Freestanding 90% 90% 83% 

Hospital-based 10 10 17 

Urban 67 81 78 

Rural 33 19 22 

Large chain 15 20 17 

Not large chain 85 80 83 

For profit 67 71 64 

Nonprofit 28 26 31 

Government 5 3 4 

Note: SNF (skilled nursing facility). 

Source: MedPAC analysis of the Provider of Services file and 2003 Medicare Provider Analysis and Review file. 

• Skilled nursing facility (SNF) services may be provided in freestanding or hospital-based 

facilities. In 2003, 90 percent of facilities were freestanding, and 83 percent of Medicarecovered SNF stays were in freestanding facilities. 

• In 2003, 67 percent of SNFs were for profit. Similarly, a majority of Medicare SNF stays 

(64 percent) were in for-profit facilities. 
136 Post-acute care

Chart 9-6. Medicare costs per day in freestanding SNFs 

 grew at an average annual rate of 3.7 percent 

 between 2000 and 2004 

2000-2001 2001-2002 2002-2003 2003-2004

0

1

2

3

4

5

Percent

2.6

3.5

4.0

4.6

Note: SNF (skilled nursing facility). Medicare per day cost growth was calculated from year to year among the cohort of 

freestanding SNFs with cost report data in all five years. Cost per day is not adjusted for differences in case mix. 

Source: MedPAC analysis of Medicare cost report data from CMS. 

• Per-day costs for Medicare beneficiaries in freestanding skilled nursing facilities (SNFs) grew, 

on average, 3.7 percent annually between 2000 and 2004, with the most recent period seeing 

a higher rate of growth. 

• During this same period, for-profit facilities had lower average annual cost growth (3.5 

percent) than nonprofit (4.4 percent) or government facilities (4.5 percent). 

• For the least costly SNFs (those at the 25th percentile), average annual per day Medicare 

cost growth was 1 percent, while for the most costly SNFs (those at the 75th percentile), it 

was 7.2 percent. 
A Data Book: Healthcare spending and the Medicare program, June 2006 137

Chart 9-7. Freestanding skilled nursing facility Medicare 

 margin, by facility group, 2004 

 Medicare 

Facility type Facilities margin 

 

All facilities 11,049 13.5% 

Urban 7,606 12.8 

Rural 3,432 16.6 

Large chain 2,043 18.2 

Not large chain 9,006 12.0 

For profit 8,374 16.1 

Nonprofit 2,304 3.8 

Government 371 –1.1 

Note: Eleven facilities had missing urban or rural designations. 

Source: MedPAC analysis of Medicare cost report and Provider of Service file from CMS. 

• Based on 2004 cost report data, we estimate that the 2006 aggregate Medicare margin for 

freestanding skilled nursing facilities (SNFs) is 9.4 percent. Nonprofit facilities had lower 

margins (3.8 percent) than for-profit facilities (16.1 percent) in 2004. 

• Our projected margin for 2006 is 9.4 percent. 
138 Post-acute care

Chart 9-8. The highest percentage of Medicare-covered 

 freestanding SNF days were in “very high” and 

 “high” rehabilitation RUG–III groups in 2004 

RUG–III group Percent of Medicare days 

Rehabilitation 79.7% 

 Ultra high, 16–18 ADL 2.3 

 Ultra high, 9–15 ADL 7.2 

 Ultra high, 4–8 ADL 1.9 

 Very high, 16–18 ADL 4.0 

 Very high, 9–15 ADL 16.8 

 Very high, 4–8 ADL 5.5 

 High, 13–18 ADL 14.7 

 High, 8–12 ADL 10.9 

 High, 4–7 ADL 3.9 

 Medium, 15–18 ADL 4.3 

 Medium, 8–14 ADL 6.0 

 Medium, 4–7 ADL 2.1 

 Low, 14–18 ADL 0.1 

 Low, 4–13 ADL 0.2 

Extensive services 6.5 

 7–18 ADL, 4–5 services 2.9 

 7–18 ADL, 2–3 services 3.4 

 7–18 ADL, 0–1 services 0.2 

Special care 5.4 

 17–18 ADL 1.3 

 15–16 ADL 1.7 

 7–14 ADL 2.4 

Clinically complex 6.0 

17–18 ADL, depression 0.2 

 17–18 ADL, no depression 0.6 

 12–16 ADL, depression 0.6 

 12–16 ADL, no depression 1.9 

 4–11 ADL, depression 0.7 

 4–11 ADL, no depression 2.0 

 

Nonskilled RUGs 2.2 

Unknown RUG 0.2 

 

Note: SNF (skilled nursing facility), RUG–III (resource utilization group, version III), ADL (activity of daily living). Total percent may 

not add to 100 due to rounding. ADLs are expressed in terms of an index. The higher the index, the greater the patient's 

limitation on activities of daily living. "Services" is a count of the services or conditions that qualify a beneficiary for the 

extensive services category. The greater the number of services, the greater the anticipated resource use within the 

extensive services category. 

Source: MedPAC analysis of Medicare cost report data from CMS. 
A Data Book: Healthcare spending and the Medicare program, June 2006 139

Chart 9-9. Spending for home health care, 1992–2005 

7.2

9.7

12.9

15.7

17.4 17.9

12.8

8.4 8.8 8.7

9.9 9.9

11.3

12.5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

2

4

6

8

10

12

14

16

18

20

Dollars ( ni billions)

Note: In 2004, the payment system changed from fiscal year to calendar year. 

Source: CMS, Office of the Actuary, 2006. 

• Medicare home health care spending grew at an average annual rate of 20 percent from 1992 

to 1997. During that period, the payment system was cost based. Eligibility had been 

loosened just before this period and enforcing the program’s standards became more difficult. 

• Spending began to fall in 1997, concurrent with the introduction of the interim payment system 

(IPS) based upon costs with limits, tighter eligibility, and increased scrutiny from the Office of 

Inspector General. 

• In 2000, the prospective payment system replaced the IPS. At the same time, eligibility for the 

benefit was broadened slightly. Enforcement of the Medicare program’s integrity standards 

continues at the regional home health intermediaries and survey and certification units. 

• Since 2001, the number of users, the number of episodes, and the amount of spending have 

increased. 
140 Post-acute care

Chart 9-10. Medicare home health care use, 1992–2003 

People served Visits 

 Number Number Per person 

Year (thousands) (millions) served 

1992 2,506 132 53 

1993 2,874 164 57 

1994 3,179 209 66 

1995 3,469 249 72 

1996 3,600 265 74 

1997 3,558 258 73 

1998 3,062 155 51 

1999 2,720 113 42 

2000 2,461 91 37 

2001 2,403 71 31 

2002 2,544 73 31 

2003 2,681 75 31 

Source: CMS, Office of the Actuary, May 2005. 

• In the early 1990s, the rapid growth in home health use was a concern to policymakers. 

Between 1992 and 1996, the number of beneficiaries using home health care increased by 

more than one million. The total volume of home health was expanding rapidly as the number 

of visits per user increased along with the number of users. 

• In the mid-1990s, the Congress required home health agencies to begin the transition to a 

prospective payment system, CMS clarified the standards of eligibility for the home health 

benefit, and the Office of Inspector General increased its scrutiny of home health. Between 

1997 and 2000, the number of users fell by one million. 
A Data Book: Healthcare spending and the Medicare program, June 2006 141

Chart 9-11. The home health product changed after the 

 prospective payment system started 

 1997 2002 

Average visits per episode 36 19 

Average minutes per episode 1,500 940 

Percent therapy visits 9% 26% 

Note: The prospective payment system (PPS) began in October 2000. 

Source: Pre-PPS CMS analysis of the National Claims History file; post-PPS MedPAC analysis of 5 percent Standard 

 Analytic File. 

• The types and quantity of home health care services that beneficiaries receive are changing. 

In 1997, before the PPS, the average number of visits per episode was 36. By 2002, that had 

fallen to 19 visits. The average length of stay fell from 106 days in 1997 to 56 days 

in 2002. 

• The mix of visits (therapy, aide, or skilled visits as a percent of total visits provided during an 

episode) has shifted toward therapy (physical therapy, occupational therapy, and speech 

pathology) and away from home health aide services. The home health payment system 

rewards the provision of therapy services (physical, occupational, or speech). Meeting the 

therapy threshold for a payment episode produces substantially higher payments for 

otherwise similar patients. For example, an episode for a patient with moderate clinical 

severity and moderate functional limitation would be paid $2,440 (base payment × case 

weight 1.08) if the episode did not meet the therapy threshold and $4,420 (base payment × 

case weight 1.95) if the episode did meet the therapy threshold.

• Information about the use of home health services after the PPS can be found on the CMS 

website, available at http://www.medicare.gov. 
142 Post-acute care

Chart 9-12. Aggregate Medicare margins for all freestanding 

 home health agencies remain in double digits, 2004 

 Number of 2004 

Agency group agencies margin 

All agencies 3,979 16.0% 

Caseload 

 Urban 2,546 15.9 

 Mixed 985 17.0 

 Rural 448 11.8 

Type of control 

 Voluntary 686 12.4 

 Private 3,047 18.1 

 Government 246 8.1 

Volume group, lowest to highest 

 First quintile 843 13.1 

 Second quintile 781 10.5 

 Third quintile 794 12.9 

 Fourth quintile 792 15.9 

 Fifth quintile 769 17.5 

Note: Some freestanding agencies were omitted because of data integrity concerns. 

Source: MedPAC analysis of Medicare Cost Report file from CMS. 

• In 2004, 80 percent of agencies had positive margins. These estimated margins indicate that 

Medicare’s payments are above the costs of providing services to Medicare beneficiaries, for 

both rural and urban home health agencies (HHAs). 

• Our projected 2006 margin is 14.7 percent. 

• These margins are for freestanding HHAs, which composed two-thirds of all HHAs in 2001. 

Home health agencies are also based in hospitals and other facilities. 
A Data Book: Healthcare spending and the Medicare program, June 2006 143

Chart 9-13. The top 15 LTC–DRGs in 2004 made up almost two- 

 thirds of LTCH discharges 

LTC–DRG Description Discharges Percentage 

 475 Respiratory system diagnosis with ventilator support 13,007 10.6% 

 249 Aftercare, musculoskeletal system and connective tissue 6,212 5.1 

 12 Degenerative nervous system disorders 5,802 4.7 

 271 Skin ulcers 5,594 4.6 

 462 Rehabilitation 5,072 4.1 

 88 Chronic obstructive pulmonary disease 4,980 4.1 

 87 Pulmonary edema and respiratory 4,960 4.1 

 89 Simple pneumonia and pleurisy with CC 4,826 3.9 

 466 Aftercare without history of malignancy as secondary diagnoses 4,497 3.7 

 79 Respiratory infections and inflammations with CC 4,449 3.6 

 416 Septicemia 4,144 3.4 

 263 Skin graft and/or debridement for skin ulcer with CCs 3,739 3.1 

 127 Heart failure and shock 3,699 3.0 

 316 Renal failure 2,360 1.9 

 430 Psychoses 2,355 1.9 

 15 LTC–DRGs 75,696 61.9 

 

 Total discharges 122,320 100.0 

Note: LTC–DRG (long-term care diagnosis related group), LTCH (long-term care hospital), CC (complication or comorbidity). 

Source: MedPAC analysis of Medicare Provider Analysis and Review data from CMS. 

• Long-term care hospitals (LTCHs) treat beneficiaries with diverse diagnoses. Five of the top 

15 diagnoses in LTCHs are related to respiratory conditions. 

• The most frequent diagnosis for LTCHs is for patients on ventilator support. These 

beneficiaries make up almost 11 percent of all Medicare LTCH patients. 
144 Post-acute care

Chart 9-14. The number of long-term care hospitals has grown 

 rapidly since 1990 

PPS

1990 1992 1994 1996 1998 2000 2002 2004

0

50

100

150

200

250

300

350

400

450

Number of hospi at sl

90 97

146

183

209

240

286

357

TEFRA PPS

Note: TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment system). 

Source: MedPAC analysis of Provider of Service file from CMS. 

• The number of long-term care hospitals (LTCHs) quadrupled between 1990 and 2004. 

• The number of LTCHs increased 10 percent annually during this period. 
A Data Book: Healthcare spending and the Medicare program, June 2006 145

Chart 9-15. Volume of cases and Medicare spending increased 

 under the LTCH prospective payment system 

 TEFRA PPS Average annual change 

 2001 2003 2004 2001–2004 

Number of cases 86,049 110,509 122,320 12% 

Medicare spending $1.7 billion $2.4 billion $3.3 billion 25 

Payment per case $22,452 $25,076 $30,180 10 

Length of stay (in days) 32.1 29.2 28.7 –4 

Note: LTCH (long-term care hospital), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment 

system). 

