A DATA BOOK 

Healthcare Spending 

and the 

Medicare Program 

J UNE 2009
A DATA BOOK 

Healthcare Spending 

and the 

Medicare Program 

J UNE 2009

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. Website 

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. 

Several charts in this Data Book use data from the Medicare Current Beneficiary Survey 

(MCBS). We use the MCBS to make comparisons between beneficiary groups with different 

characteristics. The MCBS is a survey, so expenditure amounts that we show may not match to 

actual Medicare expenditure amounts. 

Changes in aggregate spending among the fee-for-service sectors presented in this Data Book 

reflect changes in Medicare enrollment between the traditional fee-for-service program and 

Medicare Advantage. Increased enrollment in Medicare Advantage may be a significant factor in 

instances where spending in a given sector has leveled off or even declined. In these instances, 

fee-for-service spending per capita may present a more complete picture of spending changes. 

We produce a limited number of printed copies of this report. It 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 Aggregate Medicare spending among FFS beneficiaries, by sector, 2000–2008 ............................3

1-2 Per capita Medicare spending among FFS beneficiaries, by sector, 2000–2008.............................4

1-3 Medicare made up over one-fifth of spending on personal health care in 2007 ..............................5

1-4 Medicare’s share of total spending varies by type of service, 2007 ................................................6

1-5 Health care spending has grown more rapidly than GDP, with public financing making up 

nearly half of all funding..................................................................................................................7

1-6 Trustees project Medicare spending to increase as a share of GDP ................................................8

1-7 Changes in spending per enrollee, Medicare and private health insurance .....................................9

1-8 Trustees and CBO project Medicare spending to grow at an annual average rate of 7 percent 

over the next 10 years ....................................................................................................................10

1-9 Medicare spending is concentrated in certain services and has shifted over time .........................11

1-10 FFS program spending is highly concentrated in a small group of beneficiaries, 2006 ................12

1-11 Medicare HI trust fund is projected to be insolvent in 2017..........................................................13

1-12 Medicare faces serious challenges with long-term financing ........................................................14

1-13 Average monthly SMI benefits, premiums, and cost sharing are projected to grow faster 

than the average monthly Social Security benefit..........................................................................15

1-14 Medicare FFS providers: Number and spending ...........................................................................16

1-15 Medicare benefits and cost sharing per enrollee in 2008...............................................................17

Web links ......................................................................................................................................18

2 Medicare beneficiary demographics........................................................................... 19 

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

spending, 2006 ...............................................................................................................................21

2-2 Medicare spending rises as beneficiaries age, 2006 ......................................................................22

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

Medicare spending, 2006...............................................................................................................23

2-4 Enrollment in the Medicare program is projected to grow fastest in the next 30 years.................24

2-5 Characteristics of the Medicare population, 2006 .........................................................................25

2-6 Characteristics of the Medicare population, by rural and urban residence, 2006 ..........................26

2-7 The 20 clinical episode groups that account for the greatest share of total spending 

on episodes, 2005...........................................................................................................................27

2-8 The 20 common clinical episode groups that grew the fastest in terms of total spending on 

episodes, 2002 to 2005...................................................................................................................28

Web links ......................................................................................................................................29
vi 

3 Dual-eligible beneficiaries............................................................................................ 31 

3-1 Dual-eligible beneficiaries account for a disproportionate share of Medicare spending, 2006.... 33

3-2 Dual eligibles are more likely than nondual eligibles to be disabled, 2006...................................34

3-3 Dual eligibles are more likely than nondual eligibles to report poorer health status, 2006 ...........35

3-4 Demographic differences between dual eligibles and nondual eligibles, 2006 .............................36

3-5 Differences in spending and service use between dual eligibles and nondual eligibles, 2006 ......37

3-6 Both Medicare and total spending are concentrated among dual-eligible beneficiaries, 2006......38

3-7 Dual-eligible beneficiaries report generally good access to care...................................................39

 

 Web links ...................................................................................................................................... 40

4 Quality of care in the Medicare program................................................................... 41 

4-1 Most ambulatory care indicators showed improvement or were stable, 2004–2006.....................43 

4-2 Share of home health patients achieving positive outcomes continues to increase .......................44

4-3 Dialysis outcomes continue to improve for some measures ..........................................................45

4-4 Medicare Advantage plan HMO quality measures for 2003–2007 show mixed results................46

4-5 Mixed quality results for SNFs between 2000 and 2006 ...............................................................47

Web links ......................................................................................................................................48

5 Access to care in the Medicare program .................................................................... 51 

5-1 Beneficiaries’ reports of difficulties accessing care, 2000–2006...................................................53

5-2 Beneficiaries differ in their reports of timeliness in obtaining urgent or routine care, 2006 .........54

5-3 Medicare beneficiaries report as good or better ability to get timely appointments with 

physicians, compared with privately insured individuals ..............................................................55

5-4 Medicare and privately insured patients who are looking for a new physician report more 

difficulty finding one in primary care............................................................................................56

5-5 Physicians’ acceptance of new patients is highest for private PPO and Medicare 

patients, 2006 .................................................................................................................................57

Web links ...................................................................................................................................... 58

6 Medicare beneficiary and other payer financial liability ......................................... 59 

6-1 Sources of supplemental coverage among noninstitutionalized Medicare beneficiaries, 2006.....61

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

beneficiaries’ characteristics, 2006................................................................................................62

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

by source of payment, 2005...........................................................................................................63

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

beneficiaries, by source of payment, 2005.....................................................................................64

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

beneficiaries, by type of supplemental coverage, 2005 .................................................................65

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

health status, 2005..........................................................................................................................66

 Web links ..................................................................................................................................... 67
vii 

7 Acute inpatient services ............................................................................................... 69 

Short–term hospitals 

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

1996–2007 .....................................................................................................................................71

7-2 Major diagnostic categories with highest volume, fiscal year 2007 ..............................................72

7-3 Number of acute care hospitals and Medicare discharges, by hospital group, 2007 .....................73

7-4 Cumulative change in total admissions and total outpatient visits, 1997–2007.............................74

7-5 Trends in Medicare and total hospital length of stay, 1997–2007 .................................................75

7-6 Hospital occupancy rates, 1998–2007 ...........................................................................................76

7-7 Nonfederal hospital construction spending, 1999–2007................................................................77

7-8 Cumulative change in Medicare outpatient services and inpatient discharges per 

FFS beneficiary, 2002–2007..........................................................................................................78

7-9 Medicare inpatient payments, by source and hospital group, 2007 ...............................................79

7-10 Medicare acute inpatient PPS margin, 1994–2007 ........................................................................80

7-11 Medicare acute inpatient PPS margin, by urban and rural location, 1994–2007...........................81

7-12 Overall Medicare margin, 1997–2007 ...........................................................................................82

7-13 Overall Medicare margin, by urban and rural location, 1997–2007..............................................83

7-14 Hospital total margin, 1994–2007..................................................................................................84

7-15 Hospital total margin, by urban and rural location, 1994–2007 ....................................................85

7-16 Hospital total margin, by teaching status, 1994–2007 ...................................................................86

7-17 Medicare margins by teaching and disproportionate share status, 2007........................................87

7-18 Financial pressure leads to lower costs..........................................................................................88

7-19 Change in Medicare hospital inpatient costs per discharge and private payer payment-to-cost 

ratio, 1987−2007............................................................................................................................89

7-20 Markup of charges over costs for all patient care services, 1996–2007 ........................................90

7-21 Number of critical access hospitals, 1999–2009............................................................................91

Specialty psychiatric facilities

7-22 Medicare payments to inpatient psychiatric facilities (in billions), 2000–2008 ............................92

7-23 Inpatient psychiatric facilities, 2000–2008 ....................................................................................93

7-24 One diagnosis accounted for almost three-quarters of IPF cases in 2007......................................94

Web links ......................................................................................................................................95

8 Ambulatory care .......................................................................................................... 97 

Physicians

8-1 FFS Medicare spending and payment updates for physician services, 1999–2011.......................99

8-2 Medicare spending per FFS beneficiary on physician services, 1998–2008 ..............................100

8-3 Number of physicians billing Medicare increased steadily, 2001–2006 ....................................101

8-4 Continued growth in volume of physician services per beneficiary, 2002–2007 .......................102

8-5 Shifts in physician services volume from major procedures and E&M and toward 

imaging, tests, and other procedures, 2002–2007.......................................................................103

8-6 State-level volume of physician services per beneficiary compared to national 

averages, 2006 ............................................................................................................................104

8-7 Physicians’ 2002 efficiency scores are high correlated with their 2003 scores, using either 

multilevel or Monte Carlo models ..............................................................................................105
viii 

Hospital outpatient services 

8-8 Spending on all hospital outpatient services, 1998–2008 ...........................................................106

8-9 Most hospitals provide outpatient services .................................................................................107

8-10 Payments and volume of services under the Medicare hospital outpatient PPS, by type 

of service, 2007...........................................................................................................................108

8-11 Hospital outpatient services with the highest Medicare expenditures, 2007 ..............................109

8-12 Medicare coinsurance rates, by type of hospital outpatient service, 2007..................................110

8-13 Effects of hold-harmless and SCH transfer payments on hospitals’ outpatient 

revenue, 2005–2007....................................................................................................................111

8-14 Medicare hospital outpatient, inpatient, and overall Medicare margins, 2001–2007 .................112

8-15 Number of separately paid observation days has increased, 2003–2007....................................113

Ambulatory surgical centers

8-16 Number of Medicare-certified ASCs increased by over 50 percent, 2001–2008 .......................114

Imaging services

8-17 Medicare spending for imaging services, by type of service, 2002 and 2007 ............................115

8-18 Radiologists received about 40 percent of physician fee schedule payments for 

imaging services, 2007................................................................................................................116

8-19 Physician fee schedule spending for imaging has shifted from professional component to 

technical component services, 2002 to 2007 ..............................................................................117

Web links ...................................................................................................................................118

9 Post-acute care ........................................................................................................... 121 

9-1 Growth in post-acute care providers slowed in 2008..................................................................123

9-2 Medicare’s spending on home health care and skilled nursing facilities fueled growth 

in post-acute care expenditures...................................................................................................124

Skilled nursing facilities

9-3 Ten most common diagnoses among Medicare SNF patients account for more than a 

third of SNF admissions in 2006 ................................................................................................125

9-4 A growing share of Medicare stays and payments go to freestanding SNFs and 

for-profit SNFs............................................................................................................................126

9-5 Fewer SNFs admitted clinically complex and special care cases compared with 

rehabilitation cases, and the share declined between 2002 and 2007 .........................................127

9-6 Small increase in SNF days resulted in longer average stays .....................................................128

9-7 Case mix in freestanding SNFs shifted toward rehabilitation plus extensive services 

RUGs and away from other broad RUG categories....................................................................129

9-8 Rehabilitation case-mix continues to shift toward higher paying rehabilitation RUGs..............130

9-9 Freestanding SNF Medicare margins have exceeded 10 percent for seven years ......................131

9-10 Freestanding SNFs in the top quartile of Medicare margins in 2007 had much lower 

costs per day................................................................................................................................132

Home health agencies

9-11 Spending for home health care, 1994–2008................................................................................133

9-12 Trends in the provision of home health care...............................................................................134

9-13 The home health product changed after the prospective payment system started ......................135

9-14 Margins for freestanding home health agencies .........................................................................136
ix 

Long-term care hospitals

9-15 The top 15 LTC–DRGs made up almost 60 percent of cases in LTCHs in 2007.......................137

9-16 Spending for long-term care hospital services increased rapidly under PPS..............................138

9-17 LTCHs’ payments gap and cost growth narrowed in 2007.........................................................139

9-18 LTCHs’ Medicare margins by type of facility............................................................................140

Inpatient rehabilitation facilities

9-19 Most common types of inpatient rehabilitation facility cases, 2008...........................................141

9-20 The number of IRF cases has declined since 2004, while payments per case increased ............142

9-21 Overall IRFs’ payments per case have risen faster than costs, post-PPS....................................143

9-22 Inpatient rehabilitation facilities’ Medicare margin by type, 2001–2007...................................144

Web links ...................................................................................................................................145

10 Medicare Advantage.................................................................................................. 147 

10-1 MA plans available to all Medicare beneficiaries.......................................................................149

10-2 Access to zero-premium plans with MA drug coverage, 2006–2009.........................................150

10-3 Enrollment in MA plans, 1994–2009..........................................................................................151

10-4 Enrollment in local coordinated care plans grew slower than in other major plan types ...........152

10-5 MA and cost plan enrollment by state and type of plan, 2009....................................................153

10-6 Different requirements and provisions apply to different types of MA plans ............................154

10-7 MA plan benchmarks, bids, and Medicare program payments relative to FFS spending, 2009.......155

10-8 Enrollment in employer group MA plans, 2006–2009 ...............................................................156

10-9 Special needs plans decreased in 2009 after growing quickly for several years.........................157

10-10 The number of SNPs decreased while SNP enrollment increased from 2008 to 2009...............158

Web links ...................................................................................................................................159

11 Drugs ........................................................................................................................... 161 

11-1 Medicare spending for Part B drugs administered in physicians’ offices or furnished by suppliers.163

11-2 Top 10 Part B drugs administered in physician offices or furnished by suppliers by share 

of expenditures, 2007..................................................................................................................164

11-3 In 2009, about 90 percent of Medicare beneficiaries were enrolled in Part D plans or 

had other sources of creditable drug coverage............................................................................165

11-4 Defined standard benefit parameters increase over time ............................................................166

11-5 Characteristics of Medicare PDPs ..............................................................................................167

11-6 Characteristics of MA–PDs ........................................................................................................168

11-7 Characteristics of SNPs...............................................................................................................169

11-8 Average Part D premiums...........................................................................................................170

11-9 Fewer PDPs qualify as premium-free to LIS enrollees in 2009..................................................171

11-10 Distribution of 2009 Part D enrollees by organization ...............................................................172

11-11 In 2009 most Part D enrollees are in plans that charge higher copayments for 

nonpreferred brand-name drugs..................................................................................................173

11-12 Most enrollees are in Part D plans that use specialty tiers..........................................................174

11-13 PDPs and non-SNP MA–PDs list similar numbers of drugs on their formularies, 

but SNPs tend to list fewer drugs................................................................................................175

11-14 In 2009, PDPs are slightly more likely to apply utilization management tools than MA–PDs......176

Web links ...................................................................................................................................177
x 

12 Other services ............................................................................................................. 179

Dialysis

12-1 Number of dialysis facilities is growing and share of for-profit and freestanding 

dialysis providers is increasing ...................................................................................................181

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

facilities, 1996 and 2007.............................................................................................................182

12-3 Dialysis facilities’ capacity increased between 1998 and 2008..................................................183

12-4 Characteristics of dialysis patients, by type of facility, 2007 .....................................................184

12-5 The ESRD population is growing, and most ESRD patients undergo dialysis...........................185

12-6 Diabetics, the elderly, Asian Americans, and Hispanics are among the fastest growing 

segments of the ESRD population ..............................................................................................186

12-7 Aggregate margins vary by type of freestanding dialysis facility, 2007.....................................187

Hospice

12-8 Use of hospice among Medicare beneficiaries increased from 2000 to 2007.............................188

12-9 Rapid growth in Medicare hospice spending projected to continue ...........................................189

12-10 Number of Medicare-participating hospices has increased, largely driven by 

for-profit hospices.......................................................................................................................190

12-11 Hospice length of stay, by diagnosis, 2006.................................................................................191

12-12 Substantial variation exists across hospices in the prevalence of long stay patients ..................192

12-13 Hospice Medicare margins increase with length of stay, 2001–2006.........................................193

12-14 Characteristics of institutionalized and noninstitutionalized Medicare hospice 

beneficiaries, 2006 ......................................................................................................................194

12-15 Comparison of hospice providers with a low and high proportion of their Medicare 

patients residing in institutions ...................................................................................................195

Clinical laboratory

12-16 Medicare spending for clinical laboratory services, fiscal years 1998–2008 .............................196

Web links ...................................................................................................................................197
S E C T I O N 

National health care and 

Medicare spending 

 A Data Book: Healthcare spending and the Medicare program, June 2009 3

Chart 1-1. Aggregate Medicare spending among FFS 

beneficiaries, by sector, 2000–2008 

2000 2001 2002 2003 2004 2005 2006 2007 2008

0

20

40

60

80

100

120

140

M

ed ci are spend ni g (dol al rs ni bill oi ns)

Hospital inpatient

Physician

Post-acute care

Hospital outpatient

Inpatient psychiatric hospital

ASC

Note: FFS (fee-for-service), ASC (ambulatory surgical center). Dollars are Medicare spending only and do not include 

beneficiary cost sharing. The growth in spending was slowed between 2006 and 2008 by large increases in the number of 

Medicare Advantage enrollees, whose spending is not included in these aggregate totals. 

Source: CMS, Office of the Actuary and the 2009 annual report of the Boards of Trustees of the Medicare Trust Funds. 

• Medicare spending among fee-for-service (FFS) beneficiaries grew strongly in most sectors 

from 2000 through 2005. The rate of growth slowed in 2006 through 2008, reflecting a 

decline in FFS enrollment as many beneficiaries changed their enrollment to a Medicare 

Advantage plan. However, spending per beneficiary remained strong in most sectors from 

2006 to 2008 (see Chart 1-2). 
4 National health care and Medicare spending 

Chart 1-2. Per capita Medicare spending among FFS 

beneficiaries, by sector, 2000–2008 

2000 2001 2002 2003 2004 2005 2006 2007 2008

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

M

ed ci are spend ni g (dol al rs per capita)

Hospital inpatient

Physician

Post-acute care

Hospital outpatient

Inpatient psychiatric hospital

ASC

Note: FFS (fee-for-service), ASC (ambulatory surgical center). Dollars are Medicare spending only and do not include 

beneficiary cost sharing. 

Source: CMS, Office of the Actuary and the 2009 annual report of the Boards of Trustees of the Medicare Trust Funds. 

• Medicare spending per beneficiary in fee-for-service (FFS) Medicare increased steadily in 

most sectors from 2000 through 2008. This contrasts with a slowing in aggregate spending 

in FFS Medicare from 2006 to 2008 caused by a decline in the number of FFS beneficiaries. 
 A Data Book: Healthcare spending and the Medicare program, June 2009 5

Chart 1-3. Medicare made up over one-fifth of spending on 

personal health care in 2007 

Medicare

22%

Medicaid and SCHIP

17%

Other public

7%

Private health insurance

36%

Out of pocket

14%

Other private

4%

Total = $1.87 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, 2009. 

• Of the $1.9 trillion spent on personal health care in the United States in 2007, Medicare 

accounted for 22 percent, or $409 billion. Spending by all public programs—including 

Medicare, Medicaid, SCHIP, and other programs—accounted for 46 percent of health care 

spending. Medicare is the largest single purchaser of health care in the United States. 

Thirty-six percent of spending was financed through private health insurance payers and 14 

percent was from consumer out-of-pocket spending. 

• Medicare and private health insurance spending includes premium contributions from 

enrollees. 
6 National health care and Medicare spending 

Chart 1-4. Medicare’s share of total spending varies by type of 

service, 2007 

Hospital Physician and 

clinical services

Home health Nursing home Durable medical 

equipment

Prescription 

drugs

0

20

40

60

80

100

Share

of spend ni g

20%

40%

18%

29%

20%

17%

7%

34%

42%

9%

54%

73%

25%

41%

71%

Other Medicaid and all SCHIP Medicare

71%

28%

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 spending, and other private and public spending. 

Source: CMS, Office of the Actuary, National Health Expenditure Accounts, 2009. 

• 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 

long-term care during this time period. 

• In 2007, Medicare accounted for 28 percent of spending on hospital care, 20 percent of 

physician and clinical services, 40 percent of home health services, 18 percent of nursing 

home care, 29 percent of durable medical equipment, and 20 percent of prescription drugs. 
 A Data Book: Healthcare spending and the Medicare program, June 2009 7

Chart 1-5. Health care spending has grown more rapidly than 

GDP, with public financing making up nearly half of 

all funding 

1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

0%

5%

10%

15%

20%

25%

Heal ht spending as a percent of G

D

P

Actual Projected

Total health spending

All private spending

All public

spending

Medicare

spending

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, 2009. 

• 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 

about 16 percent in 2008. It is projected to reach 20 percent of GDP in 2018. 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 higher 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 4 percent of GDP by 2018. 

• In 2008, all public spending made up about 46 percent of total health care spending and 

private spending made up 54 percent. By 2018, those percentages are projected to be 49 

percent and 51 percent, respectively. 
8 National health care and Medicare spending 

Chart 1-6. Trustees project Medicare spending to increase as a 

share of GDP 

1970 1980 1990 2000 2008 2010 2020 2030 2040 2050 2060 2070 2080

0%

2%

4%

6%

8%

10%

12%

Share

of G

D

P (p

erc

ent)

Part D

Part B

Part A

0.7

1.3

1.9

2.3

3.2

3.5

4.5

6.4

7.9

8.7

11.2

9.6

10.5

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

Source: 2009 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 over 11 percent of 

GDP in 2080. 

• With a 9.6 percent annual average rate of growth, nominal Medicare spending grew 

considerably faster over the period from 1980 to 2007 than nominal growth in the economy, 

which averaged 6.1 percent per year. Future Medicare spending is projected to continue 

growing faster than GDP, averaging 6.4 percent per year between 2007 and 2080 compared 

with an annual average growth rate of 4.4 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 slightly 

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 the widespread use of insurance (which shields 

individuals from facing the full price of services) will also contribute to rapid increases in 

health care spending. 
 A Data Book: Healthcare spending and the Medicare program, June 2009 9

Chart 1-7. Changes in spending per enrollee, Medicare and 

private health insurance 

1970 1975 1980 1985 1990 1995 2000 2005

0%

5%

10%

15%

20%

25%

P

er enrol el e change (percent)

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, 2009. 

• 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. However, 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. 

 

 Medicare --- PHI 

1970-2007 8.5 9.7 

1970-1993 10.8 12.0 

1993-1997 6.1 2.8 

1997-1999 1.2 4.2 

1999-2002 5.8 8.8 

2002-2007 4.9 7.8 

Average annual percent change by period: 
10 National health care and Medicare spending 

Chart 1-8. Trustees and CBO project Medicare spending to 

grow at an annual average rate of 7 percent over the 

next 10 years 

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

0

200

400

600

800

1000

1200

D

ol al rs ( ni bill oi ns)

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: 2009 annual report of the Boards of Trustees of the Medicare Trust Funds. CBO March 2009 baseline. 

• Medicare spending has grown nearly 13-fold, from $37 billion in 1980 to $468 billion in 2008 

(see Chart 1-3). 

• Medicare spending increased significantly after 2006 with the introduction of Part D, 

Medicare’s voluntary outpatient prescription drug benefit. 

• The CBO projects that mandatory spending for Medicare will grow at an average annual rate 

of 6.4 percent between 2008 and 2018. The Medicare trustees’ intermediate projections for 

2008 to 2018 assume about 7.1 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 2009 11

Chart 1-9. Medicare spending is concentrated in certain 

services and has shifted over time 

Managed care

16%

Other feefor-service

settings

7%

b

Home 

health

7% Hospital

inpatient

41%

Hospital

outpatient

8%

Skilled 

nursing

facility

6%

Physician

15%

Hospital

inpatient

29%

Hospital

outpatient

5%

Physician

Skilled 13%

nursing

facility

5%

Home 

health

4%

Other feefor-service

settings

12%

Outpatient prescription 

drugs provided under

Part D

11%

a

 a

c

Managed care

21%

 Total spending 1998 = $210 billion Total spending 2008 = $461 billion

 b

Note: Medicare’s outpatient drug benefit began in 2006, and thus the distribution of spending for 2007 differs significantly from 

earlier years. 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 Medicarecovered 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 stand-alone prescription drug plans and Medicare Advantage prescription drug plans. c

 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, 2009. 

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

or settings can vary substantially over time. 

• In 2008, Medicare spent about $461 billion. Inpatient hospital services were by far the 

largest spending category (29 percent), followed by managed care (21 percent), physicians 

(13 percent), outpatient prescription drugs provided under Part D (11 percent), and other 

fee-for-service settings (12 percent). 

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

for those services was a smaller share of total Medicare spending in 2008 than it was in 

1998, falling from 41 percent to 29 percent. Spending on beneficiaries enrolled in managed 

care plans has grown from 13 percent to 22 percent over the same period. The number of 

beneficiaries enrolled in managed care plans has grown rapidly over the past several years, 

and current enrollment is higher than it was a decade ago. 
12 National health care and Medicare spending 

Chart 1-10. FFS program spending is highly concentrated in a 

small group of beneficiaries, 2006 

Percent of beneficiaries Percent of program spending

0

10

20

30

40

50

60

70

80

90

100

Percent

11%

24%

19%

27%

16%

3%

Most

costly 1%

Second

quartile

86%

Next 15%

Next 5%

Next 4%

Least

costly

half

Note: FFS (fee-for-service). Excludes beneficiaries with any group health enrollment during the year. Numbers do not sum to 

100 percent due to rounding. 

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

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

beneficiaries. In 2006, the costliest 5 percent of beneficiaries accounted for 43 percent of 

annual Medicare FFS spending and the costliest quartile accounted for 86 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 services, and those who are in the last year of life. 
A Data Book: Healthcare spending and the Medicare program, June 2009 13

Chart 1-11. Medicare HI trust fund is projected to be insolvent 

in 2017 

 Year costs Year HI trust 

Estimate exceed income fund assets exhausted

High 2008 2014 

Intermediate 2008 2017 

Low 2018 2028 

Note: HI (Hospital Insurance). 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: 2009 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.) 

• The SMI trust fund is financed with general revenues and beneficiary premiums. 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. 

• Medicare trustees reported that HI’s expenses exceeded its income in 2008, and under the 

intermediate assumptions the HI trust fund will be exhausted in 2017. 

• Under high cost assumptions, the HI trust fund could be exhausted as early as 2014. 

Under low cost assumptions, it would remain solvent until 2028. 
14 National health care and Medicare spending 

Chart 1-12. Medicare faces serious challenges with long-term 

financing 

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: 2009 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 9 percent by 2040 and to about 12 percent by 

2080. 

0%

2%

4%

6%

8%

10%

12%

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

Percent of GDP

Tax on benefits Payroll taxes

Premiums

General revenue transfers

State transfers

Total expenditures

Actual Projected

HI deficit 
A Data Book: Healthcare spending and the Medicare program, June 2009 15

Chart 1-13. 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

$3,000

Mon ht ly amounts per person in 2008 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 included. 

Source: 2009 annual report of the Boards of Trustees of the Medicare Trust Funds. 

• Between 1970 and 2008, the average monthly Social Security benefit (adjusted for inflation) increased by an annual 

average rate of 1.6 percent. Over the same period, average SMI premiums plus cost sharing and average SMI 

benefits grew by annual averages of 5.4 percent and 6.7 percent, respectively. 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. In the 2003–2007 periods, Part B premium increases offset 20 percent to 40 

percent of the dollar increase in the average Social Security benefit. For 2007 and 2008, the increase in the Part B 

premium offsets 13 percent and 8 percent of the Social Security benefit increase, respectively. Part D premium 

increases are not subject to a hold-harmless provision. 

• Growth over time in Medicare premiums and cost sharing will continue to outpace growth in Social Security income. 

Medicare trustees project that between 2008 and 2040 the average Social Security benefit will grow by just over 1 

percent annually (after adjusting for inflation), compared with about 3 percent annual growth in average SMI 

premiums plus cost sharing. 

• Most Medicare beneficiaries pay their Part B premium by having it withheld from their monthly Social Security 

benefit. In 2010, Social Security benefits are not expected to increase, and as a result about 75 percent of Medicare 

beneficiaries will be protected by the hold-harmless provision. This means that these beneficiaries will pay the same 

Medicare Part B premium as they did in 2009, even though Part B costs increased. 

• Three categories make up the 25 percent of Medicare beneficiaries who will not be protected under the holdharmless provision. They include: new enrollees in Medicare who did not pay a premium in 2009, high-income 

enrollees who pay the income-related Part B premium, and Medicare beneficiaries who are also eligible for 

Medicaid. (For this last group, Medicaid pays for their Part B premiums). These three groups will pay Part B 

premiums high enough to offset the costs of providing the hold-harmless protection to the other 75 percent of 

beneficiaries. 
16 National health care and Medicare spending 

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

 Number of CY 2008 

 providers, program spending 

Provider type 2008 (billions) 

Inpatient hospitals 6,083a $128.8 

Hospital outpatient PPS 3,817b

 23.7

Physicians, limited license practitioners, 

 and nonphysician practitioners 1,087,845 60.8

Skilled nursing facilities 15,054 23.9 

Home health agencies 9,054 6.6 

Hospices 3,255 11.7 

Ambulatory surgical centers 4,964 3.0 

End-stage renal disease facilities 4,957 6.9

Clinical laboratories 209,499 6.9c

Durable medical equipment suppliers ~106,000 8.7 

 

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

do not include cost sharing or administrative expenses. 

 a Short-stay and non-short-stay hospitals. b Analysis does not include alcohol and drug abuse and critical access hospitals but does include psychiatric, 

rehabilitation, and children’s hospitals that bill under the outpatient PPS. c Includes carrier and intermediary lab spending. 

Source: U.S. Department of Health and Human Services, 2007 CMS Statistics. CMS’s Provider of Service file. Spending from 

Office of the Actuary. 

• The most numerous Medicare providers are physicians, limited license practitioners, and 

nonphysician practitioners. Among the more than one million of these practitioners, 

physicians numbered 660,819. Clinical laboratories and durable medical equipment 

suppliers are the next most numerous categories of Medicare providers. 
A Data Book: Healthcare spending and the Medicare program, June 2009 17

Chart 1-15. Medicare benefits and cost sharing per enrollee 

in 2008 Average cost 

 Average benefit sharing amount 

 (in dollars) (in dollars) 

Part A $5,179 $442 

Part B 4,322 1,214 

Part D 1,517 602

 Total 11,018 2,264 

Note: Average benefit spending for Part D includes both Part D enrollees and beneficiaries with drug coverage through former 

employers who receive Medicare’s Retiree Drug Subsidy. Part D average cost sharing does not include beneficiaries with 

drug coverage through former employers who receive Medicare’s Retiree Drug Subsidy. 

Source: CMS, Office of the Actuary. 

• In calendar year 2008, the Medicare program spent an average of $11,018 in Part A, Part B, 

and Part D benefits per enrollee. Part A benefits made up 47 percent of the total, followed 

by 39 percent for Part B benefits and 14 percent for Part D. 

• In that same year, beneficiaries owed an average of $2,264 in Medicare cost sharing. Fiftyfour percent was made up of coinsurance for Part B services, 20 percent was made up of 

Part A cost sharing, followed by 26 percent for Part D cost sharing. 

• Most Medicare beneficiaries have supplemental coverage through former employers, 

medigap policies, Medicaid, or other sources that fill in much of Medicare’s cost-sharing 

requirements. 
18 National health care and Medicare spending 

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 about spending for health care in the United States. 

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

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

program spending. 

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

• CMS statistics provides information about Medicare beneficiaries, providers, utilization, and 

spending. 

http://www.cms.hhs.gov/CapMarketUpdates/02_CMSstatistics.asp 

• The Congressional Budget Office provides projections of Medicare spending. 

http://www.cbo.gov/budget/factsheets/2009b/medicare.pdf 

• MedPAC’s March 2009 Report to the Congress provides an overview of Medicare and U.S. 

health care spending in Chapter 1, Context for Medicare Payment Policy. 

http://www.medpac.gov/chapters/Mar09_Ch01.pdf 
S E C T I O N 

Medicare beneficiary 

demographics 

A Data Book: Healthcare spending and the Medicare program, June 2009 21

Chart 2-1. Aged beneficiaries account for the greatest 

share of the Medicare population and program 

spending, 2006 

 Percent of enrollees Percent of spending 

Disabled

15.4%

ESRD

0.4%

Aged

Disabled

12.4%

ESRD

2.3%

Aged

84% 85.1%

 

Note: ESRD (end-stage renal disease). ESRD 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, 2006. 2006 spending per ESRD 

beneficiary is from the United States Renal Data System. 

