A DATA BOOK 

Healthcare Spending 

and the 

Medicare Program 

J UNE 2008
A DATA BOOK 

Healthcare Spending 

and the 

Medicare Program 

J UNE 2008

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. 

Some charts in this Data Book present margins for providers operated by governmental entities. 

Margins for these providers should be treated cautiously because of the special context in which 

they operate. 

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. 

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

MedPAC website: www.medpac.gov. 

v 

Table of contents 

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

Sections 

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

1-1 Aggregate Medicare spending among FFS beneficiaries, by sector, 2000–2007 ............................3

1-2 Per capita Medicare spending among FFS beneficiaries, by sector, 2000–2007.............................4

1-3 Medicare made up over one-fifth of spending on personal health care in 2006 ..............................5

1-4 Medicare’s share of total spending varies by type of service, 2006 ................................................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, 2005 ................12

1-11 Medicare HI trust fund is projected to be insolvent in 2019..........................................................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

Web links ......................................................................................................................................17

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

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

spending, 2005 ...............................................................................................................................21

2-2 Medicare spending rises as beneficiaries age, 2005 ......................................................................22

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

Medicare spending, 2005...............................................................................................................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, 2005 .........................................................................25

2-6 Characteristics of the Medicare population, by rural and urban residence, 2005 ..........................26

Web links ......................................................................................................................................27

3 Dual-eligible beneficiaries............................................................................................ 29 

3-1 Dual-eligible beneficiaries account for a disproportionate share of Medicare spending, 2005.....31

3-2 Dual eligibles are more likely than nondual eligibles to be disabled, 2005...................................32

3-3 Dual eligibles are more likely than nondual eligibles to report poorer health status, 2005 ...........33
vi 

3-4 Demographic differences between dual eligibles and nondual eligibles, 2005 .............................34

3-5 Differences in spending and service use between dual eligibles and nondual eligibles, 2005 ......35

3-6 Both Medicare and total spending are concentrated among dual-eligible beneficiaries, 2005......36

3-7 Dual-eligible beneficiaries report generally good access to care...................................................37

Web links ......................................................................................................................................38

4 Quality of care in the Medicare program................................................................... 39 

4-1 Hospital mortality decreased, 2004–2006......................................................................................41

4-2 Safety of care: Adverse events affect many hospitalized beneficiaries, 2004–2006 .....................42

4-3 Most ambulatory care indicators show improvement or stability, 2004–2006..............................43

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

4-5 The quality of dialysis care has improved for some measures.......................................................45

4-6 Changes in patient safety indicators for long-term care hospitals, 2004–2006 .............................46

4-7 Medicare Advantage plan quality measures for 2002–2006 do not show improvement in 

the most recent time period............................................................................................................47

4-8 Mixed quality results for SNFs between 2000 and 2005 ...............................................................48

Web links ......................................................................................................................................49

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

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

5-2 Access to physicians is similar for Medicare beneficiaries and privately insured people .............54

5-3 Physicians’ acceptance of new patients is highest for private PPO and Medicare 

patients, 2006 .................................................................................................................................55

5-4 Ethnic and racial disparities in delaying or failing to receive care, 2006 ......................................56

5-5 Beneficiaries differ in their reports of timeliness in obtaining urgent or routine care, 2006 .........57

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

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

6-1 Sources of supplemental coverage among noninstitutionalized Medicare beneficiaries, 2005.....61

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

by beneficiaries’ characteristics, 2005...........................................................................................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 payments for hospital inpatient and outpatient services, 1996–2006 ........71

7-2 Major diagnostic categories with highest volume, fiscal year 2006 ..............................................72

7-3 Number of acute care hospitals and Medicare discharges, by hospital group, 2006 .....................73

7-4 Cumulative change in total admissions and total outpatient visits, 1996–2006.............................74

7-5 Trends in Medicare and total hospital length of stay, 1996–2006 .................................................75

7-6 Hospital occupancy rates, 1997–2006 ...........................................................................................76

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

7-8 Cumulative change in Medicare discharges and days of care per beneficiary, 1996–2006...........78

7-9 Medicare inpatient payments, by source and hospital group, 2006 ...............................................79

7-10 Medicare acute inpatient PPS margin, 1995–2006 ........................................................................80

7-11 Medicare acute inpatient PPS margin, by urban and rural location, 1995–2006...........................81

7-12 Overall Medicare margin, 1997–2006 ...........................................................................................82

7-13 Overall Medicare margin, by urban and rural location, 1997–2006..............................................83

7-14 Hospital total margin, 1995–2006..................................................................................................84

7-15 Hospital total margin, by urban and rural location, 1995–2006 ....................................................85

7-16 Hospital total margin, by teaching status, 1995–2006 ...................................................................86

7-17 Financial pressure leads to lower costs..........................................................................................87

7-18 Medicare margins by teaching and disproportionate share status, 2006........................................88

7-19 Relationship between hospitals’ uncompensated care costs and disproportionate 

share payments, 2003.....................................................................................................................89

7-20 Change in Medicare hospital inpatient costs per discharge and private payer 

payment-to-cost ratio, 1986−2006 .................................................................................................90

7-21 Markup of charges over costs for all patient care services, 1996–2006 ........................................91

7-22 Number of critical access hospitals, 1999–2008............................................................................92

Specialty psychiatric facilities

7-23 Medicare payments to inpatient psychiatric facilities (in billions), 1998–2007 ............................93

7-24 Inpatient psychiatric facilities, 2000–2007 ....................................................................................94

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

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

Physicians

8-1 FFS Medicare spending and payment updates for physician services, 1998–2011.......................99

8-2 Medicare spending per FFS beneficiary on physician services, 1999–2011 ..............................100

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

8-4 Continued growth in the use of physician services per beneficiary, 2000–2006........................102

8-5 Correlation between physicians’ 2002 and 2003 efficiency scores, multilevel and 

Monte Carlo models....................................................................................................................103

Hospital outpatient services

8-6 Spending on all hospital outpatient services, 1997–2007 ...........................................................104

8-7 Most hospitals provide outpatient services .................................................................................105

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

of service, 2006...........................................................................................................................106
viii 

8-9 Hospital outpatient services with the highest Medicare expenditures, 2006 ..............................107

8-10 Medicare coinsurance rates, by type of hospital outpatient service, 2006..................................108

8-11 Transitional corridor payments as a share of Medicare hospital outpatient payments, 

2004–2006 ..................................................................................................................................109

8-12 Medicare hospital outpatient, inpatient, and overall Medicare margins, 2000–2006 .................110

Ambulatory surgical centers

8-13 Number of Medicare-certified ASCs increased over 60 percent, 2000–2007 ............................111

Imaging services

8-14 Medicare spending for imaging services, by type of service, 2006............................................112

8-15 Radiologists received about 40 percent of Medicare payments for imaging services, 2006 ......113

Web links ...................................................................................................................................114

9 Post-acute care ........................................................................................................... 117 

9-1 Growth in post-acute care providers has moderated, but home health agencies continue 

to increase ...................................................................................................................................119

9-2 Spending for post-acute care has risen in each setting between 2000 and 2007.........................120

9-3 Use of post-acute care after discharge from acute care hospitals, 2006 .....................................121

Skilled nursing facilities

9-4 Ten most common diagnoses among Medicare SNF patients accounted for more than a 

third of SNF admissions in 2005 ................................................................................................122

9-5 SNF volume per fee-per-service enrollee continues to increase.................................................123

9-6 A growing share of Medicare stays and payments go to freestanding and for-profit SNFs .......124

9-7 Case mix in freestanding SNFs shifted toward extensive services plus rehabilitation RUGs ....125

9-8 Rehabilitation stays in freestanding SNFs continue to shift toward high-intensity RUGs .........126

9-9 Freestanding SNF Medicare margins have exceeded 10 percent for six years...........................127

9-10 Costs per day are higher in hospital-based SNFs........................................................................128

9-11 Percent of SNF cases discharged to different post-acute care settings, 2006 .............................129

Home health agencies

9-12 Spending for home health care, 1994–2007................................................................................130

9-13 Trends in the provision of home health care...............................................................................131

9-14 The home health product changed after the prospective payment system started ......................132

9-15 Margins for freestanding home health agencies .........................................................................133

Long-term care hospitals

9-16 The top 15 LTC–DRGs made up more than 60 percent of cases in LTCHs in 2006 .................134

9-17 Spending for long-term care hospital services increased rapidly under PPS..............................135

9-18 LTCHs’ payments have risen faster than their costs under the PPS...........................................136

9-19 All types of LTCHs’ Medicare margins increased under PPS....................................................137
ix 

Inpatient rehabilitation facilities

9-20 Most common types of cases in inpatient rehabilitation facilities, 2007 ....................................138

9-21 The number of IRFs has remained generally stable under the PPS, but has declined in 

recent years .................................................................................................................................139

9-22 Prior trend in volume of IRF cases reversed between 2004 and 2006........................................140

9-23 Per case payments for IRFs have risen faster than costs, post-PPS ............................................141

9-24 Inpatient rehabilitation facilities’ Medicare margin by type, 2000–2006...................................142

Web links ...................................................................................................................................143

10 Medicare Advantage.................................................................................................. 145 

10-1 Access to MA plans available to all Medicare beneficiaries ......................................................147

10-2 Access to zero-premium plans with MA drug coverage, 2006, 2007, and 2008 ........................148

10-3 Enrollment in MA plans, 1994–2008..........................................................................................149

10-4 Enrollment in local coordinated care plans grew slower than in other major plan types ...........150

10-5 MA enrollment by state and type of plan, 2008..........................................................................151

10-6 Different requirements and provisions apply to different types of MA plans ............................152

10-7 MA plan benchmarks, bids, and Medicare program payments relative to FFS 

spending, 2008 ............................................................................................................................153

10-8 Enrollment in employer-group MA plans, 2006–2008...............................................................154

10-9 Special needs plans have grown quickly.....................................................................................155

10-10 The number of SNPs and SNP enrollment increased from 2007 to 2008...................................156

Web links ...................................................................................................................................157

11 Drugs ........................................................................................................................... 159 

11-1 Medicare spending for Part B drugs ...........................................................................................161