Source: MedPAC analysis of MedPAR data from CMS. 

• The number of beneficiaries discharged from long-term care hospitals (LTCHs) increased 12 

percent annually from 2001 to 2004. 

• From 2001 to 2004, Medicare spending for long-term care hospitals increased 25 percent per 

year. In the last year alone, Medicare spending for these facilities increased 38 percent. 

• From 2001 to 2004, Medicare’s payment per case increased 10 percent annually while length 

of stay, usually positively associated with costs per case, decreased 4 percent. 
146 Post-acute care

Chart 9-16. Comparison of changes in LTCHs’ Medicare 

payments and costs per case, 1999–2004 

1999 2000 2001 2002 2003 2004

-10

-5

0

5

10

15

20

25

Annual percent change

Payments per case

Costs per case

TEFRA PPS

Note: LTCH (long-term care hospital), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment 

system). Data are from consistent two-year cohorts of LTCHs. 

Source: MedPAC analysis of cost reports from CMS. 

• Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and before the 

prospective payment system (PPS) was implemented in fiscal year 2003, long-term care 

hospitals’ (LTCHs’) Medicare per case costs and payments increased at similar rates. 

Under PPS, LTCHs’ Medicare per case payments have increased much faster than their per 

case costs. 

• These similarities and differences are reflected in LTCHs’ Medicare margins, shown in Chart 

9-17. 
A Data Book: Healthcare spending and the Medicare program, June 2006 147

Chart 9-17. Long-term care hospitals’ PPS Medicare margin, by 

 group, 2003–2004 

LTCH group 2003 2004 

 

All LTCHs 5.4% 9.0% 

Urban 5.5 9.0 

Rural 0.8 8.6 

Freestanding 5.2 8.7 

HWHs 5.8 9.6 

Nonprofit 1.6 6.0 

For profit 6.7 10.3 

Government –1.9 –2.8 

Note: LTCH (long-term care hospital), PPS (prospective payment system), HWH (hospital within hospital). 

Source: MedPAC analysis of cost reports from CMS. 

• Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and before long-term 

care hospitals’ (LTCHs’) prospective payment system (PPS) was implemented, these facilities’ 

Medicare margins were close to zero, ranging from –1.7 to 0.4 percent. Under PPS, margins 

have increased rapidly, from 5.4 percent in 2003 to 9.0 percent in 2004. 

• In 2004, urban, rural, freestanding, and hospital within hospital (HWH) LTCHs had similar 

Medicare margins—9.0, 8.6, 8.7, and 9.6 percent, respectively. There is greater variation in 

Medicare margins by ownership, with nonprofit LTCHs at 6 percent and for-profit LTCHs at 

10.3 percent. 

• Our projection of the 2006 margin is 7.8 percent. 
148 Post-acute care

Chart 9-18. Distribution of most common types of cases in 

inpatient rehabilitation facilities, 2004 

Joint replacement

24.1%

Stroke

16.5%

Hip fracture

10.6%

Cardiac

4.9%

Other

25.6%

Brain injury

3.9%

Neurological

5.0%

Other

orthopedic

5.1%

Spinal cord 

injury

4.2%

Note: Other includes conditions such as amputation, pain syndrome, and pulmonary. 

Source: MedPAC analysis of Inpatient Rehabilitation Facility–Patient Assessment Instrument data from CMS. 

• In 2004, the most frequent diagnosis for Medicare patients in inpatient rehabilitation facilities 

(IRFs) was joint replacement, representing 24.1 percent of cases, a smaller share of IRF 

cases than in 1996. 

• Stroke was the second most frequent diagnosis in 2004, at 16.5 percent of cases. In 1996, 

stroke made up 19.6 percent of IRF cases. 
A Data Book: Healthcare spending and the Medicare program, June 2006 149

Chart 9-19. The number of all types of inpatient rehabilitation 

facilities has grown 

 Annual Annual

 TEFRA PPS Change Change Change 

Type of IRF 2000 2001 2002 2003 2004 2000–2001 2002–2004 2000–2004

 

All IRFs 1,117 1,157 1,188 1,211 1,227 4% 2% 2% 

Urban 950 971 988 1,001 1,009 2 1 2 

Rural 167 186 200 210 218 11 4 7 

Freestanding 195 214 215 215 217 10 0 3 

Hospital-based 922 943 973 996 1,010 2 2 2 

Nonprofit 731 733 755 765 772 0 1 1 

For profit 240 271 277 290 294 13 3 5 

Government 146 153 156 156 161 5 2 2 

Note: IRF (inpatient rehabilitation facility), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment 

system). 

Source: MedPAC analysis of Provider of Service information from CMS. 

• Between 2000 and 2004, the number of inpatient rehabilitation facilities (IRFs) increased 2 

percent per year, slightly faster than Medicare beneficiaries. 

• Rural IRFs increased the fastest during this period, at 7 percent annually, while nonprofit IRFs 

increased the slowest, at 1 percent annually. 
150 Post-acute care

Chart 9-20. Volume of care and Medicare spending increased 

 under the IRF prospective payment system 

 TEFRA PPS 

 Average annual 

 Change change 

 2000 2001 2000–2001 2002 2004 2002–2004 

 

Number of cases 384,207 415,579 8% 438,631 496,695 6% 

Medicare $3.6 billion $3.7 billion 3 $4.5 billion $6.0 billion 15 

spending 

Payment per case $10,312 $9,982 –3 $11,152 $13,275 9 

Length of stay 

(in days) 14.6 14.0 –4 13.3 12.7 –2 

Note: IRF (inpatient rehabilitation facility), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment 

system). 

Source: MedPAC analysis of Medicare Provider Analysis and Review data from CMS. 

• The number of Medicare beneficiaries discharged from inpatient rehabilitation facilities (IRFs) 

increased at a somewhat slower pace under the prospective payment system (PPS), at 6 

percent per year, compared with an increase of 8 percent per year under the Tax Equity and 

Fiscal Responsibility Act of 1982 (TEFRA) during 2000 and 2001. 

• Medicare spending increased at a much faster pace under the PPS, at 15 percent per year, 

compared with 3 percent per year under TEFRA during 2000 and 2001. 

• Under PPS from 2002 to 2004, payment per case increased 9 percent per year, while length 

of stay, usually related to cost per case, decreased 2 percent per year. 
A Data Book: Healthcare spending and the Medicare program, June 2006 151

Chart 9-21. IRFs’ Medicare payments have risen faster than their 

 costs, post-PPS 

1999 2000 2001 2002 2003 2004

-10

-5

0

5

10

15

20

Cumu al tiv

e percent change

Payment per case

Cost per case TEFRA PPS

Note: IRF (inpatient rehabilitation facility), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment 

system). Data are from consistent two-year cohorts of IRFs. 

Source: MedPAC analysis of cost report data from CMS. 

• Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and before the 

prospective payment system (PPS) was implemented in 2002, inpatient rehabilitation facilities’ 

(IRFs’) Medicare per case costs and payments increased at similar rates. Under PPS, IRFs’ 

Medicare per case payments have increased much faster than their per case costs. 

• These similarities and differences are reflected in IRFs’ Medicare margins, shown in 

Chart 9-22. 
152 Post-acute care

Chart 9-22. Inpatient rehabilitation facilities’ PPS Medicare 

margins, by group, 2002–2004 

IRF group 2002 2003 2004

 

All IRFs 11.1% 17.7% 16.3% 

Urban 11.7 18.4 16.9 

Rural 4.6 10.3 10.6 

Freestanding 18.2 23.0 24.2 

Hospital-based 6.7 14.6 12.0 

Nonprofit 6.7 14.3 12.6 

For profit 19.3 24.2 24.4 

Government 1.0 9.5 8.6 

Note: IRF (inpatient rehabilitation facility), PPS (prospective payment system). 

Source: MedPAC analysis of cost report data from CMS. 

• Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and before the 

prospective payment system (PPS) was implemented, these facilities’ Medicare margins 

ranged from 1.1 percent to 2.9 percent. Under PPS, margins have increased rapidly, rising to 

16.3 percent in 2004. 

• In 2004, freestanding inpatient rehabilitation facilities (IRFs) have an aggregate margin that is 

twice that of hospital-based IRFs. Similarly, the aggregate margin of for-profit IRFs is almost 

double that of nonprofit IRFs. 

• Our projection of the 2006 margin is 9.2 percent. In making this projection, we assumed that 

facilities will reduce patient volume by 25 percent in response to changes in the criteria for 

IRFs. Under less conservative assumptions, the Medicare margin could be 3 percentage 

points higher. With more conservative assumptions, the margin would be 2 percentage points 

lower. 
A Data Book: Healthcare spending and the Medicare program, June 2006 153

Web links. Post-acute care 

• Chapter 4 of MedPAC’s March 2006 Report to the Congress and Chapter 5 of MedPAC’s 

 June 2005 Report to the Congress provide information on post-acute care. 

http://www.medpac.gov/publications/congressional_reports/Mar06_Ch04.pdf 

http://www.medpac.gov/publications/congressional_reports/June05_Ch5.pdf 

Skilled nursing facilities 

• Chapter 4A of MedPAC’s March 2006 Report to the Congress, Chapter 2C of MedPAC’s 

March 2005 Report to the Congress, and Chapter 3C of MedPAC’s March 2004 Report to the 

Congress provide information on Medicare margins for skilled nursing facilities. 

http://www.medpac.gov/publications/congressional_reports/Mar06_Ch04A.pdf 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02C.pdf 

http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3C.pdf 

• The official Medicare website provides information on the prospective payment system and 

other related issues. 

http://www.cms.hhs.gov/snfpps/ 

Home health services 

• Chapter 4B of MedPAC’s March 2006 Report to the Congress provides information on home 

health services. 

http://www.medpac.gov/publications/congressional_reports/Mar06_Ch04B.pdf 

• The official Medicare website provides information on the quality of home health care, and 

additional information on new policies, statistics, and research, as well as information on 

home health spending and use of services. 

http://www.cms.hhs.gov/center/hha.asp 

Long-term care hospitals 

• Chapter 4C of MedPAC’s March 2006 Report to the Congress and Chapter 5 of MedPAC’s 

 June 2004 Report to the Congress provide information on long-term care hospitals. 

 http://www.medpac.gov/publications/congressional_reports/Mar06_ch04c.pdf 

http://www.medpac.gov/publications/congressional_reports/June04_ch5.pdf 

• CMS also provides information on long-term care hospitals, including the long-term care 

hospital prospective payment system. 

http://www.cms.hhs.gov/longtermcarehospitalpps/ 
154 Post-acute care

Inpatient rehabilitation facilities 

• Chapter 4D of MedPAC’s March 2006 Report to the Congress provides information on 

 inpatient rehabilitation facilities. 

 http://www.medpac.gov/publications/congressional_reports/Mar06_Ch04D.pdf 

• CMS provides information on the inpatient rehabilitation facility prospective payment system. 

http://www.cms.hhs.gov/InpatientRehabFacPPS 
S E C T I O N

Medicare Advantage 

A Data Book: Healthcare spending and the Medicare program, June 2006 157

Chart 10-1. Counties with MA plans, 2006 

Note: MA (Medicare Advantage), CCP (coordinated care plan). Other includes private fee-for-service and regional preferred 

provider organizations. 

Source: Medicare Health Plan Compare database, May 2006. Available at http://www.medicare.gov. 

• Local coordinated care plans (CCPs) are local preferred provider organizations (PPOs) and health 

maintenance organizations (HMOs) which have comprehensive provider networks and limit or 

discourage use of out-of-network providers. Other types of Medicare Advantage (MA) plans are 

private fee-for-service (PFFS) plans and regional PPOs. PFFS plans are not required to have any 

networks and members may go to any willing Medicare provider. Regional PPOs cover entire statebased regions and have networks that may be looser than the ones required of local PPOs. Regional 

PPOs are available beginning in 2006. 

• MA plans are available in at least parts of all states. Local CCPs are available in 45 states, and other 

MA plans are available in all 50 states. 

• Local CCPs are available to 80 percent of Medicare beneficiaries in 2006—up from 67 percent in 

2005. Other MA plans are available to 95 percent of beneficiaries—up from 45 percent in 2005. 

Overall, almost 100 percent of beneficiaries live in a county where MA plans are available in 2006—

up from 84 percent in 2005. 

• MA plans that include the Medicare Part D prescription drug benefit are available to 99 percent of all 

Medicare beneficiaries. 

• These data do not include plans that have restricted enrollment or are not paid based on the MA plan 

bidding process. More specifically, special needs plans, cost-based plans, employer-only plans, and 

certain other demonstration plans are excluded. 
158 Medicare Advantage

Chart 10-2. Enrollment in MA plans, 1994–2006 

2.3

3.1

4.1

5.2

6.1

6.4 6.3

5.5

4.9

4.6 4.7 4.9

6.9

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

1

2

3

4

5

6

7

8

B

eneficiaries (in millions)

Note: MA (Medicare Advantage). 