• 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 

over five times as much as beneficiaries in other categories: $7,654 was spent per (nonESRD) aged beneficiary, $6,298 per (non-ESRD) disabled beneficiary, and $43,335 per 

ESRD beneficiary. On average, Medicare spending per beneficiary in 2006 was $7,862. 
22 Medicare beneficiary demographics 

Chart 2-2. Medicare spending rises as beneficiaries age, 2006 

 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, 2006. 

• Per capita expenditures increase with age. Per capita expenditures were $5,746 for 

beneficiaries ages 65 to 74, $9,497 for those 75 to 84, and $11,735 for those 85 and older. 

Per capita expenditures for Medicare beneficiaries under age 65, enrolled due to disability 

(both end-stage renal disease (ESRD) and non-ESRD) were $7,354. On average, Medicare 

spending per beneficiary was $7,862. 

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

conditions and those who die. 

Under 65

16%

65-74

42%

75-84

30%

85+

12%

Under 65

14.9%

65-74

30.6%

75-84

36.1%

85+

18.4%
A Data Book: Healthcare spending and the Medicare program, June 2009 23

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

account for a disproportionate share of Medicare 

spending, 2006 

 Percent of enrollees Percent of spending 

Poor

9.2% Poor

19%

Excellent or 

very good

Excellent or 23.5%

very good

40%

Good or fair

51%

Good or fair

56.2%

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

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2006. 

• 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 were $4,688 for those with excellent health, $8,710 for those with good or fair 

health, and $16,135 for those with poor health. On average, Medicare spending per 

beneficiary was $7,862. 
24 Medicare beneficiary demographics 

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

 to grow fastest in the next 30 years 

0

20

40

60

80

100

120

140

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

Beneficiaries (in millions)

Historical Projected

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

Source: CMS, Office of the Actuary, 2009. 

• 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 2009 25

Chart 2-5. Characteristics of the Medicare population, 2006 

Percent of the Percent of Percent of the Percent of 

 Medicare Medicare Medicare Medicare 

Characteristic population* expenditures Characteristics population* expenditures 

 

Total (43,877,456) 100% 100% 

Sex Education 

 Male 44 44 No high school diploma 27% 33% 

 Female 56 56 High school diploma only 30 28 

 Some college or more 41 37 

Race/ethnicity

 White, non-Hispanic 78 76 Income status 

 African American, Below poverty 15 19 

 non-Hispanic 9 11 100–125% of poverty 9 11 

 Hispanic 8 8 125–200% of poverty 20 23 

 Other 5 5 200–400% of poverty 31 27 

 Over 400% of poverty 25 19 

Age

 <65 16 15 

 65–74 42 31 

 75–84 30 36 Supplemental insurance status

 85+ 12 18 Medicare only 10 9 

Health status Managed care 17 20 

 Excellent or very good 40 24 Employer 32 25 

 Good or fair 51 56 Medigap 19 17 

 Poor 9 19 Medigap/employer 5 4 

Residence Medicaid 16 24 

 Urban 76 78 Other 1 1 

 Rural 24 22 

Living arrangement

 Institution 5 12 

 Alone 28 27 

 Spouse 49 40 

 Other 18 21 

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

MSAs. In 2006, poverty was defined as income of $10,294 for people living alone and as $13,167 for married couples. 

Totals may not sum to 100 percent due to rounding. Some beneficiaries may have more than one type of supplemental 

insurance. 

 *Based on a representative sample of the Medicare population. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2006. 

• 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. 

Almost half have incomes under 200 percent of poverty. 
26 Medicare beneficiary demographics 

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

 and urban residence, 2006 

 Percent of urban Percent of rural 

Characteristics Medicare population Medicare population 

Sex 

 Male 44% 45% 

 Female 56 55 

Race/ethnicity 

 White, non-Hispanic 76 86 

 African American, non-Hispanic 10 7 

 Hispanic 9 3 

 Other 5 5 

Age 

 < 65 15 18 

 65–74 42 42 

 75–84 31 28 

85+ 13 11 

Health status 

 Excellent or very good 40 37 

 Good or fair 51 52 

 Poor 9 11 

 

Income status 

 Below poverty 14 16 

 100–125% of poverty 9 10 

 125–200% of poverty 20 23 

 200–400% of poverty 31 32 

 Over 400% of poverty 26 19 

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

MSAs. In 2005, poverty was defined as income of $10,294 for people living alone and as $13,167 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, 2006. 

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

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

report being in poor health (11 percent vs. 9 percent), and to have incomes below 125 

percent of poverty (26 percent vs. 23 percent) compared to urban beneficiaries. 
A Data Book: Healthcare spending and the Medicare program, June 2009 27

Chart 2-7. The 20 clinical episode groups that account for the 

 greatest share of total spending on episodes, 2005 

 Number of Average Share of total 

 Episode treatment episodes spending spending 

Rank groups® base group (in thousands) per episode* on episodes 

 

 1 Ischemic heart disease 6,504 $4,296 14.0% 

 2 Congestive heart failure 2,493 3,437 4.3 

 3 Hypertension 14,166 562 4.0 

 4 Cerebral vascular accident 2,685 2,658 3.6 

 5 Chronic obstructive pulmonary disease 2,308 2,955 3.4 

 6 Diabetes 5,823 1,108 3.2 

 7 Joint degeneration, localized–knee & lower leg 2,272 2,681 3.1 

 8 Joint degeneration, localized–back 3,986 1,520 3.0 

 9 Chronic renal failure 1,170 4,844 2.8 

10 Closed fracture or dislocation–thigh, hip & pelvis 347 13,229 2.3 

11 Cataract 7,708 585 2.3 

12 Bacterial lung infections 1,155 3,708 2.1 

13 Malignant neoplasm of pulmonary system 284 10,895 1.6 

14 Malignant neoplasm of prostate 1,025 2,787 1.4 

15 Malignant neoplasm of breast 857 3,138 1.4 

16 Psychotic & schizophrenic disorders 559 4,725 1.3 

17 Malignant neoplasm of skin, major 2,688 882 1.2 

18 Joint degeneration, localized–thigh, hip & pelvis 781 2,991 1.2 

19 Other metabolic disorders 1,852 1,253 1.2 

20 Atherosclerosis 1,036 2,056 1.1 

Note: Symmetry Episode Treatment Groups®

 (ETGs®) is an Ingenix, Inc., product. The number of episodes column represents an 

estimate of the number of cases in the entire Medicare population based on the number of cases in the 5 percent sample. 

*Spending is standardized to exclude variation in resource costs due to geographic differences in input costs or policy 

considerations (e.g., teaching hospital payments). 

Source: MedPAC analysis of 5 percent sample of 2001–2006 Medicare claims using ETGs®

 version 7.5.1. 

• The 20 clinical episode groups that accounted for the greatest share of total spending on 

episodes in 2005 together accounted for 58 percent of total spending on episodes. 

• Of the 20 clinical episode groups, two are acute conditions—closed fracture or dislocation–

thigh, hip & pelvis and bacterial lung infections. The rest are chronic conditions. (Chronic 

ETG base groups cover health services for a full year and may include acute services. For 

example, cerebral vascular accident is a chronic condition base group that is split into six 

ETGs: with and without complication, with and without comorbidity, and with and without 

surgery.) 

• ETG software groups claims into clinically distinct episodes of care. These include 

approximately 524 clinically related groups called ETG base classes. 
28 Medicare beneficiary demographics 

Chart 2-8. The 20 common clinical episode groups that grew 

the fastest in terms of total spending on episodes, 

2002 to 2005 

 Share of 

 Average Number of Average total 

 annual episodes, spending spending on 

 Episode treatment growth 2005 per episode, episodes, 

Rank groups® base group 2002–2005 (in thousands) 2005* 2005 

 

 1 Joint degeneration, localized–neck 19% 1,346 $1,213 0.8% 

 2 Other metabolic disorders 18 1,852 1,253 1.2 

 3 Lymphoma 16 138 9,005 0.6 

 4 Joint degeneration, localized–back 16 3,986 1,520 3.0 

 5 Joint degeneration, localized– 

 knee & lower leg 14 2,272 2,681 3.1 

 6 Chronic renal failure 14 1,170 4,844 2.8 

 7 Chronic obstructive pulmonary disease 12 2,308 2,955 3.4 

 8 Malignant neoplasm of breast 11 857 3,138 1.4 

 9 Adult rheumatoid arthritis 11 573 1,864 0.5 

 10 Malignant neoplasm of large intestine 11 215 5,186 0.6 

 11 Atrial fibrillation & flutter 10 876 1,809 0.8 

 12 Malignant neoplasm of skin, major 10 2,688 882 1.2 

 13 Atherosclerosis 10 1,036 2,056 1.1 

 14 Hypertension 10 14,166 562 4.0 

 15 Spinal trauma 10 406 3,110 0.6 

 16 Chronic skin ulcers 10 875 2,212 1.0 

 17 Joint degeneration, localized– 

 thigh, hip & pelvis 9 781 2,991 1.2 

 18 Non-malignant neoplasm of prostate 8 1,873 571 0.5 

 19 Leukemia 8 130 8,256 0.5 

 20 Infection of lower genitourinary system, 

 not sexually transmitted 7 2,605 646 0.8 

Note: Symmetry Episode Treatment Groups® (ETGs®) is an Ingenix, Inc., product. Common episodes includes those that 

accounted for at least 0.5 percent of total spending on episodes. The number of episodes column represents an estimate of 

the number of cases in the entire Medicare population based on the number of cases in the 5 percent sample. 

*Spending is standardized to exclude variation in resource costs due to geographic differences in input costs or policy 

considerations (e.g., teaching hospital payments). 

Source: MedPAC analysis of 5 percent sample of 2001–2006 Medicare claims using ETGs®

 version 7.5.1. 

• The 20 clinical episode groups that grew the fastest in terms of total spending on episodes 

from 2002 to 2005 (among those that accounted for at least 0.5 percent of total spending on 

episodes) together accounted for 29 percent of total episode spending in 2005. 

• Of the 20 fastest growing clinical episode groups, two are acute conditions—spinal trauma 

and infection of lower genitourinary system, not sexually transmitted. The rest are chronic 

conditions. 
A Data Book: Healthcare spending and the Medicare program, June 2009 29

Web links. Medicare beneficiary demographics 

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

enrollment. 

 http://www.cms.hhs.gov/DataCompendium/16_2008_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 2009 33

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

disproportionate share of Medicare spending, 2006 

 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 supplemental

insurance. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2006. 

• 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 incur about 1.9 times as much fee-for-service Medicare spending as nondual 

eligibles: $12,200 is spent per dual-eligible beneficiary, and $6,527 is spent per non-dualeligible beneficiary. 

• Total spending⎯which includes Medicare, Medicaid, supplemental insurance, and out-ofpocket spending across all payers⎯for dual eligibles averaged about $23,493 per person in 

2006, over twice the amount for other Medicare beneficiaries. 
34 Dual-eligible beneficiaries

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

to be disabled, 2006 

 Dual eligibles Nondual eligibles

65-74

26%

75-84

20%

85+

13%

65-74

45%

75-84

32%

85+

12% Under 65

(disabled)

41%

Under 65

(disabled)

11%

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. Dual eligibles are designated as such if the months they qualify for Medicaid exceed 

the months they qualify for supplemental insurance. Totals may not sum to 100 percent due to rounding. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2006. 

• Over 40 percent of dual eligibles are disabled, compared with only 11 percent of the 

non-dual-eligible population. 
A Data Book: Healthcare spending and the Medicare program, June 2009 35

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

to report poorer health status, 2006 

 Dual eligibles Nondual eligibles 

Poor

20%

Good or fair

Poor

7%

Good or fair

48%

Excellent or 

very good

44%

Excellent or 

very good

16%

63%

 

Note: Totals may not sum to 100 percent due to missing responses. Dual eligibles are designated as such if the months they 

qualify for Medicaid exceed the months they qualify for supplemental insurance. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2006. 

 

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

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

(compared with less than 10 percent of the non-dual-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. 
36 Dual-eligible beneficiaries

Chart 3-4. Demographic differences between dual eligibles and 

nondual eligibles, 2006 

 Percent of dual- Percent of non-dualCharacteristic eligible beneficiaries eligible beneficiaries 

Sex 

 Male 39% 45% 

 Female 61 55 

Race/ethnicity 

 White, non-Hispanic 58 82 

 African American, non-Hispanic 18 7 

 Hispanic 15 6 

 Other 9 4 

Limitations in ADLs 

 No ADLs 49 71 

 1–2 ADLs 23 19 

 3–6 ADLs 29 10 

Residence 

 Urban 70 77 

 Rural 30 23 

Living arrangement 

 Institution 19 3 

 Alone 31 27 

 Spouse 17 55 

 Children, nonrelatives, others 32 15 

Education 

 No high school diploma 54 22 

 High school diploma only 24 31 

 Some college or more 18 45 

Income status 

 Below poverty 51 8 

 100–125% of poverty 22 7 

 125–200% of poverty 19 21 

 200–400% of poverty 5 36 

 Over 400% of poverty 2 29 

Supplemental insurance status 

 Medicare or Medicare/Medicaid only 91 12 

 Medicare managed care 3 21 

 Employer 2 38 

 Medigap 0 22 

 Medigap/employer 0 6 

 Other* 4 1 

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 2006, poverty was defined as income of $10,294 for people living alone 

and $13,167 for married couples. Totals may not sum to 100 percent due to rounding and exclusion of an “other” category. 

 *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, 2006. 

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

poverty level, and 92 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 (19 percent versus 3 percent), alone, or with persons other than a spouse. 
A Data Book: Healthcare spending and the Medicare program, June 2009 37

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

 dual eligibles and nondual eligibles, 2006 

 Dual-eligible Non-dual-eligible 

Service beneficiaries beneficiaries 

Average Medicare payment for all beneficiaries 

Total Medicare payments $12,200 $6,527 

Inpatient hospital 5,269 2,611 

Physician* 2,075 2,209 

Outpatient hospital 1,729 808 

Home health 709 311 

Skilled nursing facility** 1,068 400 

Hospice 331 173 

 

Percent of beneficiaries using service 

Percent using any type of service 93.3% 85.8% 

Inpatient hospital 28.518.5 

Physician* 90.984.3 

Outpatient hospital 75.663 

Home health 12.47.5 

Skilled nursing facility** 10.33.9 

Hospice 3.4 1.7 

Note: Includes only fee-for-service Medicare beneficiaries. Dual eligibles are designated as such if the months they qualify for 

Medicaid exceed the months they qualify for supplemental insurance. Spending totals derived from the Medicare Current 

Beneficiary Survey do not necessarily match official estimates from CMS, Office of the Actuary. 

 *Includes a variety of medical services, equipment, and supplies. 

**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, 2006, which updates the previous 

analysis by Liu, K., S.K. Long, and C. Aragon. 1998. Does health status explain higher Medicare costs among Medicaid 

enrollees? Health Care Financing Review 20, no. 2 (Winter): 39–54. 

• Average per capita spending for dual eligibles is over 85 percent higher than for nondual 

eligibles⎯$12,200 compared to $6,527. 

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

for nonduals. The largest percentage difference between the two groups is in outpatient 

hospital, skilled nursing facility, 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 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 percent versus 86 percent. 

• Duals are more likely to use each type of Medicare-covered service than nonduals. 
38 Dual-eligible beneficiaries

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

among dual-eligible beneficiaries, 2006 

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

4%

50%

4%

19%

30%

26%

40%

15%

41%

37%

5%

29%

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

designated as such if the months they qualify for Medicaid exceed the months they qualify for supplemental insurance. 

Totals may not sum to 100 percent due to rounding. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use files, 2006 (preliminary file that does not 

include Medicare spending for Part B drugs). 

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

beneficiaries. The costliest 20 percent of duals account for 77 percent of Medicare spending 

on duals; in contrast, the least costly 50 percent of duals account for only 4 percent of 

Medicare spending on duals. 

• 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 account 

for 29 percent of total spending, which includes Medicare, Medicaid, supplemental 

insurance, and out-of-pocket spending (compared with 37 percent of Medicare spending). 

• On average, total spending for duals is more than twice as high as that for nonduals— 

 $22,493 compared to $10,872. 
A Data Book: Healthcare spending and the Medicare program, June 2009 39

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

access to care 

Question Dual-eligible 

beneficiaries 

Non-dual-eligible 

beneficiaries 

Do you have a personal doctor or nurse? 

Yes 93.9% 95.8% 

In the last 6 months, when you needed care 

right away, how often did you get care as 

soon as you thought you needed? 

Always or usually 87.3 92.5 

In the last 6 months, not counting the times 

you needed care right away, how often did 

you get an appointment for your health care 

at a doctor’s office or clinic as soon as you 

thought you needed? 

Always or usually 85.1 88.6 

 

Source: MedPAC analysis of CAHPS (Consumer Assessment of Health Care Providers and Systems) for fee-for-service 

Medicare, 2006. 

• 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. 
40 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/medicaid/dual.cfm 

• The CMS Medicaid At-A-Glance publication provides information on the Medicaid program. 

http://www.cms.hhs.gov/MedicaidGenInfo/downloads/MedicaidAtAGlance2005.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 2009 43

Chart 4-1. Most ambulatory care indicators showed 

improvement or were stable, 2004–2006 

Number of indicators 

Indicators Improved Stable Worsened Total 

All 21 11 6 38 

Anemia and GI bleed 2 2 0 4 

CAD 2 2 0 4 

Cancer 3 1 3 7 

CHF 5 2 1 8 

COPD 0 1 1 2 

Depression 0 1 0 1 

Diabetes 5 1 1 7 

Hypertension 1 0 0 1 

Stroke 3 1 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 for beneficiaries with 

selected medical conditions. 

• Out of 38 indicators, 21 improved and 11 did not change statistically. This finding suggests 

that, for the most part, beneficiaries with these conditions were more likely in 2006 than 

2004 to receive necessary care and avoid hospitalizations. 

• Six of the 38 quality indicators showed a decline. These occurred in breast cancer imaging, 

iron deficiency anemia, diabetes, COPD, and heart failure. 

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

with the provision of necessary clinical care for that condition. For example, in 2006, smaller 

shares of beneficiaries with diabetes were hospitalized, concurrent with more beneficiaries 

having lipid and hemoglobin testing. 
44 Quality of care in the Medicare program

Chart 4-2. Share of home health patients achieving positive 

outcomes continues to increase 

 2004 2005 2006 2007 2008 

Functional/pain measures (higher is better) 

 Improvements in: 

 Walking 36% 37% 39% 41% 44% 

 Getting out of bed 50 51 52 53 53 

 Bathing 59 61 62 63 64 

 Managing oral medications 37 39 40 41 43 

 Patients have less pain 59 61 62 63 64 

Adverse event measures (lower is better) 

 Any hospital admission 28 28 28 28 29 

Source: MedPAC analysis of CMS Home Health Compare data. 

• Medicare publishes risk-adjusted home health quality measures that track changes in the 

functional abilities and rates of adverse events for patients who receive home health. 

• Since 2003, the trend in these measures has been steady. Functional measures, such as 

walking and bathing, have shown small but steady improvement. (For these measures 

increasing values indicate improvement.) 

• The adverse event rates, including hospitalizations and room use, have mostly remained 

unchanged over this period. However, in the last year the rate of hospitalizations increased 

by 1 percentage point. 
A Data Book: Healthcare spending and the Medicare program, June 2009 45

 Chart 4-3. Dialysis outcomes continue to improve for 

 some measures 

Outcome measure 1998 2002 2003 2006 

Percent of in-center hemodialysis patients: 

 Receiving adequate dialysis 85% 92% 94% 93% 

 With anemia under control 67 78 80 82 

 Dialyzed with an AV fistula 26 33 35 45 

 At lower risk for being malnourished 80 81 80 81 

Percent of peritoneal dialysis patients: 

 Receiving adequate CAPD 55 71 72 75 

 Receiving adequate CCPD 58 66 65 64 

 With anemia under control 72 81 83 85 

 At lower risk for being malnourished 65 60 62 63 

Percent of prevalent dialysis patients wait-listed 

 for a kidney 11 14 16 16 

Annual mortality rate per 1,000 patient years 223 217 206 201 

First-year mortality rate per 1,000 patient years 263 256 244 N/A 

Total admissions per patient year 2.00 2.05 2.06 1.97 

Hospital days per patient year 14.2 14.7 14.7 13.7 

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

dialysis), N/A (not available). Data on dialysis adequacy, use of fistulas, and anemia management represent percent of 

patients meeting CMS’s clinical performance measures. United States Renal Data System (USRDS) adjusts data by age, 

gender, race, and primary diagnosis of end-stage renal disease (ESRD). 

Source: Compiled by MedPAC from 1999–2007 Annual Reports for ESRD Clinical Performance Measures Project from CMS and 

USRDS 2008. 

• The quality of dialysis care has improved for some measures. Between 1998 and 2006, the 

proportion of hemodialysis 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 26 percent to 45 percent of 

hemodialysis patients between 1998 and 2006. Clinical guidelines recommend that at least 

40 percent of all hemodialysis patients have an AV fistula. 
46 Quality of care in the Medicare program

Chart 4-4. Medicare Advantage plan HMO quality measures for 

 2003–2007 show mixed results 

Measure 2003 2004 2005 2006 2007 

Measures for which higher scores are better 

Persistence of beta-blocker treatment after heart attack N/R 61.3 65.4 69.6 75.5* 

Colorectal cancer screening 49.5 52.6 53.9 53.3 50.4* 

Glaucoma screening for older adults N/R 62.3 61.6 62.2 59.6 

Osteoporosis management in women with fracture 18.0 19.0 20.1 21.8 20.4 

Comprehensive diabetes care 

 Eye exams 64.9 67.1 66.5 62.3 62.7 

 HbA1c testing 87.9 89.1 88.9 87.2 88.1 

 Lipid control (<100 mg/DL) 41.9 47.5 50.0 46.9 46.8 

Antidepressant medication management** 

 Acute phase 53.3 56.3 54.9 58.2 61.2* 

 Continuation phase 39.2 42.1 41.0 45.1 48.7* 

 Contacts 10.5 11.9 11.8 11.4 10.7 

 

 Follow-up after hospitalization for mental illness 

 Less than 7 days 38.8 40.2 39.1 36.5 37.0 

 Less than 30 days 60.3 60.7 59.3 55.8 54.4 

Measures for which lower scores are better 

Comprehensive diabetes care 

 Poor HbA1c control 23.4 22.5 23.6 27.3 29.0 

 

Use of high-risk medications in the elderly 

 One high-risk medication N/R N/R 23.9 23.1 23.2 

 Two high-risk medications N/R N/R 6.6 5.9 6.0

Note: N/R (not reported because measure was not yet in use), HbA1c (hemoglobin A1c). Data show the simple average 

reported rate across all plans. Reported rates are percent of enrollees receiving the appropriate screening, for example, or 

percent of enrollees with a given condition or risk factor receiving indicated care (e.g., percent of enrollees with diabetes 

who received an eye exam). Data are for HMOs only and do not include results for preferred provider organizations or 

private fee-for-service plans in Medicare Advantage. 

 *Indicates that NCQA reports the change in rate between 2006 and 2007 to be statistically significant. 

**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 refer to 

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

figure for 2006 is taken from the most recent National Committee for Quality Assurance report and is higher than the rate 

shown in last year’s data book. 

Source: National Committee for Quality Assurance. 2005, 2006, and 2007. The State of Health Care Quality. Washington, DC: 

 NCQA. Additional information provided by NCQA. 

• The National Committee for Quality Assurance judged the overall performance of Medicare 

Advantage plans in 2007 to be the second consecutive year of “relatively flat performance” 

by Medicare plans. 

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

clinically indicated services, opportunities for further improvement exist. 
A Data Book: Healthcare spending and the Medicare program, June 2009 47

Chart 4-5. Mixed quality results for SNFs between 2000 

and 2006 

Discharged to community within 100 days Rehospitalized for any of five conditions within 

100 days

0

5

10

15

20

25

30

35

40

A

v

erage facility share

of pat ei nts

2000

2001

2002

2003

2004

2005

2006

Note: SNF (skilled nursing facility). The five selected conditions include congestive heart failure, respiratory infection, urinary 

tract infection, sepsis, and electrolyte imbalance. Increases in rates of discharge to community indicate improved quality; 

declines in rehospitalization rates for the five conditions indicate improved quality. Rates are calculated for all facilities 

with more than 25 stays and are risk-adjusted. 

Source: Analysis of DataPro data conducted by University of Colorado Health Sciences Center for MedPAC. 

• Changes in the risk-adjusted measures of quality show mixed results. 

• In 2006, the rate of community discharge within 100 days was the highest it had been since 

2000 (34.4 percent), indicating improved performance. After declining between 2000 and 

2003, the rate slowly increased through 2006. 

• The risk-adjusted rates of potentially avoidable rehospitalization within 100 days for 5 

conditions have steadily increased throughout the period, indicating worse quality, though 

the increase between 2005 and 2006 was the smallest since 2000. In 2006, the mean riskadjusted facility rehospitalization rate for the five conditions was 18 percent, compared with 

11.8 percent in 2000. 

• Risk-adjusted quality measures differed by facility type. Hospital-based facilities had higher 

community discharge rates and lower potentially avoidable rehospitalization rates than 

freestanding facilities—indicating higher quality—after controlling for differences in case mix, 

ownership, and location. 

• Risk-adjusted quality measures showed mixed results by ownership. For-profit facilities had 

slightly higher community discharge rates—indicating higher quality—but also had higher 

potentially avoidable rehospitalization rates—indicating poorer quality—compared with 

nonprofit skilled nursing facilities after risk adjustment. 
48 Quality of care in the Medicare program

Web links. Quality of care in the Medicare program 

• Chapter 2 of the MedPAC March 2009 Report to the Congress includes further information 

on the quality of care in inpatient hospitals, dialysis facilities, skilled nursing facilities, home 

health agencies, inpatient rehabilitation facilities, and long-term care hospitals. 

 http://www.medpac.gov/chapters/Mar09_Ch02A.pdf 

 http://www.medpac.gov/chapters/Mar09_Ch02C.pdf 

 http://www.medpac.gov/chapters/Mar09_Ch02D.pdf 

 http://www.medpac.gov/chapters/Mar09_Ch02E.pdf 

 http://www.medpac.gov/chapters/Mar09_Ch02F.pdf 

 http://www.medpac.gov/chapters/Mar09_Ch02G.pdf 

• Chapter 3 of the MedPAC March 2009 Report to the Congress includes further information 

on the quality of care in Medicare Advantage plans. 

http://www.medpac.gov/chapters/Mar09_Ch03.pdf 

• Chapter 8 of the MedPAC June 2009 Report to the Congress discusses care coordination 

for Medicare beneficiaries and its implications for quality of care, and discusses certain care 

coordination demonstration and pilot programs for Medicare beneficiaries with chronic 

illnesses, including their impacts on quality of care. 

http://www.medpac.gov/chapters/Jun09_Ch08.pdf 

• Chapter 4 of the MedPAC June 2007 Report to the Congress discusses policy options to 

improve the quality of home health services, and Chapter 8 of the same report provides 

information on the quality of care provided by skilled nursing facilities. 

http://www.medpac.gov/chapters/Jun07_Ch04.pdf 

http://www.medpac.gov/chapters/Jun07_Ch08.pdf 

• 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 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 

 
A Data Book: Healthcare spending and the Medicare program, June 2009 49

• The CMS website provides information on all Medicare quality and value-based purchasing 

initiatives. 

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

• Medicare provides public comparative information on selected quality measures for hospital, 

nursing facility, home health agency, and dialysis facilities on its consumer website. 

http://www.medicare.gov/Hospital/home.asp 

http://www.medicare.gov/NHCompare/Home.asp 

http://www.medicare.gov/HHCompare/Home.asp 

http://www.medicare.gov/Dialysis/Home.asp 

• CMS makes available downloadable databases of the quality measures and other 

information underlying the four provider comparison databases cited above. 

http://www.medicare.gov/Download/DownloadDB.asp 

• Medicare Advantage plan quality measures are available through a Medicare consumer 

website (the Medicare Personal Plan Finder) that makes plan-to-plan comparisons within a 

specified geographic area. 

http://www.medicare.gov/MPPF/home.asp 

• CMS makes available a downloadable data base of the Medicare Advantage plan quality 

measures underlying the Medicare Personal Plan Finder. 

http://www.medicare.gov/Download/DownloadDB.asp (select “Plans - Quality Data” from the 

drop-down menu) 

• The current and past editions of the National Committee for Quality Assurance (NCQA) 

publication cited in Chart 4-4, The State of Health Care Quality, are available from the 

NCQA website. 

http://www.ncqa.org/tabid/836/Default.aspx 

• The Commonwealth Fund published a chart book in May 2005 with information on the 

quality of care for Medicare beneficiaries. 

http://www.commonwealthfund.org/Content/Publications/Chartbooks/2005/May/Quality-ofHealth-Care-for-Medicare-Beneficiaries--A-Chartbook.aspx 

S E C T I O N 

Access to care in the 

Medicare program 

 A Data Book: Healthcare spending and the Medicare program, June 2009 53

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

2000–2006 

2000 2001 2002 2003 2004 2005 2006

0

5

10

15

P

ercent of beneficiaries

7.7

8.4

8.8 8.8

4.6 4.9

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: MedPAC analysis of Medicare Current Beneficiary Survey, Access to Care file, 2006. 

• In 2006—the most recent year for which we have data from the Medicare Current 

Beneficiary Survey—more than 90 percent of beneficiaries reported good access to care, 

regardless of the question asked. 

• The percentage of beneficiaries who reported trouble getting health care increased from 4.3 

percent in 2005 to 4.9 percent in 2006. 

• When asked whether they delayed seeking medical care due to cost, 8.4 percent of 

beneficiaries answered yes in 2006, up from 7.4 percent in 2005. 

• The percentage of beneficiaries reporting that they did not see a doctor despite having a 

serious health problem or condition also increased in 2006 to 8.8 percent from 8.0 percent in 

2005. 

 
54 Access to care in the Medicare program

Chart 5-2. Beneficiaries differ in their reports of timeliness in 

obtaining urgent or routine care, 2006 

72%

64%

61%

67%

68%

71%

63%

72%

70%

63%

59%

57%

57%

61%

62%

59%

62%

61%

0% 20% 40% 60% 80% 100%

Supplemental Insurance

Dually eligible

Medicare only

Hispanic

African American

White

Disabled (under 65)

Aged (65 years and older)

Overall

Beneficiary characteristic

Percent of respondents who always got care as soon as wanted

Routine

Urgent

Source: MedPAC analysis of CAHPS®

 (Consumer Assessment of Healthcare Providers and Systems®) for fee-for-service 

Medicare, 2006. 

• Overall, 70 percent of Medicare beneficiaries who reported needing urgent care in a clinic, 

emergency room, or doctor’s office said that they always got care as soon as they wanted. 

For beneficiaries who reported making an appointment for routine care at a doctor’s office or 

clinic, 61 percent reported that they always got care as soon as they wanted. 

• Compared with beneficiaries age 65 and over, smaller percentages of beneficiaries under 

age 65 and eligible for Medicare on the basis of disability reported that they always got 

urgent or routine care as soon as they wanted. 

• Compared with white beneficiaries, somewhat smaller percentages of African American and 

Hispanic beneficiaries reported that they always got urgent or routine care as soon as they 

wanted. 

• Beneficiaries with no supplemental insurance reported the lowest percentages of always 

getting urgent (61 percent) or routine (57 percent) care as soon as they wanted. 