11-2 Top 10 drugs covered by Medicare Part B, by share of expenditures, 2006 ..............................162

11-3 Part D enrollment and other sources of drug coverage...............................................................163

11-4 Defined standard benefit parameters increase over time ...........................................................164

11-5 Characteristics of Medicare PDPs ..............................................................................................165

11-6 Average Part D premiums...........................................................................................................166

11-7 Characteristics of MA–PDs ........................................................................................................167

11-8 Geographic distribution of PDPs in 2008 ...................................................................................168

11-9 Distribution of 2007 Part D enrollees by organization ...............................................................169

11-10 In 2007, most Part D enrollees were in plans that charged higher copayments for 

nonpreferred brand name drugs ..................................................................................................170

11-11 More enrollees were in Part D plans that used specialty tiers in 2007 .......................................171

11-12 PDPs and MA–PDs listed similar numbers of drugs on their formularies in 2007 ....................172

11-13 The average percent of drugs listed in each therapeutic category depends on therapeutic 

class size and regulation..............................................................................................................173

11-14 PDPs and MA–PDs applied utilization management tools similarly in 2007.............................174

Web links ...................................................................................................................................175
x 

12 Other services ............................................................................................................. 177 

Dialysis

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

providers is increasing ................................................................................................................179

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

facilities, 1996 and 2006.............................................................................................................180

12-3 Dialysis facilities’ capacity increased between 1997 and 2007..................................................181

12-4 Characteristics of dialysis patients, by type of facility, 2006 .....................................................182

12-5 The ESRD population is growing, and most ESRD patients undergo dialysis...........................183

12-6 Diabetics, the elderly, Asians, and Hispanics are among the fastest growing segments of 

the ESRD population ..................................................................................................................184

12-7 Aggregate margins vary by type of freestanding dialysis facility, 2006.....................................185

Hospice

12-8 Rapid growth in Medicare hospice spending projected to continue ...........................................186

12-9 Number of Medicare-participating hospices has increased, largely driven by 

for-profit hospices.......................................................................................................................187

12-10 Hospices that exceeded Medicare’s annual payment cap, 2002–2005 .......................................188

12-11 Number of unique beneficiaries using hospice, fiscal years 1995–2005....................................189

12-12 Long hospice stays are getting longer, while short stays persist.................................................190

12-13 Average days per hospice patient, by disease category, below-cap and above-cap hospices, 

all diagnoses, 2005......................................................................................................................191

12-14 Hospice aggregate Medicare margins, 2001–2005 .....................................................................192

12-15 Hospice Medicare margins increase with length of stay, 2001–2005.........................................193

12-16 Hospice Medicare margins are greater for new hospices, 2001–2005........................................194

12-17 Hospice access not compromised by the cap at the 10 states with highest rate of 

Medicare patient hospice election, 2005.....................................................................................195

Clinical laboratory

12-18 Medicare spending for clinical laboratory services, in billions, fiscal years 1997–2007 ...........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 2008 3

Chart 1-1. Aggregate Medicare spending among FFS 

beneficiaries, by sector, 2000–2007 

2000 2001 2002 2003 2004 2005 2006 2007

0

20

40

60

80

100

120

140

160

M

edicare spending (dol al rs in billions)

Hospital inpatient

Physician

Post-acute care

Hospital outpatient

Psych 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 in 2006 and 2007 by large increases in the number of 

Medicare Advantage enrollees, who are not included in these aggregate totals. 

Source: Office of the Actuary at CMS and the 2008 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 and 2007, largely because 

enrollment in FFS Medicare declined because many beneficiaries changed their enrollment 

to a Medicare Advantage plan. However, spending per beneficiary remained strong in most 

sectors through 2006 and 2007 (see Chart 1-2). 
4 National health care and Medicare spending 

Chart 1-2. Per capita Medicare spending among FFS 

beneficiaries, by sector, 2000–2007 

2000 2001 2002 2003 2004 2005 2006 2007

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

M

edicare spending (dol al rs per capita)

Hospital inpatient

Physician

Post-acute care

Hospital outpatient

Psych hospital

ASC

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

beneficiary cost sharing. 

Source: Office of the Actuary at CMS and the 2008 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 2007. This contrasts with a slowing in aggregate spending 

in FFS Medicare in 2006 and 2007 caused by a decline in the number of FFS beneficiaries. 
 A Data Book: Healthcare spending and the Medicare program, June 2008 5

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

personal health care in 2006 

Medicare

22%

Medicaid and all SCHIP

17%

Other public**

7%

Private health insurance

35%

Out of pocket

15%

Other private*

4%

Total = $1.76 trillion

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. 

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

 **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, 2008. 

• Of the $1.76 trillion spent on personal health care in the United States in 2006, Medicare 

accounted for 22 percent, or $381 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-five percent of spending was financed through private health insurance payers and 15 

percent was from consumer out-of-pocket spending. 

• Medicare and private health insurance spending includes premium contributions from 

enrollees. 

• 2006 is the first year that spending for Medicare’s voluntary outpatient prescription drug 

benefit (Part D) is included in the national health accounts. 
6 National health care and Medicare spending 

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

service, 2006 

Hospital Physician and 

clinical services

Home health Nursing home Durable medical 

equipment

Prescription 

drugs

Service type

0

20

40

60

80

100

Share

of spending (percent)

29%

21%

38%

17%

29%

18%

17%

7%

34%

43%

10%

54%

72%

29%

40%

70% 72%

Medicare Medicaid and all SCHIP Other*

0.1%

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, 2008. 

• 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. 

• In 2006, Medicare accounted for 29 percent, 21 percent, 38 percent, 17 percent, 29 percent, 

and 18 percent, of spending on hospital care, physician and clinical services, home health 

services, nursing home care, durable medical equipment, and prescription drugs, 

respectively. 
 A Data Book: Healthcare spending and the Medicare program, June 2008 7

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

GDP, with public financing making up nearly half of 

all funding 

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Health 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, 2008. 

• 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 2006. It is projected to reach nearly 20 percent of GDP in 2017. 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 over 4 percent of GDP by 2017. 

• In 2006, all public spending made up about 46 percent of total health care spending and 

private spending made up 54 percent. By 2017, 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 2006 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

3.1 3.3

4.4

6.3

7.6

8.4

10.7

9.2

10.0

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

Source: 2008 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 nearly 11 percent of GDP in 

2080. 

• With a 9.7 percent annual average rate of growth, nominal Medicare spending grew considerably 

faster over the period from 1980 to 2006 than nominal growth in the economy, which averaged 

6.2 percent per year. Future Medicare spending is projected to continue growing faster than 

GDP, but at a rate somewhat closer to GDP growth: averaging 6.4 percent per year between 

2006 and 2080 compared with an annual average growth rate of 4.6 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. Still, Medicare’s growth rate is nearly 2 percentage points higher 

than GDP growth. 

• 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 2008 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 enrolle

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, 2008. 

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

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

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

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

point lower than that for private insurance over the 1970 to 2006 period. 

• This comparison is sensitive to the endpoints 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 relative to 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. 

Average annual percent change by period: 

 Medicare --- PHI 

1970-2006 8.7 9.7 

1970-1993 10.8 12.0 

1993-1997 6.1 2.8 

1997-1999 1.2 4.2 

1999-2002 5.8 8.7 

2002-2006 5.4 7.7 
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

ollars ( ni billions)

Trustees - high

Trustees - intermediate

CBO

Trustees - low

Actual Projected

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

expenses) by calendar year. 

Source: 2008 annual report of the Boards of Trustees of the Medicare Trust Funds. CBO March 2008 baseline. 

• Medicare spending has grown nearly 12-fold, from $37 billion in 1980 to $432 billion in 2007. 

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

Medicare’s voluntary outpatient prescription drug benefit. 

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

an average annual rate of 7 percent between 2007 and 2017. The Medicare trustees’ 

intermediate projections for 2007 to 2017 assume about 7.4 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 2008 11

Chart 1-9. Medicare spending is concentrated in certain 

services and has shifted over time 

Managed care

13%

Other feefor-service

settings

7%

b

Home 

health

8%

Hospital

inpatient

43%

Hospital

outpatient

8%

Skilled 

nursing

facility

6%

Physician

15%

Hospital

inpatient

30%

Hospital

outpatient

5%

Physician

14%

Skilled 

nursing

facility

5%

Home 

health

4%

Other feefor-service

settings

12%

Outpatient prescription 

drugs provided under

Part D

12%

a

 a

c

Managed care

18%

 Total spending 1997 = $210 billion Total spending 2007 = $428 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, nonhospital 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, 2008. 

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

settings can vary substantially over time. 

• In 2007, Medicare program spending was $428 billion, or nearly $10,500 per enrollee. Inpatient 

hospital services were by far the largest spending category (30 percent), followed by managed 

care (18 percent), physicians (14 percent), outpatient prescription drugs provided under Part D 

(12 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 2007 than it was in 1997, 

falling from 43 percent to 30 percent. Two reasons account for this decline: 1) a shift toward 

providing more care in outpatient settings, and 2) the introduction of Part D beginning in 2006. 

(Medicare did not pay for outpatient prescription drugs in 1997.) Spending on beneficiaries 

enrolled in managed care plans has grown from 13 percent to 18 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, 2005 

Percent of beneficiaries Percent of program spending

0

10

20

30

40

50

60

70

80

90

100

Percent

11%

23%

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 2005, the costliest 5 percent of beneficiaries accounted for 44 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 care, and those who are in the last year of life. 
A Data Book: Healthcare spending and the Medicare program, June 2008 13

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

in 2019 

 Year costs Year HI trust 

Estimate exceed income fund assets exhausted

High 2008 2015 

Intermediate 2010 2019 

Low 2020 2040 

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: 2008 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 project that under intermediate assumptions, HI cost will exceed income 

(including interest income) by 2010 and the HI trust fund will be exhausted in 2019. 

• Under high cost assumptions, the HI trust fund could be exhausted as early as 2015. 