Source: Medicare Managed Care Contract (MMCC) Plans, Monthly Summary Reports, CMS. 

• Medicare enrollment in private health plans paid on an at-risk capitated basis is at an alltime high at 6.9 million enrollees. Enrollment rose rapidly throughout the 1990s, peaking at 

6.4 million enrollees in 1999 (17 percent of all Medicare beneficiaries), and declined steadily 

to a low of 4.6 million enrollees in 2003 (12 percent of all Medicare beneficiaries). 
A Data Book: Healthcare spending and the Medicare program, June 2006 159

Chart 10-3. County benchmarks for MA plans, 2006 

Note: MA (Medicare Advantage). 

Source: CMS website, 2006. 

• Benchmarks are bidding targets that CMS sets for every county as directed by law. The 2006 

benchmarks are the 2005 Medicare Advantage (MA) county payment rates, updated by the 

projected national growth rate in per capita Medicare spending. 

• Plans submit bids for the basic Medicare benefit which are compared with the benchmark. If the bid 

is higher than the benchmark, the plan is paid the benchmark and the members pay the difference 

with a premium. However, if the bid is below the benchmark, the plan is paid its bid plus 75% of the 

difference and the remaining 25% of the difference is retained by the Medicare program. The plan is 

then obligated to rebate its share of the difference to its members in the form of supplemental 

benefits or reduced premiums. 

• In 2006, Medicare payment rates (standardized for health risk) for MA plans in U.S. counties range 

from $670 to $1,207 per month. 

• The counties with benchmarks under $700 per month contain 22 percent of Medicare beneficiaries. 

• The counties with benchmarks between $700 and $750 contain 43 percent of Medicare beneficiaries. 

• The counties with benchmarks between $750 and $850 contain 23 percent of Medicare beneficiaries. 

• The counties with benchmarks above $850 contain 12 percent of Medicare beneficiaries. 

Under $700 $700–$750 $750–$850 Over $850 
160 Medicare Advantage

Chart 10-4. Benefits available to beneficiaries in MA plans, 

by type of plan 

Local plans 

 HMO PPO PFFS Regional PPO Any MA plan 

Prescription drug plans 72% 63% 70% 88% 99% 

 

Zero-premium prescription 

drug plans 48 11 25 15 68

Out-of-pocket limit: 

 $5,000 or less 53 41 75 88 98 

 $2,000 or less 28 16 37 4 65 

 

Cost sharing for 6-day hospital stay, 

$500 or less 63 45 43 13 87

Note: MA (Medicare Advantage), HMO (health maintenance organization), PPO (preferred provider organization), PFFS (private 

fee-for-service). 

Source: CMS 2006 unpublished bid data. 

• Ninety-nine percent of Medicare beneficiaries have a Medicare Advantage (MA) plan 

available that includes the Part D prescription drug benefit—an MA–PD. The most widely 

available type of MA–PD is the regional PPO, which is available to 88 percent of Medicare 

beneficiaries. 

• Zero-premium MA–PDs are available to 68 percent of beneficiaries. In a zero-premium 

MA–PD, enrollees do not have to pay an extra premium (above the standard Part B 

premium) to join the plan, and there is no Part D premium. Local HMOs are the most widely 

available zero-premium MA–PDs. 

• Overall, 98 percent of beneficiaries have access to a plan that includes an annual out-ofpocket (OOP) limit of $5,000 or less, and 65 percent of beneficiaries have a plan available 

that includes an OOP limit of $2,000 or less. Private fee-for-service plans with an OOP limit 

no higher than $2,000 are available to 37 percent of beneficiaries. Also, HMOs with OOP 

limits of $2,000 or lower are available to 28 percent of Medicare beneficiaries, and local 

PPOs with these limits are available to 16 percent. We note that many plans charge low 

enough cost sharing that enrollees in such plans are unlikely to reach these levels of OOP 

spending. 

• Eighty-seven percent of Medicare beneficiaries have access to a plan with expected cost 

sharing of $500 or less for a six-day inpatient hospital stay. Availability of these plans is 

greater for HMOs and other local plans. Only 13 percent of beneficiaries have access to a 

regional PPO with this level of cost sharing. 
A Data Book: Healthcare spending and the Medicare program, June 2006 161

Chart 10-5. MA Regions 

Note: MA (Medicare Advantage). 

Source: CMS website, 2006. http://www.cms.hhs.gov/PrescriptionDrugCovGenIn/Downloads/MAPDRegions.pdf. 

• In 2006, regional preferred provider organizations (PPOs)—which must cover entire statebased regions—are offered in the Medicare Advantage program. Regional PPOs must have 

PPO-like networks, which may sometimes be looser than the ones required of local PPOs. 

• CMS chose 26 PPO regions based on factors including population size, sufficient numbers 

of existing competitors, and preservation of geographic patient flows. 

• In 2006, there are regional PPOs in 21 of the 26 regions. The five regions that do not have 

any regional PPOs are: Alaska, Colorado/New Mexico, Connecticut/Massachusetts/ 

Vermont, Idaho/Oregon/Utah/Washington, and Maine/New Hampshire. 
162 Medicare Advantage

Chart 10-6. Special needs plans have grown quickly 

11

125

276

2004 2005 2006

0

50

100

150

200

250

300

Number of special ne

eds plans

Source: CMS special needs plan fact sheet and data summary, February 14, 2006. 

• The Congress created special needs plans (SNPs) as a new Medicare Advantage (MA) plan 

type in the 2003 Medicare Prescription Drug, Improvement and Modernization Act to provide 

a common framework for the existing plans serving special needs beneficiaries and to 

expand beneficiaries’ access to and choice among MA plans. 

• In 2006, 276 SNPs are approved to operate. 

• Most SNPs—82 percent—are for dual eligibles, while 13 percent are for beneficiaries who 

reside in institutions, and 4 percent are for beneficiaries with chronic conditions. 

• SNPs were authorized for only five years. Absent congressional action, SNP authority will 

expire at the end of 2008. 
A Data Book: Healthcare spending and the Medicare program, June 2006 163

Chart 10-7. Number of organizations offering special needs 

plans, by county, 2006 

Source: MedPAC analysis of CMS 2006 Plan Benefit Package data. 

• In 2006, special needs plans (SNPs) are available in at least part of 42 states, the District of 

Columbia, and Puerto Rico. Fifty-nine percent of Medicare beneficiaries live in an area 

where a SNP is offered. 

• Eight states, the District of Columbia, and Puerto Rico have at least one SNP available 

throughout the entire area. 

• Several states have multiple types of SNPs available. 

• SNPs are offered as regional preferred provider organizations in Florida, Hawaii, and 

New York. 
164 Medicare Advantage

Web links. Medicare Advantage 

• Chapter 9 of MedPAC’s June 2006 Report to the Congress provides information on 

Medicare Advantage plans. 

http://www.medpac.gov/publications/congressional_reports/Jun06_Ch09.pdf 

• Chapter 3 of MedPAC’s June 2005 Report to the Congress provides information on 

Medicare Advantage plans. 

http://www.medpac.gov/publications/congressional_reports/June05_Ch3.pdf 

• More information on the Medicare Advantage program payment system can be found in 

MedPAC’s Medicare Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Dec05_payment_basics_MA.pdf 

• CMS provides information on Medicare+Choice and other Medicare managed care plans. 

http://cms.hhs.gov/healthplans/ 

• The official Medicare website provides information on plans available in specific areas and 

the benefits they offer. 

http://www.medicare.gov/mphCompare/home.asp 
S E C T I O N

Drugs

A Data Book: Healthcare spending and the Medicare program, June 2006 167

Chart 11-1. Medicare spending and annual growth rates for 

 Part B drugs 

2.76 3.22

4.09

5.09

6.41

8.45

10.34

10.87

25.9

27.0

24.4

25.9

31.8

22.3

5.1

1997 1998 1999 2000 2001 2002 2003 2004

0

5

10

15

20

Medicare spend ni g (dollars ni bill oi ns)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Annual grow ht ra et s (percent)

Medicare spending Annual growth rates

Source: MedPAC analysis of unpublished CMS data. 

• MedPAC estimates that spending for Part B drugs totaled $10.9 billion in 2004, 

an increase of 5.1 percent over 2003. This sum represents about 4 percent of total 

Medicare spending. 

• These totals do not include drugs provided through outpatient departments of hospitals or 

for end-stage renal disease patients in dialysis facilities. MedPAC estimates that in 2004, 

freestanding and hospital-based dialysis facilities alone billed Medicare an additional 

$3.2 billion for drugs. 

• The primary reason for growth in these expenditures is the increased volume of drugs used 

and the substitution of newer and more expensive medications for older therapies. 

• In 2005, CMS changed its reimbursement rate to 106 percent of the average sales price 

(ASP). Preliminary estimates by CMS indicate that spending for Part B drugs in 2005 

declined by 3 percent. 
168 Drugs

Chart 11-2. Top 10 drugs covered by Medicare Part B, by share 

of expenditures, 2004 

 FDA Percent of 

Drug name Clinical indications Competition approval date spending 

Non-ESRD erythropoietin Anemia Multisource 1989 9.0% 

 biological 

Darbepoetin alfa Anemia Sole source 2001 7.9 

Rituximab Non-Hodgkins Sole source 1997 5.5 

 lymphoma biological 

Ipratropium bromide Asthma Generic 1993 5.4 

Leuprolide acetate suspension Prostate cancer Multisource 1985 5.3 

Infliximab Rheumatoid arthritis, Sole source 1999 5.0 

 Crohn’s disease biological 

Pegfilgrastim Cancer Sole source 2002 4.6 

Albuterol Asthma Generic 1982 3.7 

Goserelin acetate implant Prostate cancer Sole source 1989 3.4 

Unclassified new drugs Various N/A 4/1/03 to present 3.0 

Note: ESRD (end-stage renal disease), FDA (Food and Drug Administration), N/A (not available). 

*Drugs that the FDA has approved since April 1, 2003 are categorized as unclassified new drugs. 

Source: MedPAC analysis of 2004 Medicare claims data from CMS and unpublished FDA data. 

• Medicare covers about 550 outpatient drugs, but spending is very concentrated. The top 

10 drugs account for about 53 percent of all Part B spending. 

• Spending for new drugs dominates the list. Of the top 10 drugs covered by Medicare in 

2003, four received Food and Drug Administration approval in 1996 or later. In addition, 

spending on injectables too new to have received their own payment codes accounted for 

3 percent of Part B drug spending. 

• Treatment for cancer dominates the list—16 of the top 20 drugs treat cancer or the side 

effects associated with chemotherapy. 
A Data Book: Healthcare spending and the Medicare program, June 2006 169

Chart 11-3. Part D enrollment and other sources of drug 

 coverage in early 2006 

Millions enrolled as of

 1/13/2006 2/11/2006 3/13/2006 4/18/2006 5/7/2006 6/11/2006 

Enrollment that leads to Medicare program spending: 

 Voluntary enrollees 

 in stand-alone PDPs 3.6 4.9 6.4 8.1 8.9 10.4 

 Enrollees in MA–PDs 

 (including some duals) 5.1 5.3 5.7 5.8 5.9 6.0 

 Individuals dually eligible for 

 Medicare and Medicaid and 

 auto-enrolled in Part D plans 5.6 5.7 5.8 5.8 5.9 6.1 

 Individuals covered by 

 Medicare RDS 6.4 6.4 6.2 6.8 6.9 6.9 

 Subtotal 20.6 22.3 24.0 26.5 27.6 29.4 

Enrollment that does not lead to Medicare program spending*: 

 Estimated federal 

 retirees in FEHB 

 and Tricare 3.1 3.1 3.5 3.5 3.5 3.5 

 Total 23.8 25.4 27.6 30.0 31.1 32.8 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]), RDS (retiree drug subsidy), FEHB 

(Federal Employees Health Benefits program). Tricare is the health program for military retirees and their dependents. For 

calendar year 2006, CMS projects that an average of 43.1 million beneficiaries will be enrolled in Medicare Parts A and/or 

B. Columns may not sum due to rounding. 

 *In addition, CMS estimates that 5.4 million Medicare beneficiaries have drug coverage of equal or greater value to Part 

D benefits through the Department of Veterans Affairs, Indian Health Service, former employers that do not receive 

Medicare’s retiree drug subsidy, current employers, or state pharmaceutical assistance programs. 

 

Source: CMS press releases dated as shown above. 