Beneficiaries who also had Medicaid coverage reported the next highest percentages (64 

percent for urgent care and 59 percent for routine appointments). Beneficiaries with private 

(e.g., medigap or employer-based retiree) or other public (veteran or active-duty military) 

supplemental coverage reported the highest rates of always getting care as soon as they 

wanted, with 72 percent for urgent care and 63 percent for routine appointments. 
 A Data Book: Healthcare spending and the Medicare program, June 2009 55

Chart 5-3. Medicare beneficiaries report as good or better 

ability to get timely appointments with physicians, 

compared with privately insured individuals 

 

 Medicare (age 65 or older) Private insurance (age 50–64) 

Survey question 2005 2006 2007 2008 2005 2006 2007 2008 

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

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

 For routine care 

 Never 74% 75% 75%* 76%* 67% 69% 67%* 69%* 

 Sometimes 21 18 18* 17* 25 21 24* 24* 

 Usually 3 3 3 3* 5 5 4 5* 

 Always 2 3 3 2 3 4 3 2 

For illness or injury 

 Never 82 84 82* 84* 75 79 76* 79* 

 Sometimes 15 11 13* 12* 19 15 17* 16* 

 Usually 1 2 3 1 3 2 3 2 

 Always 1 1 2 1 2 2 3 2 

Note: Numbers may not sum to 100 percent due to rounding. Missing responses (“Don’t Know” or “Refused”) are not presented. 

Overall sample sizes for each group (Medicare and privately insured) were 2,000 in years 2005 to 2007 and 3,000 in 

2008. Sample sizes for individual questions varied. 

 *Indicates a statistically significant difference between the Medicare and privately insured populations in the given year at 

a 95 percent confidence level. 

Source: MedPAC-sponsored telephone surveys, conducted August–October 2005, 2006, 2007, and 2008. 

• Most Medicare beneficiaries have one or more doctor appointments in a given year. 

Therefore, one access indicator we examine is their ability to schedule timely appointments. 

• Medicare beneficiaries report better access to physicians for appointments compared with 

privately insured individuals age 50 to 64. For example, in 2008, 76 percent of Medicare 

beneficiaries and 69 percent of privately insured individuals reported “never” having to wait 

longer than they wanted to get an appointment for routine care. 

• Medicare beneficiaries also report more timely appointments for injury and illness compared 

with their privately insured counterparts. 

• As expected, appointment scheduling for illness or injury is better than for routine care 

appointments for both Medicare beneficiaries and privately insured individuals. 
56 Access to care in the Medicare program

Chart 5-4. Medicare and privately insured patients who are 

looking for a new physician report more difficulty 

finding one in primary care 

 

 Medicare (age 65 or older) Private insurance (age 50–64) 

Survey question 2005 2006 2007 2008 2005 2006 2007 2008 

Looking for a new physician: “In the past 12 months, have you tried to get a new primary care doctor?” 

 Yes 7% 10% 9% 6% 9% 10% 10% 7% 

 No 92 89 91 93 91 90 90 93 

Getting a new physician: Among those who tried to get an appointment with a new physician, “How 

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

 Primary care physician 

 No problem 75 76 70* 71 75 75 82* 72 

 Small problem 12 10 12 10 16 15 7 13 

 Big problem 13 14 17 18 9 10 10 13 

Specialist 

 No problem 89 80 85 88* 86 83 79 83* 

 Small problem 6 7 6 7 7 9 11 9 

 Big problem 5 11 9 4* 6 7 10 7*

Note: Numbers may not sum to 100 percent due to rounding. Missing responses (“Don’t Know” or “Refused”) are not presented. 

Overall sample sizes for each group (Medicare and privately insured) were 2,000 in years 2005 to 2007 and 3,000 in 

2008. Sample sizes for individual questions varied. 

 *Indicates a statistically significant difference between the Medicare and privately insured populations in the given year at 

a 95 percent confidence level. 

Source: MedPAC-sponsored telephone surveys, conducted August–October 2005, 2006, 2007, and 2008. 

• In 2008, only 6 percent of Medicare beneficiaries and 7 percent of privately insured 

individuals reported looking for a new primary care physician. This finding suggests that 

most people are either satisfied with their current physician or did not see a need to look for 

one. 

• Of the 6 percent of Medicare beneficiaries who were looking for a new primary care 

physician in 2008, 28 percent reported problems finding one. Although this amounts to less 

than 2 percent of the total Medicare population reporting problems, the Commission is 

concerned about the continuing trend of greater access problems for primary care. 

• Among the privately insured individuals who were looking for a new primary care physician, 

 26 percent reported problems finding a primary care physician. The difference between the 

 Medicare and privately insured groups is not statistically significant. 

• For 2008, Medicare beneficiaries and privately insured individuals were more likely to report 

problems accessing primary care physicians compared with specialists. 
 A Data Book: Healthcare spending and the Medicare program, June 2009 57

Chart 5-5. Physicians’ acceptance of new patients is highest 

for private PPO and Medicare patients, 2006 

Type of patient insurance 

 

 Private 

PPO 

 

FFS Medicare 

HMO 

(Non-Medicaid) Medicaid 

 

Percent of physicians who are 

accepting at least some new 

patients 

Overall* 98.3% 96.7% 86.3% 70.4% 

Urban 98.5 97.2 86.4 68.4** 

Rural 96.8 93.1 85.8 84.8** 

 

Proceduralists 99.0 97.9 91.9** 75.4 

Surgeons 99.1 99.1** 88.2 74.2** 

Nonproceduralists 97.5 94.8** 83.6** 66.4** 

 

Note: PPO (preferred provider organization), FFS (fee-for-service), HMO (health maintenance organization). Proceduralists 

include physicians in medical specialties that are procedurally oriented (cardiology, dermatology, gastroenterology, and 

radiation oncology). Nonproceduralists include physicians in all other nonsurgical specialties. Private PPO category 

includes patients with private non-HMO coverage. 

 *The distribution of responses in this row is significantly different from FFS Medicare patients (p<0.0001), chi-square test. 

 **Responses by type of physician are statistically significant within insurance group, at a 95% confidence level. 

Source: MedPAC-sponsored survey of physicians conducted by the NORC at the University of Chicago and The Gallup 

Organization. 

• MedPAC’s most recent survey of physicians was conducted in 2006. This survey found that 

most physicians (almost 97 percent) accept at least some new Medicare FFS patients, with 

80 percent accepting all or most (data not shown). Acceptance of new Medicare FFS 

patients compares favorably with Medicaid and HMO patients but is a little lower than for 

private PPO patients. 

• If private PPO patients and (non-Medicaid) HMO patients were combined into one “private” 

category, then physicians are more likely to accept Medicare FFS (97 percent) than this 

private category (76 percent, not shown). 

• For almost all payers, rural physicians were less likely to accept new patients than their 

urban counterparts, except in the case of Medicaid. 

• In our sample, nonproceduralists (e.g., primary care physicians) were less likely than other 

types of physicians to accept new patients by each given insurance type. Statistically, this 

difference is not significant across all payers. 
58 Access to care in the Medicare program

Web links. Access to care in the Medicare program 

• Chapter 2B of the MedPAC March 2009 Report to the Congress provides more information 

on beneficiary access to physicians. 

http://www.medpac.gov/chapters/Mar09_Ch02b.pdf 

• Chapter 2B of the MedPAC March 2007 Report to the Congress provides a more detailed 

discussion of our most recent survey of physicians. 

http://www.medpac.gov/publications/congressional_reports/Mar07_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 May 2005 which has further information 

on access in the Medicare program. 

 http://www.commonwealthfund.org/publications/publications_show.htm?doc_id=275195 

• The Center for Studying Health System Change also conducts research on patient access 

to health care. 

http://www.hschange.org 
S E C T I O N 

Medicare beneficiary and 

other payer financial liability

A Data Book: Healthcare spending and the Medicare program, June 2009 61

Chart 6-1. Sources of supplemental coverage among 

noninstitutionalized Medicare beneficiaries, 2006 

Medigap

26.2%

No supplemental

coverage

8.5%

Employer

sponsored

31.7%

Medicaid

13.3%

Other public sector

1.1%

Medicare

managed care

19.2%

Note: Beneficiaries are assigned to the supplemental coverage category that applied for the most time in 2006. They could have 

had coverage in other categories throughout 2006. Other public sector includes federal and state programs not included in 

other categories. Analysis includes only beneficiaries not living in institutions such as nursing homes. It excludes 

beneficiaries who were not in both Part A and Part B throughout their enrollment in 2006 or who had Medicare as a 

second payer. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2006. 

• Most beneficiaries living in the community have coverage that supplements or replaces the 

Medicare benefit package. About 91 percent of beneficiaries have supplemental coverage or 

participate in Medicare managed care. 

• About 58 percent have private-sector supplemental coverage such as medigap (about 26 

percent) or employer-sponsored retiree coverage (about 32 percent). 

• About 14 percent have public-sector supplemental coverage, primarily Medicaid. 

• Nineteen percent participate in Medicare managed care. This includes Medicare Advantage, 

cost, and health care prepayment plans. These types of arrangements generally replace 

Medicare coverage and often add to it. 

• The proportion of beneficiaries who have managed care enrollment on this diagram (about 19 

percent) is much smaller than the proportion listed in Chapter 10 (23 percent). The difference 

is due to the fact that the results in this chart reflect 2006 data, and the results in Chapter 10 

reflect 2009 data. Managed care enrollment grew substantially in the intervening years. 
62 Medicare beneficiary and other payer financial liability

Chart 6-2. Sources of supplemental coverage among 

noninstitutionalized Medicare beneficiaries, by 

beneficiaries’ characteristics, 2006 

 Number of Employer- Medicare Other 

 beneficiaries sponsored Medigap managed public Medicare 

 (thousands) insurance insurance Medicaid care sector only 

 

All beneficiaries 37,916 32% 26% 13% 19% 1% 9% 

Age 

 Under 65 5,725 20 5 41 12 1 20 

 65–69 8,428 38 25 8 19 1 9 

 70–74 7,593 33 29 9 22 1 6 

 75–79 6,829 32 31 8 22 1 5 

 80–84 5,192 33 33 7 21 1 5 

 85+ 4,149 32 35 9 18 1 6 

Income status 

 Below poverty 6,203 11 11 49 17 1 11 

 100 to 125% of poverty 3,596 16 23 28 21 3 10 

 125 to 200% of poverty 7,636 25 27 10 22 2 14 

 200 to 400% of poverty 11,267 42 29 1 20 1 8 

 Over 400% of poverty 9,150 45 35 0 16 0 3 

Eligibility status 

 Aged 31,977 34 30 8 20 1 7 

 Disabled 5,505 19 5 42 13 1 21 

 ESRD 382 37 16 25 15 0 7 

Residence 

 Urban 28,717 32 25 12 24 1 7 

 Rural 9,197 32 31 17 5 1 14 

Sex 

 Male 16,774 33 24 12 19 1 11 

 Female 21,142 30 28 14 19 1 7 

Health status 

 Excellent/very good 15,635 35 31 6 20 1 7 

 Good/fair 18,925 30 24 17 19 1 9 

 Poor 3,128 28 13 30 13 2 14 

Note: ESRD (end-stage renal disease). Beneficiaries are assigned to the supplemental coverage where they spent the most 

time in 2006. They could have had coverage in other categories throughout 2006. Medicare managed care includes 

Medicare Advantage, cost, and health care prepayment plans. Other public sector includes federal and state programs 

not included in other categories. In 2006, poverty was defined as $9,669 for people living alone and $12,186 for married 

couples. Urban indicates beneficiaries living in metropolitan statistical areas (MSAs). Rural indicates beneficiaries living 

outside MSAs. Analysis includes beneficiaries living in the community. Number of beneficiaries will differ between 

boldface categories because we exclude beneficiaries with missing values. 

Source: MedPAC analysis of 2006 Medicare Current Beneficiary Survey, Cost and Use file. 

• Beneficiaries most likely to have employer-sponsored supplemental coverage are those who are above age 64, 

higher income (above 200 percent of poverty), eligible due to age or end-stage renal disease (ESRD), male, and 

who report better than good health. 

• Medigap is most common among those who are “older” aged (age 70 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, and who report poor health. 

• Medicare managed care is most common among those who are age 65 or older, with income between 100 and 400 

percent of poverty, eligible due to age, urban dwelling, and who report better than poor 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 2009 63

Chart 6-3. Total spending on health care services for 

noninstitutionalized FFS Medicare beneficiaries, 

by source of payment, 2005 

Medicare

51%

Beneficiaries' direct spending

16%

Private supplements

21%

Public supplements

12%

Per capita total spending = $12,157

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 

not living in institutions such as nursing homes. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2005. 

• 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 $12,157. Medicare is the largest source of payment; it pays 51 percent of the health 

care costs for FFS beneficiaries living in the community, or an average of $6,180 per beneficiary. 

• Private sources of supplemental coverage—primarily employer-sponsored retiree coverage and 

medigap—paid 21 percent of beneficiaries’ costs, or an average of $2,603 per beneficiary. 

• Beneficiaries paid 16 percent of their health care costs out of pocket, or an average of $1,910 of 

spending per beneficiary. 

• Public sources of supplemental coverage—primarily Medicaid—paid 12 percent of beneficiaries’ 

health care costs, or an average of $1,463 per beneficiary. 

• The effects of the prescription drug benefit established under the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 are not reflected in these results or in Charts 6-4, 

6-5, and 6-6. 
64 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, 2005 

< 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

D

ollars

Medicare

Supplemental payers

Direct spending

$242 $1,663

$4,234

$9,159

$19,253

$56,449

Note: FFS (fee-for-service). Analysis includes FFS beneficiaries not living in institutions such as nursing homes. Direct spending 

is on Medicare cost sharing and noncovered services. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2005. 

• 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 $56,449. Per capita spending for the 10 percent of 

beneficiaries with the lowest total spending averages $242. 

• 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 51 percent of total spending for all 

beneficiaries but pays 65 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 2009 65

Chart 6-5. Variation in and composition of total spending 

among noninstitutionalized FFS beneficiaries, 

by type of supplemental coverage, 2005 

6,306 7,168

5,558

9,211

4,878 4,984

4,215 1,753 3,979

608

960

4,575

1,492

3,517

1,938

2,160 1,943

1,061

2,375

1,753

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

16,000

Dol al rs

Direct spending Public supplemental Private supplemental Medicare

 15

34

57

 388

Note: FFS (fee-for-service). Beneficiaries are assigned to the supplemental coverage category that applied for the most time in

2005. They could have had coverage in other categories throughout 2005. 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 not living in institutions such as nursing homes. It excludes beneficiaries who 

were not in both Part A and Part B throughout their enrollment in 2005 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, 2005. 

• 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, 69 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. 
66 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, 2005 

909

1,576

2,607 2,835

900

3,530 2,256

3,189 2,994

1,331

1,860

942

1,717

2,797 3,169

934

1,721

1,851

2,185 1,784

772

1,688

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

Dol al rs

Out-of-pocket spending by beneficiaries

Premiums paid by beneficiaries

101

 - +

 − Beneficiaries who report they are in fair or poor health

 + Beneficiaries who report they are in good, very good, or excellent health

Health - + - +

Status

 - + - + - +

120

Note: ESI (employer-sponsored supplemental insurance). 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2005. 

• This diagram illustrates out-of-pocket spending on services and premiums, by beneficiaries’ supplemental 

insurance and health status. For example, beneficiaries who have only traditional Medicare coverage (Medicare 

only) and report fair or poor health had an average of $909 in out-of-pocket spending on premiums and $3,530 

on services. Those who have Medicare-only coverage and report good, very good, or excellent health had an 

average of $942 in out-of-pocket spending on premiums and $1,721 on services. 

• 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. 

• Despite having supplemental coverage, beneficiaries who have employer-sponsored insurance (ESI) or medigap 

have out-of-pocket spending that is comparable to or larger than those who have only coverage under traditional 

Medicare (Medicare only). This likely reflects the fact that beneficiaries who have ESI or medigap have higher 

incomes and are likely to have stronger preferences for health care. 

• 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. 
A Data Book: Healthcare spending and the Medicare program, June 2009 67

Web links. Medicare beneficiary and other payer 

financial liability 

• Chapter 1 of the MedPAC March 2009 Report to the Congress provides more information on 

 Medicare program spending. 

 http://www.medpac.gov/chapters/Mar09_ch01.pdf. 

• Chapter 1 of the MedPAC March 2008 Report to the Congress provides more information on 

Medicare program spending. 

http://www.medpac.gov/chapters/Mar08_ch01.pdf 

• Chapter 1 of the MedPAC March 2007 Report to the Congress provides more information on 

Medicare program spending. 

 http://www.medpac.gov/chapters/Mar07_ch01.pdf 

• Chapter 1 of the MedPAC March 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 2009 71

Chart 7-1. Growth in Medicare’s FFS payments for hospital 

 inpatient and outpatient services, 1996–2007 

93 94 93 95 96 105 113 119 127 134 135 136

16 17 16 18 18

21

21

23

26

28 29 31

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Calendar year

0

20

40

60

80

100

120

140

160

180

Bill oi ns of dol al rs

Outpatient

Inpatient

 Note: FFS (fee-fee-service). Analysis includes inpatient services covered by the acute inpatient prospective payment system 

(IPPS); 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 program outlays and beneficiary cost sharing. The 

growth in spending was slowed in 2006 by large increases in the number of Medicare Advantage enrollees, who are not 

included in these aggregate totals. 

Source: CMS, Office of the Actuary. 

• Aggregate Medicare fee-for-service (FFS) inpatient spending was $136 billion and 

outpatient spending was $31 billion in 2007. From 2006 to 2007 inpatient spending 

increased less than 1 percent while outpatient spending increased by over 6 percent. 

• A freeze in inpatient payment rates in the Balanced Budget Act of 1997 (BBA) reduced 

 inpatient spending growth in 1998. Spending increased substantially in 2001 through 2004. 

 Payment growth was relatively slow from 2005 to 2007 because a large number of 

beneficiaries switched from traditional fee-for-service Medicare to the Medicare Advantage 

(MA) program. 

• Outpatient spending per FFS beneficiary was approximately $880 in 2007, up from $600 

 in 2002, or a 47 percent increase. 
72 Acute inpatient services

Chart 7-2. Major diagnostic categories with highest volume, 

 fiscal year 2007 

 

 Share of Share of 

MDC Share of all medical surgical 

number MDC name discharges discharges discharges 

 5 Circulatory system 26% 25% 30% 

 4 Respiratory system 14 19 3 

 

 8 Musculoskeletal system 13 5 32 

 and connective tissue 

 6 Digestive system 10 11 9 

 

 1 Nervous system 8 9 5 

 11 Kidney and urinary tract 7 8 4 

 18 Infectious and parasitic diseases 4 5 2 

 

 10 Endocrine, nutritional, and 4 5 2 

 metabolic diseases and 

 disorders 

 

 7 Hepatobiliary system 3 3 4 

 and pancreas 

 

 9 Skin, subcutaneous 3 3 2 

 tissue, and breast 

Total 92 93 93 

Note: MDC (major diagnostic category). 

Source: MedPAC analysis of MedPAR data from CMS. 

• In fiscal year 2007, 10 major diagnostic categories accounted for 92 percent of all 

discharges at hospitals paid under the acute inpatient prospective payment system. 

• Circulatory system cases accounted for approximately one-quarter of medical cases and 30 

percent of surgical cases. 

• Respiratory system cases accounted for 19 percent of medical discharges. 

• Musculoskeletal system cases accounted for 32 percent of surgical discharges. 
A Data Book: Healthcare spending and the Medicare program, June 2009 73

Chart 7-3. Number of acute care hospitals and Medicare 

 discharges, by hospital group, 2007 

 Hospitals Medicare discharges 

 Number 

Hospital group Number Share of total (thousands) Share of total 

 

All PPS and critical 4,697 100.0% 11,309 100.0% 

access hospitals 

PPS hospitals 3,416 72.7 10,866 96.1 

Urban 2,445 52.1 9,254 81.8 

 Large urban 1,346 28.7 5,034 44.5 

 Other urban 1,099 23.4 4,221 37.3 

Rural 971 20.7 1,611 14.3 

 Rural referral 134 2.9 450 4.0 

 Sole community 402 8.6 648 5.7 

 Medicare dependent 161 3.4 185 1.6 

 Other rural <50 beds 101 2.2 57 0.5 

 Other rural >50 beds 173 3.7 271 2.4 

 Voluntary 1,995 42.5 7,782 68.8 

 Proprietary 839 17.8 1,745 15.4 

 Government 582 12.4 1,338 11.8 

 Major teaching 282 6.0 1,660 14.7 

 Other teaching 747 15.9 3,818 33.8 

 Nonteaching 2,387 50.8 5,388 47.6 

Critical access hospitals 1,281 27.3 443 3.9 

Note: PPS (prospective payment system). Analysis includes all hospitals covered by Medicare’s inpatient PPS 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 0.25. Other teaching hospitals have a 

ratio of below 0.25. Data are limited to providers with complete cost reports in the CMS database. See Chart 7-21 for 

more information about critical access hospitals. 

Source: MedPAC analysis of PPS impact files and Medicare cost report data from CMS. 

• In 2007, 3,416 hospitals provided 10.9 million discharges under Medicare’s acute inpatient 

prospective payment system (PPS) and 1,281 critical access hospitals provided more than 

0.4 million discharges. The number of PPS discharges declined from 2006 primarily due to a 

shift in Medicare beneficiaries from fee-for-service Medicare to Medicare Advantage plans. 

• 20 percent of PPS hospitals are covered by three special payment provisions (rural referral, 

sole community, and small rural Medicare-dependent hospitals) intended to help rural 

facilities that are not critical access hospitals; these facilities provide about 11 percent of all 

discharges. 

• From 2006 to 2007, the number of PPS hospitals increased by 1 percent, or 41 hospitals. 

Among the PPS hospital sub-groups, the number of proprietary hospitals increased 7.4 

percent, urban hospitals 1.9 percent, and nonteaching hospitals 2.3 percent. 
74 Acute inpatient services

Chart 7-4. Cumulative change in total admissions and total 

outpatient visits, 1997–2007 

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

5

10

15

20

25

30

35

40

P

ercent

0.0 0.8

2.5

4.9

7.2

9.3 10.2 11.2 11.7 12.1 12.0

0.0

5.3

10.0

15.8

19.6

23.6

25.1

27.0

29.8

33.2 34.0

Total outpatient visits

Total admissions

Note: Cumulative change is the total percent increase from 1997 through 2007. Data are admissions (all payers) to and 

outpatient visits at approximately 5,000 community hospitals. 

Source: American Hospital Association, AHA Hospital Statistics. 

• Hospital outpatient service use grew much more rapidly from 1997 to 2007 than inpatient 

service use. Total hospital outpatient visits increased approximately 34 percent from 1997 to 

2007, while total admissions grew just 12 percent. 

• There were nearly 600 million outpatient visits and over 35 million admissions to community 

hospitals in 2007. 

• In 2007, the overall number of annual admissions declined for the first time since 1994, 

down less than a tenth of one percentage point, or approximately 32,000 admissions from 

 2006. 
A Data Book: Healthcare spending and the Medicare program, June 2009 75

Chart 7-5. Trends in Medicare and total hospital length of stay, 

 1997–2007 

5.8 5.6 5.6 5.5 5.4 5.3 5.3 5.2 5.1 5.1 5.0

4.5 4.4 4.4 4.4 4.3 4.3 4.3 4.2 4.2 4.1 4.1

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Fiscal year

0

1

2

3

4

5

6

7

8

Days

Medicare

Total

Note: Length of stay is calculated from discharges and patient days for over 3,000 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 Medicare inpatients was nearly 1 day longer than for all hospital 

discharges in 2007. 

• Length of stay for Medicare inpatients fell 14 percent, from 5.8 days in 1997 to 5.0 days in 

2007, dropping at an average annual rate of 1.8 percent from 1997 to 2001 and 0.9 percent 

from 2001 to 2007. 

• Length of stay for all hospital discharges fell 9 percent, from 4.5 days in 1997 to 4.1 days in 

2007, dropping at an average annual rate of 0.8 percent from 1997 to 2001 and 0.3 percent 

from 2001 to 2007. 
76 Acute inpatient services

Chart 7-6. Hospital occupancy rates, 1998–2007 

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

10

20

30

40

50

60

70

80

Occupancy ra

et (percent)

63 64 65 65 67 68 68 69 69 68

49 49 50 51 51 52 52 53 52 51

59 61 61 62 63 64 65 66 65 65

Urban PPS

Rural PPS

All 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 reporting period. Bed days available are based on beds that are set up and 

staffed for inpatient service (i.e., the units are open and operating), but the beds may not be staffed for a full patient load

in each unit on any given day. Hospitals’ group designations for the entire 1998–2007 period are based on their status at 

the end of 2007. 

Source: MedPAC analysis of data from the American Hospital Association Annual Survey of Hospitals. 

• Hospitals’ occupancy rates have been rising, with the aggregate occupancy rate climbing 

from 59 percent in 1998 to 65 percent in 2007. 

• Occupancy rates are higher in urban than in rural hospitals; in 2007, occupancy rates stood 

at 68 percent for urban hospitals and 51 percent for rural hospitals, a 17 percentage point 

difference. 
A Data Book: Healthcare spending and the Medicare program, June 2009 77

Chart 7-7. Nonfederal hospital construction spending, 

1999–2007 

14.7 15.1

16.7

19.9

21.2 21.6

23.0

27.4

31.1

1999 2000 2001 2002 2003 2004 2005 2006 2007

0

5

10

15

20

25

30

35

Bill oi ns of dol al rs (2007)

Note: Spending is for nonfederal hospital construction. Data for 2007 is revised by Census Bureau in May 2008. Data are 

inflated to 2007 dollars using the McGraw-Hill construction cost index. 

Source: Census Bureau. http://www.census.gov/const/www/c30index.html. May 2008. 

• Hospital construction has increased substantially since 1999, expanding almost 35 percent 

(in real terms) from 2005 to 2007 to $31 billion, and more than doubling since 2000. 
78 Acute inpatient services

Chart 7-8. Cumulative change in Medicare outpatient services and 

inpatient discharges per FFS beneficiary, 2002–2007 

2002 2003 2004 2005 2006 2007

Calendar year

0

2

4

6

8

10

12

14

16

18

20

P

ercent

0.0

5.2

8.7

11.3

14.0

18.6

0.0 0.0

0.6 1.4

0.4 0.0

Outpatient services per FFS enrollee

Inpatient discharges per FFS enrollee

Note: FFS (fee-for-service). Data are for short-term general and surgical hospitals, including critical access and children’s 

hospitals. 

Source: MedPAC analysis of MedPAR and hospital outpatient claims data from CMS. 

• From 2002 to 2007 Medicare inpatient discharge volume per FFS beneficiary has remained 

relatively flat, in part due to shifts of patients to outpatient setting. 

• From 2002 to 2007, the number of outpatient services per FFS beneficiary increased nearly 

19 percent. 
A Data Book: Healthcare spending and the Medicare program, June 2009 79

Chart 7-9. Medicare inpatient payments, by source and hospital 

group, 2007 

 Percent of total payments 

 Total 

 Additional rural payments 

Hospital group Base IME DSH Outlier hospital* (millions) 

All hospitals 82.3% 4.8% 8.8% 3.6% 0.5% $105,758 

 

Urban 81.6 5.3 9.1 3.8 0.2 94,370 

Rural 88.2 0.7 5.8 1.6 3.7 11,388 

 

Large urban 79.8 6.5 9.7 4.1 0.0 53,828 

Other urban 83.9 3.8 8.4 3.5 0.4 40,542 

Rural referral 89.5 1.0 7.2 2.3 0.0 3,425 

Sole community 86.5 0.9 4.1 1.2 7.3 4,795 

Medicare dependent 86.6 0.0 6.8 0.8 5.8 1,171 

Other rural <50 beds 91.8 0.1 7.2 0.9 0.0 311 

Other rural >50 beds 91.0 0.4 6.9 1.7 0.0 1,686 

 

Voluntary 82.9 5.2 7.9 3.5 0.6 77,104 

Proprietary 84.8 1.4 10.4 3.0 0.4 15,209 

Government 76.1 6.7 12.1 4.5 0.7 13,445 

Major teaching 67.1 15.8 11.9 5.1 0.1 23,839 

Other teaching 84.3 3.6 8.5 3.4 0.3 37,849 

Nonteaching 88.8 0.0 7.4 2.8 1.0 44,069 

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 direct 

graduate medical education payments. Simulated payments reflect 2007 payment rules applied to actual number of cases 

in 2007. Medicare fee-for-service inpatient payments grew only slightly from 2006 to 2007 due to enrollment shifting from 

fee-for-service to Medicare Advantage (MA). Due to changes in MA enrollment and in our reporting methodology, this 

year’s table is not exactly comparable to last year’s table. 

 *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. 

• Medicare payments in 2007 to hospitals covered by the acute inpatient prospective payment system 

totaled almost $106 billion. About $94 billion (89 percent) was paid to hospitals located in urban areas 

and $11.4 billion went to rural hospitals. This figure does not reflect $2.6 billion in payments to critical 

access hospitals for inpatient care. 

• Special payments—which include indirect medical education, disproportionate share, and outlier 

payments, as well as additional payments to rural hospitals through the sole community and 

Medicare-dependent programs—account for 17.7 percent of all inpatient payments. This proportion is 

higher for urban (18.4 percent) than for rural hospitals (11.8 percent). 

• From 2006 to 2007, disproportionate share payments increased as a share of total inpatient 

payments across nearly all hospital groups, while indirect medical education decreased across nearly 

all hospital groups. Both changes are the result of specific policy changes implemented for fiscal year 

2007. 

• Outlier payments accounted for 3.6 percent of total inpatient payments in 2007. The legislative 

mandate for the level of outlier payments uses a different measure displaying outlier payments as a 

ratio of outlier payments to base payments plus outlier payments. Measured in this way, CMS’s 

outlier share ratio was 4.6 percent in 2007, near to their annual goal of 5.1 percent. 
80 Acute inpatient services

Chart 7-10. Medicare acute inpatient PPS margin, 1994–2007 

3.6

9.0

14.7

18.0

15.8

13.6

12.0

10.3

6.5

2.3 -0.3 -0.7

-2.4

-3.7

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-10

0

10

20

M

arg ni (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 2008) 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 potential 

influence of how overhead costs are allocated (see Chart 7-12). 

• The Medicare inpatient margin reached a record high of 18.0 percent in 1997. After 

implementation of the Balanced Budget Act of 1997, however, inpatient margins fell. In 

2007, the margin was –3.7 percent, the lowest level since the beginning of the inpatient 

PPS. 

• Medicare inpatient margins vary widely. In 2007, one-quarter of hospitals had Medicare 

inpatient margins that were 7.8 percent or higher, and another quarter had margins that 

were –18.2 percent or lower. This amounts to a 26 percentage point difference in 

performance between the top and bottom quartiles in 2007. Forty percent of hospitals had 

positive inpatient Medicare margins in 2007. 
A Data Book: Healthcare spending and the Medicare program, June 2009 81

Chart 7-11. Medicare acute inpatient PPS margin, by urban and 

rural location, 1994–2007 

9.5

15.3 18.7

16.7

14.6

12.9

11.1

7.1

2.6

-0.4 -0.8

-2.5

-3.8

-0.3

4.4

9.7

11.3

8.3

6.0

4.1 3.9

1.6

0.6

0.4 0.1

-2.0

-2.9

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-10

0

10

20

M

arg ni (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 2008) from CMS. 

• Urban hospitals historically had much higher Medicare inpatient margins than rural 

hospitals, but this difference narrowed earlier in this decade and today urban hospital 

margins are lower than rural hospitals. 

• The gap between urban and rural hospitals’ inpatient margins grew between 1994 and 2000. 

One factor in this divergence in this period 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, the difference narrowed and from 2004 to 2007 rural hospitals’ inpatient 

margins were slightly higher than those of urban hospitals. This change is the result of 

payment policies targeted at raising rural hospital payments, and growth in the number of 

critical access hospitals, which removed many rural hospitals with low margins from the 

prospective payment system. 
82 Acute inpatient services

Chart 7-12. Overall Medicare margin, 1997–2007 

11.9

8.5

6.3

5.4 5.4

2.3

-1.2

-3.0 -3.1

-4.7

-5.9

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-10

0

10

20

M

argin (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 2008) from CMS. 