Under low cost assumptions, it would remain solvent until 2040. 
14 National health care and Medicare spending 

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

 financing 

0%

2%

4%

6%

8%

10%

12%

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

Percent of GDP

Payroll taxes

Tax on benefits

Premiums

General revenue 

t f

State transfers

Total expenditures

Actual Projected

HI deficit

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: 2008 annual report of the Boards of Trustees of the Medicare Trust Funds. 

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

rapidly, from about 3 percent of gross domestic product today to 7.1 percent by 2036 and to 

nearly 11 percent by 2080. 

• Medicare’s problems with long-term financing may become more visible to policymakers 

because of a warning system set up in the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003. Each year, the trustees are required to project the share of Medicare 

outlays that is financed with general revenues in the current and six succeeding fiscal years. If 

two consecutive annual reports project that general revenue will fund 45 percent or more of 

Medicare outlays in any given year, then the President must propose and the Congress must 

consider legislation to bring Medicare’s spending below this threshold. In their 2008 report, the 

Medicare trustees projected that the program would hit this 45 percent trigger in 2014, the last 

year of the seven-year projection window. This is the third consecutive report with such a finding. 

As was the case for 2008, the administration must propose and policymakers must consider 

broad changes to Medicare’s benefits and financing in the spring of 2009. 

transfers 
A Data Book: Healthcare spending and the Medicare program, June 2008 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

Monthly amounts per person in 2007 dollars

Actual Projected

Average SMI benefit

Average Social

Security benefit

Average SMI premium

plus cost sharing

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

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

2006 is not shown. 

Source: 2008 annual report of the Boards of Trustees of the Medicare Trust Funds. 

• Between 1970 and 2007, the average monthly Social Security benefit (adjusted for inflation) 

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

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

averages of 5.5 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. From 2003 to 2006, 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. 

• Most beneficiaries who enroll in Medicare’s new prescription drug benefit see lower out-of-pocket 

(OOP) spending. CMS’s Office of the Actuary estimates that in 2006, with Part D coverage, about 10 

percent of elderly Medicare beneficiaries’ total spending for prescription drugs would come from direct 

out-of-pocket spending, compared with roughly 31 percent in the absence of Part D coverage. 

Beneficiaries’ OOP spending on prescription drugs prior to 2006 is not shown in this figure. 

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

Security income. Medicare trustees project that between 2007 and 2037 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. 
16 National health care and Medicare spending 

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

 Number of CY 2007 

 providers, program spending 

Provider type 2007 (billions) 

Inpatient hospitals 6,176a $129.6 

Hospital outpatient PPS 3,884b

 20.7

Physicians, limited license practitioners, 

 and nonphysician practitioners 1,075,571 58.6

Skilled nursing facilities 15,060 22.3 

Home health agencies 9,227 15.5 

Hospices 3,071 10.0 

Ambulatory surgical centers 4,707c

 2.3 

End-stage renal disease facilities 4,798 8.4c 

Clinical laboratories 199,817 6.8d

Durable medical equipment suppliers ~116,000 8.2 

 

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. 

 aShort-stay and non-short-stay hospitals. bAnalysis 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

Numbers are for 2006. 

d

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. 

• Among the more than 6,000 hospitals, 3,375 operate under the inpatient prospective 

payment system, 1,283 are critical access hospitals, 480 are psychiatric hospitals, 391 are 

long-term care hospitals, and 217 are inpatient rehabilitation facilities. 
A Data Book: Healthcare spending and the Medicare program, June 2008 17

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://cms.hhs.gov/NationalHealthExpendData/ 

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

program spending. 

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

• 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/2008b/medicare.pdf 

• MedPAC’s March 2008 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/Mar08_Ch01.pdf 

S E C T I O N 

Medicare beneficiary 

demographics 

A Data Book: Healthcare spending and the Medicare program, June 2008 21

Chart 2-1. Aged beneficiaries account for the greatest 

share of the Medicare population and program 

spending, 2005 

 Percent of enrollees Percent of spending 

Disabled

15%

ESRD

0.5%

Aged

Disabled

12.6%

ESRD

3.1%

Aged

84.4% 84.1%

 

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, 2005. 2005 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 at 

least five times as much as beneficiaries in other categories: $7,085 is spent per (nonESRD) aged beneficiary, $6,225 per (non-ESRD) disabled beneficiary, and $59,417 per 

ESRD beneficiary. On average, Medicare spending per beneficiary is $7,363. 
22 Medicare beneficiary demographics 

Chart 2-2. Medicare spending rises as beneficiaries age, 2005 

 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, 2005. 

• Per capita expenditures increase with age. Per capita expenditures were $5,390 for 

beneficiaries ages 65 to 74, $8,561 for those 75 to 84, and $11,026 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 $7,488. On average, Medicare 

spending per beneficiary was $7,363. 

• 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

31%

85+

12% Under 65

16%

65-74

31%

75-84

36%

85+

18%
A Data Book: Healthcare spending and the Medicare program, June 2008 23

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

account for a disproportionate share of Medicare 

spending, 2005 

 Percent of enrollees Percent of spending 

Poor

9% Poor

19%

Excellent or 

very good

23%

Excellent or 

very good

40%

Good or fair

50%

Good or fair

57%

 

 

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

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

• 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 are $4,286 for those with excellent health, $8,346 for those with good or fair 

health, and $15,705 for those with poor health. On average, Medicare spending per 

beneficiary is $7,363. 
24 Medicare beneficiary demographics 

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

 to grow fastest in the next 30 years 

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

0

10

20

30

40

50

60

70

80

90

100

110

Beneficiaries (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, 2007. 

• The total number of people enrolled in the Medicare program will double between 2000 and 

2030, from about 39 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 2008 25

Chart 2-5. Characteristics of the Medicare population, 2005 

 Percent of the Percent of the 

Characteristic Medicare population* Characteristic Medicare population* 

Total (43,400,577) 100% 

Sex Education 

 Male 44 No high school diploma 28% 

 Female 56 High school diploma only 30 

 Some college or more 41 

Race/ethnicity 

 White, non-Hispanic 78 Income status 

 African American, non-Hispanic 9 Below poverty 16 

 Hispanic 8 100–125% of poverty 9 

 Other 5 125–200% of poverty 20 

Age 200–400% of poverty 31

 < 65 16 Over 400% of poverty 23 

 65–74 42 

 75–84 31 Supplemental insurance status 

85+ 12 Medicare only 11 

Health status Managed care 13

 Excellent or very good 40 Employer 33 

 Good or fair 50 Medigap 20 

 Poor 9 Medigap/employer 5 

Residence Medicaid 16 

 Urban 76 Other 1 

 Rural 24 

Living arrangement 

 Institution 5 

 Alone 28 

 Spouse 49 

 Other 18 

 

 

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

MSAs. In 2005, poverty was defined as income of $9,367 for people living alone and as $11,815 for married couples. 

Totals may not sum to 100 percent due to rounding. 

 *Based on a representative sample of the Medicare population. 

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

• 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, 2005 

 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 6 

 Hispanic 9 3 

 Other 5 5 

Age 

 < 65 15 18 

 65–74 42 42 

 75–84 31 29 

85+ 12 11 

Health status 

 Excellent or very good 42 36 

 Good or fair 50 52 

 Poor 8 12 

 

Income status 

 Below poverty 15 18 

 100–125% of poverty 9 10 

 125–200% of poverty 20 22 

 200–400% of poverty 30 32 

 Over 400% of poverty 25 18 

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

MSAs. In 2005, poverty was defined as income of $9,367 for people living alone and as $11,815 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, 2005. 

• 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 (12 percent vs. 8 percent), and to have incomes below 125 

percent of poverty (28 percent vs. 24 percent) compared to urban beneficiaries. 
A Data Book: Healthcare spending and the Medicare program, June 2008 27

Web links. Medicare beneficiary demographics 

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

http://www.cms.hhs.gov/TheChartSeries/02_CMS_Facts_Figures.asp#TopOfPage 

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

enrollment. 

http://www.cms.hhs.gov/DataCompendium/17_2007_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 2008 31

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

disproportionate share of Medicare spending, 2005 

 Percent of enrollees Percent of spending 

Dual eligible

16%

Nondual eligible

84%

Dual eligible

25%

Nondual eligible

75%

 

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, 2005. 

• 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 25 percent of Medicare 

spending. 

• Dual eligibles cost Medicare about 1.8 times as much as nondual eligibles: $10,994 is spent 

per dual-eligible beneficiary, and $6,212 is spent per non-dual-eligible beneficiary. 

• Total spending⎯which includes Medicare, Medicaid, supplemental insurance, and out-ofpocket spending across all payers⎯for dual eligibles averaged about $23,554 per person in 

2005, over twice the amount for other Medicare beneficiaries. 
32 Dual-eligible beneficiaries

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

to be disabled, 2005 

 Dual eligibles Nondual eligibles

65-74

26%

75-84

23%

85+

13%

65-74

45%

75-84

32%

85+

12% Under 65

(disabled)

39%

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, 2005. 

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

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

eligibles to be age 85 or older. 
A Data Book: Healthcare spending and the Medicare program, June 2008 33

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

to report poorer health status, 2005 

 Dual eligibles Nondual eligibles 

Poor

20%

Good or fair

Poor

7%

Good or fair

48%

Excellent or 

very good

45%

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, 2005. 

 

• 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. 

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

nondual eligibles. 
34 Dual-eligible beneficiaries

Chart 3-4. Demographic differences between dual eligibles and 

nondual eligibles, 2005 

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

Sex 

 Male 38% 45% 

 Female 62 55 

Race/ethnicity 

 White, non-Hispanic 57 83 

 African American, non-Hispanic 19 8 

 Hispanic 15 6 

 Other 9 4 

Limitations in ADLs 

 No ADLs 47 71 

 1–2 ADLs 25 19 

 3–6 ADLs 28 9 

Residence 

 Urban 71 77 

 Rural 28 23 

Living arrangement 

 Institution 19 2 

 Alone 30 28 

 Spouse 18 55 

 Children, nonrelatives, others 32 15 

Education 

 No high school diploma 54 23 

 High school diploma only 24 31 

 Some college or more 18 45 

Income status 

 Below poverty 53 9 

 100–125% of poverty 21 7 

 125–200% of poverty 19 21 

 200–400% of poverty 5 36 

 Over 400% of poverty 1 28 

Supplemental insurance status 

 Medicare or Medicare/Medicaid only 91 13 

 Medicare managed care 2 16 

 Employer 1 40 

 Medigap 1 24 

 Medigap/employer 0 6 

 Other* 5 2 

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

they qualify for other supplemental insurance. Urban indicates beneficiaries living in metropolitan statistical areas (MSAs). 