• As of June 2006, CMS estimated that 29.4 million of the 43 million Medicare beneficiaries (68 

percent) were either signed up for Part D plans or had prescription drug coverage through 

employer-sponsored coverage under Medicare’s retiree drug subsidy (RDS). (If an employer 

agrees to provide primary drug coverage to its retirees with an average benefit value that is 

equal or greater in value to Part D (called creditable coverage), Medicare provides the employer 

with a tax-free subsidy for 28 percent of each eligible individual’s drug costs that fall within a 

specified range of spending.) 

• Voluntary enrollees in stand-alone drug plans numbered 10.4 million, or 24 percent of all 

Medicare beneficiaries. Individuals who are dually eligible for Medicare and Medicaid and 

enrollees in Medicare Advantage–Prescription Drug plans numbered 6.0 million and 6.1 million, 

respectively; each group is 14 percent of all beneficiaries. Individuals whose employers received 

Medicare’s RDS numbered 6.9 million, or 16 percent. Those four groups of beneficiaries directly 

affect Medicare program spending. 

• Other Medicare beneficiaries have creditable drug coverage, but that coverage does not affect 

Medicare program spending. For example, 3.5 million beneficiaries (8 percent) were federal 

retirees who receive drug coverage through the Federal Employees Health Benefits program or 

Tricare. Another 5.4 million others (12 percent) (not shown) had prescription drug coverage 

through the Department of Veterans Affairs, Indian Health Service, other former employers that 

are not a part of Medicare’s RDS, current employers because the individual is still an active 

worker, or state pharmaceutical assistance programs. 
170 Drugs

Chart 11-4. Characteristics of Medicare PDPs in 2006

 Basic benefits 

 All types Defined Actuarially Enhanced 

 of benefits standard equivalent benefits 

Total number of plans 1,429 132 689 608 

Distribution of plans 

 Plan type 100% 9% 48% 43% 

 Type of deductible 

 Zero 58 N/A 18 40 

 Reduced 8 N/A 5 3 

 $250 34 9 25 0 

Cost-sharing structure before the initial coverage limit 

 Uses 25% coinsurance 9 9 0 0 

 Uses tiered cost sharing 91 N/A 48 43 

 Copays 21 N/A 8 13 

 Coinsurance 3 N/A 2 0 

 Combination 67 N/A 38 30 

Coverage in the gap 

 Generics 13 N/A 0 13 

 Generics and brands 2 N/A 0 2 

 None 85 N/A 48 27 

Offers mail-order 

 pharmacy services 91 8 43 40 

Note: PDP (prescription drug plan), N/A (not applicable). Percentages are not weighted by plan enrollment. The PDPs described 

here exclude those offered in U.S. territories. Benefits labeled actuarially equivalent to Part D’s standard benefit include 

what CMS calls “actuarially equivalent standard” and “basic alternative” benefits. Plans with “gap coverage” include some 

benefits in the range of beneficiary drug spending above the standard benefit’s initial coverage limit and below its out-ofpocket threshold. Part D’s defined standard benefit requires the enrollee to pay 100 percent coinsurance in this coverage 

gap. 

Source: MedPAC analysis of CMS plan benefit package and landscape data. 

• Among all 1,429 prescription drug plans (PDPs), 57 percent provide basic benefits—either Part 

D’s standard benefit design (9 percent) or a benefit that is actuarially equivalent to the standard 

benefit (48 percent). The remaining plans are enhanced (43 percent); they include basic benefits 

and some supplemental coverage. 

• Fifty-eight percent of the 1,429 PDPs do not charge a deductible, 34 percent use the standard 

benefit’s $250 deductible, and the remaining 8 percent use deductibles that are less than $250. 

No enhanced plans use the standard benefit’s $250 deductible, and many actuarially equivalent 

plans charge no deductible either. A plan could charge no deductible yet maintain actuarial 

equivalence to the standard benefit by charging higher cost sharing or lowering the benefit’s 

initial coverage limit. 

• Most plans (91 percent) use cost-sharing tiers rather than the defined standard benefit’s flat 25 

percent coinsurance. However, 67 percent of all PDPs use a combination of copays for some 

(usually lower price) tiers and coinsurance (typically for specialty drugs placed on higher price 

tiers). 

• Relatively few PDPs offer any coverage in the standard benefit’s coverage gap. 
A Data Book: Healthcare spending and the Medicare program, June 2006 171

Chart 11-5. Distribution of PDP and MA–PD premiums for basic 

and enhanced plans in 2006 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Distributions are not weighted by 

beneficiary enrollment. Total number of PDPs is 1,429, which excludes plans offered in U.S. territories. Total number of 

MA–PDs is 1,303, which excludes demonstration programs, 1876 cost plans, and plans offered in U.S. territories. MA–PD 

enrollees must pay any other Medicare Advantage premiums in order to obtain Part D prescription drug coverage. 

 Benefits labeled basic include Part D’s standard benefit design as well as benefits that are actuarially equivalent to 

standard benefits. Enhanced plans include supplemental coverage. 

Source: MedPAC analysis of CMS plan benefit package and landscape data. 

• Among all basic prescription drug plans (PDPs) (defined standard benefits and those that 

are actuarially equivalent), the simple average monthly premium is $33. CMS officials have 

noted that beneficiary premiums are expected to average $23 per month. The reason for 

this difference is that the $23 figure is weighted by Part D enrollment. 

• At the median, premiums for enhanced PDPs run about $10 more per month than premiums 

for basic PDPs. Within each category of basic and enhanced plans, there is quite a bit of 

variation among premiums. Some enhanced benefits cost less than $20 per month in certain 

regions, while other basic plans cost more than $50 per month. 

• Medicare Advantage–Prescription Drug plans (MA–PDs) tend to have lower premiums for 

their drug benefits than PDPs. More than 500 MA–PDs (nearly 40 percent) charge no 

additional premium for Part D coverage beyond what the plan charges for Parts A and B 

services. 

0

50

100

150

200

250

300

350

400

450

$0 $1.00-

$19.99

$20.00-

$24.99

$25.00-

$29.99

$30.00-

$34.99

$35.00-

$39.99

$40.00-

$49.99

$50+

Basic (57% of plans)

Enhanced (43% of plans)

0

50

100

150

200

250

300

350

400

450

$0 $1.00-

$19.99

$20.00-

$24.99

$25.00-

$29.99

$30.00-

$34.99

$35.00-

$39.99

$40.00-

$49.99

$50+

Basic (36% of plans)

Enhanced (64% of plans)

Monthly premium (in dollars) 

PDPs MA–PDs 

Number of plans 
172 Drugs
A Data Book: Healthcare spending and the Medicare program, June 2006 173
174 Drugs

 
A Data Book: Healthcare spending and the Medicare program, June 2006 175

Chart 11-8. Premiums and cost-sharing requirements among 

PDPs in 2006 

 Basic benefits 

 Defined Actuarially Enhanced 

 Standard* equivalent benefits 

Monthly premium 

 Minimum $2 $14 $5 

 Maximum 85 63 105 

 Median 28 32 44 

 Mean 26 35 43 

Deductible 

 Minimum 250 0 0 

 Maximum 250 250 150 

 Median 250 250 0 

Median cost sharing for: 

 Plans with generic/brand tier structure 

 Generic copay N/A 5 7 

 Brand copay N/A 28 30 

 Specialty tier coinsurance 

 (where applicable) N/A 25% 25% 

 Plans with generic/preferred brand/nonpreferred brand tier structure 

 Generic copay N/A $7 $5 

 Preferred brand copay N/A 22 26 

 Nonpreferred brand copay N/A 55 50 

 Specialty tier coinsurance 

 (where applicable) N/A 25% 30% 

Note: PDP (prescription drug plan), N/A (not applicable). Values do not reflect plan enrollment. The PDPs described here 

exclude plans offered in U.S. territories. Cost sharing is for median cost sharing among plans that use tiered cost sharing 

before the initial coverage limit. Benefits labeled actuarially equivalent to Part D’s standard benefit include actuarially 

equivalent standard and basic alternative benefits. 

 *The defined standard benefit charges 25 percent coinsurance between a $250 deductible (in 2006) and the benefit’s 

initial coverage limit of $2,250 in covered drug spending (in 2006). 

Source: MedPAC analysis of CMS plan benefit package and landscape data. 

• Across all types of prescription drug plan (PDP) benefits offered among the 1,429 plans 

(including both basic and enhanced packages), the lowest-premium plan is a defined 

standard benefit at a cost of just under $2 per month, while the higher premium plan 

provides enhanced coverage for about $105 per month. 

• Plans that use tiered cost sharing tend to charge fixed-dollar copays rather than a 

percentage coinsurance of the prescription’s price. Among plans that use a generic/brand 

tier structure, median copays for generic drugs are $5 to $7, and those for brand name 

drugs are $28 to $30. Plans that distinguish between preferred and nonpreferred brand 

name drugs charge copays of $7 to $5 for generics, $22 to $26 for preferred brand name 

drugs, and $55 to $50 for nonpreferred brand name drugs. Many plans use a separate tier 

for higher cost specialty drugs, such as biologics. PDPs that use a specialty tier tend to 

charge 25 percent to 30 percent coinsurance. Based on CMS guidance, plan enrollees may 

not appeal payment of a lower tier’s cost-sharing requirement for such specialty drugs. 
176 Drugs

Chart 11-9. Geographic distribution of PDPs in 2006 

 Number of PDPs Mean premium for: 

 That qualify With a monthly 

 States in for auto- premium Basic Enhanced 

PDP region the region Total enrollment ≤ $20 benefits benefits 

 

 1 ME, NH 41 14 1 $35 $44 

 2 CT, MA, RI, VT 44 11 4 31 42 

 3 NY 46 15 6 32 37 

 4 NJ 44 14 4 32 41 

 5 DC, DE, MD 47 15 3 33 45 

 6 PA, WV 52 15 2 34 45 

 7 VA 41 16 2 34 44 

 8 NC 38 13 2 37 46 

 9 SC 45 16 1 35 47 

10 GA 42 14 1 34 43 

11 FL 43 6 4 34 47 

12 AL, TN 41 9 1 35 48 

13 MI 40 14 1 34 43 

14 OH 43 10 3 33 42 

15 IN, KY 42 13 1 36 46 

16 WI 45 14 4 31 41 

17 IL 42 15 1 32 43 

18 MO 41 10 2 34 43 

19 AR 40 13 2 35 46 

20 MS 38 12 2 36 47 

21 LA 39 11 1 38 48 

22 TX 47 16 2 33 44 

23 OK 42 12 2 36 46 

24 KS 40 11 2 34 42 

25 IA, MN, MT, ND, 

 NE, SD, WY 41 14 3 32 44 

26 NM 43 8 6 29 41 

27 CO 43 10 3 32 41 

28 AZ 43 6 4 31 40 

29 NV 44 7 3 30 40 

30 OR, WA 45 15 5 31 41 

31 ID, UT 44 14 3 34 44 

32 CA 47 10 6 28 38 

33 HI 29 8 3 31 37 

34 AK 27 8 0 34 41 

Total 1,429 409 90 33 43 

Note: PDP (prescription drug plan). Mean values are not weighted by plan enrollment. The PDPs described here exclude plans 

offered in U.S. territories. Benefits labeled basic include Part D’s standard benefit design as well as benefits that are 

actuarially equivalent to standard benefits. Enhanced plans include supplemental coverage. Plans that “qualify for autoenrollment” have premiums that are at or below threshold values calculated by CMS for each PDP region. 

Source: MedPAC analysis of CMS plan benefit package and landscape data. 

• For 2006, all regions of the country experienced strong plan entry among stand-alone PDPs. 

Every region has at least 27 PDPs offering Part D coverage and the median number of 

plans per region is 43. Medicare beneficiaries who qualify to receive Part D’s low-income 

subsidies have a broad choice of PDPs available. All regions but Alaska have at least one 

PDP available with a monthly premium of $20 or less. 
A Data Book: Healthcare spending and the Medicare program, June 2006 177

Chart 11-10. Characteristics of MA–PDs’ drug benefits in 2006 

 Basic benefits 

 All types Defined Actuarially Enhanced 

 of benefits standard equivalent benefits 

Total number of plans 1,303 96 376 831 

Distribution of plans (in percent): 

 Plan type 100% 7% 29% 64% 

 Type of organization 

 Local HMO 66 4 18 43 

 Local PPO 21 1 8 12 

 PFFS 10 1 2 7 

 Regional PPO 4 1 1 2 

 Type of deductible 

 Zero 80 N/A 18 62 

 Reduced 3 N/A 2 1 

 $250 17 7 8 1 

 Cost-sharing structure before the initial coverage limit 

 Uses 25% coinsurance 7 7 0 0 

 Uses tiered cost sharing 93 N/A 29 64 

 Copays 34 N/A 16 17 

 Coinsurance 0 N/A 0 0 

 Both 59 N/A 13 46 

 Coverage in the gap 

 Generics 23 N/A 0 23 

 Generics and branded 5 N/A 0 5 

 None 72 N/A 29 36 

 Offers mail-order pharmacy services 96 7 27 62 

Note: MA–PD (Medicare Advantage–Prescription Drug [plan]), PPO (preferred provider organization), PFFS (private fee for 

service), N/A (not applicable). Local plans (HMOs, PPOs, and PFFS plans) select individual counties in which they 

operate. Regional PPOs must provide Medicare services throughout a CMS-defined region that encompasses one or 

more states. Percentages are not weighted by plan enrollment. The MA–PDs described here exclude demonstration 

programs, 1876 cost plans, and plans offered in U.S. territories. Benefits labeled actuarially equivalent to Part D’s 

standard benefit include what CMS calls “actuarially equivalent standard” and “basic alternative” benefits. Plans with 

“coverage in the gap” include some benefits in the range of beneficiary drug spending above the standard benefit’s initial 

coverage limit and below its out-of-pocket threshold. Part D’s defined standard benefit requires the enrollee to pay 100 

percent coinsurance in this coverage gap. 