• The overall Medicare margin incorporates payments and costs for acute inpatient, 

outpatient, skilled nursing, home health care, and inpatient psychiatric and rehabilitative 

services, as well as direct 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 in 1997 was 11.9 percent. In fiscal year 2007, it was 

–5.9 percent. 

• In 2007, one-quarter of hospitals had overall Medicare margins of 3.8 percent or higher, and 

another quarter had margins of –17.9 percent or lower. Between 1997 and 2007, the 

difference in performance between the top and bottom quartile widened from 14 percent to 

nearly 22 percent. About 34 percent of hospitals had positive overall Medicare margins in 

2007, accounting for 36 percent of Medicare inpatient discharges. 
A Data Book: Healthcare spending and the Medicare program, June 2009 83

Chart 7-13. Overall Medicare margin, by urban and rural 

 location, 1997–2007 

12.6

9.4

7.3

6.4 6.1

2.9

-0.8

-2.9

-3.1

-4.7

-6.0

6.2

1.7

-1.5 -2.2

-0.4

-2.3

-3.9 -3.3

-2.8

-4.8

-5.6

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-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 direct 

graduate medical education and bad debts. Data on overall Medicare margins before 1997 are unavailable. 

Source: MedPAC analysis of Medicare cost report data (August 2008) from CMS. 

• As with inpatient margins, overall Medicare margins historically were higher for urban 

hospitals than for rural hospitals, but since 2004 overall Medicare margins for urban and 

rural hospitals have been similar, with rural hospitals having slightly higher margins in 2007. 

• The difference in margins between the two groups grew between 1997 and 2000 but has 

since narrowed, with rural hospital margins similar to those of urban hospitals in each of the 

past four years. In 1997, the overall margin for urban hospitals was 12.6 percent, compared 

with 6.2 percent for rural hospitals. In 2007, the overall margin for urban hospitals was –6.0 

percent, compared with –5.6 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. 
84 Acute inpatient services

Chart 7-14. Hospital total margin, 1994–2007 

4.6

5.8 5.9 6.4

4.8

3.6 3.9 3.7 3.6

4.3 4.3 4.8

5.4

6.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

5

10

15

20

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 2008) 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 peaked in 1997 at 6.4 percent, before declining to under 4 percent in 

the 1999 to 2002 period. In 2007, the total margin climbed for the third year in a row to 6.0 

percent, its highest level in 10 years. Total margins rose despite declines in overall Medicare 

margins over this same period. 

• The decline 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 

corresponding total margins. 

• In 2007, 75 percent of hospitals had positive total margins. 

• The total margin varies much less than the Medicare inpatient or overall Medicare margin. In 

2007, one-quarter of prospective payment system hospitals had total margins that were 9.2 

percent or higher, while another quarter had margins that were –0.1 percent or lower, a spread 

of just 9 percentage points compared to a 22 percentage point spread for overall Medicare 

margins and a 26 percentage point spread for Medicare inpatient margins. 
A Data Book: Healthcare spending and the Medicare program, June 2009 85

Chart 7-15. Hospital total margin, by urban and rural location, 

1994–2007 

5.5

6.8

7.2

7.9

5.6

5.2 5.1

4.5

3.9

4.2

5.1

5.6 5.8

5.8

4.5

5.7 5.8

6.2

4.7

3.5 3.7 3.6 3.6

4.3

4.2

4.7

5.3

6.1

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

5

10

15

M

argin (in 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 2007) from CMS. 

• In 2007, for only the second year in the last 14 years urban hospitals had higher total (all 

payer) margins than rural hospitals. 

• In 2007, total margins were 6.1 percent for urban and 5.8 percent for rural hospitals. The 6.1 

percent total margin for urban hospitals is just shy of the highest margin they have achieved 

(6.2 percent in 1997) in the last 14 years. 
86 Acute inpatient services

Chart 7-16. Hospital total margin, by teaching status, 1994–2007 

5.4

6.8 7.0 6.9

5.2

4.6 4.6

5.0 4.8 5.1

4.6

5.2

5.2

5.9

4.8

6.1

6.7 6.9

5.3

4.2 4.3 4.1 4.3

4.9

4.9

5.3

6.0

6.7

3.4

4.0

3.4

5.0

3.4

1.5

2.3

1.4 1.4

2.6

3.0

3.6

4.8

5.4

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

5

10

15

Marg ni (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 greater than zero and 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 2008) 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 2007, the total margin of nonteaching hospitals stood at 5.9 percent compared 

with 5.4 percent for major teaching hospitals. 

• In 2007, major teaching hospitals’ total (all payer) margins reached their highest level in 

more than two decades, and increased for the fifth consecutive year. 

• The difference in margins between major teaching and nonteaching hospitals remained 

narrow for the second consecutive year, at 0.5 percentage points. Other teaching hospitals 

had the highest margin of any group and reached their highest level in a decade in 2007. 
A Data Book: Healthcare spending and the Medicare program, June 2009 87

Chart 7-17. Medicare margins by teaching and disproportionate 

 share status, 2007 

 Share of Medicare Overall 

 Share of inpatient inpatient Medicare 

Hospital group hospitals payments margin margin 

All hospitals 100% 100% –3.7% –5.9% 

Major teaching 8 23 7.4 1.1 

Other teaching 22 36 –4.9 –6.4 

Nonteaching 70 42 –8.9 –9.3 

Both IME and DSH 26 51 1.6 –2.3 

IME only 5 7 –11.3 –11.3 

DSH only 53 31 –5.9 –7.1 

Neither IME nor DSH 17 10 –17.8 –16.0 

Note: IME (indirect medical education), DSH (disproportionate share). 

Source: MedPAC analysis of 2007 Medicare cost report data from CMS. 

• Major teaching hospitals have the highest Medicare inpatient and overall Medicare margins. 

Their better financial performance is due largely to the additional payments they receive 

from the indirect medical education (IME) and disproportionate share (DSH) adjustments. 

• Hospitals that receive neither IME nor DSH payments have the lowest Medicare margins. In 

2007, the Medicare inpatient margins of these hospitals were more than 25 percentage 

points below those of major teaching hospitals and overall Medicare margins were more 

than 17 percentage points lower. 
88 Acute inpatient services

Chart 7-18. Financial pressure leads to lower costs 

 Level of financial pressure 2002 to 2007 

 High pressure Low pressure 

 (non-Medicare Medium (non-Medicare 

 margin <1%) pressure margins >5%) 

Number of hospitals 837 413 1,700 

Financial characteristics, 2007 

Non-Medicare margin 

(private, Medicaid, uninsured) –2.4% 4.5% 13.5% 

Standardized cost per discharge 

 Median of for profit and nonprofit $5,800* $6,000 $6,400 

 Nonprofit hospital 5,700* 6,000 6,500 

 For-profit hospital 5,900* 6,000 6,000 

Annual growth in cost per 

discharge 2004 to 2007 4.8%* 4.9% 5.0% 

Overall 2007 Medicare margin 4.2% –3.8% –11.7% 

Patient characteristics (medians) 

Total hospital discharges in 2007 5,424* 7,478 7,312 

Medicare share of inpatient days 45% 44% 46% 

Medicaid share of inpatient days 13%* 12% 10% 

Medicare case mix index 1.27* 1.33 1.38 

 

Note: Standardized costs are adjusted for hospital case mix, wage index, outliers, transfer cases, interest expense, and the 

effect of teaching and low-income Medicare patients on hospital costs. The sample includes all hospitals that had 

complete cost reports on file with CMS by August 31, 2008. 

 *Indicates significantly different from low-pressure hospitals using p = 0.01 and a Wilcoxon rank test. A Wilcoxon rank test 

is used to limit the influence of the few hospitals that report very large costs per discharge. 

Source: MedPAC analysis of Medicare cost report and claims files from CMS. 

• Higher financial pressure tends to lead to lower cost growth and lower costs per discharge. 

 Hospitals with lower volume, lower case mix, and higher Medicaid charges are more likely to 

be under financial pressure. 
A Data Book: Healthcare spending and the Medicare program, June 2009 89

Chart 7-19. Change in Medicare hospital inpatient costs per 

discharge and private payer payment-to-cost ratio, 

1987−2007 

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

-2

0

2

4

6

8

10

12

Change ni cost per d si charge ( ni percent)

1.1

1.15

1.2

1.25

1.3

1.35

P

a

y

m

ent- ot -cost ratio

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

8.1

6.6

5.6

5.1

5.3 4.3

1.20

1.22

1.24

1.28

1.31

1.32

1.30

1.24

1.24

1.22

1.18

1.16

1.15

1.16

1.17

1.19

1.22

1.29

1.29

1.30

1.32

Change in Medicare acute inpatient costs per discharge

Private payer payment-to-cost ratio

1.35

1.30

1.25

1.20

1.15

1.10

Note: Data are for community hospitals and cover all hospital services. Imputed values were used for missing data (about onethird of observations). Most Medicare and Medicaid managed care patients are included in this private insurer category. 

Source: MedPAC analysis of Medicare Cost Report files 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, 1987 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 per year, which was more than 2 percentage points 

below the average increase in the market basket. 

• As pressure from private payers waned after 1999, the private payer payment-to-cost ratio 

rose sharply, and hospital cost growth exceeded growth in the market basket by 2 

percentage points a year. In 2005 through 2007 the growth in private payer profit margins 

slowed, and in 2007 cost growth more closely matches market basket. 
90 Acute inpatient services

Chart 7-20. Markup of charges over costs for all patient care 

services, 1996–2007 

85 90

97

103

113

124

137

153

164

173

180 185

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

25

50

75

100

125

150

175

200

P

ercent

Note: Analysis includes all community hospitals. 

Source: American Hospital Association Annual Survey of Hospitals. 

• The markup of charges over costs rose from about 85 percent in 1996 to about 185 percent 

in 2007. Charges are now almost three times costs. 

• Since few patients pay full charges, rapid charge growth may have little impact on hospital 

financial performance. However, this growth may significantly impact uninsured patients, 

who may pay full charges. More rapid growth in charges than costs may reflect hospital 

attempts to maximize revenue from private payers (who often structure their payments as a 

discount off charges). The unusually large increases in charges in 2002 and 2003 may have 

resulted from some hospitals manipulating Medicare outlier payments. Toward the end of 

fiscal year 2003, Medicare revised its outlier policy in an attempt to curb hospitals’ 

opportunity to increase their outlier payments through excessive increases in their charges. 
A Data Book: Healthcare spending and the Medicare program, June 2009 91

Chart 7-21. Number of critical access hospitals, 1999–2009 

41

139

341

563

722

875

1,055

1,280 1,283 1,291 1,302

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

200

400

600

800

1,000

1,200

1,400

Number of C

A

Hs

Note: CAH (critical access hospital). 

Source: The Medicare Rural Hospital Flexibility Program and CMS. 

• The number of critical access hospitals (CAHs) grew steadily from 1999 through 2006, but 

has since leveled off. 

• The increase in 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 are paid their Medicare costs plus 1 percent for inpatient services, 

outpatient services (including laboratory and therapy services), and post-acute services in 

swing beds. 

• Prior to 2006, a hospital could convert to CAH status if it was (1) 35 miles by primary road or 

15 miles by secondary road from the nearest hospital, or (2) their state waived the distance 

requirement by declaring the hospital a “necessary provider.” Starting in 2006, states could 

no longer waive the distance requirement. While most existing CAHs fail the distance test, 

they are grandfathered into the program. Among small rural hospitals that have not 

converted, most would not meet the distance requirement. Therefore, we expect the number 

of CAHs to remain fairly constant. 
92 Acute inpatient services

Chart 7-22. Medicare payments to inpatient psychiatric facilities 

(in billions), 2000–2008 

3.2 3.3

3.5 3.5

3.8

4.0 4.0 4.1 4.2

2000 2001 2002 2003 2004 2005 2006* 2007* 2008*

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

D

ol al rs ( ni bill oi ns)

Note: *Estimated spending. The rate of growth in spending was slowed somewhat from 2006 to 2008 by large increases in the 

number of Medicare Advantage enrollees, who are not included in these aggregate totals. 

Source: CMS, Office of the Actuary. 

• The inpatient psychiatric facility prospective payment system started January 1, 2005. 

• Medicare program spending for beneficiaries’ care in inpatient psychiatric facilities grew an 

estimated 3.3 percent per year between 2000 and 2008. 

• Inpatient psychiatric care is also furnished in scatter beds in acute care hospitals and paid 

under the acute care inpatient prospective payment system. Medicare payments for these 

services are not included here. 
A Data Book: Healthcare spending and the Medicare program, June 2009 93

Chart 7-23. Inpatient psychiatric facilities, 2000–2008 

 2000 2001 2002 2003 2004 2005 2006 2007 2008 

Freestanding hospitals 491 477 473 466 463 478 478 488 493 

Hospital-based units 

 PPS hospital units 1,862 1,838 1,815 1,795 1,743 1,699 1,668 1,650 1,635 

 CAH units N/A N/A N/A N/A 34 78 83 85 86 

Total 2,353 2,315 2,288 2,261 2,240 2,255 2,229 2,221 2,214 

 

Note: PPS (prospective payment system), CAH (critical access hospital), N/A (not available). 

Source: CASPER reports from CMS, as of December each year. 

• Inpatient psychiatric facilities⎯both freestanding and hospital-based facilities⎯provide 

acute hospital care to beneficiaries with mental illnesses and alcohol- or drug-related 

problems. 

• In recent years, the number of critical access hospitals with Medicare-certified psychiatric 

units has grown substantially because of new authority granted in the Medicare Prescription 

Drug, Improvement, and Modernization Act of 2003. After declining from 2000 to 2004, the 

number of freestanding psychiatric hospitals has grown as well. The number of psychiatric 

units in hospitals covered by the acute inpatient prospective payment system has declined, 

however. Overall, the total number of certified psychiatric facilities has fallen 5.9 percent 

since 2000. 
94 Acute inpatient services

Chart 7-24. One diagnosis accounted for almost three-quarters 

 of IPF cases in 2007 

Diagnoses Discharges Percentage 

 

Psychosis 331,671 72.8% 

Degenerative nervous system disorders 37,533 8.2 

Organic disturbances & mental retardation 26,221 5.8 

Depressive neurosis 16,010 3.5 

Alcohol/drug use without rehabilitation 11,838 2.6 

Alcohol/drug use with comorbid conditions 10,394 2.3 

Neurosis except depressive 5,312 1.2 

Acute adjustment reaction 3,406 0.7 

Disorders of personality 2,239 0.5 

Childhood disorders 1,924 0.4 

Alcohol/drug use without comorbid conditions 1,635 0.4 

Alcohol/drug use–leave AMA 1,068 0.2 

Procedure with principal diagnosis of mental illness 740 0.2 

Non-traumatic stupor & coma 450 0.1 

Other mental disorders 366 0.1 

 

Non-psychiatric diagnoses 4,573 1.0 

Total 455,380 100.0 

Note: IPF (inpatient psychiatric facility), AMA (against medical advice). Columns may not sum due to rounding. 

 

Source: MedPAC analysis of MedPAR data from CMS. 

• A majority of patients in inpatient psychiatric facilities (IPFs) receive the diagnosis of 

psychosis. 

• Inpatient psychiatric care is also furnished in scatter beds in acute care hospitals. Patients 

with psychosis made up a smaller share of scatter bed cases in 2007. 
A Data Book: Healthcare spending and the Medicare program, June 2009 95

Web links. Acute inpatient services 

Short-term hospitals 

• Chapter 2A of the MedPAC March 2009 Report to the Congress provides additional detailed 

information on hospital margins. 

http://www.medpac.gov/chapters/Mar09_Ch02a.pdf 

• MedPAC provides basic information about the acute inpatient prospective payment system 

in its Payment Basics series. 

http://www.medpac.gov/documents/MedPAC_Payment_Basics_ 08_hospital.pdf 

• MedPAC provides information on the outlier payment issue in Medicare 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/downloads/info.pdf 

• CMS published the proposed acute inpatient PPS rule in the May 22, 2009 Federal Register. 

http://gpo.gov/fdsys/pkg/FR-2009-05-22/pdf/E9-10458.pdf

Inpatient psychiatric facilities 

• MedPAC provides basic information about the inpatient psychiatric facility (IPF) prospective 

payment system in its Payment Basics series. 

http://www.medpac.gov/documents/MedPAC_Payment_Basics_08_psych.pdf 

• CMS provides information on the inpatient psychiatric facility prospective payment system. 

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

• CMS describes updates to the inpatient psychiatric facility prospective payment system for 

the rate year beginning July 1, 2009 in the May 1, 2009 Federal Register.

http://edocket.access.gpo.gov/2009/pdf/E9-9962.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 2009 99

Chart 8-1. FFS Medicare spending and payment updates for 

physician services, 1999–2011 

33.4 37.0

42.0 44.8 48.3

54.1 57.7 58.2 58.9 60.8 61.7

52.5 51.0

2.3

5.5 4.8

-4.8

1.7 1.5 1.5

0.2 0.0 0.5 1.1

-21.5

-5.6

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

10

20

30

40

50

60

70

M

edicare spending (dol al rs in bill oi ns)

-25

-20

-15

-10

-5

0 

5

10

P

a

y

m

ent updates

Medicare spending

Payment updates

Note: FFS (fee-for-service). Dollars are Medicare spending only and do not include beneficiary coinsurance. 

Source: 2008 and 2009 annual report of the Boards of Trustees of the Medicare trust funds. 

• Rapid growth in total Medicare spending on physician fee schedule services occurred 

between 1999 and 2005—averaging almost 10 percent annually. 

• The sustainable growth rate (SGR) system 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 physician fee schedule rates due to the SGR, 

Congress has taken several actions. 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, resulted in an update of 0.2 percent for 2006. The Tax Relief and Health Care Act 

effectively held 2007 payments at 2006 levels through a conversion factor bonus. The 

Medicare, Medicaid, and SCHIP Extension Act of 2007 updated physician services 

furnished January 1 through June 30, 2008, by 0.5 percent. Then the Medicare 

Improvements for Patients and Providers Act of 2008 maintained this level through the end 

of 2008 and increased the conversion factor by 1.1 percent in 2009. 

• The SGR formula calls for payment rate cuts starting January 1, 2010 through 2015. 

Because the SGR has been overridden for several years, the cut in 2010 is scheduled to be 

at least 21 percent. 
100 Ambulatory care

Chart 8-2. Medicare spending per FFS beneficiary on physician 

services, 1998–2008 

1998 2000 2002 2004 2006 2008

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Spend ni g per beneficiary (dollars)

Aged

Disabled

Note: FFS (fee-for-service). Dollars are Medicare spending only and do not include beneficiary coinsurance. The category of 

“disabled” excludes beneficiaries who qualify for Medicare because they have end-stage renal disease. All beneficiaries 

age 65 and over are calculated within the aged category. 

Source: 2008 and 2009 annual reports of the Boards of Trustees of the Medicare trust funds. 

• Fee-for-service (FFS) spending per beneficiary for physician services has increased 

annually. In the decade between 1998 and 2008, Medicare spending per FFS beneficiary on 

physician services grew more than 75 percent. 

• Growth in spending on physician services is one of several contributions to Part B premium 

increases over this time period. 

• Per capita spending for disabled beneficiaries (under age 65) is lower than per capita 

spending for aged beneficiaries. In 2008, for example, per capita spending for disabled 

beneficiaries was $1,617 compared with $1,911 for aged beneficiaries. 
A Data Book: Healthcare spending and the Medicare program, June 2009 101

Chart 8-3. Number of physicians billing Medicare increased 

steadily, 2001–2006 

 Number of Medicare patients in caseload 

 ≥1 ≥15 ≥50 ≥100 ≥200 

 

Number of physicians 

 2001 535,834 457,292 411,424 364,023 286,862 

 2002 544,615 466,299 419,269 370,144 291,593 

 2003 544,922 470,213 424,684 374,721 292,183 

 2004 561,514 483,945 440,462 393,730 315,398 

 2005 566,629 492,131 449,524 402,451 322,643 

 2006 569,461 497,072 453,822 405,504 323,877 

 

 Percent growth, 2001–2006 6.3% 8.7% 10.3% 11.4% 12.9% 

 

Physicians per 1,000 beneficiaries 

 2001 14.2 12.1 10.9 9.7 7.6 

 2002 14.3 12.3 11.0 9.7 7.7 

 2003 14.1 12.2 11.0 9.7 7.6 

 2004 14.4 12.4 11.3 10.1 8.1 

 2005 14.3 12.4 11.4 10.2 8.1 

 2006 14.1 12.3 11.3 10.1 8.0 

Note: Calculations include physicians (allopathic and osteopathic). Nurse practitioners, physician assistants, psychologists, and 

other health care professionals are not included in these calculations. Medicare enrollment includes beneficiaries in feefor-service Medicare and Medicare Advantage, on the assumption that physicians are providing services to both types of 

beneficiaries. Physicians are identified by their Unique Physician Identification Number (UPIN). UPINs with extraordinarily 

large caseload sizes (in the top 1 percent) are excluded because they may represent multiple providers billing under the 

same UPIN. 

Source: MedPAC analysis of Health Care Information System, CMS. 

• The number of physicians providing services to beneficiaries has kept pace with growth in 

the beneficiary population. From 2001 to 2006, the number of physicians per 1,000 

beneficiaries was relatively steady at a little over 14. 

• Growth rates are faster among physicians with higher Medicare caseloads. In fact, the 

fastest growth is seen for physicians with caseloads of 200 or more Medicare patients. This 

subset of physicians grew 12.9 percent between 2001 and 2006. 

• Information on the number of physicians billing Medicare in 2007 is unavailable because of 

data complications stemming from the conversion to new provider identifier numbers in 

accordance with the Health Insurance Portability and Accountability Act. 
102 Ambulatory care

Chart 8-4. Continued growth in volume of physician services 

 per beneficiary, 2002–2007 

2002 2003 2004 2005 2006 2007

0

5

10

15

20

25

30

35

40

45

50

Cumu al t vi e

p

erc

ent chang

e

Imaging

Tests

Other procedures

Evaluation & management

Major procedures

All services

Note: Volume is units of service multiplied by relative value units from the physician fee schedule. Volume for all years is 

measured on a common scale, with relative value units for 2007. 

Source: MedPAC analysis of claims data for 100 percent of Medicare beneficiaries. 

• Year after year, the volume of physician services has continued to grow, with some services 

growing much more than others. From 2002 to 2007, the volume per beneficiary of imaging, 

tests, and other procedures (procedures other than major procedures) grew at cumulative 

rates that ranged from 33.9 percent to 44.4 percent. Meanwhile, the comparable growth 

rates for major procedures and evaluation and management services were only 14.6 

percent and 15.9 percent, respectively. The average for all services was 23.2 percent. 

• Volume growth has slowed in recent years, but it has remained positive. From 2006 to 2007, 

services in the “other procedures” category grew the most: They increased 5.0 percent. 

Imaging was next, at 3.8 percent, followed by evaluation and management (2.1 percent), 

tests (1.8 percent), and major procedures (1.6 percent). 

• Volume growth increases spending, squeezing other priorities in the federal budget and 

requiring taxpayers and beneficiaries to contribute ever greater amounts toward the 

Medicare program. Overall volume increases translate directly to growth in both Part B 

spending and premiums. They are also largely responsible for the negative updates required 

by the sustainable growth rate (SGR) formula. And volume growth may be a sign that some 

services in the physician fee schedule are mispriced. 
A Data Book: Healthcare spending and the Medicare program, June 2009 103

Chart 8-5. Shifts in physician services volume from major 

 procedures and E&M and toward imaging, tests, and 

 other procedures, 2002–2007 

2002 2007

0

20

40

60

80

100

Percent of total vo ul me

45.7 42.3

13.7 16.0

9.6 8.8

19.7 21.2

4.7 5.0

6.6 6.5

Other

Tests

Other procedures

Major procedures

Imaging

Evaluation and management

Note: E&M (evaluation and management). Volume is units of service multiplied by relative value units from the physician fee 

 schedule. Volume for both years is measured on a common scale, with relative value units for 2007. 

Source: MedPAC analysis of claims data for 100 percent of Medicare beneficiaries. 

• Among broad categories of services, evaluation and management (E&M) services—

including office visits and visits to hospital inpatients—account for the largest share of 

volume. In 2007, E&M was 42.3 percent of the total, followed by other procedures (21.2 

percent), imaging (16.0 percent), major procedures (8.8 percent), and tests (5.0 percent). 

Services in other categories—such as chiropractic—accounted for the remaining 6.5 

percent. 

• With higher growth rates for some services and lower growth rates for others, the distribution 

of volume across the service categories has shifted. For instance, as a proportion of total 

volume, evaluation and management services fell between 2002 and 2007 from 45.7 

percent to 42.3 percent. By contrast, imaging’s share of total volume for those years rose 

from 13.7 percent to 16.0 percent. 
104 Ambulatory care

0

5

10

15

20

25

30

35

40

45

E&M Major procedures Other procedures Imaging Tests

Percent of beneficiaries living in states with specified volume levels

<85 85-95

95-104 105-114

≥115

Volume as percent of national average 

Chart 8-6. State-level volume of physician services per 

 beneficiary compared to national averages, 2006 

 

 

 

Note: E&M (evaluation and management). Volume is units of service multiplied by relative value units from the physician 

 fee schedule. Volume is risk adjusted with hierarchical coexisting condition risk scores. 

Source: MedPAC analysis of claims data for a 5 percent sample of Medicare beneficiaries. 

• Depending on the type of service and the geographic area, the volume of physician services 

furnished to Medicare beneficiaries can vary widely. Imaging and tests vary the most. Fewer 

than 25 percent of beneficiaries live in a state with a volume per beneficiary of these 

services that is within 5 percent of the national average. By contrast, evaluation and 

management (E&M) and major procedures vary the least. More than 40 percent of 

beneficiaries live in a state with a volume per beneficiary of these services that is within 5 

percent of the national average. 

• In some states, the volume of services could be relatively low because beneficiaries receive 

services that are not billable under the physician fee schedule. Examples include imaging 

and tests furnished in hospital outpatient departments. Nonetheless, the high level of 

volume in other states suggests the potential for more efficient use of resources. 
A Data Book: Healthcare spending and the Medicare program, June 2009 105

Chart 8-7. Physicians’ 2002 efficiency scores are high 

correlated with their 2003 scores, using either 

multilevel or Monte Carlo models 

MSA Multilevel Monte Carlo 

Boston, MA 0.90 0.87 

Greenville, SC 0.91 0.89 

Miami, FL 0.88 0.86 

Minneapolis, MN 0.86 0.84 

Orange County, CA 0.89 0.84 

Phoenix, AZ 0.90 0.88 

Total 0.89 0.87 

Note: MSA (metropolitan statistical area). Physicians with fewer than 20 episodes were excluded from the analysis. Correlation

coefficients measure how the ranks of items in two different lists compare. A perfect correlation of 1.00 means that the 

items are at exactly the same rank in both lists. A coefficient of 0 means that there is no relationship between the rank of 

items on the two lists. 

Source: MedPAC analysis of 100 percent sample of 2001–2004 Medicare claims using the Thomson Reuters Medical Episode 

Grouper®. 

• Physicians’ efficiency scores were calculated by analyzing Medicare claims using the Medical 

Episode Grouper® (MEG®) to create clinically distinct episodes of care—a series of clinically 

related health care services over a defined time period, such as all claims related to a patient’s 

diabetes condition. Episodes were then risk adjusted to account for patient health status and 

disease severity, and each was attributed to the physician who billed for the most (at least 35 

percent) evaluation & management (E&M) dollars in the episode. Physicians’ average 

resource use across episodes was compared to their peers’ average resource use across 

similar episodes within the same specialty and metropolitan statistical area. 

• Correlations between physicians’ 2002 and 2003 efficiency scores, weighted by each 

physician’s average number of episodes per year are high, indicating good year-to-year 

stability in the efficiency scores using two statistical methods—one based on a multilevel 

model and the other based on a Monte Carlo model. 

• Physicians with high efficiency scores in 2002 tended to have high scores in 2003 and vice 

versa. 
106 Ambulatory care

Chart 8-8. Spending on all hospital outpatient services, 

1998–2008 

8.6 9.0 9.3

12.8 13.3

15.3

17.7

20.2 21.2 22.8 23.7 7.9

8.9 8.7

8.1 8.2

7.9

8.3

8.5 8.0

8.2 7.9

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*

0

5

10

15

20

25

30

35

Dollars (in 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) from calendar year 1998 to 2008 increased by 92 percent, reaching 

$31.6 billion. The Office of the Actuary projects continued growth in total spending, averaging 4.3 

percent per year from 2005 to 2010. However, projected spending growth per beneficiary is even 

higher—5.8 percent—because increased enrollment in Medicare Advantage is expected to 

reduce the number of beneficiaries in traditional Medicare. 

• A prospective payment system (PPS) for hospital outpatient services was implemented in August 

2000. Services paid under the outpatient PPS represent about 91 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. The spending in 

the outpatient PPS represented 92 percent of the $20.9 billion in spending on hospital outpatient 

services in 2001. By 2008, spending under the outpatient PPS is expected to rise to $28.8 billion 

($21.4 billion program spending; $7.3 billion beneficiary copayments). The outpatient PPS 

accounted for about 5 percent of total Medicare spending by the program in 2008. 

• Beneficiary cost sharing under the outpatient PPS is generally higher than for other sectors, 

about 27 percent in 2007. Chart 8-12 provides more detail on coinsurance. 
A Data Book: Healthcare spending and the Medicare program, June 2009 107

Chart 8-9. Most hospitals provide outpatient services 

 Percent offering 

 Outpatient Outpatient Emergency 

Year Hospitals services surgery services 

2001 4,347 94% 84% 93% 

2002 4,210 94 84 93 

2004 3,882 94 86 92 

2006 3,651 94 86 91 

2008 3,607 94 87 91 

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 (PPS) declined from 2001 through 2006, largely due to growth in the 

number of hospitals converting to critical access hospital status, which allows payment on a 

cost basis. Since 2006, the number of outpatient PPS hospitals has been stable. In addition, 

the percent of hospitals providing outpatient services, outpatient surgery, and emergency 

services has remained stable. 

• Almost all hospitals in 2008 provide outpatient (94 percent) and emergency (91 percent) 

services. The vast majority (87 percent) provide outpatient surgery. 
108 Ambulatory care

 Chart 8-10. Payments and volume of services under the 

 Medicare hospital outpatient PPS, by type of 

 service, 2007 

Separately paid drugs/

blood products

11%

Evaluation &

management

13%

Imaging

23%

Tests

4%

Procedures

47%

Evaluation &

management

10%

Separately paid drugs/

blood products

57%

Tests

8%

Pass-through

drugs

1%

Procedures

12%

Imaging

12%

 Payments Volume 

Pass-through

devices, brachytherapy, 

and radiopharmaceuticals

1%

Pass-through

drugs

1%

Pass-through

devices, brachytherapy, 

and radiopharmaceuticals

1%

Note: PPS (prospective payment system). Payments include both program spending and beneficiary cost sharing but do not 

include hold-harmless payments to rural hospitals (see Chart 8-13 for further information regarding these payments). 

Services are grouped into evaluation and management, procedures, imaging, and tests, according to the BerensonEggers Type of Service classification developed by CMS. Pass-through drugs, separately paid drugs and blood products, 

and pass-through devices, brachytherapy, and radiopharmaceuticals 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 2007 from CMS. 

• 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. 

• The payments for services are distributed differently than volume. For example, procedures 

account for 47 percent of the payments, but 12 percent of the volume. 

• Procedures (e.g., endoscopies, surgeries, skin and musculoskeletal procedures) account for 

the greatest share of payments for services (47 percent), followed by imaging services (23 

percent) and evaluation and management services (13 percent). 