Rural indicates beneficiaries living outside MSAs. In 2005, poverty was defined as income of $9,376 for people living alone 

and $11,815 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, 2005. 

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

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

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

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

an institution, alone, or with persons other than a spouse. 
A Data Book: Healthcare spending and the Medicare program, June 2008 35

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

 dual eligibles and nondual eligibles, 2005 

 Dual-eligible Non-dual-eligible 

Service beneficiaries beneficiaries 

Average Medicare payment for all beneficiaries 

Total Medicare payments $10,994 $6,212 

Inpatient hospital 4,586 2,618 

Physician* 2,880 2,058 

Outpatient hospital 1,641 749 

Home health 500 311 

Skilled nursing facility** 1,078 317 

Hospice 273 136 

 

Percent of beneficiaries using service 

Percent using any type of service 91.8% 85.2% 

Inpatient hospital 27.818.3 

Physician* 89.683.7 

Outpatient hospital 72.661.3 

Home health 10.67.8 

Skilled nursing facility** 8.67.3 

Hospice 3.11.8 

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, 2005, which updates the previous 

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

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

• Average per capita spending for dual eligibles is over 75 percent higher than for nondual 

eligibles⎯$10,994 compared to $6,212. 

• 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 (SNF), and home health services, for which Medicare spends 

over three times 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⎯92 percent versus 85 percent. 

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

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

among dual-eligible beneficiaries, 2005 

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%

8%

20%

30%

27%

39%

15%

38%

38%

5%

27%

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, 2005. 

• 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 27 percent of total spending, which includes Medicare, Medicaid, supplemental 

insurance, and out-of-pocket spending (compared with 38 percent of Medicare spending). 

• On average, total spending for duals is almost twice as high as that for nonduals—$23,554 

compared to $13,048. 
A Data Book: Healthcare spending and the Medicare program, June 2008 37

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. 
38 Dual-eligible beneficiaries

Web links. Dual-eligible beneficiaries 

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

dual-eligible beneficiaries. 

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

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

http://kff.org 

• The CMS Medicaid 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 2008 41

Chart 4-1. Hospital mortality decreased, 2004–2006 

 Risk-adjusted rates per 10,000 

 eligible discharges 

 Percent change Number of IPPS 

Diagnosis or procedure 2004 2005 2006 2004–2006 deaths in 2006 

 

In-hospital mortality 

 Pneumonia 789 689 618 –22% 45,593 

 Stroke 1,019 951 864 –15 29,720 

 AMI 1,110 1,017 968 –13 27,232 

 CHF 358 308 228 –36 27,659 

 GI hemorrhage 264 226 160 –39 8,563 

 CABG 355 300 246 –31 5,665 

 Craniotomy 814 737 670 –18 3,056 

 AAA repair 956 802 735 –23 1,539 

30-day mortality

 Pneumonia 1,452 1,339 1,283 –12 90,790 

 Stroke 1,767 1,702 1,631 –8 52,189 

AMI 1,570 1,489 1,444 –8 40,037 

 CHF 834 806 717 –14 63,940 

 GI hemorrhage 587 544 473 –19 18,076 

 CABG 366 312 269 –27 5,698 

 Craniotomy 1,094 1,007 986 –12 4,260 

 AAA repair 912 862 814 –11 1,630 

Note: IPPS (inpatient prospective payment system), AMI (acute myocardial infarction), CHF (congestive heart failure), GI 

(gastrointestinal), CABG (coronary artery bypass graft), AAA (abdominal aortic aneurysm). Rate is for discharges eligible 

to be counted in the measure. IPPS deaths are those occurring in hospitals reimbursed under the inpatient prospective 

payment system (does not include deaths in non-IPPS hospitals or Medicare Advantage plans). 

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

• Risk-adjusted in-hospital mortality rates decreased between 2004 and 2006 for all 

diagnoses and procedures measured. The most substantial improvements occurred for 

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

abdominal aortic aneurysm repair. 

• Risk-adjusted 30-day mortality rates (as measured from admission date) also decreased, 

though not in most cases by as much as in-hospital mortality rates. The most substantial 

improvements occurred for coronary artery bypass graft, gastrointestinal hemorrhage, and 

congestive heart failure. 
42 Quality of care in the Medicare program

Chart 4-2. Safety of care: Adverse events affect many 

hospitalized beneficiaries, 2004–2006 

 Observed 

 Risk-adjusted rates per 10,000 Difference adverse 

 2004 2005 2006 2004–2006 events, 2006 

 

Decubitus ulcer 276 282 291 16 156,781 

Failure to rescue 1,114 1,058 984 –131 59,965 

Postoperative PE 

or DVT 98 100 113 15 46,220 

Accidental puncture/ 

laceration 34 35 36 2 38,576 

Selected infections due 

to medical care 25 15 13 –11 16,817 

Postoperative 

respiratory failure 53 59 63 10 12,221 

Iatrogenic 

pneumothorax 8 8 7 – 0.3 10,350 

Postoperative hemorrhage 

or hematoma 17 17 18 2 7,183 

Postoperative sepsis 131 121 133 2 6,643 

Postoperative physiologic 

and metabolic derangement 8 8 6 –2 2,494 

Postoperative wound 

dehiscence 12 15 15 3 1,904 

Postoperative hip fracture 3 3 2 –1 887 

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

difference in rates between 2004 and 2006 may be affected by rounding. 

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

and methods. 

• From 2004 to 2006, 7 of 12 rates of adverse events experienced by Medicare beneficiaries 

increased, indicating a decline in the safety of hospital care. 

• Five of the indicators have seen decreasing rates, indicating increases in safety; these 

improvements include failure to rescue, one of the most common and—because it results in 

death—most severe. 
A Data Book: Healthcare spending and the Medicare program, June 2008 43

Chart 4-3. Most ambulatory care indicators show improvement 

or stability, 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 4-4. Share of home health patients achieving positive 

outcomes continues to increase 

 2003 2004 2005 2006 2007 

Functional/pain measures (higher is better) 

 Improvements in: 

 Walking 34% 36% 38% 40% 42% 

 Getting out of bed 49 51 52 52 53 

 Bathing 57 60 61 63 64 

 Managing oral medications 35 38 39 41 42 

 Patients have less pain 57 59 61 62 63 

Adverse event measures (lower is better) 

 Any hospital admission 28 28 28 28 29 

 Any unplanned emergency room use 21 21 21 21 21 

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 unplanned emergency 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 2008 45

Chart 4-5. The quality of dialysis care has improved for some 

measures 

Outcome measure 2002 2003 2004 2005 

Percent of in-center hemodialysis patients: 

 Receiving adequate dialysis 92% 94% 95% 94% 

 With anemia under control 78 81 80 80 

 Dialyzed with an AV fistula 33 35 39 44 

 With low serum albumin (greater risk of 

 being malnourished) 19 19 18 20 

 

Percent of peritoneal dialysis patients: 

 Receiving adequate CAPD 71 70 73 73 

 Receiving adequate CCPD 66 65 59 59 

 With anemia under control 81 83 82 83 

 With low serum albumin (greater risk of 

 being malnourished) 40 37 38 38 

 

Annual mortality rate per 1,000 patient years 211 208 204 200 

First-year mortality rate per 1,000 patient years 238 235 232 N/A 

Total admissions per patient year 2.04 2.04 2.05 2.01 

 

Hospital days per patient per year 14.6 14.5 14.7 14.3 

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 2002–2005 Annual Reports for ESRD Clinical Performance Measures Project from CMS and 

USRDS 2007. 

 

• The quality of dialysis care has improved for some measures. Between 2002 and 2005, 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 33 percent to 44 percent of 

hemodialysis patients between 2002 and 2005. 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 4-6. Changes in patient safety indicators for long-term 

care hospitals, 2004–2006 

 Risk-adjusted rates per Observed Total number 

 1,000 eligible discharges Change in rate, adverse events of patients 

Patient safety indicator 2004 2005 2006 2005–2006 2006 2006 

 

Decubitus ulcer 98.49 137.56 152.30 10.7% 16,593 103,975 

Infection due to medical 

 care 21.41 24.98 25.57 2.4 2,444 91,934 

Postoperative PE or DVT 35.61 38.89 34.79 –10.5 560 15,940 

Postoperative sepsis 81.68 74.18 75.58 1.9 286 3,158 

Note: PE (pulmonary embolism), DVT (deep vein thrombosis). To control for patient condition on admission to the long-term 

care hospital, eligible discharges include only those with a previous acute hospital stay. Due to a change in methodology, 

this chart cannot be compared with its counterparts in previous MedPAC data books. 

Source: MedPAC analysis of MedPAR data from CMS. 

• These rates suggest that safety for long-term care hospital (LTCH) patients has 

deteriorated. The rates for three of four patient safety indicators (PSIs) increased from 2005 

to 2006, although the rate for one PSI, postoperative pulmonary embolism or deep vein 

thrombosis, declined. 