Source: MedPAC analysis of CMS plan benefit package and landscape data. 

• In addition to stand-alone PDPs, private health plans are offering 1,303 MA–PDs around the country. 

In order to enroll in an MA–PD, beneficiaries must elect to have their health care services (e.g., 

hospital and physician care) provided by the MA–PD. The vast majority of MA–PDs are offered at a 

local level; that is, availability varies depending on the county in which a beneficiary lives. 

• The law allows MA–PDs to use 75 percent of the difference between an MA plan’s benchmark 

payment and its bid for providing Parts A and B services (called rebate dollars) to supplement its 

package of benefits or lower its premium, including Part D premiums. For this reason, offerings 

through MA–PDs differ systematically from PDPs. 

• A much larger proportion of MA–PDs (64 percent) provide enhanced benefits than do PDPs (43 

percent). For 2006, 80 percent of all MA–PDs have no deductible compared with 58 percent of PDPs. 

They are also more likely to provide coverage within Part D’s coverage gap: 23 percent of MA–PDs 

offer coverage of generic drugs, and another 5 percent of MA–PDs provide coverage of both generic 

and brand-name drugs. By comparison, 13 percent of PDPs offered generic coverage in the gap and 

2 percent covered generic and brand name drugs. 
178 Drugs

Chart 11-11. Premiums and cost-sharing requirements among 

MA–PD drug benefits in 2006 

 Basic benefits 

 Defined Actuarially Enhanced 

 Standard* equivalent benefits 

Monthly drug premium 

 Minimum $0 $0 $0 

 Maximum 77 78 120 

 Median 23 24 0 

 Mean 25 21 16 

Monthly total plan premium (including medical and drug premiums) 

 Minimum 0 0 0 

 Maximum 202 179 260 

 Median 63 63 29 

 Mean 68 61 41 

Deductible 

 Minimum 250 0 0 

 Maximum 250 250 250 

 Median 250 0 0 

Median cost sharing for: 

 Plans with generic/brand tier structure 

 Generic copay N/A 5 7 

 Brand copay N/A 30 30 

 Specialty tier coinsurance 

 (where applicable) N/A 25% 30% 

 Plans with generic/preferred brand/nonpreferred brand tier structure 

 Generic copay N/A $5 $5 

 Preferred brand copay N/A 29 28 

 Nonpreferred brand copay N/A 55 50 

 Specialty tier coinsurance 

 (where applicable) N/A 25% 25% 

Note: MA–PD (Medicare Advantage–Prescription Drug [plan]), N/A (not applicable). Values are not weighted by plan enrollment. 

The MA–PDs described here exclude demonstration programs, 1876 cost plans, and plans offered in U.S. territories. Cost 

sharing is for median cost sharing among plans that use tiered cost sharing before the initial coverage limit. Benefits labeled

actuarially equivalent to Part D’s standard benefit include actuarially equivalent standard and basic alternative benefits. 

*Part D’s defined standard benefit has a $250 deductible (in 2006) and 25 percent coinsurance below an initial coverage limit 

of $2,250 (in 2006). 

Source: MedPAC analysis of CMS plan benefit package and landscape data. 

• Many Medicare Advantage organizations have applied some of their rebate dollars toward the 

premiums of enhanced plans. In 2006, the median monthly premium for an enhanced Medicare 

Advantage–Prescription Drug plan (MA–PD) is essentially zero. However, not every beneficiary has 

access to a zero-premium enhanced plan; availability depends on the county in which they live. 

• In order to obtain MA–PD coverage, enrollees must pay the Part B premium and any other 

premium amount charged by their plan for regular medical services. The median combined MA–

PD premiums for medical services and prescription drugs range from $29 to $63 per month. 

• Median cost-sharing amounts are similar to those used by prescription drug plans. MA–PDs that 

use a generic/brand tier structure typically charge $5 to $7 to fill a generic prescription and $30 

for brand name prescriptions. Plans that distinguish between preferred and nonpreferred brand 

name drugs have the following median copays: $5 for generics, $29 to $28 for preferred brand 

name drugs, and $55 to $50 for nonpreferred brand name drugs. Plans often charge 25 percent 

coinsurance for specialty and higher priced drugs. 
A Data Book: Healthcare spending and the Medicare program, June 2006 179

Chart 11-12. Distribution of Part D enrollees by organization 

Humana

18%

Wellpoint*

7%

Other

31%

Coventry

4%

WellCare 6%

MemberHealth

7%

Humana

13%

Other

46%

United and PacifiCare

27%

United and 

PacifiCare

20%

Kaiser

Permanente

14%

Health Net

3%

Highmark

4%

PDP enrollment = 13.9 million MA-PD enrollment = 5.9 million 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Data are as of 

April 27, 2006. 

 *Includes Blue Cross and Blue Shield New England Alliance, Blue Medicare Rx, and Unicare. 

Source: MedPAC based on CMS enrollment data. 

• As of late April 2006, Part D enrollment was concentrated among plans offered by a small 

number of parent organizations. Several of those organizations offer both stand-alone 

prescription drug plans (PDPs) and Medicare Advantage–Prescription Drug plans (MA–

PDs). For example, United and PacifiCare (which merged recently) had 27 percent of the 

13.9 million enrollees in PDPs and 20 percent of the 5.9 million enrollees in MA–PDs. 

Similarly, Humana had a considerable portion of both markets: 18 percent of PDP enrollees 

and 13 percent of MA–PD enrollees. 

• As information on enrollment in specific Part D plans becomes available, the Commission 

will monitor those data to see how they affect plans’ decisions to enter or exit the market. 
180 Drugs

Chart 11-13. Most Part D plans distinguish between preferred

 and nonpreferred brands and include specialty tiers 

 Distribution of plans by tier structures 

 Generic/preferred brand/ 

 Generic/brand nonpreferred brand 

 25% Without With Without With 

 coinsurance, specialty specialty specialty specialty 

Plan characteristics all tiers tier tier tier tier Other 

All Part D plans 8% 11% 15% 19% 45% 2% 

All PDPs 9 8 22 23 38 1 

 National, near-national 5 8 21 25 40 0 

 Non-national 31 3 28 12 21 4 

 Auto-enrollment 23 2 33 9 33 1 

 No auto-enrollment 3 10 18 29 40 0 

 Basic 16 5 25 18 36 1 

 Enhanced 0 12 18 30 40 0 

All MA–PDs 7 16 6 15 53 3 

 Local HMO 6 15 5 14 58 2 

 Local PPO 6 21 8 24 37 5 

 Regional PPO 29 8 15 10 38 0 

 PFFS 10 11 11 0 67 0 

 Basic 18 21 10 16 32 2 

 Enhanced 1 13 5 14 65 3 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]), PPO (preferred provider 

organization), PFFS (private fee-for-service). The PDPs described here exclude plans offered in U.S. territories. The MA–

PDs described here exclude demonstration programs, 1876 cost plans, and plans offered in U.S. territories. Autoenrollment refers to PDPs that were eligible for automatically enrolled beneficiaries based on low-income status. Costsharing structures are for before the initial coverage limit of Part D. A specialty tier generally includes expensive products 

and unique drugs and biologicals, such as biotechnology drugs, for which enrollees may not appeal for lower cost-sharing 

amounts. Numbers may not sum to 100 percent due to rounding. 

Source: National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for 

January 1, 2006. 

• Most Part D formularies distinguish between preferred and nonpreferred brands. About a 

quarter of Part D plans distinguish only between brand name and generic drugs. Less than 

10 percent of plans have 25 percent cost sharing for all covered drugs. 

• 61 percent of PDPs and 68 percent of MA–PDs use the generic, preferred, and 

nonpreferred brand structure. 

• PDPs with flat, 25 percent cost sharing were more likely to be non-national, basic, and 

qualify for auto-enrollment. Enhanced plans almost never use this structure. 

• 60 percent of plans include a specialty tier in their formulary designs for expensive products 

and unique drugs and biologicals. Beneficiaries may not appeal the cost-sharing amount 

(generally limited to 25 percent) for drugs listed on a specialty tier. 
A Data Book: Healthcare spending and the Medicare program, June 2006 181

Chart 11-14. Part D plans typically list about 1,000 drugs: PDPs 

0 500 1000 1500 2000

Median number of drugs listed

All PDPs (N=1409)

National, near-national (n=1222)

Non-national (N=207)

Auto-enrollment (N=409)

No auto-enrollment (N=1020)

Basic (N=821)

Enhanced (N=608) 

25% Coinsurance (N=128)

G/B (N=108)

G/B/S (N=314)

G/PB/NPB (N=332)

G/PB/NPB/S (N=538)

Generic

Brand

Plan type

Tier structure

Note: PDP (prescription drug plan), G (generic), B (brand), PB (preferred brand), NPB (nonpreferred brand), S (specialty). 

Occasionally, plans list some generic drugs on brand tiers and vice versa. Plans with “other” tier structures are not 

displayed. The PDPs described here exclude plans offered in U.S. territories. A specialty tier generally includes expensive 

products and unique drugs and biologicals for which enrollees may not appeal for lower cost sharing. 

Source: National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for 

January 1, 2006. 

• Plan formularies in Part D typically list about 1,000 drugs. Among prescription drug plans 

(PDPs), the total number of drugs listed ranges from 618 drugs to 1,743 with a median of 

957 drugs. 

• Among PDPs, the non-national plans carry the largest formularies. Plans that are eligible for 

auto-enrollees typically list almost the same number of total drugs (and brand name drugs) 

as plans without auto-enrollment. 

• Plans with only one brand-name tier typically list fewer drugs than plans with preferred and 

nonpreferred brand tiers on their formularies. 

• The number of drugs on a plan’s formulary does not necessarily represent beneficiary 

access to medications. Beneficiaries may access coverage for unlisted drugs through the 

plan’s nonformulary exceptions process and may be denied coverage for listed drugs 

through prior authorization approval requirements. 
182 Drugs

Chart 11-15. Part D plans typically list about 1,000 drugs: MA–PDs 

0 500 1000 1500 2000

Median number of drugs listed

All MA-PDs (N=1,302)

Local HMO (N=856)

Local PPO (N=275)

Regional PPO (N=48)

PFFS (N=124)

Basic (N=471)

Enhanced (N=831)

25% Coinsurance (N=92)

G/B (N=206)

G/B/S (N=83)

G/PB/NPB (N=193)

G/PB/NPB/S (N=696)

Generic

Brand

Plan type

Tier structure

Note: MA–PD (Medicare Advantage–Prescription Drug [plan]), HMO (health maintenance organization), PPO (preferred 

provider organization), PFFS (private fee-for-service), G (generic), B (brand), PB (preferred brand), NPB (nonpreferred 

brand), S (specialty). Occasionally, plans list some generic drugs on brand tiers and vice versa. Plans with “other” tier 

structures are not displayed. The MA–PDs described here exclude demonstration programs, 1876 cost plans, and plans 

offered in U.S. territories. Cost-sharing are for before the initial coverage limit of Part D. A specialty tier generally includes 

expensive products and unique drugs and biologicals for which enrollees may not appeal for lower cost sharing. 

Source: National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for 

January 1, 2006. 

• Plan formularies in Part D typically list about 1,000 drugs. Among Medicare Advantage–

Prescription Drug plans (MA–PDs), the total number of drugs listed ranges from 509 to 

2,130, with a median of 1,096. 

• Among MA–PDs, regional preferred provider organizations and private fee-for-service 

MA–PDs have the largest formularies, but these plans only represent 6 percent of the Part D 

landscape. 

• Plans with only one brand-name tier typically list fewer drugs than plans with preferred and 

nonpreferred brand tiers on their formularies. 