• In 2007, separately paid drugs and blood products accounted for 11 percent of payments.
A Data Book: Healthcare spending and the Medicare program, June 2009 109

Chart 8-11. Hospital outpatient services with the highest 

 Medicare expenditures, 2007 

 Share of Volume Payment 

APC title payments (thousands) rate

Total 46% 

All emergency visits 7 11,274 $156 

All clinic visits 4 16,046 65 

Cataract procedures with IOL insert 3 586 1,453 

Computerized axial tomography with contrast material 3 3,395 251 

Diagnostic cardiac catheterization 3 384 2,278 

Computerized axial tomography without contrast material 3 4,185 190 

Level I plain film except teeth 3 16,129 44 

Lower gastrointestinal endoscopy 2 1,252 539 

MRI and magnetic resonance angiography without contrast material 2 1,291 349 

MRI and magnetic resonance angiography without 

contrast material followed by contrast material 2 862 499 

IMRT treatment delivery1 1,130 336 

Level I upper gastrointestinal procedures 1 865 511 

Level II radiation therapy 1 2,492 137 

Level III angiography and venography except extremity 1 266 1,280 

Level II laparoscopy 1 188 2,677 

Level V drug administration* 1 2,665 111 

Level III hospital clinic visits 1 3,262 84 

Level III drug administration* 1 5,917 49 

Level III nerve injections 1 802 391 

Rituximab cancer treatment 1 541 496 

Computerized axial tomography without contrast material 

 followed by contrast material 1 904 298 

Insertion/Replacement of a permanent dual chamber pacemaker* 1 38 6,932 

Non-coronary angioplasty or atherectomy 1 120 2,639 

Average APC 441 77 

 

Note: APC (ambulatory payment classification), IOL (intraocular lens), IMRT (intensity-modulated radiation therapy), MRI 

(magnetic resonance imaging). The payment rates for “All emergency visits” and “All clinic visits” are weighted averages 

of payment rates from five APCs. 

 *Did not appear on the list for 2006. 

Source: MedPAC analysis of 100 percent analytic file of outpatient prospective payment system claims for calendar year 2007. 

• 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. 
110 Ambulatory care

Chart 8-12. Medicare coinsurance rates, by type of hospital 

outpatient service, 2007 

23

35

26

32

20 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

Coinsurance ra et

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 separately paid drugs and 

blood products are classified by their payment status indicators. 

Source: MedPAC analysis of 2007 outpatient prospective payment system claims that CMS used to set payment rates for 2009. 

• 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 payments 

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—35 percent. Other services, such as evaluation and 

management services, have coinsurance rates of 23 percent. 

• In 2007, the average coinsurance rate was about 27 percent. 

27 
A Data Book: Healthcare spending and the Medicare program, June 2009 111

Chart 8-13. Effects of hold-harmless and SCH transfer payments 

on hospitals’ outpatient revenue, 2005–2007 

 2005 2006 2007 

 Share of Share of Share of 

 payments payments payments

 from Number from Number from 

 Number of hold harmless of hold harmless of hold harmless 

Hospital group hospitals and SCH transfer hospitals and SCH transfer hospitals and SCH transfer 

 

All hospitals 3,369 0.4% 3,323 0.3% 3,275 0.2% 

 

Urban 2,395 0.1 2,360 –0.3 2,330 –0.4 

Rural SCHs 421 3.8 414 5.3 400 5.8 

Rural < 100 beds 385 3.1 385 3.2 380 2.9 

Other rural 168 0.1 164 –0.3 165 –0.4 

 

Major teaching 284 0.0 283 –0.2 279 –0.3 

Other teaching 754 0.1 735 –0.1 726 –0.2 

Nonteaching 2,331 0.9 2,305 0.7 2,270 0.6 

 

Note: SCH (sole-community hospital). A small number of hospitals could not be classified due to missing data. SCH transfer 

payments began in 2006. 

Source: MedPAC analysis of Medicare Cost Report files from CMS. 

• Medicare implemented the hospital outpatient prospective payment system (PPS) in 2000. 

Previously, Medicare paid for hospital outpatient services on the basis of hospital costs. 

• Recognizing that some hospitals might receive lower payments under the outpatient PPS than they 

had under the earlier system, the Congress established 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. 

• Transitional corridor payments expired for most hospitals at the end of 2003. However, some rural 

hospitals continue to receive a special category of transitional corridor payments called “holdharmless.” Qualifying hospitals receive the greater of the payments they would have received from 

the previous system or the actual outpatient PPS payments. 

• Hospitals that qualified for hold-harmless payments in 2004 and 2005 included sole-community 

hospitals (SCHs) located in rural areas and other small rural hospitals (100 or fewer beds). After 

2005, small rural hospitals continued to be eligible for hold-harmless payments but SCHs were no 

longer qualified. However, in 2006, CMS implemented a policy (the “SCH transfer”) that increased 

outpatient payments to rural SCHs by 7.1 percent above the standard rates. This policy is budget 

neutral by reducing payments to all other hospitals by 0.4 percent. 

• Hold-harmless payments represented 0.4 percent of total outpatient PPS payments for all hospitals 

in 2005. However, the percentage of total outpatient payments from the hold-harmless policy was 

3.8 percent for rural SCHs and 3.1 percent for small rural hospitals. Data from 2006 and 2007 

indicate rural SCHs have benefited more from the SCH transfer policy than they did from holdharmless payments. SCH transfer payments were 5.3 percent of SCH outpatient revenue in 2006 

and 5.8 percent in 2007. Small rural hospitals continued to benefit from hold-harmless payments in 

2006 and 2007. These payments were 3.2 percent of their total outpatient payments in 2006 and 

2.9 percent in 2007. 
112 Ambulatory care

Chart 8-14. Medicare hospital outpatient, inpatient, and overall 

 Medicare margins, 2001–2007 

10.3

6.5

2.3

-0.3 -0.7

-2.4

-3.7

5.4

2.3

-1.2

-3.0 -3.1

-4.7

-5.9 -6.8

-8.2

-11.4 -10.7

-9.0

-10.9 -11.8

2001 2002 2003 2004 2005 2006 2007

-20

-15

-10

-5

0

5

10

15

20

M

argin (percent)

Outpatient margin

Overall Medicare margin

Inpatient margin

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 2007, while the aggregate margin was –11.8 percent, 25 

percent of hospitals had margins of –22.7 percent or lower, and 25 percent had margins of –0.5 

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 decline in outpatient margins from 2001 to 2003 may reflect the decline in the number of 

drugs and devices eligible for pass-through payments. The margin improved in 2004 and 2005, 

which was fueled, at least in part, by many drugs becoming specified covered outpatient drugs. 

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. The margin declined in 2006, reflecting a change that 

paid for these drugs on the basis of average sales price rather than average wholesale price and 

an end to hold-harmless payments to sole-community hospitals. Finally, the margin declined 

again in 2007, which may be partly due to lower hold-harmless payments for hospitals that still 

qualify for them. 
A Data Book: Healthcare spending and the Medicare program, June 2009 113

Chart 8-15. Number of separately paid observation days has 

increased, 2003–2007 

65

89

145

231

262

2003 2004 2005 2006 2007

0

50

100

150

200

250

300

Observ

ation da

ys (1,000s)

Note: Observation services are paid on a per diem basis. 

Source: MedPAC analysis of outpatient prospective payment system claims that CMS uses to set payment rates, 2003–2007. 

• Hospitals use observation care to determine whether a patient should be hospitalized for 

inpatient care or sent home. 

• Medicare began providing separate payments to hospitals for observation services on 

April 1, 2002. Previously, the observation services were packaged into the payments for the 

emergency room or clinic visits that occur with the observation care. 

• The number of separately paid observation days has increased substantially from 65,000 in 

2003 to 262,000 in 2007. 
114 Ambulatory care

Chart 8-16. Number of Medicare-certified ASCs increased by 

 over 50 percent, 2001–2008 

 2001 2002 2003 2004 2005 2006 2007 2008 

Medicare payments (billions of dollars) $1.6 $1.9 $2.2 $2.5 $2.7 $2.8 $2.9 $3.0 

 

Number of centers 3,302 3,545 3,848 4,140 4,441 4,700 4,991 5,174 

 New centers 286 306 368 366 355 331 346 219 

 Exiting centers 53 63 65 74 54 72 55 36 

 

Net percent growth in number 

of centers from previous year 9.0% 7.4% 8.5% 7.6% 7.3% 5.8% 6.2% 3.7% 

 

Percent of all centers that are: 

 For profit 94 95 95 96 96 96 96 96 

 Nonprofit 5 5 5 4 4 4 4 4 

 Urban 88 87 87 87 87 88 88 88 

 Rural 12 13 13 13 13 12 12 12 

Note: ASC (ambulatory surgical center). Medicare payments include program spending and beneficiary cost sharing for ASC 

facility services. Payments for 2008 are preliminary and subject to change. Totals may not sum to 100 percent due 

to rounding. 

Source: MedPAC analysis of provider of services file from CMS, 2008. Payment data are 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. 

• In 2008, Medicare began using a new payment system for ASC services that is based on 

the hospital outpatient prospective payment system (PPS). ASC rates are less than hospital 

outpatient rates. In contrast to the old ASC system, which had only nine procedure groups, 

the new system has several hundred procedure groups. The new system will be phased in 

over four years. 

• Total Medicare payments for ASC services increased by 9.7 percent per year, on average, 

from 2001 through 2008. Payments per fee-for-service beneficiary grew by 9.4 percent per 

year during this period. Between 2007 and 2008, total payments rose by 4.6 percent and 

payments per beneficiary grew by 6.9 percent. The growth in total spending was slowed in 

2006, 2007, and 2008 by large increases in the number of Medicare Advantage enrollees, 

who are not included in these aggregate totals. Spending growth was also slowed in 2007 

by a provision in the Deficit Reduction Act of 2005, which capped the ASC rate for each 

service at the outpatient PPS rate. 

• The number of Medicare-certified ASCs grew at an average annual rate of 6.6 percent from 

2001 through 2008. Each year from 2001 through 2008, an average of 322 new Medicarecertified facilities entered the market, while an average of 59 closed or merged with other 

facilities. 
A Data Book: Healthcare spending and the Medicare program, June 2009 115

Chart 8-17. Medicare spending for imaging services, by type of 

service, 2002 and 2007 

Standard

22%

CT

15%

MRI

17%

Echocardiography

14%

Nuclear medicine

14%

Standard

19%

CT

18%

MRI

15%

Echocardiography

14%

Other 

echography

(ultrasound)

11%

PET

2%

 2002 2007

($8.4 billion) ($11.4 billion)

Imaging

procedure

5%

Nuclear

medicine

13%

Other

echography

(ultrasound)

12%

Imaging

procedure

6%

PET

3%

Note: CT (computed tomography), MRI (magnetic resonance imaging), PET (positron emission tomography). Imaging 

procedure includes cardiac catheterization and angiography. Medicare payments include program spending and 

beneficiary cost sharing for physician fee schedule imaging services. Payments include carrier-priced codes but exclude 

radiopharmaceuticals. Totals may not sum to 100 percent due to rounding. 

Source: MedPAC analysis of 100 percent physician/supplier procedure summary file from CMS, 2002 and 2007. 

• One-third of Medicare spending in 2007 for imaging under the physician fee schedule was 

for computed tomography (CT) and magnetic resonance imaging (MRI) studies. Ultrasound 

services (echocardiography and other echography) accounted for about one-quarter of 

imaging spending. 

• Medicare spending for imaging services under the physician fee schedule grew by 12.1 

percent per year between 2002 and 2006, from $8.4 billion to $13.2 billion. Spending per 

fee-for-service (FFS) beneficiary grew by 11.1 percent per year. 

• In 2007, CMS implemented a provision from the Deficit Reduction Act of 2005 (DRA) that 

capped physician fee schedule rates for the technical component of imaging services at the 

level of hospital outpatient rates. Although the number of imaging studies continued to grow, 

spending declined from $13.2 billion in 2006 to $11.4 billion in 2007, largely as a result of 

the DRA provision. Overall imaging spending dropped by 13.9 percent and imaging 

spending per FFS beneficiary fell by 12.2 percent. However, the number and intensity of 

imaging services per FFS beneficiary increased by 3.8 percent from 2006 to 2007. 
116 Ambulatory care

Chart 8-18. Radiologists received about 40 percent of physician 

fee schedule payments for imaging services, 2007 

Radiology

43%

Cardiology

25%

Other

10%

IDTF

7%

Orthopedic surgery

3%

Family/general 

practice

2% General

surgery

2%

Internal medicine

7%

Note: IDTF (independent diagnostic testing facility). Medicare payments include program spending and beneficiary cost sharing 

for physician fee schedule imaging services. Payments include carrier-priced codes but exclude radiopharmaceuticals. 

Total fee schedule imaging spending was $11.4 billion in 2007. IDTFs are independent of a hospital and physician’s office 

and provide only outpatient diagnostic services. Other includes other medical, urology, ophthalmology, other surgical, 

gastroenterology, anesthesiology, and thoracic surgery. 

Source: MedPAC analysis of 100 percent physician/supplier procedure summary file from CMS, 2007. 

• Imaging services paid under Medicare’s 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. 

• Although radiologists received three-quarters of total physician fee schedule payments for 

professional component services in 2007, they accounted for much smaller shares of 

spending for global bills (32 percent) and technical component services (13 percent). 

• Between 2002 and 2007, radiologists’ share of total imaging payments declined by 1.5 

percent per year while the shares for other providers increased. For example, general 

surgery’s share of payments grew by 5.5 percent per year, internal medicine by 2.0 percent 

per year, and cardiology by 1.9 percent per year. 
A Data Book: Healthcare spending and the Medicare program, June 2009 117

Chart 8-19. Physician fee schedule spending for imaging has 

 shifted from professional component to technical 

 component services, 2002 to 2007 

Global

62% Global

62%

 2002 2007 

Professional

component

32%

Professional

component

29%

Technical

component

9%

Technical

component

6%

 Note: Medicare spending includes program spending and beneficiary cost sharing for physician fee schedule imaging services. 

Spending includes carrier-priced codes but excludes radiopharmaceuticals. 

Source: MedPAC analysis of 100 percent physician/supplier procedure summary file from CMS, 2002 and 2007. 

• Imaging services paid under Medicare’s 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. Technical component claims are billed for imaging studies 

performed in physician offices and freestanding centers, while professional component 

claims may be billed for studies performed in any setting. A physician who both performs 

and interprets a study submits a global bill, which includes the technical and professional 

components. The technical portion of imaging services performed in hospital outpatient 

departments is paid under the hospital outpatient prospective payment system. 

• Spending for technical component services doubled from $500 million in 2002 to $1 billion in 

2007, and their share of imaging spending increased from 6 percent to 9 percent. Part of 

this growth reflects a shift of imaging from hospitals to physician offices and freestanding 

centers. 

• Spending for professional component services increased from $2.7 billion in 2002 to $3.2 

billion in 2007, but declined as a share of total imaging spending from 32 percent to 29 

percent. 

• Spending on global services increased from $5.2 billion in 2002 to $7.1 billion in 2007. 
118 Ambulatory care

Web links. Ambulatory care

Physicians 

• For more information on Medicare’s payment system for physician services, see MedPAC’s Payment 

Basics series. 

http://medpac.gov/documents/MedPAC_Payment_Basics_08_Physician.pdf 

• Chapter 2B of the MedPAC March 2009 Report to the Congress and Appendix A of the June 

2009 Report to the Congress provide additional information on physician services. 

 http://www.medpac.gov/chapters/Mar09_Ch02b.pdf 

http://www.medpac.gov/chapters/Jun09_AppA.pdf 

• MedPAC’s congressionally mandated report, Assessing Alternatives to the Sustainable Growth 

Rate (SGR) System, examines the SGR and analyzes alternative mechanisms for controlling 

physician expenditures under Medicare. 

http://www.medpac.gov/documents/Mar07_SGR_mandated_report.pdf 

• Congressional testimony by the Chairman and Executive Director of MedPAC discusses payment 

for physician services in the Medicare program. This includes: 

Payments to selected fee-for-service providers (May 15, 2007) 

 http://www.medpac.gov/documents/051507_WandM_Testimony_MedPAC_FFS.pdf 

 

 Options to improve Medicare’s payments to physicians (May 10, 2007) 

 http://www.medpac.gov/documents/051007_Testimony_MedPAC_physician_payment.pdf 

 Assessing alternatives to the Sustainable Growth Rate System (March 6, 2007) 

 http://www.medpac.gov/documents/030607_W_M_testimony_SGR.pdf 

 Assessing alternatives to the Sustainable Growth Rate System (March 6, 2007) 

 http://www.medpac.gov/documents/030607_E_C_testimony_SGR.pdf 

 Assessing alternatives to the Sustainable Growth Rate System (March 1, 2007) 

 http://www.medpac.gov/documents/030107_Finance_testimony_SGR.pdf 

 MedPAC recommendations on imaging services (July 18, 2006) 

http://medpac.gov/publications/congressional_testimony/071806_Testimony_imaging.pdf

 Medicare payment to physicians (July 25, 2006) 

http://www.medpac.gov/publications/congressional_testimony/072506_Testimony_physician.pdf 

• The 2008 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/downloads/tr2009.pdf 
A Data Book: Healthcare spending and the Medicare program, June 2009 119

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/documents/MEDPAC_Payment_Basics_08_opd.pdf

• Section 2A of the MedPAC 2009 Report to the Congress provides information on the status of 

hospital outpatient departments including supply, volume, profitability, and cost growth. 

 http://www.medpac.gov/chapters/Mar09_Ch02a.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 

• 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 

• 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://medpac.gov/documents/MedPAC_Payment_Basics_08_ASC.pdf 

• Chapter 2B of the MedPAC March 2009 Report to the Congress provides additional information on 

ambulatory surgical centers. 

http://www.medpac.gov/chapters/Mar09_Ch02B.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 2009 123

Chart 9-1. Growth in post-acute care providers slowed in 2008 

 Average 

 annual 

 percent Percent 

 change change 

 2000– 2007– 

 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2008 

Home health 

 agencies 7,525 7,058 7,052 7,335 7,797 8,305 8,949 9,404 9,801 3.4% 4.2% 

 

Inpatient 

 rehabilitation 

 facilities 1,117 1,157 1,188 1,211 1,227 1,231 1,224 1,202 1,202 0.9 0.0 

 

Long-term 

 care hospitals 263 278 297 334 366 392 397 398 409 5.7 2.8 

Skilled nursing 

 facilities 14,777 14,713 14,792 14,877 14,937 15,000 15,006 15,048 15,041 0.2 0.0 

Note: The skilled nursing facility count does not include swing beds. 

Source: MedPAC analysis of data from certification and Survey Provider Enhanced Reporting on CMS’s Survey and Certification’s 

Providing Data Quickly system for 2000–2008 and CMS Provider of Service data. 

• The number of home health agencies fell in the early part of the decade, but since 2002 has 

increased significantly. 

• The number of inpatient rehabilitation facilities (rehabilitation hospitals and rehabilitation 

units) was unchanged in 2008, after growing between 2000 and 2005 and then declining 

modestly from 2005 through 2007. 

• The number of long-term care hospitals grew much more slowly since 2005 compared with 

the early years of the decade. 

• The total number of skilled nursing facilities has remained about the same for four years, but 

the mix of facilities continues to shift from hospital-based to freestanding facilities. Hospitalbased facilities make up 7 percent of all facilities, down from almost 12 percent in 2000. 
124 Post-acute care

Chart 9-2. Medicare’s spending on home health care and skilled 

 nursing facilities fueled growth in post-acute care 

 expenditures

2001 2002 2003 2004 2005 2006 2007 2008

0

10

20

30

40

50

60

D

ol al rs ( ni bill oi ns)

27.1

31.5

34.1

36.6

40.8

43.7

46.3

49.9

12.1

14.8

14.9

16.7

18.6 19.7

22.1

24.2

8.5

8.5 10.0 9.9 11.3

13.1 13.7

15.4

4.5 5.7

6.2 6.4 6.5 6.3 6.0 5.8

2.0 2.5 3.0 3.6 4.4 4.6 4.5 4.5

All post-acute care

Skilled nursing facilities

Home health agencies

Inpatient rehabilitation hospitals

Long-term care hospitals

Note: These numbers are program spending only and do not include beneficiary copayments. 

 

Source: Centers for Medicare and Medicaid Services, Office of the Actuary. 

• Increases in fee-for-service spending on post-acute care have slowed in part due to 

expanded enrollment in managed care, whose spending is not included in this spending. 

• Despite the slower growth, spending on all post-acute care still grew over 8 percent between 

2007 and 2008, fueled by the increases in home health care and skilled nursing facilities 

expenditures. 

• Fee-for-service spending on inpatient rehabilitation hospitals has declined since 2005, 

reflecting policies intended to ensure that patients who do not need this intensity of services 

are treated in less intensive settings. 

• After years of explosive growth early in the decade, spending on long-term care hospitals 

remained flat between 2007 and 2008. 
A Data Book: Healthcare spending and the Medicare program, June 2009 125

Chart 9-3. Ten most common diagnoses among Medicare SNF 

patients account for more than a third of SNF 

 admissions in 2006

Diagnosis code Share of SNF 

from hospital stay Diagnosis admissions 

 

 544 Major joint and limb reattachment of lower extremity 6.9% 

 127 Heart failure and shock 4.8 

 089 Simple pneumonia and pleurisy, age >17, with CC 4.5 

 210 Hip and femur procedures except major joint, age >17, with CC 3.7 

 014 Intracranial hemorrhage and stroke with infarction 3.3 

 320 Kidney and urinary tract infection, age > 17, with CC 3.3 

 416 Septicemia, age >17 2.9 

 316 Renal failure 2.5 

 296 Nutritional and miscellaneous metabolic disorders, age > 17, with CC 2.3 

 079 Respiratory infections and inflammations, age > 17, with CC 2.3 

 Total 36.5

Note: SNF (skilled nursing facility), CC (complication or comorbidity). The diagnosis code from hospital stay is the discharge 

diagnosis related group. 

Source: MedPAC analysis of DataPRO files from CMS, 2006. 

• The most common diagnosis for a skilled nursing facility (SNF) admission in 2006 was a 

major joint and limb reattachment procedure of the lower extremity, typically a hip or knee 

replacement. 

• Ten conditions accounted for about 37 percent of all admissions to SNFs in 2006. 

• Hospital-based and freestanding facilities, and nonprofit and for-profit facilities had the same 

top 10 diagnoses, with the same 6 top rank orderings of the conditions. Hospital-based 

facilities had more than double the share of major joint procedures, making up 14 percent of 

admissions compared with 6 percent for freestanding facilities. 
126 Post-acute care

Chart 9-4. A growing share of Medicare stays and payments go 

 to freestanding SNFs and for-profit SNFs 

 Facilities Medicare-covered stays Medicare payments 

Type of SNF 2005 2007 2005 2007 2005 2007 

All SNFs 100% 100% 100% 100% 100% 100% 

Freestanding 92 93 87 90 93 95 

Hospital based 8 7 13 10 7 5 

Urban 67 67 79 79 81 81 

Rural 33 33 21 21 19 19 

For profit 68 68 66 68 72 74 

Nonprofit 28 27 30 28 25 23 

Government 5 5 4 4 3 3 

Note: SNF (skilled nursing facility). Totals may not sum to 100 due to rounding or missing information about facility 

characteristics. 

Source: MedPAC analysis of the Provider of Services and Medicare Provider Analysis and Review files 2005–2007. 

• Freestanding SNFs made up 93 percent of facilities in 2007. 

• Freestanding SNFs treated 90 percent of stays (up 3 percentage points from 2005) and 

accounted for 95 percent of Medicare payments. 

• For-profit SNFs’ share of Medicare-covered stays and payments each increased 2 

percentage points between 2005 and 2007. 

• Urban SNFs’ share of facilities, share of Medicare-covered stays, and share of payments 

each remained the same between 2005 and 2007. 
A Data Book: Healthcare spending and the Medicare program, June 2009 127

Chart 9-5. Fewer SNFs admitted clinically complex and special 

 care cases compared with rehabilitation cases, and 

 the share declined between 2002 and 2007 

Rehabilitation Clinically complex Special care

0%

20%

40%

60%

80%

100%

P

ercent of S

N

Fs admitting case types

2002

2006

Note: SNF (skilled nursing facility). Admission category based on admitting case-mix group assignment. The clinically complex 

 category includes patients who are comatose; have burns, septicemia, pneumonia, internal bleeding, or dehydration; or 

 receive dialysis or chemotherapy. The special care category includes patients with multiple sclerosis or cerebral palsy, 

 those who receive respiratory services seven days per week, or those who are aphasic or tube-fed. 

Source: MedPAC analysis of 2006 DataPro data from CMS. 

• In 2006, fewer SNFs admitted patients grouped into clinically complex and special care 

RUGs than rehabilitation RUGs. Only 68 percent of SNFs admitted clinically complex 

patients and 78 percent admitted special care patients compared with 99 percent of SNFs 

that admitted rehabilitation patients. 

• Between 2002 and 2006, the share of SNFs admitting clinically complex and special care 

patients declined. As a result, medically complex patients were more concentrated in fewer 

SNFs than rehabilitation patients. 
128 Post-acute care

Chart 9-6. Small increase in SNF days resulted in longer 

 average stays 

 Change 

 2005 2006 2007 2006–2007 

 

Volume per 1,000 fee-for-service enrollees 

 Covered admissions 70 72 72 0.0% 

 Covered days 1,817 1,892 1,925 1.7 

 Covered days per admission 26.0 26.3 26.7 1.5 

Note: SNF (skilled nursing facility). Data include 50 states and the District of Columbia. Data for 2007 are preliminary. 

Source: Calendar year data from CMS, Office of Research, Development and Information. 

• Covered days rose 1.7 percent and admissions remained unchanged, resulting in a small 

increase in covered days per admission. 

• Measures are reported on a per fee-for-service enrollee basis because the counts of days 

and admissions do not include the utilization of beneficiaries enrolled in Medicare 

Advantage (MA) plans. Because MA enrollment continued to increase, changes in utilization 

could reflect a smaller pool of users rather than changes in service use by the beneficiaries 

captured by the data.
A Data Book: Healthcare spending and the Medicare program, June 2009 129

Chart 9-7. Case mix in freestanding SNFs shifted toward 

 rehabilitation plus extensive services RUGs and away 

 from other broad RUG categories 

2001 2003 2005 2007

0

10

20

30

40

50

60

70

80

90

100

Share

of M

ed ci are da

ys

Rehabilitation only

Rehabilitation plus extensive services

Extensive services

Special care

Clinically complex

Note: SNF (skilled nursing facility), RUG (resource utilization group). The clinically complex category includes patients who are 

comatose; have burns, septicemia, pneumonia, internal bleeding, or dehydration; or receive dialysis or chemotherapy. 

The special care category includes patients with multiple sclerosis or cerebral palsy, those who receive respiratory 

services seven days per week, or are aphasic or tube fed. The extensive services category includes patients who have 

received intravenous medications or suctioning in the past 14 days, have required a ventilator or respiratory or 

tracheostomy care, or have received intravenous feeding within the past 7 days. Days are for freestanding skilled nursing 

facilities with valid cost reports. 

Source: MedPAC analysis of freestanding SNF cost reports. 

• In 2007, rehabilitation RUGs accounted for 88 percent of all Medicare days in freestanding 

SNFs. Rehabilitation-only RUGs accounted for 54 percent of days, down from 83 percent in 

2005. 

• The nine rehabilitation plus extensive services RUGs accounted for 34 percent of all 

freestanding SNFs’ RUG days in 2007. 

• Some of the growth in total rehabilitation days may be explained by a shift in the site of care 

from inpatient rehabilitation facilities to SNFs. Between 2004 and 2007, the share of 

beneficiaries who had a major joint replacement or revision and were discharged from a 

hospital to a SNF increased 3 percentage points, from 33 percent to 36 percent. 
130 Post-acute care

Chart 9-8. Rehabilitation case-mix continues to shift toward 

higher paying rehabilitation RUGs 

Ultra high Very high High Medium Low

Rehabilitation RUG categories

0%

10%

20%

30%

40%

50%

P

ercent of rehabili at t oi n da

ys

2001

2003

2005

2007

Note: SNF (skilled nursing facility), RUG (resource utilization group). Rehabilitation days include days in the rehabilitation casemix groups and the rehabilitation plus extensive services case-mix groups. Days are for freestanding skilled nursing 

facilities with valid cost report data. 

Source: MedPAC analysis of freestanding SNF cost reports. 

• The distribution of rehabilitation days in freestanding SNFs continued to shift toward the 

highest therapy groups. Between 2006 and 2007, the number of ultra high rehabilitation 

days increased 30 percent, making up just under one-third of all rehabilitation days. During 

this period the share of days in the very high, high, and low rehabilitation groups declined. 

• The shifts towards higher intensity RUGs could be a function of shifts in site of service from 

other settings or could reflect the payment incentives to furnish the services necessary to 

get patients classified into higher paying rehabilitation RUGs. 

• After nine new RUGs groups were added in 2006, the payment rates for medium 

rehabilitation plus extensive services were set higher than the rates for high rehabilitation 

plus extensive services case-mix groups. Between 2006 and 2007, the volume of all 

medium days increased almost 5 percent, while the volume of all high days declined 21 

percent. 
A Data Book: Healthcare spending and the Medicare program, June 2009 131

Chart 9-9. Freestanding SNF Medicare margins have exceeded 

 10 percent for seven years 

Type of SNF 2001 2002 2003 2004 2005 2006 2007

All 17.6% 17.4% 10.8% 13.7% 12.9% 13.3% 14.5% 

 

Urban 17.4 16.8 10.0 13.0 12.4 13.0 14.2 

Rural 18.4 20.0 14.1 16.5 15.3 14.5 16.0 

 

For profit 19.9 19.9 13.9 16.6 15.6 16.2 17.5 

Nonprofit 10.3 9.1 1.5 4.2 4.4 4.0 4.5 

Government* N/A N/A N/A N/A N/A N/A N/A 

Note: SNF (skilled nursing facility). 

 *Government-owned providers operate in a different context from other providers, so their margins are not necessarily 

comparable. 

Source: MedPAC analysis of freestanding SNF cost reports. 

• Although aggregate Medicare margins for freestanding SNFs have varied over the past 7 

years, they have exceeded 10 percent every year since 2001. 

• Aggregate Medicare margins increased from 2006 to 2007 due to costs per day growing 

more slowly than payments per day. The growth in payments reflected the increased share 

of days classified into the highest-paying RUGs. 

• Examining the distribution of 2007 margins, one-half of freestanding SNFs had margins of 

16.1 percent or more, while one-quarter had Medicare margins at or below 5.2 percent. One 

quarter had margins of at least 24.8 percent. 
132 Post-acute care

Chart 9-10. Freestanding SNFs in the top quartile of Medicare 

 margins in 2007 had much lower costs per day 

 Top Bottom 

 margin margin 

Characteristic quartile quartile 

Case-mix adjusted cost per day 

 Total $212 $308 

 Ancillary $89 $123 

Average daily census (patients) 86 75 

Length of stay (days) 45 38 

Medicare payment per day $377 $352 

Share of days, by broad RUG category 

 Rehabilitation plus extensive services 30% 27% 

 Clinically complex and special care 4% 6% 

Share of SNFs, by type 

 Percent for-profit 87% 53% 

 Percent urban 66% 71% 

Note: SNF (skilled nursing facility), RUG (resource utilization group). Values shown are medians for the quartile. Top margin 

quartile SNFs were in the top 25 percent of the distribution of Medicare margins. Bottom margin quartile SNFs were in the 

bottom 25 percent of the distribution of Medicare margins. Standardized costs have been adjusted for case mix using the 

facility's nursing case-mix index. 

Source: MedPAC analysis of freestanding cost reports. 

• Freestanding SNFs in the bottom quartile of 2007 Medicare margins had case-mix adjusted 

costs per day that were 45 percent higher than SNFs in the top quartile and ancillary costs 

per day that were one-third higher. 

• Low-margin SNFs’ higher daily costs are partly explained by their lower average daily 

census (with poorer economies of scale) and shorter stays (over which to spread their fixed 

costs). 