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

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

treated in LTCHs in 2004, 2005, and 2006. These PSIs had enough observations for the 

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

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

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

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

who had these conditions in the acute care hospital. The PSIs are risk adjusted so these 

indicators should not reflect a changing LTCH patient population over time. 
A Data Book: Healthcare spending and the Medicare program, June 2008 47

Chart 4-7. Medicare Advantage plan quality measures for 

2002–2006 do not show improvement in the most 

recent time period 

Measure 2002 2003 2004 2005 2006 

Measures for which higher scores are better 

 Beta-blocker treatment after heart attacka

 — a 92.9 94.0 93.8 93.7 

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

 Colorectal cancer screening N/R 49.5 52.6 53.9 53.3 

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

 Osteoporosis management in women with fracture N/R 18.0 19.0 20.1 21.8 

 Comprehensive diabetes care 

 Eye examsa

 — a 64.9 67.1 66.5 62.3 

 HbA1c testing 85.0 87.9 89.1 88.9 87.2 

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

 Antidepressant medication managementb

 

 Acute phase 52.1 53.3 56.3 54.9 58.2 

 Continuation phase 37.7 39.2 42.1 41.0 41.0 

 Contacts 10.8 10.5 11.9 11.8 11.4 

 

 Follow-up after hospitalization for mental illness 

 Less than 7 days 38.7 38.8 40.2 39.1 36.5 

 Less than 30 days 60.6 60.3 60.7 59.3 55.8 

Measures for which lower scores are better 

 Comprehensive diabetes care 

 Poor HbA1c control 24.5 23.4 22.5 23.6 27.3 

 

 Use of high-risk medications in the elderly 

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

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

Note: N/R (not reported because measure was not yet in use), HbA1c (hemoglobin A1c). Rates shown 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 who had a heart attack who received beta blockers). 

 a The definition of these measures changed in 2003; therefore 2002 results are not shown. b 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. 

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

NCQA. Data for 2006 were taken from an April 8, 2008 download of the 2007 NCQA report. Earlier versions of the 2007 

report show different scores in some of the measures. 

• Of the 16 measures shown in the table, between 2005 and 2006 six measures remained about the 

same, four improved and six had not improved between 2005 and 2006. (The reports that are the 

basis of these data do not indicate whether changes across years are statistically significant.) 

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

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

Chart 4-8. Mixed quality results for SNFs between 2000 

and 2005 

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 patients

2000

2001

2002

2003

2004

2005

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. 

Source: Kramer et al. 2008. Changes in SNF rates of community discharge and rehospitalization 2000–2005. Study prepared for 

MedPAC available at http://www.medpac.gov. 

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

• Rates of community discharge within 100 days are almost at the same level as five years 

ago, having declined through 2003 and then improved during the past two years. 

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

conditions have steadily increased throughout the period, indicating worse quality. In 2005, 

the mean risk-adjusted facility rehospitalization rate for the five conditions was 17.8 percent, 

compared with 11.7 percent in 2000. 

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

community discharge rates more than 14 percentage points higher (indicating higher quality) 

and potentially avoidable rehospitalization rates 4.5 percentage points lower (indicating 

higher quality) than freestanding SNFs. 

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

higher community discharge rates (0.7 percentage point)—indicating higher quality—but 

also higher potentially avoidable rehospitalization rates (1.4 percentage points)—indicating 

poorer quality—compared with nonprofit skilled nursing facilities after risk adjustment. 
A Data Book: Healthcare spending and the Medicare program, June 2008 49

Web links. Quality of care in the Medicare program 

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

for Medicare beneficiaries and its implications for quality of care. 

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

• Chapter 2 of the MedPAC March 2007 Report to the Congress includes further information

 on quality in hospitals and outpatient dialysis services. 

http://www.medpac.gov/chapters/Mar07_Ch02.pdf 

• Chapter 2 of the MedPAC March 2008 Report to the Congress includes further information 

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

inpatient rehabilitation facilities. Chapter 4 of MedPAC’s June 2007 Report to the Congress 

discusses initiatives to improve the quality of home health services, and Chapter 8 of this 

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

http://medpac.gov/document_TOC.cfm?id=539 

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

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

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

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

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

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

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

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

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

dialysis care. 

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

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

CMS website. 

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

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

http://www.medicare.gov/HHCompare/Home.asp 
50 Quality of care in the Medicare program

• Chapter 3 of the MedPAC June 2007 Report to the Congress contains additional information 

on reported quality indicators for Medicare Advantage (MA) plans. 

http://medpac.gov/chapters/Jun07_Ch03.pdf 

• The National Committee for Quality Assurance (NCQA) publication cited in Chart 4-7, 

showing results for the kinds of measures shown in the table, is available from NCQA. 

http://web.ncqa.org/Default.aspx?tabid=447 

• Medicare Advantage plan-level results on quality measures can be obtained by using the 

Centers for Medicare & Medicaid Services (CMS) Medicare Personal Plan Finder. 

http://www.medicare.gov/MPPF/Include/DataSection/Questions/SearchOptions.asp 

• CMS makes available a downloadable data base of MA plan performance on quality 

measures, the MPPF–Medicare Advantage data set. 

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

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

spring of 2005. 

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

Access to care in the 

Medicare program 

 A Data Book: Healthcare spending and the Medicare program, June 2008 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 benef ci ai r ei s

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, 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. Access to physicians is similar for Medicare 

beneficiaries and privately insured people 

Medicare 

Age 65 and older 

 Private insurance 

Age 50–64 

Survey question 2006 2007 2006 2007 

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

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

 For routine care 

 Never 75%* 75% 69%* 67% 

 Sometimes 18* 18* 21* 24* 

 Usually 3* 3 5* 4 

 Always 3 3 4 3 

 For illness or injury 

 Never 84* 82* 79* 76* 

 Sometimes 11* 13* 15* 17* 

 Usually 2 3 2 3 

 Always 1* 2 2* 3 

 

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

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

 Primary care physician 

 No problem 76 70* 75 82* 

 Small problem 10 12 16 7 

 Big problem 14 17 9 10 

 Specialist 

 No problem 80 85 83 79 

 Small problem 7 6 9 11 

 Big problem 11 9 7 10 

 

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

doctor for a medical problem, but did not?” 

 Yes 8* 10* 11* 12* 

Note: Numbers may not sum to 100 percent due to rounding. Missing responses are not presented. 

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

confidence level. 

 

Source: MedPAC-sponsored telephone surveys conducted August–September 2006 and 2007. 

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

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

their privately insured counterparts. 

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

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

appointments than for routine care. Both reported more difficulty finding a primary care physician 

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

• In 2007, 10 percent of Medicare beneficiaries and 12 percent of privately insured individuals said they 

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

availability issues (e.g., appointment time, finding a doctor) were not as common a reason for not 

seeing a doctor than other reasons, such as cost. 
 A Data Book: Healthcare spending and the Medicare program, June 2008 55

Chart 5-3. 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: HMO (health maintenance organization), FFS (fee-for-service), PPO (preferred provider 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. 

• 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%) than this private 

category (76%, 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. 
56 Access to care in the Medicare program

Chart 5-4. Ethnic and racial disparities in delaying or failing to 

receive care, 2006 

Delayed medical care due to cost 

Did not receive medical care due to cost 

5.6

6.8 6.6

White, non-Hispanic Black, non-Hispanic Hispanic

0

2

4

6

8

10

Percent of U.S. popu al t oi n

Source: National Center for Health Statistics, Centers for Disease Control and Prevention: National Health Interview Survey, 2006. 

 

• Rates of delaying medical care due to cost in 2006 were slightly higher for Hispanic than for 

non-Hispanic beneficiaries; rates of failing to get care due to cost were higher for both black 

and Hispanic beneficiaries than for white non-Hispanic beneficiaries. These differences 

among groups may be related to differences in insurance status and availability of a regular 

source of care. 

8.0 7.7

8.2

White, non-Hispanic Black, non-Hispanic Hispanic

0

2

4

6

8

10

Percent of U.S. population
 A Data Book: Healthcare spending and the Medicare program, June 2008 57

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

obtaining urgent or routine care, 2006 

 Always got care as soon as wanted

Beneficiary characteristic Urgent Routine 

Overall 70% 61% 

 

Aged (65 years and older) 72 62 

Disabled (Under 65) 63 59 

White 71 62 

African American 68 61 

Hispanic 67 57 

Medicare only 61 57 

Dually eligible 64 59 

Supplemental Insurance 72 63 

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. 

• The presence and type of supplemental insurance affected beneficiaries’ ability to always 

obtain care as soon as 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. 
58 Access to care in the Medicare program

Web links. Access to care in the Medicare program 

• Chapter 2B of the MedPAC March 2008 Report to the Congress provides more information 

on beneficiary access to physicians. 

http://www.medpac.gov/chapters/Mar08_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 

• Additional information about physician acceptance of new Medicare patients can be found at: 

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 2008 61

Chart 6-1. Sources of supplemental coverage among 

noninstitutionalized Medicare beneficiaries, 2005 

Medigap

28.5%

No supplemental

coverage

9.6%

Employer

sponsored

31.9%

Medicaid

14.2%

Other public

sector

1.3%

Medicare

managed care

14.6%

Note: 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 

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 2005 or who had Medicare as a 

second payer. 

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

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

Medicare benefit package. About 90 percent of beneficiaries have supplemental coverage or 

participate in Medicare managed care. 

• About 60 percent have private-sector supplemental coverage such as medigap (about 28 

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

• About 16 percent have public-sector supplemental coverage, primarily Medicaid. 

• Fifteen 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 15 

percent) is much smaller than the proportion listed in Chapter 10 (22 percent). The difference is 

due the fact that the results in this chart reflect 2005 data, and the results in Chapter 10 reflect 

2008 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, 2005 

 Number of Employer- Medicare Other 

 beneficiaries sponsored Medigap managed public Medicare 

 (thousands) insurance insurance Medicaid care sector only 

All beneficiaries 36,978 32% 28% 14% 15% 1% 10% 

Age 

 Under 65 5,323 19 5 44 7 2 22 

 65–69 8,012 38 29 10 12 1 10 

 70–74 7,631 33 31 9 19 1 7 

 75–79 6,815 33 34 9 16 1 6 

 80–84 5,261 32 35 9 17 1 6 

 85+ 3,936 32 36 9 16 1 6 

Income status 

 Below poverty 6,092 11 14 50 10 2 13 

 100 to 125% of poverty 3,712 16 25 28 15 3 13 

 125 to 200% of poverty 7,426 27 28 12 18 2 14 

 200 to 400% of poverty 10,803 40 31 2 17 1 9 

 Over 400% of poverty 8,880 47 38 0 12 0 3 

Eligibility status 

 Aged 31,511 34 32 9 16 1 7 

 Disabled 5,090 18 5 44 8 2 23 

 ESRD 314 43 16 23 8 0 9 

Residence 

 Urban 28,078 32 27 13 19 1 8 

 Rural 8,889 32 34 17 2 2 14 

Sex 

 Male 16,244 34 26 13 13 1 13 

 Female 20,733 30 30 15 16 1 7 

Health status 

 Excellent/very good 15,628 35 34 6 16 1 8 

 Good/fair 18,327 30 26 18 15 1 10 

 Poor 2,871 25 14 34 8 3 16 

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

time in 2005. They could have had coverage in other categories throughout 2005. 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 2005, poverty was defined as $9,367 for people living alone and $11,815 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 2005 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), and male, 

and who report better than poor health. 