• The number of drugs on a plan’s formulary does not necessarily represent beneficiary 

access to medications. Beneficiaries may access coverage for unlisted drugs through the 

plan’s nonformulary exceptions process and may be denied coverage for listed drugs 

through prior authorization approval requirements. 
A Data Book: Healthcare spending and the Medicare program, June 2006 183

Chart 11-16. The share of drugs listed in a therapeutic category 

depends on category size and regulation 

 Median percent of drugs listed by selected therapeutic categories 

 Cholinesterase Atypical 

 Inhibitors Dyslipidemics Opioid analgesics antipsychotics* 

 

Total drugs in category 4 20 61 6 

Plan type: 

 PDPs 75% 65% 39% 100% 

 MA–PDs 75 75 48 100 

Note: PDP (prescription drug plan); MA–PD (Medicare Advantage prescription drug [plan]). Descriptions of therapeutic 

 categories are given in parentheses: cholinesterase inhibitors (antidementia agents); dyslipidemics (anticholesterol 

 agents); opioid analgesics (narcotic pain relievers); atypical antipsychotics (nonphenothiazines). Occasionally, plans list 

 some generic drugs on brand tiers and vice versa. This table excludes plans offered in U.S. territories. The MA–PDs 

described here also exclude demonstration programs and 1876 cost plans. 

*Under CMS regulation, plans are required to list all drugs in the atypical antipsychotic category. 

Source: National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for 

January 1, 2006. 

• In addition to regulatory coverage rules for certain therapeutic categories, the number of 

drugs Part D plans listed in a therapeutic class reflects the size of the class of drugs 

available in the marketplace. 

• In classes with fewer drugs available, plans typically list a larger share of them. Conversely, 

when there are more drugs available in a given class, plans are able to negotiate better 

prices by listing only selected drugs on their formulary, particularly when there are 

overlapping products. 

• For example, in a therapeutic class with only a small number of drugs, such as 

cholinesterase inhibitors (within the class of antidementia agents), plans typically list a 

higher share of available drugs in the market. But in classes where there are many drugs 

available in the market, such as opioid analgesics, plans typically list a much smaller share 

on their formularies. 

• In classes for which CMS requires that plans cover all or substantially all drugs, plans 

predictably list a larger share of drugs. For example, in the class of atypical antipsychotics, 

both MA–PDs and PDPs typically list all of the available drugs. 
184 Drugs

Chart 11-17. Part D plans concentrate prior authorization in 

selected categories 

 Median percent of listed drugs subject to prior 

 authorization, among plans that use it 

Therapeutic category PDPs MA–PDs 

All drugs 9% 9% 

Atypical antipsychotics* 33 33 

Dyslipidemics 13 17 

Immune suppressants* 83 71 

Metabolic bone disease agents 17 17 

Molecular target inhibitors* 75 75 

Opioid analgesics 12 9 

Oral hypoglycemics 17 11 

Proton pump inhibitors 50 75 

Renin-angiotensins 2 4 

Reuptake inhibitors* 5 5 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Descriptions of selected 

therapeutic categories are given in parentheses: atypical antipsychotics (antipsychotics, nonphenothiazines); 

dyslipidemics (anticholesterol agents); immune suppressants (rheumatoid arthritis agents); opioid analgesics (narcotic 

pain relievers); oral hypoglycemics (blood sugar level agents); proton pump inhibitors (stomach acid reducers); renninangiotensins (selected hypertension drugs); reuptake inhibitors (selected antidepressants). This table excludes plans 

offered in U.S. territories. The MA–PDs described here exclude demonstration programs and 1876 cost plans. 

 *Plans may only apply prior authorization to new-start enrollees—those not already taking a drug in these categories. 

Source: National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for 

January 1, 2006. 

• Most Part D plans apply drug utilization management tools to selected drugs. These tools 

include prior authorization (plans require pre-approval before coverage), step therapy 

(enrollees must try specified drugs before moving to other drugs), and quantity limits (plans 

limit the number of doses of a particular drug covered in a given time period). 

• Plans use these tools for drugs that are expensive, potentially risky, subject to abuse, 

misuse, or experimental use, or to encourage use of lower-cost therapies. 

• All prescription drug plans (PDPs) and almost all Medicare Advantage–Prescription Drug 

plans (MA–PDs) (98 percent) use prior authorization for at least one drug on their 

formularies. The median plan applies prior authorization to 9 percent of the drugs on its 

formulary. Step therapy is less commonly used among Part D plans and those that use it do 

so for a smaller proportion of drugs. 

• In the class of proton pump inhibitors (PPIs), which have low-cost and over-the-counter 

drugs among the choices, PDPs and MA–PDs typically apply prior authorization to at least 

half of their listed PPIs. 

• PDPs and MA–PDs that use prior authorization typically require it for most of the drugs in 

the immune suppressant category that includes expensive rheumatoid arthritis drugs. Plans 

are likely applying prior authorization restrictions in this category (and several other 

categories) to assist in determining whether the drugs should be covered under Part B 

instead of Part D. 
A Data Book: Healthcare spending and the Medicare program, June 2006 185

Web links. Drugs 

• Chapters 7 and 8 of the MedPAC June 2006 Report to the Congress provide information on 

the Medicare Part D program, as does MedPAC’s Payment Basics series. 

http://www.medpac.gov/publications/congressional_reports/Jun06_Ch07.pdf 

http://www.medpac.gov/publications/congressional_reports/Jun06_Ch08.pdf 

http://www.medpac.gov/publications/other_reports/Dec05_payment_basics_PartD.pdf 

• Analysis of Medicare spending on oncology drugs can be found in MedPAC’s January 2006 

Report to the Congress: Effects of Medicare Payment Changes on Oncology Services. 

http://www.medpac.gov/publications/congressional_reports/Jan06_Oncology_mandated_ 

report.pdf 

• A Kaiser Family Foundation fact sheet, last updated in May 2006, provides information on 

the Medicare Part D benefit. 

http://www.kff.org/medicare/upload/7044-03-2.pdf 

• A Kaiser Family Foundation analysis of formularies and other features of Medicare Part D plan. 

 www.kff.org/medicare/upload/7489.pdf 

• A Kaiser Family Foundation fact sheet on low-income assistance under the Medicare 

Part D benefit. 

 www.kff.org/medicare/upload/7327.pdf 

• A Kaiser Family Foundation fact sheet on enrollment in the Medicare Part D program. 

 www.kff.org/medicare/upload/7466.pdf 

• CMS information on Part D enrollment. 

 www.cms.hhs.gov/prescriptiondrugcovgenin/02_Enrollmentdata.asp 

S E C T I O N

Other services

Dialysis 

Hospice 

Clinical laboratory 

Outpatient therapy 

A Data Book: Healthcare spending and the Medicare program, June 2006 189

Chart 12-1. Total number of dialysis facilities is growing; for 

profit and freestanding are increasing over time 

 1995 2000 2005 

Total number of 

 dialysis facilities 2,721 3,805 4,540 

Mean number of 

 hemodialysis stations 15 16 17 

Percent of all facilities: 

 Urban 76% 74% 75% 

 Rural 23 25 25 

 For profit 65 78 78 

 Nonprofit 35 22 22 

 Freestanding 74 82 86 

 Hospital based 26 18 14 

Source: Compiled by MedPAC from the CMS facility survey file. 

 

• Between 1995 and 2005, the number of freestanding and for-profit facilities increased, while 

hospital-based and nonprofit facilities decreased. Freestanding facilities increased from 

74 percent to 86 percent of all facilities, and for-profit facilities increased from 65 percent to 

78 percent of all facilities. 

• Two national for-profit chains own about 60 percent of all facilities and 70 percent of all 

freestanding facilities. 

• Between 1995 and 2005, the proportion of facilities located in rural areas has remained 

relatively constant. 

• While the number of facilities has increased 67 percent since 1995, the mean number of 

hemodialysis stations per facility has grown more slowly, climbing from 15 in 1995 to 17 in 

2005. 
190 Other services

Chart 12-2. Medicare spending for outpatient dialysis services 

furnished by freestanding dialysis facilities, 

1996 and 2004 

2.1

3.8

1.0

2.8

1996 2004

0

1

2

3

4

5

6

7

D

ollars (in billions)

Drugs

Composite rate services

Source: Compiled by MedPAC from the 1996 and 2004 institutional outpatient files from CMS. 

• Between 1996 and 2004, Medicare spending for both dialysis treatments (for which 

providers are paid a predetermined rate) and for injectable drugs administered during 

treatments (for which providers are paid on a per unit basis) increased by about 10 percent 

per year. 

• Two factors contributing to spending growth are the increasing size of the dialysis population 

and the growing use of injectable drugs, such as erythropoietin, iron supplements, and 

vitamin D analogues. 

• The number of dialysis patients increased by 6 percent annually between 1996 and 2004. 

This growth is linked to a number of factors, including improvements in survival and 

increases in the number of people with diabetes, a risk factor for end-stage renal disease. 

• Between 1996 and 2004, estimated spending for injectable drugs increased by 15 percent 

annually; in contrast, spending for dialysis increased by 8 percent annually during this time 

period. 
A Data Book: Healthcare spending and the Medicare program, June 2006 191

Chart 12-3. Dialysis facilities’ capacity increased steadily 

between 1995 and 2004 

2,732

2,940

3,172

3,394

3,619

3,805

3,961

4,132

4,421 4,497

23.1

25.2

27.3

29.9

32.3

34.6

36.2

38.1

40.5

42.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

D

ai lysis facilities

15

20

25

30

35

40

45

50

H

e

m

od ai yl s si tre

a

mt ents ( ni mill oi ns)

Facilities

Hemodialysis treatments

Source: Compiled by MedPAC from the 1993–2004 facility file from CMS. 

• Providers have met the demand for furnishing care to an increasing number of dialysis 

patients by opening new facilities. In 2004, a facility provided about 

9,500 treatments per year on average. 

• Between 1995 and 2004, the total number of dialysis facilities grew by about 

6 percent annually, and the number of hemodialysis treatments grew by 

7 percent annually. 
192 Other services

Chart 12-4. Characteristics of beneficiaries vary somewhat 

according to the dialysis facility’s business status 

in 2001 and 2002 

32

48

24

40 39

48

21

46

32

48

22

40

African Amercian Female Elderly (age 75+ years) Medicaid

Patient characteristics

0

5

10

15

20

25

30

35

40

45

50

55

P

ercent of patients tre

ated

Newly opened facilities Facilities that remained in business Closed facilities

Note: The 122 closed facilities are those that were open for business in 2001 but closed in 2002. The 3,752 facilities that 

remained in business are those that were open for business in 2001 and 2002. The 253 newly opened facilities are those 

that did not provide dialysis services until 2002. Patients may receive care from more than one facility. A total of 9,296 

patients received care at closed facilities; 337,637 received care from facilities that remained in business; and 11,412 

received care from facilities newly opened in 2002. Results are weighted by the number of treatments patients received 

from each facility. 

Source: Compiled by MedPAC from the 2005 Renal Management Information System file (the number of dialysis treatments provided 

to each beneficiary), 2001–2002 denominator files (beneficiaries’ demographic characteristics and Medicaid eligibility status),

2000–2003 facility surveys, and 2003–2004 Compare database (facilities’ business status and characteristics) from CMS. 

• Facilities that stayed in business in both years treated a greater proportion of patients who were 

African American or dually eligible for Medicaid compared with facilities that closed or were 

newly opened. 

• The characteristics of the patients treated by closed and newly opened facilities were similar—32 

percent were African American, nearly half were female, nearly one-quarter were elderly, and 40 

percent were dually eligible for Medicaid. 

• In 2002, providers’ capacity to furnish care increased by 131 facilities and by about 2,000 

hemodialysis stations (data not shown). 

• These results together suggest that beneficiaries should not be experiencing problems 

accessing needed care. 
A Data Book: Healthcare spending and the Medicare program, June 2006 193

Chart 12-5. The ESRD population is growing, and most ESRD 

patients undergo dialysis 

 1994 1998 2003 

 Patients Patients Patients 

 (thousands) Percent (thousands) Percent (thousands) Percent 

Total 272.3 100% 356.0 100% 453.0 100% 

Dialysis 200.4 74 260.4 73 324.8 72 

 In-center hemodialysis 167.7 62 230.5 65 296.8 66 

 Home hemodialysis 0.8 <1 1.6 <1 1.3 <1 

 Peritoneal dialysis 29.5 11 26.8 8 25.9 6 

 Unknown 2.3 <1 1.4 <1 0.8 <1 

 

Functioning graft and 

 kidney transplants 71.9 26 95.5 27 128.1 28 

 

Note: ESRD (end-stage renal disease). Totals may not equal sum of components due to rounding. 

Source: Compiled by MedPAC from the United States Renal Data System. 