• Low-margin SNFs had lower Medicare payments per day, partly explained by a smaller 

 share of days grouped into the highest-paying rehabilitation plus extensive services RUGs.
A Data Book: Healthcare spending and the Medicare program, June 2009 133

Chart 9-11. Spending for home health care, 1994–2008 

12.5

16.0

17.3

18.0

13.9

9.8 9.3

8.6

9.8 10.0

11.1

13.0

13.7

15.4

16.6

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

2

4

6

8

10

12

14

16

18

20

Dollars ( ni billions)

Note: 2008 is an estimate; all other years are actual expenditures. 

Source: CMS, Office of the Actuary, 2009. 

• 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 October of 2000, the prospective payment system (PPS) 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 state survey and certification 

agencies. 

• Home health has risen steadily under PPS. Spending has risen by 9.9 percent a year in 

2001–2008. 

• Payments in 2006 grew at a lower rate because of a one-year freeze in payments and more 

beneficiaries opting to receive benefits from Medicare Advantage instead of Medicare fee-forservice. Despite these factors, spending still increased and the share of fee-for-service 

beneficiaries using home health increased slightly. 
134 Post-acute care

Chart 9-12. Trends in the provision of home health care 

 Average annual 

 percent change 

 2002 2004 2007 2002–2007 

 

Number of users (in millions) 2.5 2.8 3.1 4.3% 

 

Percent of beneficiaries who 

 used home health (percent) 7.1% 7.6% 8.9% 4.0 

 

Episodes by type (in millions) 

 Less than 10 therapy visits 3.2 3.6 4.3 6.7 

 10 or more 0.9 1.2 1.6 12.2 

Total 4.1 4.8 5.8 8.1 

 

Episodes per home health patient 1.6 1.7 1.9 3.4 

 

Visits per home health patient 31 31 37 3.6 

Average payment per episode $2,329 $2,366 $2,705 3.0 

Source: MedPAC analysis of the home health Standard Analytic File. 

• Under the prospective payment system (PPS), in effect since 2001, the number of users and 

the number of episodes has risen significantly. In 2007, about 3 million beneficiaries used 

the home health benefit. 

• The number of home health episodes increased rapidly from 2002 to 2007. The growth in 

episodes that were therapy intensive—those with 10 or more therapy visits—was about 

double the growth rate of episodes that were not therapy intensive. The home health PPS in 

effect prior to 2008 provided a significant payment increase for these episodes. 

• The number of episodes per user has increased since 2002, and as a result the growth in 

episodes has been greater than the growth in users of home health. 

• The number of visits per home health patient increased in 2007 to 37. This is due primarily 

to an increase in the number of home health episodes per patient, which increased to 1.9 

episodes per patient in 2007. A slight increase in the number of visits per episode also 

contributed. Aberrant patterns of utilization in Florida contributed to some of the increase in 

episodes per beneficiary and visits per beneficiary. CMS is currently investigating operations 

in south Florida and other areas to determine the extent of fraudulent home health activity. 
A Data Book: Healthcare spending and the Medicare program, June 2009 135

Chart 9-13. The home health product changed after the 

prospective payment system started 

 Percent change 

 1997– 2000– 

 1997 2000 2007 2000 2007 

Number of beneficiaries using 3.6 2.5 3.1 –31 26 

home health (in millions) 

 

Number of visits (in millions) 258 91 114 –65 23 

 

Visit type (percent of total) 

 Home health aide 48% 31% 20% –37 –35 

 Skilled nursing 41 49 54 20 10 

 Therapy 10 19 26 101 37 

 Medical social services 1 1 1 1 * 

Visits per home health patient 73 37 37 –49 –2 

 

Percent of fee-for-service beneficiaries 

 who used home health 10.5% 7.4% 8.9% –30.1 20.0 

Note: The prospective payment system began in October 2000. 

 *Changed by less than a half percent. 

Source: Home health Standard Analytic File; Health Care Financing Review, Medicare and Medicaid Statistical Supplement, 2002. 

• The types and amount of home health care services that beneficiaries receive have changed. In 1997 

home health aide services were the most frequently provided visit type, and beneficiaries who used 

home health received an average of 73 visits. 

• CMS began to phase in the interim payment system in October of 1997 to stem the rise in spending 

for home health services (see Chart 9-11). By 2000, total visits had dropped by 65 percent, total 

users had dropped by 31 percent, and average visits per user had dropped to 37. The mix of services 

changed as well, with skilled nursing and therapy visits now accounting for about two-thirds of all 

services. 

• Medicare shifted to a prospective payment system (PPS) in October of 2000. The PPS makes a 

single payment for all services provided in a 60-day episode, ending the per visit payment systems in 

effect for previous years. The number of beneficiaries using home health and total visits has 

increased under PPS. The growth in users has been more rapid than the growth in visits, and the 

number of average visits per user in 2007 is the same as in 2000. 

• Under the PPS the mix of visits has continued to shift toward therapy (physical therapy, occupational 

therapy, and speech language pathology) and away from home health aide services. During 2000–

2007, the payment system made substantially higher payments for episodes with 10 or more therapy 

visits. 

• Concerns about the growth in therapy led CMS to revise the payments for therapy services in 2008. 

The new system increases payment for therapy services more gradually than the previous approach, 

but it still bases payments on the amount of services provided and not patient characteristics. 
136 Post-acute care

Chart 9-14. Margins for freestanding home health agencies 

 Percent of 

 agencies 

 2006 2007 2007 

 

All 15.8% 16.6% 100%

Geography 

Urban 15.1 16.4 67 

 Rural 16.3 14.0 16 

 Mixed 17.3 18.7 17

Type of control 

 For-profit 15.8 18.6 79

 Nonprofit 11.8 11.9 14

 Government N/A N/A N/A 

Volume quintile 

First 10.8 10.3 20 

 Second 11.4 11.6 20 

 Third 11.4 12.9 20 

 Fourth 15.5 16.7 20 

 Fifth 17.2 17.7 20

Note: N/A (not available). Analysis includes 4,625 agencies for 2006 and 4,629 agencies for 2007. 

 *The results for government-owned providers are not necessarily comparable to other providers because they operate in 

a different context. 

Source: MedPAC analysis of 2006–2007 Cost Report files. 

• In 2007, about 75 percent of agencies had positive margins (not shown in table). 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). 

• These margins are for freestanding HHAs, which composed about 85 percent of all HHAs in 

2007. HHAs are also based in hospitals and other facilities. 

• The 2007 margin is consistent with the historically high margins the home health industry has 

experienced under the PPS. The weighted average margin in 2002–2007 was 16.5 percent, 

indicating that most agencies have been paid well in excess of cost under prospective payment. 

• HHAs that served both urban and rural patients in 2007 had a weighted average margin of 18.7 

percent, those that served mostly urban patients had a weighted average margin of 16.4 percent, 

and agencies that served rural patients had a weighted average margin of 14 percent. 

• For-profit agencies in 2007 had a weighted average margin of 18.6 percent, and nonprofit 

agencies had a weighted average margin of 11.9 percent. 

• Agencies that serve more patients have higher margins. The agencies in the lowest volume 

quintile in 2007 have a weighted average margin of 10.3, while those in the highest have a 

weighted average margin of 17.7 percent. 
A Data Book: Healthcare spending and the Medicare program, June 2009 137

Chart 9-15. The top 15 LTC–DRGs made up almost 60 percent of 

cases in LTCHs in 2007 

 

LTC–DRG Description Discharges Percentage 

 

 565 Respiratory system diagnosis with ventilator support 96+ hours 13,830 10.7% 

 87 Pulmonary edema and respiratory failure 7,386 5.7 

 576 Septicemia with mechanical ventilation <96 hours age >17 6,799 5.3 

 271 Skin ulcers 6,766 5.2 

 79 Respiratory infections and inflammation age >17 with CC 6,378 4.9 

 89 Simple pneumonia and pleurisy age >17 with CC 4,655 3.6 

 88 Chronic obstructive pulmonary disease 4,185 3.2 

 249 Aftercare, musculoskeletal system and connective tissue 3,915 3.0 

 466 Aftercare, without history of malignancy 3,836 3.0 

 263 Skin graft and/or debridement for skin ulcer with CC 3,749 2.9 

 12 Degenerative nervous system disorders 3,343 2.6 

 127 Heart failure and shock 3,328 2.6 

 462 Rehabilitation 3,066 2.4 

 418 Postoperative and post-traumatic infections 2,575 2.0 

 316 Renal failure 2,509 1.9 

 Top 15 LTC–DRGs 76,320 59.1 

 Total 129,202 100.0 

 

Note: LTC–DRG (long-term care diagnosis related group), LTCH (long-term care hospital), CC (complication or comorbidity). 

 LTC–DRGs are the case-mix system for these facilities. Columns may not sum due to rounding. 

 

Source: MedPAC analysis of MedPAR 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 respiratory system diagnosis with ventilator 

support. These beneficiaries make up 11 percent of all Medicare LTCH patients. 
138 Post-acute care

Chart 9-16. Spending for long-term care hospital services 

increased rapidly under PPS 

Average 

 TEFRA PPS annual change 

 2003– 2005– 

 2001 2002 2003 2004 2005 2006 2007 2005 2007 

 

Cases 85,229 98,896 110,396 121,955 134,003 130,164 129,202 10.2% –1.8% 

Cases per 10,000 

 FFS beneficiaries 25.1 28.6 31.3 33.9 37.0 36.7 37.3 8.8 0.3 

Spending per FFS 

 beneficiary $56.0 $64.3 $77.5 $101.8 $124.6 $128.0 $129.6 26.8 2.0 

Payment per case $22,009 $22,486 $24,758 $30,059 $33,658 $34,859 $34,769 16.6 1.6 

Length of stay 

 (in days) 31.3 30.7 28.8 28.5 28.2 27.9 26.9 –1.0 –2.3 

Note: FFS (fee for service), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment system). 

Numbers may not sum due to rounding. Growth in FFS cases and spending was slowed in 2006 and 2007 by large increases 

in the number of Medicare Advantage enrollees, whose long-term care hospital use is not included in these totals. 

Source: MedPAC analysis of MedPAR data from CMS. 

• In 2007 Medicare spending for long-term care hospitals (LTCHs) was virtually the same as 

in 2005 ($4.5 billion). However, because of growth in the number of beneficiaries enrolling in 

Medicare Advantage plans, Medicare spending per fee-for-service (FFS) beneficiary 

continued to rise, growing 2 percent per year on average between 2005 and 2007. 

• Similarly, between 2005 and 2007 the number of LTCH cases fell 1.8 percent per year, on 

average. But when we control for the numbers of beneficiaries enrolled in FFS, we find that 

the number of cases in 2007 was roughly the same as in 2005. 
A Data Book: Healthcare spending and the Medicare program, June 2009 139

Chart 9-17. LTCHs’ payments gap and cost growth narrowed 

 in 2007 

1999 2000 2001 2002 2003 2004 2005 2006 2007

-10

-5

0

5

10

15

20

25

30

35

40

Cumulativ

e percent change

Payment per case

Cost 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 Medicare 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 fiscal year 2003, long-term care 

hospitals’ (LTCHs’) Medicare per case costs and payments changed at similar rates. Until 

2006, LTCHs’ Medicare per case payments under PPS increased much faster than their per 

case costs. Between 2006 and 2007, the gap between per case payment and cost growth 

narrowed somewhat. 

• These similarities and differences are reflected in LTCHs’ Medicare margins, shown in 

Chart 9-19. 
140 Post-acute care

Chart 9-18. LTCHs’ Medicare margins by type of facility 

 TEFRA PPS 

Type of LTCH 2001 2002 2003 2004 2005 2006 2007 

All -1.6% -0.2% 5.2% 9.0% 11.9% 9.7% 4.7%

 

 

Urban -1.5 -0.1 5.3 9.3 12.0 10.0 5.1 

Rural -4.8 -1.6 3.5 1.8 8.2 4.2 -3.6 

 

Freestanding -1.3 0.1 5.4 8.1 11.2 8.9 5.1 

Hospital within 

 hospital -2.1 -0.5 5.0 9.9 12.5 10.6 4.3 

 

 

Nonprofit -1.8 0.1 1.9 6.8 9.1 6.5 1.5 

For profit -1.4 -0.1 6.3 10.0 13.1 11.0 5.8 

Government* N/A N/A N/A N/A N/A N/A N/A 

Note: LTCH (long–term care hospital), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment 

system), N/A (not available). Rural facilities margins are not presented because the number of rural facilities is very small. 

*Government-owned provides operate in a different context from other providers, so their margins are not necessarily 

comparable. 

 

Source: MedPAC analysis of cost report data from CMS. 

• Under the Tax Equity and Fiscal Responsibility Act of 1982 and before the long-term care 

hospital (LTCH) prospective payment system (PPS) was implemented, these facilities’ 

Medicare margins were generally negative. Under PPS, margins increased rapidly, from 5.2 

percent in 2003 to 11.9 percent in 2005. Since 2005, aggregate margins have begun to 

decline. 

• In 2007, the aggregate margin for urban LTCHs was higher than the rural counterpart. 

 The for-profit LTCH aggregate margin was also higher than for other ownership categories. 
A Data Book: Healthcare spending and the Medicare program, June 2009 141

Chart 9-19. Most common types of inpatient rehabilitation 

facility cases, 2008 

Type of case Share of cases 

Stroke 20.5% 

Hip fracture 16.3 

Major joint replacement 13.2 

Debility 9.1 

Neurological 7.9 

Brain injury 6.9 

Other orthopedic 5.8 

Spinal cord injury 4.6 

Cardiac 4.3 

Other 11.4 

Note: Other includes conditions such as amputations, major multiple traumas, and pain syndrome. Numbers may not sum to 

100 percent due to rounding. 

Source: MedPAC analysis of Inpatient Rehabilitation Facility–Patient Assessment Instrument data from CMS (January 1 through 

June 30, 2008). 

• In 2008, the most frequent diagnosis for Medicare patients in inpatient rehabilitation facilities 

(IRFs) was stroke, representing just over 20 percent of cases, up from 2004, when stroke 

represented less than 17 percent of cases. 

• Major joint replacement cases represented just over 13 percent of IRF admissions in 2008, 

down from 24 percent of cases in 2004, when major joint replacement was the most 

common IRF Medicare case type. 
142 Post-acute care

Chart 9-20. The number of IRF cases has declined since 2004, 

while payments per case increased 

 Average Average 

 annual annual 

 change change 

Type of IRF 2002 2004 2006 2007 2002–2004 2004–2007 

Number of admissions 439,631 496,695 404,255 370,048 6.3% -9.3% 

FFS patients per 10,000 114 124 103 98 4.4 -7.5 

 FFS beneficiaries 

Payment per case $11,152 $13,275 $15,354 $16,143 9.1 6.7 

Medicare spending 

 (in billions) $5.65 $6.43 $6.29 $5.95 6.7% -2.6% 

Average length of stay 

 (in days) 13.3 12.7 13.0 13.2 -2.3 1.3 

Note: IRF (inpatient rehabilitation facility), fee-for-service (FFS). Numbers of cases and patients reflect Medicare fee-for-service 

utilization only. 

Source: MedPAC analysis of MedPAR data from CMS. Total Medicare spending from CMS Office of the Actuary. 

• The number of Medicare fee-for-service (FFS) admissions to inpatient rehabilitation facilities 

(IRFs) increased rapidly with implementation of the prospective payment system, rising to 

nearly 500,000 cases in 2004. 

• The number of FFS admissions decreased to about 370,000 by 2007, reflecting CMS’s 

renewed enforcement of the 75% rule (now the 60% rule), increased medical review by 

Medicare’s contractors, and reduced FFS enrollment due to greater enrollment in Medicare 

managed care. 

• Controlling for changes in FFS enrollment, the number of Medicare FFS beneficiaries 

admitted to IRFs increased by more than 4 percent per year from 2002 to 2004, and then 

declined from 2004 to 2007 by an average of 7.5 percent per year. The number of FFS 

patients admitted to IRFs declined in 2007, but at a slower rate than in previous years. 

• While total Medicare FFS spending on IRFs decreased from 2004 to 2007, Medicare 

payments per case increased by an average of almost 7 percent per year during this period. 
A Data Book: Healthcare spending and the Medicare program, June 2009 143

Chart 9-21. Overall IRFs’ payments per case have risen faster 

than costs, post-PPS 

1999 2000 2001 2002 2003 2004 2005 2006 2007

-10

-5

0

5

10

15

20

25

30

35

40

45

Cumu al tiv

e percent change

Payment per case

Cost per case

TEFRA PPS

Note: IRF (inpatient rehabilitation facility), PPS (prospective payment system), TEFRA (Tax Equity and Fiscal Responsibility Act 

of 1982). Data are from consistent two-year cohorts of IRFs. 

Source: MedPAC analysis of cost report data from CMS. 

• Before implementation of the prospective payment system (PPS) in 2002, Medicare per 

case costs and payments increased at similar rates, as IRFs received cost-based 

reimbursement under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). 

• Since implementation of the PPS, overall Medicare per case payments have increased 

faster than costs. 

• These trends in Medicare per case payments and costs are reflected in IRFs’ Medicare 

margins, shown in Chart 9-22. 
144 Post-acute care

Chart 9-22. Inpatient rehabilitation facilities’ Medicare margin by 

type, 2001–2007 

 TEFRA PPS 

 2001 2002 2003 2004 2005 2006 2007 

All IRFs 1.5% 11.0% 17.9% 16.3% 13.1% 12.3% 11.7% 

Hospital based 1.5 6.2 14.9 12.1 9.2 9.6 7.9 

Freestanding 1.6 18.5 23.0 24.3 20.5 17.4 18.5 

Urban 1.5 11.3 18.3 16.6 13.2 12.6 12.1 

Rural 1.2 8.2 13.5 14.0 12.4 9.8 8.9 

Nonprofit 1.6 6.7 14.5 12.8 10.2 10.6 9.3 

For profit 1.3 18.7 24.3 24.1 19.4 16.3 16.9 

Government N/A N/A N/A N/A N/A N/A N/A 

Note: IRF (inpatient rehabilitation facility), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment 

system), N/A (not available). 

Source: MedPAC analysis of cost report data from CMS. 

• From 2001 to 2003, the aggregate Medicare margin increased rapidly, from just under 2 

percent to almost 18 percent. From 2003 to 2007, margins declined but remained high at 

nearly 12 percent in 2007. 

• Freestanding and for-profit IRFs had a substantially higher aggregate Medicare margin than 

hospital-based and nonprofit IRFs, continuing a trend that began with implementation of the 

IRF prospective payment system. 
A Data Book: Healthcare spending and the Medicare program, June 2009 145

Web links. Post-acute care 

Skilled nursing facilities 

• Chapter 2D of MedPAC’s March 2009 Report to the Congress provides information about the 

supply, quality, service use, and Medicare margins for skilled nursing facilities. Chapter 7 of 

MedPAC’s June 2008 Report to the Congress provides information about alternative designs for 

Medicare’s prospective payment system that would more accurately pay providers for their SNF 

services. Medicare payment basics: Skilled nursing facility payment system provides a 

description of how Medicare pays for skilled nursing facility care. 

 http://www.medpac.gov/chapters/Mar09_Ch02D.pdf 

 http://www.medpac.gov/chapters/Jun08_Ch07.pdf 

 http://www.medpac.gov/documents/MedPAC_Payment_Basics_08_SNF.pdf 

• The official Medicare website provides information on SNFs, including the payment system and 

other related issues. 

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

Home health services 

• Chapter 2E of MedPAC’s March 2009 Report to the Congress, Chapter 4 of MedPAC’s June 

2007 Report to the Congress, and Chapter 5 of MedPAC’s June 2006 Report to the Congress 

provide information on home health services. Medicare payment basics: Home health care 

services payment system provides a description of how Medicare pays for home health care. 

 http://www.medpac.gov/chapters/Mar09_Ch02e.pdf 

 

 http://www.medpac.gov/chapters/Jun07_Ch04.pdf 

 

 http://www.medpac.gov/publications/congressional_reports/Jun06_Ch05.pdf 

 http://www.medpac.gov/documents/MedPAC_Payment_Basics_08_HHA.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/HomeHealthPPS/ 

Long-term care hospitals 

• Chapter 2G of MedPAC’s March 2009 Report to the Congress provides information on long-term 

care hospitals. Medicare payment basics: Long-term care hospital services payment system 

provides a description of how Medicare pays for long-term care hospital services. 

 http://www.medpac.gov/chapters/Mar09_Ch02g.pdf 

 http://www.medpac.gov/documents/MedPAC_Payment_Basics_08_LTCH.pdf 
146 Post-acute care

• CMS also provides information on long-term care hospitals, including the long-term care hospital 

 prospective payment system. 

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

Inpatient rehabilitation facilities 

• Chapter 2F of MedPAC’s March 2009 Report to the Congress provides information on inpatient 

rehabilitation facilities. Medicare payment basics: Rehabilitation facilities (inpatient) payment 

system provides a description of how Medicare pays for inpatient rehabilitation facility services. 

 http://www.medpac.gov/chapters/Mar09_Ch02F.pdf 

 http://www.medpac.gov/documents/MedPAC_Payment_Basics_08_IRF.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 2009 149

Chart 10-1. MA plans available to all Medicare beneficiaries 

CCPs 

 HMO Any Average plan 

 or local Regional Any MA offerings per 

 PPO PPO CCP PFFS plan county 

 

2005 67% N/A 67% 45% 84% 5 

2006 80 87 98 80 100 12 

2007 82 87 99 100 100 20 

2008 85 87 99 100 100 35 

2009 88 91 99 100 100 34 

Note: MA (Medicare Advantage), CCP (coordinated care plan), HMO (health maintenance organization), PPO (preferred 

provider organization), PFFS (private fee-for-service). These data do not include plans that have restricted enrollment or 

are not paid based on the MA plan bidding process (special needs plans, cost-based plans, employer-only plans, and 

certain demonstration plans). 

Source: MedPAC analysis of plan finder data from CMS. 

• There are four types of plans, three of which are coordinated care plans (CCPs). Local 

CCPs include 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. Local CCPs may choose which individual counties to serve. 

Regional CCPs (regional plans are required by statute to be PPOs) cover entire state-based 

regions and have networks that may be looser than the ones required of local PPOs. 

Regional PPOs were only available beginning in 2006. PFFS plans, which are not CCPs, 

are not required to have networks and members may go to any willing Medicare provider. 

• Local CCPs are available to 88 percent of Medicare beneficiaries in 2009—up from 67 

percent in 2005. Regional PPOs are available to 91 percent of beneficiaries. Virtually all 

beneficiaries live in a county where MA PFFS plans are available in 2009—up from 45 

percent in 2005. For the past four years, 100 percent of Medicare beneficiaries have had 

MA plans available, up from 84 percent in 2005. 

• The number of plans from which beneficiaries may choose has increased. In 2009, 

beneficiaries can choose from an average of 34 plans operating in their counties, up from a 

choice of 20 plans in 2007 and 5 plans in 2005. 
150 Medicare Advantage 

Chart 10-2. Access to zero-premium plans with MA drug 

coverage, 2006–2009 

48

11

25

15

73

60

19

55

25

86

66

29

52

25

88

70

34

72

29

94

HMO PPO PFFS Regional PPO Any MA plan

0

10

20

30

40

50

60

70

80

90

100

P

erc

ent of b

enef ci iarie

s

2006 2007 2008 2009

Note: MA (Medicare Advantage), HMO (health maintenance organization), PPO (preferred provider organization), PFFS (private 

fee-for-service). 

Source: MedPAC analysis of bid and plan finder data from CMS. 

• Across all plan types, in 2009 there is increased availability of “zero-premium” plans—plans 

with no premium payments other than the Medicare Part B premium. More beneficiaries can 

obtain an MA plan with Part D drug coverage (an MA–PD plan) for which the enrollee pays 

no premium for either the drug coverage or the coverage of Medicare Part A and Part B 

services. In 2009, 94 percent of Medicare beneficiaries have access to at least one MA–PD 

plan with no premium (beyond the Medicare Part B premium) for the combined coverage 

(and no premium for any non-Medicare-covered benefits included in the benefit package), 

compared with 73 percent in 2006 and 88 percent in 2008. 

• Seventy percent of beneficiaries have zero-premium MA–PD HMOs available, while MA–PD 

PPOs without premiums are much less widely available. Particularly noteworthy is the 

increased availability of private fee-for-service (PFFS) plans offering zero premiums. In 

2006, 25 percent of beneficiaries had access to a PFFS plan with no plan premium for Part 

C and Part D coverage—a figure that grew to 72 percent in 2009. 

• In most cases, enrollees of MA plans continue paying their Medicare Part B premium, but 

some MA–PD plans use rebate dollars to reduce or eliminate their enrollees’ Part B 

premium obligation. 
 A Data Book: Healthcare spending and the Medicare program, June 2009 151

 Chart 10-3. Enrollment in MA plans, 1994–2009 

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

8.1

9.4

10.5

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

2

4

6

8

10

12

B

eneficiaries (in millions)

Note: MA (Medicare Advantage). 

Source: Medicare managed care contract (MMCC) reports and monthly summary reports, CMS. 

• Medicare enrollment in private health plans paid on an at-risk capitated basis is at an alltime high at 10.5 million enrollees (23 percent of all Medicare beneficiaries). Enrollment rose 

rapidly throughout the 1990s, peaking at 6.4 million enrollees in 1999, then declined to a low 

of 4.6 million enrollees in 2003. MA enrollment has increased steadily since 2003. 
152 Medicare Advantage 

Chart 10-4. Enrollment in local coordinated care plans grew 

 slower than in other major plan types 

Total enrollees 

 (in thousands) 

 July February February February Percentage change 

Plan type 2006 2007 2008 2009 2008–2009 

Local CCPs 5,480 6,065 6,830 7,625 12% 

Regional PPOs 82 121 257 377 47 

PFFS 774 1,328 2,057 2,353 14 

Note: CCP (coordinated care plan), PPO (preferred provider organization), PFFS (private fee-for-service). Local CCPs include 

health maintenance organizations and local PPOs. 

Source: CMS health plan monthly summary reports. 

• Growth in enrollment in local coordinated care plans (CCPs) was slower than growth in 

regional preferred provider organizations (PPOs) or private fee-for-service (PFFS) plans 

over the past year. Combined enrollment in the three types of plans grew by 13 percent from 

February 2008 to February 2009. 

 

• While still the dominant form of enrollment, local CCP enrollment grew 12 percent over the 

past year, while enrollment in regional PPOs grew by 47 percent and PFFS enrollment grew 

by 14 percent. 

• More than half of the growth in PFFS plans from February 2008 to February 2009 can be 

attributed to employer-group plans (see Chart 10-8). As of February 2009, 30 percent of 

PFFS enrollees are enrolled through employer groups. 
 A Data Book: Healthcare spending and the Medicare program, June 2009 153

Chart 10-5. MA and cost plan enrollment by state and type of 

 plan, 2009 

 

 Medicare eligibles Distribution (in percent) of enrollees by plan type 

State (in thousands) HMO Local PPO Regional PPO PFFS Cost Total 

Alabama 805 11% 7% 0% 2% 0% 21% 

Alaska 55 0 0 0 1 0 1 

Arizona 853 31 2 1 4 0 38 

Arkansas 506 3 1 2 8 0 14 

California 4,475 33 0 1 1 0 35 

Colorado 576 24 1 0 5 4 34 

Connecticut 547 13 1 0 1 0 16 

Delaware 140 1 1 0 3 0 5 

District of Columbia 75 2 2 0 1 6 11 

Florida 3,176 23 1 3 2 0 29 

Georgia 1,148 3 2 2 8 0 15 

Hawaii 194 13 4 1 2 19 39 

Idaho 213 10 4 0 13 1 27 

Illinois 1,770 5 1 0 3 0 10 

Indiana 959 1 3 2 9 1 15 

Iowa 570 2 1 1 6 1 11 

Kansas 463 2 3 0 4 1 9 

Kentucky 725 3 2 2 7 1 15 

Louisiana 654 18 0 0 4 0 22 

Maine 253 3 1 0 6 0 9 

Maryland 742 3 1 0 1 3 7 

Massachusetts 1,016 14 1 0 3 0 19 

Michigan 1,574 5 0 1 18 0 24 

Minnesota 748 13 0 2 9 13 37 

Mississippi 477 3 0 1 6 0 9 

Missouri 962 12 3 0 4 0 20 

Montana 160 0 2 0 15 0 17 

North Carolina 1,395 8 1 0 9 0 18 

North Dakota 106 0 0 0 6 1 8 

Nebraska 271 3 0 1 7 1 12 

Nevada 328 27 1 1 2 0 31 

New Hampshire 204 0 0 0 6 0 6 

New Jersey 1,279 10 1 0 2 0 12 

New Mexico 293 17 4 0 4 0 24 

New York 2,879 23 3 1 2 0 29 

Ohio 1,831 13 1 1 10 1 27 

Oklahoma 576 10 1 0 3 0 14 

Oregon 581 23 15 0 5 0 42 

Pennsylvania 2,210 26 6 0 6 0 38 

Puerto Rico 620 55 7 0 0 0 62 

Rhode Island 177 34 1 0 1 0 36 

South Carolina 716 1 1 3 10 0 15 

South Dakota 132 0 0 1 6 0 7 

Tennessee 997 15 1 0 6 0 22 

Texas 2,784 12 1 2 3 1 18 

Utah 263 7 13 0 10 1 31 

Vermont 105 0 0 0 3 0 4 

Virginia 1,073 1 1 0 10 1 14 

West Virginia 372 1 3 0 15 3 23 

Washington 899 15 3 0 6 0 24 

Wisconsin 872 8 2 0 14 2 27 

Wyoming 76 0 0 0 4 1 6 

U.S. Total 44,871 15 2 1 5 1 24 

Note: MA (Medicare Advantage), HMO (health maintenance organization), PPO (preferred provider organization), PFFS (private fee-forservice). Cost plans are not MA plans; they submit cost reports to CMS rather than bids. Totals may not sum due to rounding. 

Source: CMS enrollment and population data, 2008. 

• Medicare private plans attract more beneficiaries in some areas than in others. At the state level, private plans attract only

1 percent of beneficiaries in Alaska. The highest penetrations of Medicare private plans are in Oregon and Puerto Rico, 

with 42 percent and 62 percent of beneficiaries, respectively, enrolled in plans. 

• The popularity of different types of plans varies as well. For example, some states have all their plan enrollment in 

private fee-for-service (PFFS) plans, while other states have little or none of their enrollment in PFFS plans. 
154 Medicare Advantage 

Chart 10-6. Different requirements and provisions apply to 

different types of MA plans 

 HMO/Local Regional 

 PFFS MSA PPO PPO SNP 

Must build networks of providers 9 9 9

Must report quality measures 9 9 9

Must have CMS review and 9 9 9

approve bids and premiums 

Must return to the Trust Funds 9 9 9 9 

25 percent of the difference 

between bid and benchmark 

Must offer individual MA plan 9 9 9 

if offering employer group plan* 

Must offer Part D coverage 9 9 9 

 

Must have an out-of-pocket limit 9 9

on enrollee expenditures 

Can limit enrollment to targeted 9 

beneficiaries

Note: MA (Medicare Advantage), PFFS (private fee-for-service), MSA (medical savings account), HMO (health maintenance 

organization), PPO (preferred provider organization), SNP (special needs plan). 

*Effective as of 2008 contract year; requirement does not apply to PFFS and MSA plans. 

Source: MedPAC analysis of MA statutory and regulatory requirements. 

• Different requirements apply to different plan types in Medicare Advantage (MA). Private fee-forservice (PFFS) plans and medical savings account (MSA) plans are exempt from many 

requirements that apply to coordinated care plans (CCPs). PFFS and MSA plans are not 

required to build networks, report on all CCP-required quality measures, offer the Part D drug 

benefit, or have the level of their premiums approved by CMS. Also, beginning in 2008, nonnetwork PFFS plans and MSA plans will not be subject to the requirement that they offer 

nongroup MA plans if they offer employer group MA plans. 