• Medigap is most common among those who are “older” aged (age 75 or older), middle or high income (above 

125 percent of poverty), eligible due to age, rural dwelling, female, and who report excellent or very good health. 

• Medicaid coverage is most common among those who are under 65, low income (below 125 percent of 

poverty), eligible due to disability or ESRD, rural dwelling, female, and who report poor health. 

• Medicare managed care is most common among those who are age 65 or older, with income between 125 and 

400 percent of poverty, eligible due to age, urban dwelling, female, 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 2008 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 publicsector 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

Dollars

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 2008 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 2008 67

Web links. Medicare beneficiary and other payer 

financial liability 

• Chapter 1 of the MedPAC 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 2008 71

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

 inpatient and outpatient services, 1996–2006 

93 94 93 95 96 105 113 119 127 134 135

16 17 16 18 18

21

21

23

26

28 29

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Calendar year

0

20

40

60

80

100

120

140

160

180

Billions of dol al rs

Outpatient

Inpatient

 Note: 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 $135 billion and 

outpatient spending was $29 billion in 2006. 

• Medicare hospital FFS inpatient spending increased 46 percent (3.9 percent per year) and 

 outpatient spending increased 77 percent (6.0 percent per year) from 1996 to 2006. 

• 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 2006 because a large number of 

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

(MA) program. 

• Outpatient spending fell in 1998, reflecting the BBA’s elimination of inadvertent 

overpayments. Transitional corridor and new technology payments in the outpatient 

prospective payment system, along with volume increase, increased outpatient spending in 

2001. Payment for certain outpatient drugs on an average wholesale price basis and 

extension of hold-harmless payments to small rural and sole community hospitals were the 

key factors in higher growth rates in 2004 and 2005. 
72 Acute inpatient services

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

 fiscal year 2006 

 

MDC Share of Share of Share of 

number MDC name all discharges medical discharges surgical discharges 

 5 Circulatory system 27% 25% 31% 

 4 Respiratory system 14 19 3 

 

 8 Musculoskeletal 12 4 31 

 system and connective 

 tissue 

 6 Digestive system 11 12 9 

 

 1 Nervous system 8 9 5 

 11 Kidney and urinary 6 7 4 

 tract 

 10 Endocrine, nutritional, 4 5 2 

 and metabolic diseases 

 and disorders 

 18 Infectious and parasitic 4 5 2 

 diseases 

 7 Hepatobiliary system 3 3 4 

 and pancreas 

 

 9 Skin, subcutaneous 3 3 2 

 tissue, and breast 

Total 92 92 92 

Note: MDC (major diagnostic category). 

Source: MedPAC analysis of MedPAR data from CMS. 

• In fiscal year 2006, 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 almost one-third of surgical discharges and onequarter of medical discharges. 

• Musculoskeletal system cases accounted for 31 percent of surgical discharges. 

• Respiratory system cases accounted for 19 percent of medical discharges. 
A Data Book: Healthcare spending and the Medicare program, June 2008 73

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

 discharges, by hospital group, 2006 

 Hospitals Medicare discharges 

 Number 

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

 

All PPS and critical 4,643 100.0% 11,608 100.0% 

access hospitals 

PPS hospitals 3,375 72.7 11,148 96.0 

 Urban 2,400 51.7 9,484 81.7 

 Rural 975 21.0 1,663 14.3 

 Large urban 1,311 28.2 5,130 44.2 

 Other urban 1,089 23.5 4,354 37.5 

 Rural referral 141 3.0 481 4.1 

 Sole community 410 8.8 655 5.6 

 Medicare dependent 142 3.1 164 1.4 

 Other rural <50 beds 95 2.0 60 0.5 

 Other rural >50 beds 187 4.0 303 2.6 

 Voluntary 2,008 43.2 8,048 69.3 

 Proprietary 781 16.8 1,743 15.0 

 Government* 586 12.6 1,357 11.7 

 Major teaching 281 6.1 1,681 14.5 

 Other teaching 761 16.4 3,964 34.1 

 Nonteaching 2,333 50.2 5,503 47.4 

Critical access hospitals 1,268 27.3 461 4.0 

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. 

 *The results for government-owned providers are not necessarily comparable to other providers because they operate in 

a different context. 

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

• In 2006, 3,375 hospitals provided 11.1 million discharges under Medicare’s acute inpatient 

prospective payment system (PPS) and 1,268 critical access hospitals provided almost 0.5 

million discharges. The number of PPS discharges declined primarily due to a shift in 

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

• About 15 percent of acute care hospitals (20 percent of PPS hospitals) are covered by three 

special payment provisions intended to help rural facilities that do not become critical access 

hospitals (rural referral, sole community, and small rural Medicare-dependent hospitals); 

these facilities provide about 11 percent of all discharges. 

• See Chart 7-22 for more information about critical access hospitals. 
74 Acute inpatient services

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

outpatient visits, 1996–2006 

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

10

20

30

40

50

60

P

ercent

0.0

2.3

4.0

6.3

8.4

10.4 11.3 12.2 12.6 13.0

0.0

2.3

7.7

12.1

17.4

20.7

24.0 25.2 26.7

29.0

31.6

Total outpatient visits

Total admissions

1.5

Note: Cumulative change is the total percent increase from 1996 through 2006. 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 has grown much more rapidly than inpatient service use. 

Total hospital outpatient visits increased approximately 32 percent from 1996 to 2006, while 

total admissions grew just 13 percent. 

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

hospitals in 2006. 
A Data Book: Healthcare spending and the Medicare program, June 2008 75

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

 1996–2006 

6.0 5.8 5.6 5.6 5.5 5.4 5.3 5.3 5.2 5.1 5.1

4.7

4.5 4.4 4.4 4.4 4.3 4.3 4.3 4.2 4.2 4.2

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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 approximately 3,300 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 2006. 

• Length of stay for all hospital discharges fell 10 percent, from 4.7 days in 1996 to 4.2 days in 

2006, dropping at an average annual rate of 1.1 percent from 1996 to 2001 and 0.3 percent 

from 2001 to 2006. 

• Length of stay for Medicare inpatients fell 15 percent, from 6.0 days in 1996 to 5.1 days in 

2006, dropping at an average annual rate of 2.3 percent from 1996 to 2001 and 0.9 percent 

from 2001 to 2006. 
76 Acute inpatient services

Chart 7-6. Hospital occupancy rates, 1997–2006 

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

10

20

30

40

50

60

70

80

Occupancy rate (percent)

62 63 64 65 65 67 68 68 69 69

49 49 49 50 51 51 52 52 53 52

59 59 61 61 62 63 64 65 66 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 1997–2006 period are based on their status at 

the end of 2006. 

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 1997 to 65 percent in 2006. 

• Occupancy rates are higher in urban than in rural hospitals; in 2006, occupancy rates stood 

at 69 percent for urban hospitals and 52 percent for rural hospitals, a 17 percentage point 

difference. 
A Data Book: Healthcare spending and the Medicare program, June 2008 77

Chart 7-7. Nonfederal hospital construction spending, 

1999–2007 

14.7 15.1

16.7

19.9

21.2 21.6

23

27.4

31.1

1999 2000 2001 2002 2003 2004 2005 2006 2007r

0

5

10

15

20

25

30

35

Bill oi ns of dollars 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. r = revised. 

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) in the past two years alone to $31 billion. 
78 Acute inpatient services

Chart 7-8. Cumulative change in Medicare discharges and days 

of care per beneficiary, 1996–2006 

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Calendar year

-25

-20

-15

-10

-5

0

5

10

15

20

25

P

ercent

0.0

2.3 2.9

5.8 5.2 6.1 5.8 5.2 4.1 2.9

1.2 0.0

-1.5

-3.5 -2.3

-4.3 -4.5 -5.0

-6.4

-8.8

-10.3

-12.8

Number of discharges per beneficiary

Total days of care per beneficiary

Note: Cumulative change is the total percent change from 1996 through 2006. Data are short-stay hospital Medicare patient 

days and discharges. Rate is per beneficiary enrolled in Part A. The statistics do not reflect managed care enrollment. 

Source: MedPAC analysis of claims files and enrollment data from CMS. 

• From 1996 to 2006 short-stay hospital discharges per beneficiary increased slightly and total 

days of care per beneficiary declined. Medicare discharge rates increased between 1996 

and 2006, to a peak of approximately 6 percent more discharges per enrollee in 2001. 

However, by the end of the period discharges returned close to 1996 levels. In addition, 

declining length of stay led to 12.8 percent fewer days of inpatient care per enrollee in 2006, 

relative to 1996. 

• There were 349 Medicare hospital discharges and 1,981 patient days per 1,000 

beneficiaries enrolled in Part A in calendar year 2006. 
A Data Book: Healthcare spending and the Medicare program, June 2008 79

Chart 7-9. Medicare inpatient payments, by source and hospital 

group, 2006 

 Percent of total payments 

 Total 

 Additional rural payments 

Hospital group Base IME DSH Outlier hospital* (millions) 

All hospitals 82.5% 5.1% 7.8% 4.2% 0.5% $104,992 

 

Urban 81.8 5.6 8.1 4.5 0.2 93,645 

Rural 88.8 0.7 5.5 1.8 3.1 11,277 

 

Large urban 79.9 6.8 8.6 4.7 0.0 53,150 

Other urban 84.2 3.9 7.4 4.1 0.3 40,445 

Rural referral 88.4 2.3 5.5 2.7 2.3 5,793 

Sole community 87.3 0.0 4.0 0.9 7.8 2,436 

Medicare dependent 90.2 0.0 5.7 0.8 3.2 830 

Other rural <50 beds 91.6 0.0 7.7 0.7 0.0 315 

Other rural >50 beds 91.0 0.3 6.6 1.8 0.4 1,953 

 

Voluntary 83.1 5.4 6.9 4.1 0.5 77,289 

Proprietary 85.1 1.5 9.5 3.6 0.3 14,231 

Government** 76.2 6.7 11.4 4.9 0.7 13,106 

Major teaching 67.0 16.4 10.7 5.8 0.1 23,634 

Other teaching 84.6 3.7 7.4 4.0 0.3 37,915 

Nonteaching 89.2 0.0 6.5 3.5 0.8 43,374 

Note: IME (indirect medical education), DSH (disproportionate share). Analysis includes all hospitals covered by Medicare’s 

acute inpatient prospective payment system (PPS). Includes both operating and capital payments but excludes graduate 

medical education payments. Excludes critical access hospitals. Simulated payments reflect 2006 payment rules applied 

to actual number of cases in 2006. Medicare fee-for-service inpatient payments did not grow from 2005 to 2006 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. 