• Persons with end-stage renal disease (ESRD) require either dialysis or a kidney transplant 

to maintain life. The total number of ESRD patients increased by 6 percent annually 

between 1994 and 2003. 

• In hemodialysis, a patient’s blood flows through a machine with a special filter that removes 

wastes and extra fluids. In peritoneal dialysis, the patient’s blood is cleaned by using the 

lining of his or her abdomen as a filter. Peritoneal dialysis is usually performed in a 

patient’s home. 

• Most ESRD patients undergo hemodialysis administered in dialysis facilities three times a 

week. Hemodialysis use is growing, while use of the two types of dialysis administered in 

patients’ homes—peritoneal dialysis and home hemodialysis—is declining. 

• Functioning graft patients are patients who have had a successful kidney transplant. 

Patients undergoing kidney transplant may receive either a living or a cadaveric kidney 

donation. About 40 percent of the kidneys were from living donors and 60 percent were from 

cadaver donors. 

• Medicare is the primary payer for about 80 percent of all dialysis patients and for about half 

of all kidney transplant and functioning graft patients. 
194 Other services

Chart 12-6. Diabetics and the elderly are among the fastest 

growing segments of the ESRD population 

 Percent Annual 

 of total percent change 

 in 2003 1996–2003 

Total (n = 452,957) 100% 5% 

Age 

 0–19 2 3 

 20–44 21 2 

 45–64 43 7 

 65–74 20 5 

 75+ 16 8 

Sex 

 Male 55 6 

 Female 45 5 

Race/Ethnicity 

 White 61 5 

 African American 32 5 

 Native American 1 6 

 Asian 4 8 

 Hispanic 13 9 

 Non-Hispanic 87 5 

Underlying cause of ESRD 

 Diabetes 36 7 

 Hypertension 24 5 

 Glomerulonephritis 16 4 

 Other causes 23 5 

 

Note: ESRD (end-stage renal disease). Totals may not equal sum of the components due to rounding. 

Source: Compiled by MedPAC from the United States Renal Data System. 

 

• Among end-stage renal disease (ESRD) patients, about 35 percent are over age 65. About 

60 percent are white. 

• Diabetes is the most common cause of renal failure. 

• The number of ESRD patients increased by 5 percent annually between 1996 and 2003. 

Among the fastest growing groups of patients are those who are over age 75 and those with 

diabetes as the cause of kidney failure. 
A Data Book: Healthcare spending and the Medicare program, June 2006 195

Chart 12-7. Aggregate margins vary by type of freestanding 

dialysis facility, 2003 

 Percentage of 

 Percentage of payments from 

Type of facility all treatment dialysis drugs Aggregate margin 

All facilities 100% 41% 2.4% 

Urban 84 41 2.7 

Rural 16 42 1.4 

For profit 90 41 2.7 

Nonprofit 10 38 –0.3 

Four largest chains 73 42 3.7 

Other chains 14 39 –1.1 

Nonchain 12 38 –1.9 

Furnishes per year: 

≤ 10,000 treatments 27 42 –2.2 

> 10,000 treatments 73 41 4.2 

 

Note: Margins include payments and costs for composite rate services and injectable drugs. Margins are adjusted to reflect 

MedPAC’s analysis of audited cost reports, which found that the ratio of allowable to reported cost per treatment for 

composite rate services is 95.5 percent. 

Source: Compiled by MedPAC from the 2001 and 2003 cost reports and the 2003 institutional outpatient file from CMS. 

• For 2003, the adjusted aggregate Medicare margin for composite rate services and injectable 

drugs was 2.4 percent. 

• Aggregate margins vary based on a facility’s size, affiliation with the four largest chains, and 

profit status. This finding stems from differences in the cost per treatment; for example, total cost 

per treatment was 6 percent higher for independent facilities than for facilities affiliated with the 

four largest chains. In addition, this finding also reflects differences in the proportion of payments 

facilities receive from composite rate services, which are less profitable than dialysis injectables. 

• Aggregate margins for composite rate services and injectable drugs declined from 5.5 percent in 

2000 to 2.4 percent in 2003. During this period the composite rate increased twice, by 1.2 

percent in 2000 and 2.4 percent in 2001. In addition, providers’ cost per treatment for composite 

rate services spiked between 2000 and 2002. Although providers’ cost per treatment for dialysis 

injectables increased during this period, the difference between payments and costs remained 

about the same. 
196 Other services

Chart 12-8. Use of hospice among Medicare beneficiaries 

increased from 2000 to 2004 

 Percent change 

 2000 2004 2000–2004 

Beneficiaries in hospice 534,261 797,117 49% 

Payment (in billions) $2.9 $6.7 130 

Days of care (in millions) 26 52 101 

Share of decedents in hospice 22% 31% N/A 

Note: N/A (not available). Data include Puerto Rico. 

Source: Share of decedents in hospice from MedPAC analysis of 5 percent Enrollment Database file, 2005, from CMS. 

Beneficiaries, payment, and days of care from Medicare National Summary for HHA, Hospice, SNF, and Outpatient. 

http://www.cms.hhs.gov/MedicareFeeforSvcPartsAB/02_MedicareUtilizationforPartA.asp#TopofPage. Accessed February 

13, 2006. 

• Medicare spending on hospice increased 130 percent to $6.7 billion between 2000 and 

2004. The CMS Office of the Actuary estimates that spending on hospice will grow to $9.8 

billion by 2006. 

• Medicare’s spending on hospice services is projected to increase at an average annual rate 

of 9 percent per year from 2004 to 2015. This growth outpaces the rates of spending growth 

for hospital, physician, skilled nursing facility, and home health services. 

• Over time, more Medicare beneficiaries have elected to use hospice before they die. The 

rate of hospice use grew from 22 percent of decedents in 2000 to 31 percent in 2004. 

• With the increase in the share of decedents electing hospice before they die, the total 

number of hospice users has increased. Between 2000 and 2004, the number of hospice 

users increased almost 50 percent and the total number of covered days doubled during 

that same period. 
A Data Book: Healthcare spending and the Medicare program, June 2006 197

Chart 12-9. Long hospice stays are getting longer, but short 

 stays persist 

3 6

16

51

130

2 5

15

56

168

10th Percentile 25th Percentile Median 75th Percentile 90th Percentile

0

20

40

60

80

100

120

140

160

180

Length of enrollm

ent (da

ys)

2000

2004

Note: Data are for Medicare beneficiaries in fee-for-service Medicare. 

Source: MedPAC analysis of 5 percent Enrollment Database file, 2005, from CMS. 

• The increase in the number of covered hospice days outpaced the growth in the number of 

users of hospices. This trend in driven by increasingly longer lengths of enrollment over time 

for the share of beneficiaries at the upper end of the enrollment distribution. 

• Increasingly longer stays at the upper end of the enrollment distribution drove up the mean 

length of enrollment between 2000 and 2004, but the median length of enrollment remains 

at about 2 weeks. 

• In 2000 and 2004, more than 25 percent of beneficiaries dying in hospice were enrolled for 

less than a week before their deaths. 
198 Other services

Chart 12-10. Average length of stay in hospice by state, 2004 

Source: MedPAC analysis of CMS data from Medicare Hospice Utilization by State, CY 2004. 

http://www.cms.hhs.gov/MedicareFeeforSvcPartsAB/Downloads/HOSPICE04.pdf. Accessed February 13, 2006. 

• Mean lengths of stay in hospice varied widely by state from a low of 41 days in South 

Dakota to a high of 122 days in Mississippi in 2004. 
A Data Book: Healthcare spending and the Medicare program, June 2006 199

Chart 12-11. Hospice use has grown for all Medicare decedents, 

but use remains higher among those in 

managed care 

20

22

25

27

30 30

32

34

37 38

2000 2001 2002 2003 2004

0

5

10

15

20

25

30

35

40

45

P

ercent of decedents who died in hospice

Fee for service

Managed care

 

 

 

Source: MedPAC analysis of 5 percent Enrollment Database file, 2005, from CMS. 

• Among beneficiaries who died, those in managed care were more likely to use hospice care 

than beneficiaries in the fee-for-service program. In 2004, 38 percent of decedents in 

managed care used hospice, while 30 percent in fee-for-service used hospice. 
200 Other services

Chart 12-12. An increase in freestanding agencies fueled growth 

in the number of hospice providers, 2001–2005 

949

1067

1222

1393

1615

744

677 653 653 671

553 560 562 560 553

20 19 16 14 13

2001 2002 2003 2004 2005

0

200

400

600

800

1000

1200

1400

1600

1800

Number of pro

viders

Freestanding

Home health agency

Hospital

Skilled nursing facility

Note: Data for 2001–2005 are as of the end of each calendar year. 

Source: MedPAC analysis of unpublished Online Survey, Certification, and Reporting System data from CMS. 

• The number of hospice agencies participating in the Medicare program rose 26 percent from 

2001 to 2005. This growth is attributable to the growth in freestanding hospice providers, 

which accounted for 57 percent of hospices in 2005. 

• Over time, for-profit hospices have come to take up a larger share of hospice providers (not 

shown). As of February 2006, 46 percent of hospice providers were for profit, compared to 

31 percent in 2001. 

 
A Data Book: Healthcare spending and the Medicare program, June 2006 201

Chart 12-13. Medicare spending for clinical laboratory services, 

in billions, FY 1994–2004 

1.4 1.4 1.4 1.5 1.5 1.7 1.8 1.9 2.2 2.4 2.6

2.9 2.8 2.6 2.4 2.1

2.1 2.2

2.4

2.7

3

3.2

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

1

2

3

4

5

6

7

D

ollars ( ni billions)

Hospital-based

Independent and physician office

Note: FY (fiscal year). Spending is for services paid under the clinical laboratory fee schedule. Hospital-based services 

furnished to noninpatients in laboratories owned or operated by hospitals. 

Source: CMS, Office of the Actuary. 

• Repeated reductions in Medicare’s payment rates for clinical laboratory services resulted in 

declining overall program spending throughout the 1990s, particularly for services furnished 

in independent and physician office labs. Since 1999, however, growth in volume has 

caused Medicare expenditures for lab services to climb an average of 9 percent per year. 

• In 2004, Medicare payments for clinical laboratory services totaled an estimated $5.8 billion, 

or 2 percent of total program spending. 
202 Other services

Chart 12-14. Hospital and independent laboratories account for 

most ambulatory test volume 

 Number Share Share of total Share of total 

Type of facility of labs of total labs test volume payments 

Physician office labs 104,944 54.5% 17.3% 15.5% 

Hospital labs 8,617 4.5 49.3 44.1 

Independent labs 5,239 2.7 30.5 37.3 

Other 73,683 38.3 3.0 3.1 

Total 192,533 100.0 100.0 100.0 

Note: Other includes skilled nursing facility labs, home health agency labs, and other labs. Data on number of labs and share of 

total labs are from 2005. Data on test volume and payments are from 2003. Analysis includes only tests paid under the 

Medicare clinical laboratory fee schedule; it excludes tests furnished to hospital inpatients and tests furnished to dialysis 

patients as part of the composite payment bundle. 

Source: MedPAC analysis of a 5 percent sample of Medicare claims data and the CMS Clinical Laboratory Improvement Act 

database. 

• The number of labs has grown, on average, about 2 percent per year over the last decade. 

• Because some hospitals operate more than one lab, there are more hospital-based 

laboratories than there are hospitals. Hospital-based labs conduct tests for their inpatients 

and outpatients and also provide services for nonpatients (referred to as “outreach testing”). 

Although they account for only 4.5 percent of the nation’s labs, hospital-based laboratories 

conduct about half of the tests paid under Medicare’s clinical laboratory fee schedule. 

• Independent laboratories conduct tests for physicians, hospitals, and other health care 

providers. Patient samples are frequently taken by other health care providers (in physician 

offices, hospitals, and other health care settings) and sent to independent labs for analysis, 

but samples may also be drawn in independent laboratory patient service centers. Although 

independent labs represent only about 3 percent of all labs nationwide, they furnished 31 

percent of tests paid under Medicare’s lab fee schedule in 2003. Independent labs’ share of 

Medicare payments for tests was even higher (37 percent), consistent with the fact that 

independent labs are more likely than other labs to provide costly tests. 