• MSA plans have a payment advantage over other types of MA plans (though currently only three 

MSA plans are in operation). When an MSA plan bids below the benchmark, its enrollees retain 

the full difference in their accounts, while non-MSA plans receive only 75 percent of the 

difference between the bid and benchmark to provide extra benefits to their enrollees (Medicare 

retains the other 25 percent of the difference). 

• Only regional preferred provider organizations and MSA plans are required to have benefit 

structures that include an out-of-pocket limit on enrollee expenditures. The plans are allowed to 

determine their own level of the out-of-pocket limits. Special needs plans are allowed to limit their 

enrollment to one of three special populations: Medicare/Medicaid dual eligibles, institutionalized 

beneficiaries, and beneficiaries with chronic or disabling conditions. 
 A Data Book: Healthcare spending and the Medicare program, June 2009 155

Chart 10-7. MA plan benchmarks, bids, and Medicare program 

payments relative to FFS spending, 2009 

All Plans HMOs Local PPOs Regional PPOs PFFS 

 

Benchmarks/FFS 118% 118% 121% 114% 120% 

Bids/FFS 102 98 108 106 113 

Payments/FFS 114 113 118 112 118 

 

Note: MA (Medicare Advantage), FFS (fee-for-service), HMO (health maintenance organization), PPO (preferred provider 

organization), PFFS (private fee-for-service). 

Source: MedPAC analysis of plan bid data from CMS, November 2008. 

• Since 2006, plan bids have partially determined the Medicare payments they receive. Plans bid 

to offer Part A and Part B coverage to Medicare beneficiaries (Part D coverage is handled 

separately). The bid includes plan administrative cost and profit. CMS bases the Medicare 

payment for a private plan on the relationship between its bid and its applicable benchmark. 

• The benchmark is an administratively determined bidding target. Legislation in 1997 established 

benchmarks in each county, which included a floor—a minimum amount below which no county 

benchmarks could go. By design, the floor rate exceeded fee-for-service (FFS) spending in many 

counties. Benchmarks are updated yearly by the national growth in FFS spending. 

• If a plan’s bid is above the benchmark, then the plan receives the benchmark as payment from 

Medicare and enrollees have to pay an additional premium that equals the difference. If a plan’s 

bid is below the benchmark, the plan receives its bid, plus a “rebate,” defined by law as 75 

percent of the difference between the plan’s bid and its benchmark. The plan must then return 

the rebate to its enrollees in the form of supplemental benefits, lower cost sharing, or lower 

premiums. 

• We estimate that Medicare Advantage (MA) benchmarks average 118 percent of FFS spending 

when weighted by MA enrollment. The ratio varies by plan type, because different types of plans 

tend to draw enrollment from different types of areas. 

• Plans’ enrollment-weighted bids average 102 percent of FFS spending. We estimate that HMOs 

bid an average of 98 percent of FFS spending, while bids from other plan types average at least 

106 percent of FFS spending. These numbers suggest that HMOs can provide the same 

services for less than FFS, while other plan types tend to charge more. 

• We project that 2009 MA payments will be 114 percent of FFS spending. That means that in 

2009 the Medicare program is paying about $12 billion more for the 23 percent of beneficiaries 

enrolled in MA plans than if they remained in FFS Medicare. 

• The ratio of payments relative to FFS spending varies by the type of MA plan. HMOs and 

regional preferred provider organization (PPO) payments are estimated to be 113 percent and 

112 percent of FFS, while payments to PFFS and local PPOs will average 118 percent. 
156 Medicare Advantage 

Chart 10-8. Enrollment in employer group MA plans, 2006–2009 

0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Enrollment (in millions)

CCP

PFFS

May-06 Nov-07 Feb-08 Feb-09

Note: MA (Medicare Advantage), CCP (coordinated care plan), PFFS (private fee-for-service). 

Source: CMS enrollment data. 

• While most Medicare Advantage (MA) plans are available to any Medicare beneficiary, some MA plans 

are available only to retirees whose Medicare coverage is supplemented by their former employer or 

union. These plans are called employer group plans. Such plans are usually offered through insurers 

and are marketed to groups formed by employers or unions rather than to individual beneficiaries. 

• In the last 3 years, enrollment in employer group plans has grown by more than 90 percent, while 

overall MA enrollment grew by about 50 percent. As of February 2009, there were about 1.8 million 

enrollees in employer group plans compared with about 8.5 million enrollees in individual MA plans. 

Thus, about 18 percent of all enrollees in MA plans were employer group enrollees. 

• As in the individual MA market, the growth has been concentrated in private fee-for-service (PFFS) 

plans. About 80 percent of the growth in employer group enrollment over the past three years has come 

from private fee-for-service enrollment. There are now more than 700,000 enrollees in employer group 

PFFS plans. PFFS plans now have about 40 percent of the enrollment in the MA employer group 

market, and employer group enrollment is now about 30 percent of all PFFS enrollment. 

• Our analysis of MA bid data shows that employer group plans on average have bids that are higher 

relative to fee-for-service (FFS) spending than individual plans, meaning that group plans appear less 

efficient than individual market MA plans. Employer group plans bid an average of 109 percent of 

FFS, compared with 100 percent of FFS for individual plans. 

• We estimate that Medicare pays employer group plans 115 percent of average FFS Medicare 

spending, compared with 114 percent of FFS for individual market MA plans. 
 A Data Book: Healthcare spending and the Medicare program, June 2009 157

Chart 10-9. Special needs plans decreased in 2009 after 

 growing quickly for several years 

11

125

276

476

769

698

2004 2005 2006 2007 2008 2009

0

100

200

300

400

500

600

700

800

Number of special ne

eds plans

Source: CMS special needs plans fact sheet and data summary, February 14, 2006 and CMS special needs plans comprehensive 

reports, March 21, 2007, April 2008, and April 2009. 

• 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 2009, there are 698 SNPs; this is the first decrease in the number of SNPs since they 

were created. 

• SNPs were originally authorized for five years. SNP authority was extended, subject to new 

requirements, by the Medicare, Medicaid, and SCHIP Extension Act of 2007 and the 

Medicare Improvements for Patients and Providers Act of 2008. Absent additional 

congressional action, SNP authority will expire at the end of 2010. 
158 Medicare Advantage 

Chart 10-10. The number of SNPs decreased while SNP 

enrollment increased from 2008 to 2009 

April 2008 April 2009

0

100

200

300

400

500

600

700

800

900

Number of SNPs

April 2008 April 2009

SNP enrollment (in ht ousands)

Chronic or disabling condition

Institutional

Dual eligible

0

200

400

600

800

1,000

1,200

1,303,000

1,147,000

698

769

1,400

Note: SNP (special needs plan). 

Source: CMS special needs plans comprehensive reports, April 2008 and 2009. 

 

• Although the number of SNP plans decreased by 9 percent from April 2008 to April 2009, 

the number of SNP enrollees increased by 14 percent. 

• In 2009, most special needs plans (SNPs) (58 percent) are for dual-eligible beneficiaries, 

while 30 percent are for beneficiaries with chronic conditions, and 12 percent are for 

beneficiaries who reside in institutions (or reside in the community but have a similar level of 

need). 

• Enrollment in SNPs has grown from 843,000 in March 2007 (not shown) to 1,147,000 in 

April 2008, to 1,303,000 in April 2009. 

• In 2009, 76 percent of beneficiaries reside in areas where SNPs serve beneficiaries dually 

eligible for Medicare and Medicaid, 53 percent live where SNPs serve institutionalized 

beneficiaries, and 72 percent live where SNPs serve beneficiaries with chronic conditions. 

Only the last type decreased in availability—down from 89 percent in 2008 because of the 

withdrawal of one plan from the MA program. 
 A Data Book: Healthcare spending and the Medicare program, June 2009 159

Web links. Medicare Advantage 

• Chapter 7 of MedPAC’s June 2009 Report to the Congress provides information on 

 Medicare Advantage plans. 

http://www.medpac.gov/chapters/Jun09_Ch07.pdf 

• Chapter 3 of MedPAC’s March 2009 Report to the Congress provides information on 

Medicare Advantage plans. 

http://www.medpac.gov/chapters/Mar09_Ch03.pdf 

• More information on the Medicare Advantage program payment system can be found in 

MedPAC’s Medicare Payment Basics series. 

http://www.medpac.gov/documents/MedPAC_Payment_Basics_08_MA.pdf 

• CMS provides information on Medicare Advantage and other Medicare managed care plans. 

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

• The official Medicare website provides information on plans available in specific areas and 

the benefits they offer. 

http://www.medicare.gov/ 

S E C T I O N

Drugs

A Data Book: Healthcare spending and the Medicare program, June 2009 163

Chart 11-1. Medicare spending for Part B drugs administered in 

physicians’ offices or furnished by suppliers 

2.8 3.2

4.1

5.1

6.4

8.5

10.3 10.9

10.1 10.6 11.0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

5

10

15

20

M

ed ci are spend ni g (dol al rs ni bill oi ns)

Medicare spending

Note: Data include Part B covered drugs administered in physicians’ offices or furnished by suppliers (e.g., certain oral drugs

and drugs used with durable medical equipment). Data do not include Part B covered drugs furnished in hospital 

outpatient departments or dialysis facilities. 

Source: MedPAC analysis of Medicare claims data from unpublished CMS data. 

• MedPAC estimates that spending for Part B drugs administered in physicians’ offices or 

furnished by suppliers totaled $11.0 billion in 2007. 

• Medicare spending on Part B drugs increased at an average rate of 25 percent per year 

from 1997 to 2003. In 2005, the Medicare payment rate changed from one based on the 

average wholesale price to 106 percent of the average sales price. Since then the rate has 

moderated. In 2005, spending declined by 7.8 percent compared with 2004. Spending 

increased 4.7 percent in 2006 and 4.5 percent in 2007. 

• This total does not include drugs provided through outpatient departments of hospitals or to 

patients with end-stage renal disease in dialysis facilities. MedPAC estimates that payments 

for separately billed drugs provided in hospital outpatient departments equaled about $3 

billion in 2007. We estimate that freestanding and hospital-based dialysis facilities billed 

Medicare an additional $2.8 billion for drugs in 2007. 
164 Drugs

Chart 11-2. Top 10 Part B drugs administered in physician 

offices or furnished by suppliers by share of 

expenditures, 2007 

 Percent of Rank in 

Drug name Clinical indications Competition spending 2006 

Darbepoetin alfa Anemia Sole source 8.5% 1 

Rituximab Non-Hodgkin’s Sole source 7.2 2 

 lymphoma 

Bevacizumab Cancer Sole source 5.6 6 

Infliximab Rheumatoid arthritis, Sole source 5.5 4 

 Crohn’s disease 

Pegfilgrastim Cancer Sole source 4.9 5 

Non-ESRD erythropoietin Anemia Multisource 4.7 3 

 biological 

Unclassified drugs N/A N/A 4.0 N/A 

Budesonide Asthma and other Sole source 3.0 not on list 

 lung conditions 

Oxaliplatin Cancer Sole source 2.8 9 

Docetaxel Cancer Sole source 2.5 not on list 

Note: N/A (not applicable). Data do not include Part B drugs furnished in hospital outpatient departments or dialysis facilities. 

Source: MedPAC analysis of 2007 Medicare claims data from CMS and unpublished Food and Drug Administration data. 

• Medicare covers about 650 outpatient drugs under Part B, but spending is very 

concentrated. The top 10 drugs account for about 49 percent of all Part B drug spending. 

• Spending for new drugs dominates the list. Of the top nine listed drugs, eight received Food 

and Drug Administration approval in 1997 or later. Drugs too new to have their own codes 

(unclassified drugs) accounted for 4 percent of all Part B drug spending. 

• Treatment for cancer dominates the list—seven out of the top nine listed drugs treat cancer 

or the side effects associated with chemotherapy. This is because most cancer drugs must 

be administered by physicians, a requirement for coverage of most Part B drugs. 

• These rankings reflect Part B drugs administered in physicians’ offices or furnished by 

suppliers. If drugs furnished in hospital outpatient departments and dialysis facilities were 

included, erythropoietin would account for the most Part B drug spending in 2007. 
A Data Book: Healthcare spending and the Medicare program, June 2009 165

Chart 11-3. In 2009, about 90 percent of Medicare beneficiaries 

were enrolled in Part D plans or had other sources of 

creditable drug coverage 

Note: LIS (low-income subsidy), PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]), RDS 

(retiree drug subsidy), FEHB (Federal Employees Health Benefits program), VA (Department of Veterans Affairs). 

TRICARE is the health program for military retirees and their dependents. 

*Creditable coverage means drug benefits that are of equal or greater value to the basic Part D benefit. 

Source: CMS Management Information Integrated Repository. 

• As of February 2009, CMS estimated that 32.6 million of the 45 million Medicare beneficiaries (72 percent) were either 

signed up for Part D plans or had prescription drug coverage through employer-sponsored plans 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.) 

• About 9.7 million beneficiaries (21 percent) receive Part D’s low-income subsidies (LISs). Of these individuals, 6.3 

million are dually eligible to receive Medicare and all Medicaid benefits offered in their state. Another 3.3 million 

qualified for extra help either because they receive benefits through the Medicare Savings Program or Supplemental 

Security Income Program, or they were determined eligible by the Social Security Administration after applying directly 

to that agency. Among all LIS beneficiaries, about 8 million (18 percent) are enrolled in stand-alone prescription drug 

plans (PDPs) and 1.7 million (4 percent) are in Medicare Advantage–Prescription Drug plans (MA–PDs). 

• Other enrollees in stand-alone PDPs numbered 9.5 million, or 21 percent of all Medicare beneficiaries. Another 7.5 

million enrollees (17 percent) are in MA–PDs or other private Medicare health plans. Individuals whose employers 

receive Medicare’s RDS numbered 6.0 million, or 13 percent. Those 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, 6.1 million beneficiaries (14 percent) receive drug coverage through the Federal Employees 

Health Benefits program, TRICARE, the Department of Veterans Affairs, or current employers because the individual is 

still an active worker. CMS estimates that another 2 million individuals have other sources of creditable coverage. 

• An estimated 4.5 million beneficiaries (10 percent) have no creditable drug coverage. 

Non-LIS enrollees in MAPDs

17%

Primary coverage 

through employers that 

receive RDS

13%

Other sources of 

creditable coverage*

5%

Non-LIS enrollees in 

PDPs

21%

LIS enrollees in MA-PDs

4%

Primary coverage 

through FEHB, TRICARE, 

VA, or active w orker 

w ith Medicare as 

secondary payer

14%

No creditable coverage

10%

LIS enrollees in PDPs

18%

PDPs

39%

MA-PDs 20%
166 Drugs

Chart 11-4. Defined standard benefit parameters increase 

over time 

2006 2007 2008 2009 

 

Deductible $250.00 $265.00 275.00 $295.00 

Initial coverage limit 2,250.00 2,400.00 2,510.00 2,700.00 

True out-of-pocket spending limit 3,600.00 3,850.00 4,050.00 4,350.00 

Total covered drug spending at true out-of-pocket limit 5,100.00 5,451.25 5,726.25 6,153.75 

Minimum cost sharing above true out-of-pocket limit 

 Copay for generic/preferred multisource drug prescription 2.00 2.15 2.25 $2.40 

 Copay for other prescription drugs 5.00 5.35 5.60 6.00 

 

Note: Under Part D’s defined standard benefit, the enrollee pays the deductible and then 25 percent of covered drug spending 

(75 percent paid by the plan) until total covered drug spending reaches the initial coverage limit. The enrollee then 

reaches the coverage gap where she must pay 100 percent of covered drug spending until she reaches the true out-ofpocket limit. “True out of pocket” refers to the fact that cost sharing paid by most sources of supplemental coverage does 

not count toward this limit. The enrollee pays nominal cost sharing above the limit. For 2009 most parameters will 

increase by about 7.5 percent reflecting about a 6 percent trend in per capita spending for Part D benefits as well as about 

1.5 percent increase for prior year revisions. 

Source: CMS, Office of the Actuary. 

• The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 specified a 

defined standard benefit structure. For 2009 that includes a $295 deductible, 25 percent 

coinsurance on covered drugs until the enrollee reaches $2,700 in total covered drug 

spending, and then a coverage gap in which the enrollee is responsible for the full 

discounted price of covered drugs until her true out-of-pocket spending reaches $4,350. 

Enrollees with drug spending even higher than that amount would pay just $2.40 to $6 per 

prescription. 

• The parameters of this defined standard benefit structure increase over time at the same 

rate as the annual increase in average total drug expenses of Medicare beneficiaries. 

Benefit parameters for 2006 through 2009 are shown in the chart above. 

• Within certain limits, sponsoring organizations may offer Part D plans that have the same 

actuarial value as the defined standard benefit but a different benefit structure. For example, 

a plan may use tiered copayments rather than 25 percent coinsurance. Or a plan may have 

no deductible but use cost-sharing requirements that are equivalent to a rate higher than 25 

percent. Both defined standard benefit plans and plans that are actuarially equivalent to the 

defined standard benefit are known as “basic benefits.” 

• Once a sponsoring organization offers at least one plan with basic benefits within a 

prescription drug plan region, it may also offer a plan with enhanced benefits—basic and 

supplemental coverage combined. 
A Data Book: Healthcare spending and the Medicare program, June 2009 167

Chart 11-5. Characteristics of Medicare PDPs 

 2008 2009 

 Enrollees as of Enrollees as of 

 Plans October 2008 Plans February 2009 

 

 Number Number 

 Number Percent (in millions) Percent Number Percent (in millions) Percent 

 

Total 1,824 100% 16.5 100% 1,689 100% 16.6 100% 

Type of organization 

 Nationala

 1,589 87 14.2 86 1,496 89 14.3 86 

 Near-nationalb 0 0 0.0 0 32 2 0.2 1 

 Other 235 13 2.3 14 161 9 2.1 13 

Type of benefit 

 Defined standard 217 12 2.7 17 170 10 1.6 10 

 Actuarially 

 equivalentc

 682 37 10.0 61 628 37 10.5 64 

 Enhanced 925 51 3.7 23 891 53 4.4 27 

Type of deductible 

 Zero 1,065 58 8.4 51 934 55 7.9 48 

 Reduced 150 8 0.7 4 189 11 0.7 4 

 Defined 

 standardd

 609 33 7.4 45 566 34 7.9 48 

Drugs covered in the gap 

 Some generics but 

 no brand-name 

 drugs 528 29 1.2 7 413 24 1.1 7 

 Some generics 

 and some 

 brand-name drugs 1 <0.5 <0.5 <0.5 3 <0.5 <0.1 0 

 None 1,295 71 15.3 93 1,273 75 15.4 93 

Note: PDP (prescription drug plan). The PDPs and enrollment described here exclude employer-only plans and plans offered in 

 U.S. territories. Sums may not add to totals due to rounding. 

a

 Reflects total numbers of plans for the 16 organizations with at least 1 PDP in all 34 PDP regions. b

 Totals for organizations offering 30 or more PDPs across the country, but without 1 in each PDP region. c

 Includes “actuarially equivalent standard” and “basic alternative” benefits. d

 $275 in 2008 and $295 in 2009. 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

• Part D drew about 7 percent fewer stand-alone prescription drug plans (PDPs) into the field for 2009 than in 2008 primarily due 

to organizational mergers and acquisitions. Plan sponsors are offering 1,689 PDPs in 2009 compared with 1,824 in 2008. 

• In 2009, 89 percent of all PDPs are offered by sponsoring organizations that have at least one PDP in each of the 34 PDP 

regions across the country. Plans offered by those national sponsors account for 86 percent of all PDP enrollment. 

• Sponsors are offering a slightly larger proportion of PDPs with enhanced benefits (basic plus supplemental coverage) for 2009 

and a slightly smaller proportion of benefits with the defined standard benefit. Most enrollees (64 percent) are in plans with the 

same average value as the standard benefit but with alternative benefit designs (called actuarially equivalent benefits). 

• A smaller proportion of PDPs include some benefits in the coverage gap for 2009 than in 2008. Nearly all plans with some gap 

coverage limit that coverage to generic drugs; 24 percent offer generics only while less than 1 percent of plans offer generics and 

brand name drugs. Among those plans that provide coverage for brand name drugs, most limit the benefit to preferred drugs. 

• In 2009, 93 percent of PDP enrollees are in plans that offered no additional benefits in the coverage gap; just under half are

beneficiaries who receive Part D’s low-income subsidies (LISs). As LIS enrollees do not face a coverage gap, the number of 

beneficiaries who face 100 percent coinsurance is considerably smaller than 93 percent. In addition, many enrollees were 

unlikely to exceed the initial coverage limit for drug spending. 
168 Drugs

Chart 11-6. Characteristics of MA–PDs 

 2008 2009 

 Enrollees as of Enrollees as of 

 Plans October 2008 Plans February 2009 

 

 Number Number 

 Number Percent (in millions) Percent Number Percent (in millions) Percent 

 

Totals 1,932 100% 5.7 100% 2,039 100% 6.2 100% 

Type of organization 

 Local HMO 1,025 53 4.1 72 1,126 55 4.3 69 

 Local PPO 353 18 0.5 8 430 21 0.6 10 

 PFFS 520 27 0.9 17 449 22 1.0 17 

 Regional PPO 34 2 0.2 4 33 2 0.3 4 

Type of benefit 

 Defined standard 79 4 <0.1 1 92 5 0.1 1 

 Actuarially 

 equivalent a 132 7 0.3 6 161 8 0.3 6 

 Enhanced 1,721 89 5.3 93 1,786 88 5.8 94 

Type of deductible 

 Zero 1,665 86 5.3 94 1,797 88 5.9 94 

 Reduced 45 2 0.1 2 104 5 0.2 3 

 Defined standard b 222 11 0.2 4 138 7 0.2 3 

Drugs covered in the gap 

 Some generics but no 

 brand name drugs 661 34 2.2 38 701 34 2.5 39 

 Some generics and 

 some brand name 

 drugs 327 17 1.4 25 355 17 1.5 25 

 None 944 49 2.1 37 983 48 2.2 36 

Note: MA–PD (Medicare Advantage–Prescription Drug [plan]), SNP (special needs plan). The MA–PDs and enrollment 

described here exclude employer-only plans, plans offered in U.S. territories, 1876 cost plans, special needs plans, 

demonstrations, and Part B-only plans. Sums may not add to totals due to rounding. a Benefits labeled actuarially equivalent to Part D’s standard benefit include what CMS calls “actuarially equivalent 

standard” and “basic alternative” benefits. b $275 in 2008 and $295 in 2009. 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

• There were slightly more MA–PDs in 2009 than in 2008. Sponsors are offering 2,039 MA–PDs 

compared with 1,932 the year before (about 6 percent more). Although local HMOs offer the 

most MA–PD plans, there were increases in the number of drug plans offered by preferred 

provider organizations. PFFS plans made up 22 percent of all (unweighted) offerings in 2009 

compared with 27 percent in 2008. 

• A larger share of MA–PDs than PDPs offer enhanced benefits (compare Chart 11-6 with Chart 

11-5). In 2008, 51 percent of all PDPs had enhanced benefits compared with 89 percent of MA–

PDs. In 2009, 53 percent of PDPs were enhanced compared with 88 percent of MA–PDs. In 

2009, enhanced MA–PDs attracted 94 percent of total MA–PD enrollment. 

• Most MA–PD plans have no deductible: 86 percent of MA–PD offerings in 2008 and 88 percent in 

2009. MA–PDs with no deductible attracted about 94 percent of total MA–PD enrollment in 2009. 

• MA–PDs are more likely than PDPs to provide some additional benefits in the coverage gap, 

although mostly for generics. In 2009, 51 percent of MA–PDs included some gap coverage—34 

percent with some generics but no brand name drugs and 17 percent with some generics and 

some brand name drug coverage. Those plans account for 64 percent of MA–PD enrollment. 
A Data Book: Healthcare spending and the Medicare program, June 2009 169

Chart 11-7. Characteristics of SNPs 

 2008 2009 

 Enrollees as of Enrollees as of 

 Plans October 2008 Plans February 2009 

 

 Number Percent Number Percent Number Percent Number Percent 

 (in millions) (in millions) 

 

Total 704 100% 1.1 100% 658 100% 1.1 100% 

Type of SNP 

 Chronic condition 221 31 0.2 22 195 30 0.2 22 

 Dual eligible 401 57 0.7 66 383 58 0.7 67 

 Institutionalized 82 12 0.1 12 80 12 0.1 11 

Type of MA organization 

 Local HMO 587 84 0.9 84 555 84 0.9 85 

 Local PPO 76 11 0.1 9 72 11 0.1 9 

 Regional PPO 41 6 0.1 8 31 5 0.1 7 

Type of benefit 

 Defined standard 188 27 0.3 28 230 35 0.4 39 

 Actuarially 

 equivalenta 162 23 0.3 26 67 10 0.1 13 

 Enhanced 354 50 0.5 46 361 55 0.5 47 

Type of deductible 

 Zero 358 51 0.6 57 277 42 0.5 44 

 Reduced 69 10 <0.05 5 22 3 <0.5 2 

 Defined standardb

 277 39 0.4 38 359 55 0.6 55 

Drugs covered in the gap 

 Some generics but no 117 16 0.2 21 39 6 0.1 13 

 brand-name drugs 

 Some generics and 99 15 0.1 8 119 18 0.1 9 

 some brand-name drugs 

 None 488 69 0.7 71 500 76 0.8 78 

Note: SNPs (special needs plans), MA (Medicare Advantage). SNPs are MA plans that are permitted to limit their enrollment 

 to a targeted population such as beneficiaries with a specific chronic condition, dual eligibles, or the institutionalized. 

 The SNPs and enrollment described here exclude employer-only plans and plans offered in U.S. territories. Private fee- 

 for-service plans are not permitted to offer SNPs. Sums may not add to totals due to rounding. a

 Includes “actuarially equivalent standard” and “basic alternative” benefits. b

 $275 in 2008 and $295 in 2009. 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

• In 2009, more than a million beneficiaries are enrolled in special needs plans (SNPs). SNPs function like and are 

paid in the same way as other Medicare Advantage plans, but they can focus on enrolling certain types of 

enrollees—beneficiaries dually eligible for Medicare and Medicaid (dual eligibles), institutionalized beneficiaries, 

and beneficiaries with severe or disabling chronic conditions. In practice, however, some individuals other than 

those categories of beneficiaries are also enrolled in SNPs. 

• In 2008, the Congress placed a moratorium on new SNPs but also extended the authority of SNPs to focus 

enrollment on certain populations (with new restrictions) until December 31, 2010. 

• In 2009, about 58 percent of SNPs target dual eligibles, and these beneficiaries make up 67 percent of SNP 

enrollees. Chronic condition SNPs make up 30 percent of plans and have 22 percent of total SNP enrollment. 

• The vast majority of SNPs are HMOs. Private fee-for-service plans are ineligible to operate as SNPs. 
170 Drugs

Chart 11-8. Average Part D premiums 

 Average monthly Average monthly Percentage 

 2008 premium 2009 premium change in 

 2008 weighted by 2009 weighted by weighted 

 enrollment 2008 enrollment 2009 Dollar average 

 in millions enrollment (in millions) enrollment increase premium 

PDPs 

 Basic plans 12.8 $26.72 12.2 $31.08 $4.36 16% 

 Enhanced plans 3.7 40.65 4.4 46.12 5.47 13 

 All PDPs 16.5 29.86 16.6 35.08 5.22 17 a 

MA–PDs, excluding SNPsb 

 Basic plans 0.4 21.88 0.4 19.92 -1.96 -9 

 Enhanced plans 5.3 11.23 5.8 14.22 2.99 27 

 All MA–PDs 5.7 11.97 6.2 14.59 2.62 22 

SNPsb

 Basic plans 0.6 20.30 0.6 21.38 1.08 5 

 Enhanced plans 0.5 11.68 0.5 11.20 -0.49 -4 

 All SNPs 1.1 16.30 1.1 16.55 0.25 2 

All plans 

 Basic plans 13.7 26.31 13.1 30.32 4.01 15 

 Enhanced plans 9.5 22.73 10.7 27.18 4.45 20 

 All plans 23.3 24.85 23.8 28.91 4.06 16 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]), SNP (special 

 needs plan. The PDPs and enrollment described here exclude employer-only plans and plans offered in U.S. territories. 

 The MA–PDs and SNPs and their enrollment described here exclude employer-only plans, plans offered in U.S. 

 territories, 1876 cost plans, demonstrations, and Part B-only plans. a A 17 percent increase is counterintuitive because it is larger than the 16 percent and 13 percent increases for average 

 basic and enhanced PDP premiums, respectively. However, the average PDP premium for 2009 reflects a higher 

 proportion of enrollment in higher premium enhanced PDPs rather than basic PDPs. b Reflects the portion of Medicare Advantage plans’ total monthly premium attributable to Part D benefits for plans that 

 offer Part D coverage. MA–PD premiums reflect rebate dollars (75 percent of the difference between a plan’s payment 

 benchmark and its bid for providing Part A and Part B services) that were used to offset Part D premium costs. 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

• On average, Part D enrollees pay $29 per month in 2009, up $4 or 16 percent from 2008. 

 

• The average PDP enrollee pays about $35 per month, compared with $30 in 2008—a 17 percent 

increase. 

• Medicare Advantage–Prescription Drug plans (MA–PDs) can lower the part of their monthly 

premium attributable to Part D using rebate dollars—75 percent of the difference between the 

plan’s payment benchmark and its bid for providing Part A and Part B services. MA–PDs may 

also enhance their Part D benefit with rebate dollars. Many MA–PDs use rebate dollars in these 

ways, resulting in more enhanced offerings and lower average premiums compared with PDPs. 

• The portion of MA premiums attributable to prescription drug benefits increased for 2009, with 

the average MA–PD enrollee paying nearly $15 per month compared with $12 in 2008 (22 

percent higher). 

• The average portion of SNP premiums attributable to Part D benefits remained fairly flat, with the 

average SNP enrollee paying premiums that are 2 percent higher in 2009 than in 2008. 
A Data Book: Healthcare spending and the Medicare program, June 2009 171

Chart 11-9. Fewer PDPs qualify as premium-free to LIS 

 enrollees in 2009 

 Number of PDPs that have zero 

 Number of PDPs premium for LIS enrollees 

PDP region State(s) 2008 2009 Difference 2008 2009 Difference 

 1 ME, NH 53 46 –7 18 5 –13 

 2 CT, MA, RI, VT 51 47 –4 14 12 –2 

 3 NY 55 51 –4 15 9 –6 

 4 NJ 57 52 –5 18 7 –11 

 5 DE, DC, MD 52 48 –4 18 11 –7 

 6 PA, WV 63 57 –6 18 9 –9 

 7 VA 52 48 –4 17 13 –4 

 8 NC 52 49 –3 17 11 –6 

 9 SC 56 53 –3 20 15 –5 

 10 GA 54 50 –4 18 11 –7 

 11 FL 58 54 –4 8 5 –3 

 12 AL, TN 53 49 –4 15 12 –3 

 13 MI 55 51 –4 17 11 –6 

 14 OH 58 49 –9 15 6 –9 

 15 IN, KY 52 48 –4 17 12 –5 

 16 WI 57 53 –4 16 16 0 

 17 IL 53 49 –4 19 12 –7 

 18 MO 52 48 –4 13 6 –7 

 19 AR 55 52 –3 18 12 –6 

 20 MS 49 47 –2 15 13 –2 

 21 LA 50 47 –3 10 7 –3 

 22 TX 56 53 –3 15 14 –1 

 23 OK 52 49 –3 13 8 –5 

 24 KS 52 48 –4 17 10 –7 

 25 IA, MN, MT, NE, 

 ND, SD, WY 52 48 –4 16 9 –7 

 26 NM 55 50 –5 11 7 –4 

 27 CO 55 53 –2 12 8 –4 

 28 AZ 51 49 –2 7 2 –5 

 29 NV 53 49 –4 5 1 –4 

 30 OR, WA 55 48 –7 15 7 –8 

 31 ID, UT 54 51 –3 14 9 –5 

 32 CA 56 51 –5 9 6 –3 

 33 HI 49 47 –2 10 5 –5 

 34 AK 47 45 –2 15 7 –8 

 Total 1,824 1,689 –135 495 308 –187 

Note: PDP (prescription drug plan), LIS (low-income subsidy), N/A (not applicable). 