 ** The results for government-owned providers are not necessarily comparable to other providers because they operate in 

a different context. 

Source: MedPAC analysis of claims and impact file data from CMS. 

• Medicare payments in 2006 to hospitals covered by the acute inpatient prospective payment system 

totaled about $105 billion. About $94 billion (89 percent) was paid to hospitals located in urban areas. 

The other $11 billion went to rural hospitals, although this figure does not reflect payments to critical 

access hospitals. 

• Special payments—which include disproportionate share, indirect medical education, and outlier 

payments, as well as additional payments to rural hospitals through the sole community and 

Medicare-dependent programs—account for about 17 percent of all inpatient payments. This 

proportion is higher for urban than for rural hospitals. 

• Outlier payments were 4.2 percent of total inpatient payments in 2006. The legislative mandate for 

the level of outlier payments uses a different measure—outlier payments as a percent of base plus 

outlier payments. Measured in this way, CMS’s goal is 5.1 percent and the agency reports that outlier 

payments were 4.0 percent in 2005 and 4.7 percent in 2006. 
80 Acute inpatient services

Chart 7-10. Medicare acute inpatient PPS margin, 1995–2006 

9.0

14.7

17.9

15.8

13.6

11.9

10.3

6.5

2.2

-0.3 -0.6

-2.6

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-5

0

5

10

15

20

25

30

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 2007) from CMS. 

• Medicare’s acute inpatient margin reflects payments and costs for services covered by 

Medicare’s inpatient hospital prospective payment system (PPS). The inpatient margin may 

be influenced by how hospitals allocate overhead costs across service lines. Only by 

combining data for all major services can we estimate Medicare costs without the influence 

of how overhead costs are allocated (see Chart 7-12). 

• The Medicare inpatient margin reached a record high of 17.9 percent in 1997. After 

implementation of the Balanced Budget Act of 1997, however, inpatient margins fell. In 

2006, the margin was –2.6 percent, the lowest level since the beginning of the inpatient 

PPS. 

• Medicare inpatient margins vary widely. In 2006, one-quarter of hospitals had Medicare 

inpatient margins that were 8.0 percent or higher, and another quarter had margins that 

were –16.8 percent or lower. About 42 percent of hospitals treating 42 percent of Medicare 

cases had positive inpatient Medicare margins in 2006. 
A Data Book: Healthcare spending and the Medicare program, June 2008 81

Chart 7-11. Medicare acute inpatient PPS margin, by urban and 

rural location, 1995–2006 

15.3

18.7

16.7

14.5

12.9

11.1

7.1

2.4

-0.4 -0.7

-2.6

4.4

9.7

11.3

8.3

6.0

4.1 3.9

1.6 0.6 0.3 -0.1

-2.3

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-10

-5

0

5

10

15

20

25

30

M

argin (percent)

Urban

Rural

9.5

 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 2007) from CMS. 

• Urban hospitals tend to have higher Medicare inpatient margins than rural hospitals. 

• The gap between urban and rural hospitals’ inpatient margins grew between 1995 and 2000. 

One factor in this divergence is that urban hospitals had greater success in controlling cost 

growth, at least partly in response to pressures from managed care. From 2001 through 

2004, these differences narrowed and from 2004 to 2006 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, 1997–2006 

11.8

8.5

6.3

5.4 5.4

2.5

-1.3

-3.0 -3.0

-4.8

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-5

0

5

10

15

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 2007) from CMS. 

• The overall Medicare margin incorporates payments and costs for acute inpatient, 

outpatient, skilled nursing, home health, and inpatient psychiatric and rehabilitative services, 

as well as graduate medical education and bad debts. The overall margin is available only 

since 1997, but it follows a trend similar to that of the inpatient margin. 

• The overall Medicare margin in 1997 was 11.8 percent. In fiscal year 2006, it was 

–4.8 percent. 

• In 2006, one-quarter of hospitals had overall Medicare margins of 3.6 percent or higher, and 

another quarter had margins of –16.3 percent or lower. Between 1997 and 2006, the 

difference in performance between the top and bottom quartile widened from 14 percent to 

20 percent. About 35 percent of hospitals had positive overall Medicare margins in 2006, 

accounting for 36 percent of Medicare inpatient discharges. 
A Data Book: Healthcare spending and the Medicare program, June 2008 83

Chart 7-13. Overall Medicare margin, by urban and rural 

 location, 1997–2006 

12.6

9.4

7.3

6.4 6.2

3.1

-0.9 -2.9 -3.0

-4.8

6.2

1.7

-1.5 -2.2

-0.4

-2.3

-3.9 -3.4 -3.1

-5.1

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-10

-5

0

5

10

15

20

M

argin (percent)

Urban

Rural

 

Note: A margin is calculated as revenue minus costs, divided by revenue. Data are based on Medicare-allowable costs and 

exclude critical access hospitals. Overall Medicare margins cover the costs and payments of acute hospital inpatient, 

outpatient, inpatient psychiatric and rehabilitation unit, skilled nursing facility, and home health services, as well as 

graduate medical education and bad debts. Data on overall Medicare margins before 1997 are unavailable. 

Source: MedPAC analysis of Medicare cost report data (August 2007) from CMS. 

• As with inpatient margins, overall Medicare margins have historically been higher for urban 

hospitals than for rural hospitals. 

• The difference in margins between the two groups grew between 1997 and 2000 but has 

since narrowed, with rural hospital margins similar to those of urban hospitals in each of the 

past three years. In 1997, the overall margin for urban hospitals was 12.6 percent, 

compared with 6.2 percent for rural hospitals. In 2006, the overall margin for urban hospitals 

was –4.8 percent, compared with –5.1 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, 1995–2006 

5.8 5.9

6.4

4.8

3.6 3.9 3.7 3.6

4.3 4.4

4.9

5.4

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

5

10

15

M

argin (percent)

 

Note: A margin is calculated as revenue minus costs, divided by revenue. Total margin includes all patient care services funded

by all payers, plus nonpatient revenue. Analysis excludes critical access hospitals. 

Source: MedPAC analysis of Medicare cost report data (August 2007) 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 2005, the total margin climbed to 4.9 percent and again rose to 5.4 

percent in 2006, its highest level in nine years. Total margins rose despite declines in Medicare 

overall 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 2006, 75 percent of hospitals had positive total margins. These hospitals accounted for 82 

percent of all hospital discharges and 83 percent of Medicare discharges. 

• The total margin varies much less than the Medicare inpatient or overall Medicare margin. In 

2006, one-quarter of prospective payment system hospitals had total margins that were 8.6 

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 20 percentage point spread for overall Medicare margins 

and a 25 percentage point spread for Medicare inpatient margins. 
A Data Book: Healthcare spending and the Medicare program, June 2008 85

Chart 7-15. Hospital total margin, by urban and rural location, 

1995–2006 

6.8

7.2

7.9

5.6

5.2 5.1

4.4

3.8

4.2

5.1

5.7 6.0

5.7 5.8

6.2

4.7

3.5 3.7 3.6 3.6

4.4 4.3

4.8

5.4

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

5

10

15

M

arg ni ( ni 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. 

• With the exception of 2002 and 2003, total (all payer) margins for rural hospitals have been 

about 1 percentage point higher than those of urban hospitals. 

• In 2006, total margins were 6.0 percent for rural and 5.4 percent for urban hospitals, the 

highest they have been for either group since 1997. 
86 Acute inpatient services

Chart 7-16. Hospital total margin, by teaching status, 1995–2006 

6.8 7.0 6.9

5.3

4.6 4.6

5.0 4.7

5.1

4.6

5.2

5.3 6.1

6.7 7.0

5.2

4.2 4.2 4.1 4.3

4.8 5.0 5.3

6.0

4.0

3.4

5.0

3.4

1.6

2.3

1.4 1.4

2.6

3.2

4.0

5.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

5

10

15

Margin (percent)

Nonteaching

Other teaching

Major teaching

Note: Major teaching hospitals are defined by a ratio of interns and residents to beds of 0.25 or greater, while other teaching

hospitals have a ratio of 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 2007) 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 2006, the total margin of nonteaching hospitals stood at 5.3 percent compared 

with 5.0 percent for major teaching hospitals. 

• The difference in margins between major teaching and nonteaching hospitals narrowed to 

only 0.3 percentage points in 2006, the smallest difference recorded since the start of the 

inpatient prospective payment system. In 2006, major teaching hospitals’ total margins 

reached their highest level since 1997. 
A Data Book: Healthcare spending and the Medicare program, June 2008 87

Chart 7-17. Financial pressure leads to lower costs 

 Level of financial pressure 2002 to 2005 

 High pressure Low pressure 

 (non-Medicare Medium (non-Medicare 

 margin <1%) pressure margins >5%) 

Number of hospitals 911 427 1,529 

Financial characteristics, 2006 

Non-Medicare margin 

(private, Medicaid, uninsured) –1.1% 6.3% 13.6% 

Standardized cost per discharge 

 Median of for profit and nonprofit $5,500* $5,800 $6,200 

 Nonprofit hospital 5,500* 5,800 6,200 

 For-profit hospital 5,600* 5,600 5,800 

Annual growth in cost per 

discharge 2003 to 2006 4.6%* 5.4% 5.5% 

Overall 2006 Medicare margin 3.7* –3.3 –10.8 

Patient characteristics (medians) 

Total hospital discharges in 2006 5,495* 7,350 7,130 

Medicare share of inpatient days 47% 45% 49% 

Medicaid share of inpatient days 13%* 12% 12% 

Medicare case mix index 1.26* 1.35 1.36 

 

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, 2007. 