• Physician office labs represent slightly more than half of all labs, but most (about 80 

percent) perform only a few simple types of tests. Thus, physician office labs furnish only 17 

percent of the lab services paid under Medicare’s clinical laboratory fee schedule. 
A Data Book: Healthcare spending and the Medicare program, June 2006 203

Chart 12-15. Highest volume laboratory tests, 2003 

 Average 

 Percent of Percent of annual volume 

Test total volume total payments growth, 2001–2003 

Complete blood count, automated 8.2% 9.4% 25.0% 

Prothrombin time 6.3 3.6 8.3 

Comprehensive metabolic panel 5.6 7.4 13.9 

Lipid panel 4.7 7.0 11.3 

Basic metabolic panel 3.8 4.1 6.9 

Assay of thyroid-stimulating hormone 3.1 7.7 11.0 

Glycated hemoglobin test 2.3 3.3 13.0 

Urinalysis, automated, with scope 1.5 0.7 9.7 

Urinalysis, nonautomated, with scope 1.4 0.7 –4.0 

Assay of creatinine 1.4 0.5 –2.2 

Top 10 tests 38.4 44.5 11.9 

Note: The most frequently provided service on Medicare’s clinical laboratory fee schedule is not a laboratory test. Venipuncture, 

the drawing of blood for a test specimen, accounts for 18 percent of total volume and 6 percent of total payments. 

Source: MedPAC analysis of Medicare claims data. 

• Although there are more than 1,000 items on Medicare’s lab fee schedule, the volume of 

tests is fairly concentrated, with the top 10 tests accounting for 38 percent of total volume 

and 45 percent of total payments. 

• Five of the highest volume tests—complete blood count (CBC), comprehensive metabolic 

panel, lipid panel, thyroid stimulating hormone assay, and glycated hemoglobin—grew more 

than 10 percent between 2001 and 2003, with CBC volume rising at a rate of 25 percent per 

year. Many of the laboratory tests that are growing rapidly are recommended by clinical 

guidelines for the treatment of certain chronic conditions. For example, complete blood 

count tests and metabolic panel tests are quality indicators for congestive heart failure, and 

the lipid panel and hemoglobin tests are quality indicators for diabetes. 
204 Other services

Chart 12-16. Outpatient therapy is furnished by many different 

entities 

PT private practice

24%

Nursing home

23%

Hospital outpatient

19%

ORF

14%

Physician

office

10%

SNF outpatient

4%

CORF

4%

OT private

practice

2%

Note: PT (physical therapist), ORF (outpatient rehabilitation facility), SNF (skilled nursing facility), CORF (comprehensive 

outpatient rehabilitation facility), OT (occupational therapist). Based on share of Medicare spending in 2004. PT private 

practice and OT private practice include therapists employed by physician groups who bill independently and are not 

furnishing services incident to physician services. 

Source: MedPAC analysis of the 5 percent file of carrier and fiscal intermediary claims for 2004. 

• Outpatient therapy services are furnished in a variety of settings, both institutional (e.g., 

nursing homes and hospital outpatient departments) and independent (e.g., therapists’ and 

physicians’ offices). 

• Services are increasingly provided in independent settings. The share of services furnished 

in nursing homes and in hospital departments was considerably smaller in 2004 (23 percent 

and 19 percent, respectively) than in 2002 (30 percent and 24 percent, respectively). 

• Services furnished by physical therapists in private practice (which include therapists 

working for physicians’ practices and billing independently) and those provided in nursing 

homes to long-stay nursing home residents accounted for almost half of outpatient therapy 

services. 
A Data Book: Healthcare spending and the Medicare program, June 2006 205

Chart 12-17. Medicare spending on outpatient therapy services 

has almost doubled since 2000 

Therapy

caps

3 months

of therapy

caps

1998 1999 2000 2001 2002 2003 2004

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

M

ed ci are spend ni g (bill oi ns)

2.1

1.4

2.0

2.4

2.9

3.1

3.8

Therapy

caps

3 months

of therapy caps

Note: Therapy caps were in effect for all of 1999 and for three months in 2003. 

Source: MedPAC analysis of the 5 percent file of carrier and fiscal intermediary claims for 1998–2004. 

• Medicare spending on outpatient therapy services in 2004 was $3.8 billion, up from $2 

billion in 2000. This growth was a result of more beneficiaries using therapy services and 

more services being furnished to each user. 

• Spending slowed during 1999, when limits on Medicare payments per beneficiary (the 

therapy caps) were in place. One therapy cap limited spending per beneficiary for physical 

therapy services and speech-language pathology services; the other limited spending on 

occupational therapy services. When first put in place in 1999, each cap was $1,500. 

• In January 2006, the $1,500 therapy caps were reinstated. The caps are updated each year 

for inflation and are currently $1,740. However, as required by the Congress, there is now 

an exceptions process allowing beneficiaries with high care needs to apply for exemption 

from the therapy caps. 
206 Other services

Chart 12-18. Outpatient therapy users and service have 

increased since 2000 

 

 Average 

 annual change 

 1998 1999* 2000 2001 2002 2003* 2004 2000–2004 

 

Spending 

(billions) $2.1 $1.4 $2.0 $2.5 $3.0 $3.2 $3.9 18% 

Users 

(millions) 3.1 3.0 3.3 3.7 4.0 4.2 4.5 8 

Spending 

per user $671 $469 $621 $693 $749 $760 $883 9 

Note: *Indicates the year in which the therapy caps were in operation (full year in 1999, 3 months in 2003). 

Source: MedPAC analysis of the 5 percent file of carrier and fiscal intermediary claims for 1998–2004. 

• Medicare spending on outpatient therapy services increased an average 18 percent per 

year between 2000 and 2004. This rapid growth was the result of both beneficiaries using 

therapy services and more services being furnished to each user. 

• The number of users increased an average of 8 percent per year between 2000 and 2004, 

much faster than the 1 percent to 2 percent annual growth in the number of beneficiaries. 

• Service intensity, as measured by spending per user, increased 9 percent per year during 

this period. Although fee schedule increases account for some of this increase, the number 

of units of service billed during this period grew an average of 13 percent per year. Growth 

in services commonly furnished, not new modalities, drove the increases. 
A Data Book: Healthcare spending and the Medicare program, June 2006 207

Chart 12-19. Medicare spending on therapists in private practice 

 grew faster than that for other providers, 2000–2004 

9%

11%

14% 14%

22%

33%

47%

Hospital 

outpatient

CORF ORF Physician 

office

Nursing 

home

PT private 

practice

OT private 

practice

Setting where patient was treated

0

10

20

30

40

Average annual percent grow ht

50

Mean 

(18%)

Note: CORF (comprehensive outpatient rehabilitation facility), ORF (outpatient rehabilitation facility), PT (physical therapist), OT 

 (occupational therapist). PT private practice and OT private practice include therapists employed by physician groups who 

bill independently and are not furnishing services incident to physician services. 

 

Source: MedPAC analysis of 5 percent fiscal intermediary and carrier 2000–2004 claims files. 

• Between 2000 and 2004, spending on outpatient therapy grew an average 18 percent a 

year, but this number varied considerably by provider setting. Spending in hospital 

outpatient departments grew the slowest, while therapists in private practice (physical and 

occupational therapists) grew the fastest. 

• The number of therapists in private practice who furnished services to beneficiaries more 

than doubled between 2000 and 2004. Several factors contributed to this growth, including 

changes in the way therapists were paid in institutional settings, which encouraged them to 

establish their own practices, and changes in Medicare rules that allowed licensed 

therapists to bill directly for services they furnished. 
208 Other services

Chart 12-20. Per user spending on outpatient therapy varied 

threefold across settings, 2004 

$441

$627

$875

$937 $986

$1,368

$1,614

Hospital 

outpatient

Physician 

office

OT private 

practice

PT private 

practice

ORF CORF

Setting where patient was treated

0

500

1,000

1,500

$2,000

Spend ni g per user

Mean ($883)

Nursing

 home

Note: CORF (comprehensive outpatient rehabilitation facility), ORF (outpatient rehabilitation facility), PT (physical therapist), OT 

(occupational therapist). PT private practice and OT private practice include therapists employed by physician groups who 

bill independently and are not furnishing services incident to physician services. 

 

Source: MedPAC analysis of 5 percent fiscal intermediary and carrier 2000–2004 claims files. 

• In 2004, Medicare spending on outpatient therapy services averaged $883 per user. 

However, spending varied considerably by setting. Spending was the lowest in hospital 

outpatient departments ($441) and the highest in CORFs ($1,614). Because payment rates 

are the same across settings, differences are attributable to the volume and intensity of 

services. 

• There was a twofold variation across states (data not shown). In states with low per user 

spending, beneficiaries received a higher share of their therapy in hospital outpatient 

departments compared with states with high per user spending. 
A Data Book: Healthcare spending and the Medicare program, June 2006 209

Chart 12-21. Since 2000 the number of outpatient therapy users 

grew 8 percent a year 

4% 5% 6% 6%

8%

21%

35%

Physician 

office

CORF Hospital 

outpatient

ORF PT private 

practice

OT private 

practice

Setting where patient was treated

0

10

20

30

40

A

v

erage

annual percent change

2

0

0

0-2

0

0

4

Mean (8%)

50

 Nursing

 home

Note: CORF (comprehensive outpatient rehabilitation facility), ORF (outpatient rehabilitation facility), PT (physical therapist), OT 

(occupational therapist). PT private practice and OT private practice include therapists employed by physician groups who 

bill independently and are not furnishing services incident to physician services. 

 

Source: MedPAC analysis of 5 percent fiscal intermediary and carrier 2000–2004 claims files. 

• On average, the number of therapy users grew 8 percent per year between 2000 and 2004. 

The number of beneficiaries treated in private practice grew much faster than average. 

• The number of therapists in private practice who furnished services to beneficiaries more 

than doubled between 2000 and 2004. This growth reflected many policy changes since the 

late 1990s that allowed therapists to bill independently and encouraged them to establish 

their practices as private practices. 
210 Other services

Web links. Other services

Dialysis 

• More information on Medicare’s payment system for outpatient dialysis services can be found in 

MedPAC’s Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Dec05_payment_basics_dialysis.pdf 

• The US Renal Data System provides information about the incidence and prevalence of patients 

with renal disease, their demographic and clinical characteristics, and their spending patterns. 

http://www.usrds.org 

• The National Institute of Diabetes & Digestive & Kidney Diseases and the National Kidney 

Foundation provide health information about kidney disease for consumers.

http://www.niddk.nih.gov/ 

http://www.kidney.org/ 

• CMS provides specific information about each dialysis facility. 

http://www.medicare.gov/Dialysis/Home.asp 

• Chapter 2C of the MedPAC March 2006 Report to the Congress provides information about 

the financial performance of dialysis facilities. 

http://www.medpac.gov/publications/congressional_reports/Mar06_Ch02C.pdf

• MedPAC’s June 2005 Report to the Congress recommends changes to how Medicare pays 

for composite rate services and injectable drugs. 

http://www.medpac.gov/publications/congressional_reports/June05_Ch4.pdf 

• MedPAC’s October 2003 report describes how Medicare could modernize the outpatient 

dialysis payment system. 

http://www.medpac.gov/publications/congressional_reports/oct2003_Dialysis.pdf 

• MedPAC’s comment on revisions to payment policies under the physician fee schedule for 

calendar year 2004 includes changes in how to pay for services furnished by nephrologists. 

http://www.medpac.gov/publications/other_reports/100603_RevPhysFeeSched_CB_comment.pdf 

Hospice 

• More information on Medicare’s payment system for hospice services can be found in 

MedPAC’s Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Dec05_payment_basics_hospice.pdf 

• Additional information and analysis related to the Medicare hospice benefit can be found in 

Chapter 3 of MedPAC’s June 2006 Report to the Congress, available at 

http://www.medpac.gov/publications/congressonal_reports/Jun06_ch03.pdf 
A Data Book: Healthcare spending and the Medicare program, June 2006 211

• Chapter 6 of the MedPAC’s June 2004 Report to the Congress reviews trends and policy 

issues for the Medicare hospice benefit. 

 http://www.medpac.gov/publications/congressional_reports/June04_ch6.pdf 

• The MedPAC May 2002 Report to the Congress: Medicare beneficiaries’ access to hospice 

provides information on beneficiaries’ access to hospice care. 

 http://www.medpac.gov/publications/congressional_reports/may2002_HospiceAccess.pdf 

• Chapter 7 of the MedPAC June 1999 Report to the Congress examines end-of-life care and 

makes policy recommendations. 

 http://www.medpac.gov/publications/congressional_reports/Jun99%20Ch7.pdf 

Clinical laboratory 

• Information about CMS regulation of clinical laboratories, including the number and type of 

certified labs in the U.S., can be found on the CMS website. 

http://www.cms.hhs.gov/CLIA 

Outpatient therapy 

• Chapter 6 of MedPAC’s June 2006 Report to the Congress provides information about 

outpatient therapy services. 

http://www.medpac.gov/publications/congressional_reports/Jun06_Ch06.pdf 

• A description of the history and impact of the therapy caps can be found in MedPAC’s 

Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Dec05_Medicare_Basics_OPT.pdf 
601 New Jersey Avenue, NW • Suite 9000 • Washington, DC 20001

(202) 220-3700 • Fax: (202) 220-3759 • www.medpac.gov