Source: MedPAC based on 2009 PDP landscape file and LIS enrollment data provided by CMS. 

• The number of stand-alone prescription drug plans (PDPs) declined by about 7 percent around the country, from 

1,824 in 2008 to 1,689 in 2009. The median number of plans offered in each region is 49 compared with 53 in 

2008. 

• Alaska had the fewest stand-alone plans with 45. The Pennsylvania–West Virginia region had the most with 57 

PDPs. 

• In 2009, enrollees who receive Part D’s low-income subsidy have fewer options of PDPs in which they pay no 

premium. In 2009, 308 PDPs qualified to be premium-free to those enrollees, compared with 495 in 2008. 

• Unlike past years in which each region had at least 5 PDPs available to LIS enrollees at no premium, in 2009, 

two regions have fewer than three (Nevada and Arizona). Every region but Wisconsin had a decline in the 

number of such PDPs. 
172 Drugs

Chart 11-10. Distribution of 2009 Part D enrollees by organization

CVS Caremark

9%

Medco

3%

Other

21%

Coventry

9%

Wellpoint

 7%

Humana

15%

Kaiser Permanente

10%

Other

42%

UnitedHealthcare

24% UnitedHealthcare

17%

Universal

American

10% Highmark

3%

 PDP enrollment = 17.4 million MA−PD enrollment = 9.1 million 

Wellpoint

Coventry 4%

3%

Wellcare

5%

Humana

12%

Blue Cross Blue 

Shield of Michigan

3% Health Net

3%

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Enrollment numbers are as of 

 February 2009. 

Source: CMS 2009. 

• As of February 2009, 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, UnitedHealthcare had 24 percent of the 17.4 million enrollees in PDPs 

and 17 percent of the 9.1 million enrollees in MA–PDs. Similarly, Humana had a 

considerable portion of both markets: 12 percent of PDP enrollees and 15 percent of MA–

PD enrollees. 

• Market shares of top PDP sponsors changed somewhat in 2009. Humana’s market share 

declined to 12 percent from 18 percent of 2008 PDP enrollment, largely because of the 

reassignment of low-income subsidy (LIS) enrollees in 2009 to plans with lower premiums. 

CVS Caremark and Coventry expanded their PDP market shares in part by gaining LIS 

enrollees. 

• Market shares of top MA–PD sponsors were relatively stable between 2008 and 2009. 
A Data Book: Healthcare spending and the Medicare program, June 2009 173

Chart 11-11. In 2009 most Part D enrollees are in plans that 

charge higher copayments for nonpreferred 

brand name drugs 

22% 19% 17%

10%

18%

11%

4%

24%

8% 9% 8%

59%

69% 73%

85%

3% 5% 6%

2006 2007 2008 2009 2006 2007 2008 2009

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

P

ercent of enrol el es

Other tier structure

Generic, preferred brand, and nonpreferred brand name tiers

Generic and brand name tiers

25% coinsurance

1% 3% 1%

 PDP enrollees MA-PD enrollees 

79%

87%

83%

87%

1%

1% 2% 1% 1% 1%

1%

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Calculations are weighted by 

enrollment. PDPs exclude employer-only groups and plans offered in U.S. territories. MA–PDs exclude employer-only 

groups, demonstration programs, special needs plans, 1876 cost plans, and plans offered in U.S. territories. Most plans, 

except benefits that use the standard 25 percent coinsurance for all drugs, also have a specialty tier for higher-price 

drugs. 

Source: MedPAC-sponsored analysis by NORC/Georgetown University/Social and Scientific Systems analysis of formularies 

submitted to CMS. 

• The share of beneficiaries enrolled in plans that distinguish between preferred and nonpreferred 

brand name drugs grew between 2006 and 2009. Among PDPs, 87 percent of enrollees are in 

such a plan in 2009, compared with 59 percent in 2006. Similarly, 83 percent of MA–PD 

enrollees are in such a plan in 2009, up from 73 percent in 2006. 

• For enrollees in PDPs that distinguish between preferred and nonpreferred brand name drugs, 

the median copay in 2009 is $38 for a preferred brand and $75 for a nonpreferred brand. The 

median copay for generic drugs is $7. For MA–PD enrollees, in 2009, the median copay is $30 

for a preferred brand, $60 for a nonpreferred brand, and $5 for a generic drug. 

• In 2009, about 10 percent of PDP enrollees and 1 percent of MA–PD enrollees are in plans that 

charge 25 percent coinsurance for all covered drugs after the plan’s deductible, up to its initial 

coverage limit. Enrollees in these PDPs who receive Part D’s low-income subsidies pay nominal 

copays per prescription rather than 25 percent coinsurance. 
174 Drugs

Chart 11-12. Most enrollees are in Part D plans that use 

 specialty tiers 

82%

69%

93%

88%

92%

82%

PDPs MA-PDs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percent of nons at ndard plans we gi h et d by enrol ml ent

2006

2007

2008

2009

96% 97%

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Nonstandard plans are those that 

do not use Part D’s defined standard benefit, which has a flat 25 percent coinsurance rate for all listed drugs. Calculations 

are weighted by enrollment. PDPs exclude employer-only groups and plans offered in U.S. territories. MA–PDs exclude 

employer-only groups, demonstration programs, special needs plans, 1876 cost plans, and plans offered in U.S. 

territories. Specialty tiers apply to expensive products and unique drugs and biologicals for which enrollees may not 

appeal for lower cost sharing. 

Source: MedPAC-sponsored analysis by NORC/Georgetown University/Social and Scientific Systems analysis of formularies 

submitted to CMS. 

• Generally, plans use specialty tiers for expensive products, unique drugs, and biologicals. 

For 2009, CMS allowed plans to place drugs on a specialty tier if the drug’s negotiated price 

exceeds $600 per month. Cost-sharing requirements for specialty-tier drugs can be high (at 

least 25 percent of the plan’s negotiated price) until the beneficiary reaches the catastrophic 

levels of spending in Part D’s benefit that limit out-of-pocket spending. Under CMS 

regulations, enrollees may not appeal cost sharing for drugs on specialty tiers as they can 

for other drugs such as those on nonpreferred brand tiers. 

• Among PDP enrollees in plans that use tiered cost sharing, 82 percent are in plans with 

specialty tiers in 2009, and 97 percent of MA–PD enrollees are in plans with a specialty tier. 

The median PDP enrollee or MA–PD enrollee pays 33 percent coinsurance for specialty-tier 

drugs. 
A Data Book: Healthcare spending and the Medicare program, June 2009 175

Chart 11-13. PDPs and non-SNP MA–PDs list similar numbers 

 of drugs on their formularies, but SNPs tend to 

 list fewer drugs 

61% 61%

34%

89% 91%

76%

PDPs (N=1,687) MA-PDs (N=1,950) SNPs (N=641)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percent of all chem ci al entit ei s

Minimum Enrollment-weighted average Maximum

100% 100% 100%

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]), SNP (special needs plan). Values 

reflect the percent of distinct chemical entities listed within CMS formulary reference file, with white bars weighted by 

enrollment as of March 2009. PDPs exclude employer-only groups and plans offered in U.S. territories. Non-SNP 

MA–PDs exclude demonstration programs, 1876 cost plans, employer-only groups, and plans offered in U.S. territories. 

SNPs are one type of MA–PD. N refers to the number of plans. 

 

Source: MedPAC-sponsored analysis by NORC/Georgetown University/Social and Scientific Systems analysis of formularies 

submitted to CMS. 

• In 2009, enrollees in stand-alone PDPs and non-SNP MA–PDs have similar numbers of 

drugs listed on their plans’ formularies. The average PDP enrollee is in a plan that lists 89 

percent of all distinct chemical entities on which CMS requires plans to report, while the 

average MA–PD enrollee is in a plan listing 91 percent. SNPs tend to list fewer drugs: the 

average SNP enrollee is in a plan listing 76 percent of all chemical entities. 

• The number of drugs listed on any given plan’s formulary can vary considerably, from 34 

percent of reportable drugs for plans with the tightest formularies to 100 percent for some of 

the most popular plans. 
176 Drugs

Chart 11-14. In 2009, PDPs are slightly more likely to apply 

 utilization management tools than MA–PDs Prior authorization Step therapy

Quantity l mi its

Any util zi at oi n

management

0%

5%

10%

15%

20%

25%

30%

35%

40%

2007 2008 2009

Prior 

authorization

Step therapy

Quantity limits

Any util zi at oi n

management

0%

5%

10%

15%

20%

25%

30%

35%

40%

2007 2008 2009

PDPs MA-PDs

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). PDPs exclude employer-only 

groups and plans offered in U.S. territories. MA–PDs exclude demonstration programs, special needs plans, 1876 cost 

plans, employer-only groups, and plans offered in U.S. territories. Values reflect the percent of listed chemical entities that

are subject to utilization management, weighted by plan enrollment. Quantity limits mean that plans limit the number of 

doses of a drug available to the enrollee in a given time period. Step therapy refers to a requirement that the enrollee try 

specified drugs first before moving to other drugs. Prior authorization means that the enrollee must get preapproval from 

the plan before coverage. 

Source: MedPAC-sponsored analysis by NORC/Georgetown University/Social and Scientific Systems analysis of formularies 

submitted to CMS. 

• The number of drugs listed on a plan’s formulary does not necessarily represent beneficiary 

access to medications. Plans’ processes for nonformulary exceptions, prior authorization 

(preapproval from plan before coverage), quantity limits (plans limit the number of doses of a 

particular drug covered in a given time period), and step therapy requirements (enrollees 

must try specified drugs before moving to other drugs) can have a strong influence on 

access to certain drugs. For example, unlisted drugs may be covered through the 

nonformulary exceptions process, which may be relatively easy for some plans and more 

burdensome for others. Alternatively, on-formulary drugs may not be covered in cases in 

which a plan does not approve a prior authorization request. Also, a formulary’s size can be 

deceptively large if it includes drugs that are no longer used in common practice. 

• In 2009, the average enrollee in a stand-alone prescription drug plan faces some form of 

utilization management for 29 percent of drugs listed on a plan’s formulary, compared with 

25 percent for the average MA–PD enrollee. The most commonly used utilization 

management tool is quantity limits, followed by prior authorization, and then step therapy. 
A Data Book: Healthcare spending and the Medicare program, June 2009 177

Web links. Drugs 

 

 

• Chapters in several of MedPAC’s Reports to the Congress provide information on 

 the Medicare Part D program, as does MedPAC’s Payment Basics series. 

 http://www.medpac.gov/chapters/Mar09_Ch04.pdf 

 http://www.medpac.gov/chapters/Mar08_Ch04.pdf 

 http://www.medpac.gov/chapters/Mar08_Ch05.pdf 

 http://www.medpac.gov/chapters/Jun07_Ch07.pdf 

 http://www.medpac.gov/chapters/Mar07_Ch04.pdf 

 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/congressional_reports/June05_ch1.pdf 

 http://www.medpac.gov/publications/congressional_reports/June04_ch1.pdf 

 http://www.medpac.gov/documents/MedPAC_Payment_Basics_08_PartD.pdf 

 

• Analysis of Medicare spending on Part B drugs can be found in MedPAC’s January 2007 and 

January 2006 Reports to the Congress. 

 http://www.medpac.gov/documents/Jan07_PartB_mandated_report.pdf 

 http://www.medpac.gov/publications/congressional_reports/Jan06_Oncology_mandated_report.pdf 

 

• A series of Kaiser Family Foundation fact sheets data spotlights provide information on the 

Medicare Part D benefit. 

 

 http://www.kff.org/medicare/rxdrugbenefit.cfm 

• CMS information on Part D enrollment 

 

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

S E C T I O N

Other services

Dialysis 

Hospice 

Clinical laboratory 

A Data Book: Healthcare spending and the Medicare program, June 2009 181

Chart 12-1. Number of dialysis facilities is growing and share of 

for-profit and freestanding dialysis providers is 

increasing 

Average annual 

percent change

 1998 2003 2008 1998–2008 2003–2008 

Total number of 

 Dialysis facilities 3,394 4,240 4,957 4% 3% 

 Hemodialysis stations 52,827 72,171 86,744 5 4 

 

Mean number of 

 Hemodialysis stations 16 17 17 1 <1 

Percent of all facilities: 

 Nonchain N/A 29% 21% N/A –3 

 Affiliated with any chain N/A 71 79 N/A 5 

 Affiliated with largest two chains N/A 56 59 N/A 4 

 Hospital based 21% 16 12 –2 –2 

 Freestanding 79 84 88 5 4 

 Rural 25 25 25 4 3 

 Urban 75 75 75 4 3 

 For profit 75 76 81 5 4 

 Nonprofit 25 24 19 1 –1 

 

Note: N/A (not available). Nonprofit includes facilities designated as either nonprofit or government. 

 

Source: Compiled by MedPAC from the CMS facility survey file and Dialysis Compare file. 

 

• Between 1998 and 2008, the number of freestanding and for-profit facilities increased, while 

hospital-based and nonprofit facilities decreased. Freestanding facilities increased from 

79 percent to 88 percent of all facilities, and for-profit facilities increased from 75 percent to 

81 percent of all facilities. 

• Two national for-profit chains own about 60 percent of all facilities and 70 percent of all 

freestanding facilities. 

• Between 1998 and 2008, the proportion of facilities located in rural areas has remained 

relatively constant. 

• The number of facilities has increased 4 percent per year since 1998. The size of a facility 

has remained about the same, as evidenced by the mean number of hemodialysis stations 

per facility, which increased from 16 in 1998 to 17 in 2008. 
182 Other services

Chart 12-2. Medicare spending for outpatient dialysis services 

furnished by freestanding dialysis facilities, 

1996 and 2007 

$2.1

$1.0 $5.1

$2.5

1996 2007

0

1

2

3

4

5

6

7

8

D

ollars ( ni bill oi ns)

Drugs

Composite rate services

32%

68%

33%

67%

Source: Compiled by MedPAC from the 1996 and 2007 institutional outpatient files from CMS. 

• Between 1996 and 2007, 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 9 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. 
A Data Book: Healthcare spending and the Medicare program, June 2009 183

Chart 12-3. Dialysis facilities’ capacity increased between 1998 

and 2008 

3,394

4,957

52.8

86.7

1998 2008

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

Dialysis fa

cilities

35

40

45

50

55

60

65

70

75

80

85

90

95

100

H

e

m

o

dia

yl sis s at tions (in ht ousands)

Source: Compiled by MedPAC from the 1998 Facility Survey file from CMS and the 2008 Dialysis Compare database from CMS. 

• Providers have met the demand for furnishing care to an increasing number of dialysis 

patients by opening new facilities. In 2008, a facility had an average of about 17 

hemodialysis stations. 

• Between 1998 and 2008, the total number of dialysis facilities grew by about 4 percent 

annually, and the number of hemodialysis stations grew by 5 percent annually. 
184 Other services

Chart 12-4. Characteristics of dialysis patients, by type of 

facility, 2007 

0%

10%

20%

30%

40%

50%

60%

Elderly (age

75+ years)

Female African

American 

Hispanic Medicaid Diabetes Hypertension

Patient characteristic

Percent of patients

LDOs Not LDOs Freestanding Hospital-based

Note: LDO (large dialysis organization), ESRD (end-stage renal disease). The facility types are not mutually exclusive (see text). 

Source: MedPAC analysis of dialysis claims files, denominator files, Renal Management Information System files, and Dialysis 

Compare files from CMS. 

• Across the different provider types, the proportion of patients who are elderly, female, 

African American, Hispanic, and dually eligible for Medicaid does not differ by more than 1 

percentage point between 2006 and 2007 (data not shown for 2006). 

• This analysis suggests that providers have not changed the mix of patients they care for 

between 2006 and 2007, including the large dialysis organizations, which account for about 

60 percent of all facilities. 

• In 2006 and 2007, freestanding facilities were more likely than hospital-based facilities to 

treat African Americans and dual eligibles. Freestanding facilities account for about 88 

percent of all dialysis facilities. 

Primary cause of ESRD 
A Data Book: Healthcare spending and the Medicare program, June 2009 185

Chart 12-5. The ESRD population is growing, and most ESRD 

patients undergo dialysis 

 1996 2001 2006 

 Patients Patients Patients 

 (thousands) Percent (thousands) Percent (thousands) Percent 

Total 307.7 100% 411.6 100% 506.3 100% 

Dialysis 223.8 73 296.5 72 354.8 70 

 In-center hemodialysis 190.2 62 268.3 65 325.3 64 

 Home hemodialysis 2.9 1 1.9 <1 2.5 <1 

 Peritoneal dialysis 29.6 10 25.3 6 26.1 5 

 Unknown 1.1 <1 1.0 <1 0.9 <1 

 

Functioning graft and 

 kidney transplants 83.9 27 115.1 28 151.5 30 

 

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 5 percent annually 

between 1996 and 2006. 

• 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. Between 1996 and 2006, hemodialysis use grew, while use of the two types of 

dialysis administered in patients’ homes—peritoneal dialysis and home hemodialysis—

declined. 

• 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. In 2006, 36 percent of the kidneys were from living donors and 64 percent were 

from cadaver donors. 
186 Other services

Chart 12-6. Diabetics, the elderly, Asian Americans, and 

Hispanics are among the fastest growing segments 

of the ESRD population 

 Percent Average annual 

 of total percent change 

 in 2006 1998–2006 

Total (n = 506,256) 100% 5% 

Age 

 0–19 1 2 

 20–44 19 1 

 45–64 44 6 

 65–74 20 4 

 75+ 16 6 

Sex 

 Male 56 5 

 Female 44 4 

Race/Ethnicity 

 White 61 5 

 African American 32 4 

 Native American 1 4 

 Asian American 5 8 

 Hispanic 14 9 

 Non-Hispanic 86 4 

Underlying cause of ESRD 

 Diabetes 37 6 

 Hypertension 24 4 

 Glomerulonephritis 16 3 

 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, 36 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 1998 and 2006. 

Among the fastest growing groups of patients include those who are over age 75, Asian 

Americans, Hispanics, and those with diabetes as the cause of kidney failure. 
A Data Book: Healthcare spending and the Medicare program, June 2009 187

Chart 12-7. Aggregate margins vary by type of freestanding 

 dialysis facility, 2007 

 Percentage of Medicare payments 

Type of facility going to freestanding facilities Aggregate margin 

All facilities 100% 4.8% 

Urban 82 5.1 

Rural 18 3.1 

Large dialysis organizations 68 6.9 

Non large dialysis organizations 32 0.2 

 

Note: Margins include payments and costs for composite rate services and injectable drugs. 

Source: Compiled by MedPAC from the 2007 cost reports and the 2007 institutional outpatient file from CMS. 

• For 2007, the aggregate Medicare margin for composite rate services and injectable drugs 

was 5.9 percent. 

• As in earlier years, we continue to see higher margins for facilities affiliated with the largest 

two chains. This finding stems from differences in the composite rate cost per treatment and 

drug payment per treatment. Compared with their counterparts, the composite rate cost per 

treatment was lower and the drug payment per treatment was higher for the two largest 

chains. 
188 Other services

Chart 12-8. Use of hospice among Medicare beneficiaries 

increased from 2000 to 2007 

 Average annual 

 percent change 

 2000 2007 2000–2007 

Beneficiaries in hospice 513,000 1,000,000 10% 

 

Payments (in billions) $2.9 $10.1 20 

 

Source: 2000 data from CMS analysis of 100 percent hospice claims standard analytic file: 

http://www.cms.hhs.gov/ProspMedicareFeeSvcPmtGen/downloads/FY05update_hospice_expenditures_and_units_of_ 

care.pdf. 2007 data from MedPAC analysis of 100 percent hospice claims standard analytic file from CMS. 

• The number of Medicare beneficiaries electing hospice almost doubled between 2000 and 

2007, suggesting that access to hospice care has grown. 

• Total Medicare payments to hospices increased by nearly 250 percent, or about 20 percent 

per year, between 2000 and 2007 due to increased enrollment and longer lengths of stay. 
A Data Book: Healthcare spending and the Medicare program, June 2009 189

Chart 12-9. Rapid growth in Medicare hospice spending 

projected to continue 

10.6

11.7

12.7 13.3

14.2

15.2

16.4

17.5

18.8

20.1

21.6

23.1

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Year

0

5

10

15

20

25

Billions of dol al rs

Note: 2007–2008 are incurred expenses; 2009 forward are projections. 

Source: CMS Office of the Actuary. 

• Medicare spending for hospice was nearly $12 billion in 2008. 

• The CMS Office of the Actuary projects that Medicare spending for hospice will almost 

double in the next 10 years. 
190 Other services

Chart 12-10. Number of Medicare-participating hospices has 

 increased, largely driven by for-profit hospices 

2000 2002 2004 2006 2007 2008

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Number of pro

v di ers

Nonprofit

For profit

Government

Voluntary closures

Source: CMS Providing Data Quickly Query, May 15, 2009, https://pdq.cms.hhs.gov/index.jsp. 

• There were over 3,300 Medicare-participating hospices in 2008. A majority of these were 

for-profit hospices. 

• For-profit hospices have made up over 90 percent of hospices that began participating in 

Medicare since 2000. 

• Between 2002 and 2008, an average of just over 40 hospices voluntarily exited the 

Medicare program in any given year. 
A Data Book: Healthcare spending and the Medicare program, June 2009 191

Chart 12-11. Hospice length of stay, by diagnosis, 2006 

 Percent of cases with 

 Diagnosis share length of stay 

 of total cases greater than 180 days 

 

Cancer (except lung cancer) 24% 9% 

Circulatory, except heart failure 11 19 

Lung cancer 10 8 

Heart failure 8 20 

Debility, NOS 8 21 

Alzheimer’s and similar disease 6 31 

Chronic airway obstruction, NOS 6 24 

Unspecific symptoms / signs 6 21 

Dementia 5 26 

Organic psychoses 4 25 

Genitourinary disease 3 5 

Nervous system, except Alzheimer’s 3 28 

Respiratory diseases 3 12 

Other 2 13 

Digestive diseases 2 9 

All 100 17 

Note: NOS (not otherwise specified). Totals may not sum to 100 percent due to rounding. 

Source: MedPAC analysis of 2006 100 percent hospice claims standard analytical file from CMS. 

• In 2006, the most common terminal diagnosis among Medicare hospice patients was 

cancer, accounting for roughly one-third of patients. The next most common diagnoses were 

heart failure and other circulatory conditions (nearly 20 percent of cases) and Alzheimer’s 

disease and dementia (11 percent of cases). 

• Length of stays varies by diagnosis. At least a quarter of hospice patients with Alzheimer’s 

disease, neurological conditions, dementia, or organic psychoses had length stay exceeding 

180 days. Long hospice stays were least common among beneficiaries with cancer, 

digestive diseases, or genitourinary disease. 
192 Other services

Chart 12-12. Substantial variation exists across hospices in the 

 prevalence of long stay patients 

8%

13%

18%

25%

0%

5%

10%

15%

20%

25%

30%

20th Percentile 40th Percentile 60th Percentile 80th Percentile

Hospices by percent of stays exceeding 180 days

Percent of stays exceeding 180 days

Source: MedPAC analysis of 2006 100 percent hospice claims standard analytic file from CMS. 

• The 20 percent of hospices with the most long stay patients have one-quarter or more of 

their cases with stays exceeding 180 days. Among these hospices, on average 34 percent 

of stays exceeded 180 days. 

• The 20 percent of hospices with the fewest long stay patients have less than 8 percent of 

their cases with stays exceeding 180 days. 
A Data Book: Healthcare spending and the Medicare program, June 2009 193

Chart 12-13. Hospice Medicare margins increase with length of 

 stay, 2001–2006 

1 2 3 4 5 6 7 8 9 10

LOS decile

-15

-10

-5

0

5

10

15

20

25

30

35

M

arg ni

2001

2002

2003

2004

2005

2006

Note: LOS (length of stay). Data are for freestanding facilities. Margins are before the return of overpayments received by 

hospices that exceed the cap on the average annual Medicare payment per beneficiary. 

Source: MedPAC analysis of Medicare hospice cost reports, 100 percent hospice claims standard analytical file, and Medicare 

Provider of Services data from CMS. 

• Medicare’s per-diem-based payment system for hospice provides an incentive for longer 

lengths of stay. 

• Profitability of Medicare hospice episodes (prior to the return of overpayments by hospices 

that exceed the cap) increases with length of stay. 
194 Other services

Chart 12-14. Characteristics of institutionalized and 

 noninstitutionalized Medicare hospice 

 beneficiaries, 2006 

Hospice beneficiaries 

 Institutionalized Noninstitutionalized 

 

Percent of all hospice beneficiaries 18.0% 82.0% 

Percent eligible for Medicare and Medicaid 51.1 16.6 

Average age (in years) 84.6 80.0 

Percent female 72.5 54.9 

Percent of all beneficiaries by diagnosis 

 Ill-defined debility 12.7 6.2 

 Alzheimer’s disease 11.8 4.1 

 Circulatory diseases 11.1 10.7 

 Dementia 10.5 2.7 

 Cancer (lung and other) 10.2 41.9 

 Unspecific symptoms/signs 9.6 4.4 

 Heart failure 7.2 8.1 

 Organic psychosis 7.2 2.3 

 Chronic airway obstruction, not otherwise specified 4.1 5.7 

 Multiple diagnoses during episode 3.6 2.7 

 Genitourinary diseases 3.6 3.4 

 Nervous system 3.4 2.2 

 Respiratory diseases 2.1 2.8 

 Other 2.0 1.8 

 Digestive diseases 0.9 1.7 

Note: Institutionalized beneficiaries are defined as beneficiaries who spent at least 90 days in a nursing facility leading up to or 

during their hospice stay. 

Source: MedPAC analysis of 100 percent hospice claims standard analytic file and beneficiary data from CMS for 2006. 

• Medicare hospice patients residing in institutions (i.e., nursing facilities) were on average 

older and more likely to be female and dually eligible for Medicare and Medicaid than 

hospice patients residing in the community. 

• Institutionalized beneficiaries were more likely than beneficiaries living in the community to 

have the terminal diagnoses that typically incur long hospice stays, such as Alzheimer’s, 

dementia, and ill-defined debility. 

• Overall, institutionalized beneficiaries had hospice stays that were over 50 percent longer 

than their counterparts residing in the community. For most terminal diagnoses, 

institutionalized beneficiaries had longer hospice lengths of stay than beneficiaries residing 

in the community with the same diagnosis. 
A Data Book: Healthcare spending and the Medicare program, June 2009 195

Chart 12-15. Comparison of hospice providers with a low and 

high proportion of their Medicare patients residing 

in institutions 

 Low-institutionalized High-institutionalized 

 hospices hospices 

 (less than 15 percent (more than 40 percent 

 institutionalized) institutionalized) 

Number of providers serving institutionalized 

 beneficiaries, 2006 1,329 290 

Average percent of institutionalized beneficiaries 

 as proportion of caseload, 2006 9% 52% 

Percent, 2006: 

 Freestanding 57 80 

 For profit 45 72 

 Urban 68 74 

Average length of episode (in days), 2005 79 117 

Percent of stays above 180 days, 2005 14 24 

Note: Low- and high-institutionalized hospices are defined based on the percent of Medicare patients institutionalized—less 

than 15 percent and more than 40 percent. Patients are considered institutionalized if they spent at least 90 days in a 

nursing facility leading up to or during their hospice stay. 

Source: MedPAC analysis of 100 percent hospice claims standard analytic file and beneficiary data for 2004, 2005, and 2006 from

CMS. 

• Hospices with a large share of their Medicare patients institutionalized are more likely to be 

freestanding, for profit, and urban compared with hospices with few institutionalized patients. 

• Compared to hospices with a small institutionalized caseload, high institutionalized hospices 

had episode lengths that averaged about 50 percent longer and had almost twice the 

proportion of stays exceeding 180 days. 
196 Other services

Chart 12-16. Medicare spending for clinical laboratory services, 

fiscal years 1998–2008 

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

1

2

3

4

5

6

7

8

Dol al rs ( ni billions)

2.2 2.1 2.2 2.4 2.7 2.9 3.2 3.5 3.7 4.0 4.2

1.5 1.6 1.7

1.9

2.2

2.4

2.7

2.9

3.2 2.8

3.0

Hospital based

Independent and physician office

3.7 3.7 3.9

4.3

4.9

5.3

5.9

6.4

6.9 6.8

7.1

Note: Spending is for services paid under the clinical laboratory fee schedule. Hospital-based services are furnished to 

outpatients in labs owned or operated by hospitals. Total spending appears on top of each bar. The segments of each bar 

may not sum to the totals on top of each bar due to rounding. 

Source: CMS, Office of the Actuary. 

• Medicare spending for clinical laboratory services grew by an average of 8.0 percent per 

year between 1998 and 2006. This growth was driven by rising volume, as there was only 

one increase in lab payment rates during those years. Spending declined by 0.5 percent 

between 2006 and 2007 due to a drop in hospital-based lab spending, and increased by 4.4 

percent between 2007 and 2008. 

• In 2008, Medicare spent $7.1 billion (1.5 percent of total program spending) on clinical lab 

services. 

• Hospital-based labs’ share of total clinical lab spending increased from 41 percent in 1998 to 

46 percent in 2006, but fell to 42 percent in 2007 and 2008. 

 
A Data Book: Healthcare spending and the Medicare program, June 2009 197

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/documents/MedPAC_Payment_Basics_08_dialysis.pdf 

• The U.S. 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 and Digestive and 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 2008 Report to the Congress provides information about 

the financial performance of dialysis facilities. 

http://www.medpac.gov/chapters/Mar09_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%5Ccongressional_reports%5CJune05_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 

• MedPAC’s comment on revisions to payment policies under the physician fee schedule for 

calendar year 2009 includes changes in how to pay for dialysis services 

 http://www.medpac.gov/documents/Physician%20fee%20schedule%202009%20NPRM%20

 comment%20letter%20to%20CMS.pdf 
198 Other services

Hospice 

• More information on Medicare’s payment system for hospice services can be found in MedPAC’s 

Payment Basics series. 

 http://www.medpac.gov/documents/MedPAC_Payment_Basics_08_hospice.pdf. 

• Additional information and analysis related to the Medicare hospice benefit, including 

recommendations for reforms to the hospice payment system, can be found in Chapter 6 of 

MedPAC’s June 2009 Report to the Congress, available at 

 http://www.medpac.gov/chapters/Mar09_ch06.pdf 

• Information and analysis related to the Medicare hospice benefit, with a specific focus on the hospice 

cap can be found in Chapter 8 of MedPAC’s June 2008 Report to the Congress, available at 

 http://www.medpac.gov/chapters/Jun08_Ch08.pdf 

• General analysis and information 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/congressional_reports/Jun06_Ch6.pdf 

 

• Chapter 6 of 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 

useful benchmark information on hospice utilization early in this decade: 

 http://www.medpac.gov/publications/congressional_reports/may2002_HospiceAccess.pdf 

• The Centers for Medicare & Medicaid Services (CMS) maintains a variety of information related to the 

hospice benefit. 

 

 http://www.cms.hhs.gov/center/hospice.asp 

• CMS also provides information on hospice for its beneficiaries: 

 http://www.medicare.gov/Publications/Pubs/pdf/02154.pdf 

Clinical laboratory 

• More information on Medicare’s payment system for clinical lab services can be found in MedPAC’s 

Payment Basics series. 

http://medpac.gov/documents/MedPAC_briefs_Payment_Basics_08_clinical_lab.pdf 

• Information about CMS’s 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 
601 New Jersey Avenue, NW • Suite 9000 • Washington, DC 20001

(202) 220-3700 • Fax: (202) 220-3759 • www.medpac.gov