 * 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. 
88 Acute inpatient services

Chart 7-18. Medicare margins by teaching and disproportionate 

share status, 2006 

 Share of Medicare Overall 

 Share of inpatient inpatient Medicare 

Hospital group hospitals payments margin margin 

All hospitals 100% 100% –2.6% –4.8% 

Major teaching 8 23 9.2 2.8 

Other teaching 23 35 –3.9 –5.4 

Nonteaching 69 42 –8.0 –8.5 

Both IME and DSH 25 49 3.3 0.7 

IME only 6 10 –9.7 –9.9 

DSH only 51 30 –4.9 –6.2 

Neither IME nor DSH 18 11 –16.7 –15.1 

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 

2006, the Medicare inpatient margins of these hospitals were more than 25 percentage 

points below those of major teaching hospitals and overall Medicare margins were about 18 

percentage points lower. 
A Data Book: Healthcare spending and the Medicare program, June 2008 89

Chart 7-19. Relationship between hospitals’ uncompensated care 

costs and disproportionate share payments, 2003 

40.6

9.9 9.8

8.5 8.4 7.7

5.0 4.5 3.9

1.5

9.5 9.1

11.1 10.0 10.4 9.8

8.1

9.5

11.8

7.6

1 2 3 4 5 6 7 8 9 10

Hospitals ranked on uncompensated care costs as a percent of total costs (deciles)

0

5

10

15

20

25

30

35

40

45

P

erc

ent

 Hospital group's share of:

Uncompensated care costs

DSH payments

Note: DSH (disproportionate share). The first group includes the 10 percent of hospitals with the highest ratio of uncompensated 

care costs to total costs. The last group includes the 10 percent of hospitals with the lowest such ratio. 

Source: State-mandated reporting systems in California, Florida, Georgia, Indiana, and Texas (2002 and 2003 data, N=848) and 

Medicare cost report data from CMS. State-level data compiled by the Government Accountability Office. 

• The original rationale for the Medicare disproportionate share (DSH) adjustment was that 

poor patients are more costly to treat, so that hospitals with substantial low-income patient 

loads would likely experience higher costs for their Medicare patients than otherwise similar 

institutions. Over the last decade, however, many observers have shifted to arguing that the 

adjustment subsidizes uncompensated care provided to the uninsured and underinsured. 

• Uncompensated care is highly concentrated. The top 10 percent of hospitals in terms of the 

share of resources they devote to furnishing uncompensated care provided 41 percent of all 

unpaid care. But DSH payments are poorly targeted to hospitals’ uncompensated care. This 

top group of uncompensated care providers receives only about 10 percent of DSH 

payments. The bottom 10 percent, in contrast, provides less than 2 percent of all 

uncompensated care but receives almost 8 percent of DSH payments. 
90 Acute inpatient services

Chart 7-20. Change in Medicare hospital inpatient costs per 

discharge and private payer payment-to-cost ratio, 

1986−2006 

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

-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-to-cost rat oi

9.6 9.2 9.1 9.4

8.6

6.9

5.3

3.0

0.8

-1.4 -1.2

0.6

1.1

2.6 2.4

5.1

8.1

5.7 5.6 5.2 4.8

1.16

1.20

1.22

1.22

1.27

1.30 1.31

1.29

1.24

1.24

1.22

1.18

1.13

1.16

1.18

1.24 1.24 1.24

Change in Medicare acute inpatient costs per discharge

Private payer payment-to-cost ratio

1.35

1.30

1.25

1.20

1.15

1.13

1.10

1.14

1.12

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, 1986 through 1992, private payers’ payments rose much faster than 

the cost of treating their patients (seen in the chart as a steep increase in the payment-tocost ratio). This suggests an almost complete lack of pressure from private payers. Medicare 

costs per discharge rose 8.3 percent per year through these years, more than 3 percentage 

points a year above the increase in Medicare’s market basket index. 

• As HMOs and other private insurers exerted more pressure during the second period, 1993 

through 1999, the private payer payment-to-cost ratio dropped substantially. The rate of cost 

growth plummeted to only 0.8 percent 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 

has again risen sharply, and hospital cost growth has once again exceeded growth in the 

market basket by 2 percentage points a year. In 2005 and 2006, the trend in private payer 

profit margins begins to level off, and cost growth more closely matches market basket. 
A Data Book: Healthcare spending and the Medicare program, June 2008 91

Chart 7-21. Markup of charges over costs for all patient care 

services, 1996–2006 

85 90

97

103

113

124

137

153

164

173

180

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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. 

• From 1996 through 2006, hospitals’ patient care costs (covering all services and all payers) 

increased 6.5 percent per year but their charges went up by 11 percent per year. 

Consequently, the markup of charges over costs rose from about 85 percent in 1996 to 

about 180 percent in 2006. 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. In 2003, Medicare 

revised its outlier policy in an attempt to curb hospitals’ opportunity to increase their outlier 

payments through excessive increases in their charges. 
92 Acute inpatient services

Chart 7-22. Number of critical access hospitals, 1999–2008 

41

139

341

563

722

875

1,055

1,280 1,283 1,291

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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) has grown steadily over the last nine years, 

from 41 in 1999 to approximately 1,291 as of March 2008. 

• 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. 
A Data Book: Healthcare spending and the Medicare program, June 2008 93

Chart 7-23. Medicare payments to inpatient psychiatric facilities 

(in billions), 1998–2007 

3.3 3.2 3.2

3.4 3.5 3.6

3.8 3.9 4.0 4.1

1998 1999 2000 2001 2002 2003 2004 2005* 2006* 2007*

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

D

ollars ( ni billions)

Note: *Estimated spending. The rate of growth in spending was slowed somewhat in 2006 and 2007 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 2.4 percent per year between 1998 and 2007. 
94 Acute inpatient services

Chart 7-24. Inpatient psychiatric facilities, 2000–2007 

 2000 2001 2002 2003 2004 2005 2006 2007 

Freestanding hospitals 491 477 473 466 463 477 481 490 

Hospital-based units 

 PPS hospital units 1,848 1,821 1,794 1,769 1,732 1,688 1,657 1,643 

 CAH units 1 3 6 10 27 70 75 77 

Total 2,340 2,301 2,273 2,245 2,222 2,235 2,213 2,210 

 

Note: PPS (prospective payment system), CAH (critical access hospital). 

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 5.6 percent 

since 2000. 
A Data Book: Healthcare spending and the Medicare program, June 2008 95

Web links. Acute inpatient services 

Short-term hospitals 

• Chapter 2A of the MedPAC March 2008 Report to the Congress provides additional detailed 

information on hospital margins. 

http://www.medpac.gov/chapters/Mar08_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_ 07_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 3, 2007 Federal Register. 

http://edocket.access.gpo.gov/2008/pdf/08-1135.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_07_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, 2008 in the May 7, 2008 Federal Register.

http://www.access.gpo.gov/su_docs/fedreg/a080507c.html 

http://edocket.access.gpo.gov/2008/pdf/08-1213.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 2008 99

Chart 8-1. FFS Medicare spending and payment updates 

 for physician services, 1998–2011 

32.4 33.4

37.0

42.0 44.8

48.3

54.1

57.7 58.1 58.7 57.3 54.2 53.3 52.3

1.00 1.02

1.08

1.13

1.08 1.10 1.11 1.13 1.13 1.13

1.02

0.97

0.92

0.87

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

0

10

20

30

40

50

60

70

Medicare spending (dollars in billions)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Cumu al t vi e upda

et s ( ni de

x)

Medicare spending

Cumulative updates

Historical Projected

Note: FFS (fee-for-service). Dollars are Medicare spending only and do not include beneficiary coinsurance. The cumulative 

updates are presented as an index, starting from 1998 with an assigned value of 1.0. Estimates do not include the 0.5 

percent payment update for physician services furnished January 1 through June 31, 2008, as established by the 

Medicare, Medicaid, and SCHIP Extension Act of 2007. The growth in spending was slowed in 2006 and 2007 by large 

increases in the number of Medicare Advantage enrollees, who are not included in these aggregate totals. 

 

Source: 2008 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. Most recently, the Medicare, Medicaid, and SCHIP Extension 

Act of 2007 updated physician services furnished January 1 through June 31, 2008, by 0.5 

percent. 

• As this publication goes to press, the SGR formula continues to call for payment rate cuts 

starting July 1, 2008, through 2016. 
100 Ambulatory care

Chart 8-2. Medicare spending per FFS beneficiary on physician 

services, 1999–2011 

1999 2001 2003 2005 2007 2009 2011

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

Historical Projected

Note: FFS (fee-for-service). Dollars are Medicare spending only and do not include beneficiary coinsurance. Estimates do not 

include the 0.5 percent payment increase for physician services furnished January 1 through June 31, 2008, as 

established by the Medicare, Medicaid, and SCHIP Extension Act of 2007. 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 annual report of the Boards of Trustees of the Medicare trust funds. 

• Historical calculations show that fee-for-service (FFS) physician spending per beneficiary 

has increased annually. 

• Under current law, FFS Medicare payments for physician services per beneficiary are 

projected to decline beginning July 1, 2008, because of scheduled negative payment 

updates. The volume of physician services per beneficiary, however, is expected to continue 

to grow. 

• Per capita spending for disabled beneficiaries (under age 65) is lower than per capita 

spending for aged beneficiaries. In 2007, for example, per capita spending for disabled 

beneficiaries was $1,492 compared with $1,850 for aged beneficiaries. 
A Data Book: Healthcare spending and the Medicare program, June 2008 101

Chart 8-3. Number of physicians billing Medicare is increasing 

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. 
102 Ambulatory care

Chart 8-4. Continued growth in the use of physician services 

per beneficiary, 2000–2006 

2000 2001 2002 2003 2004 2005 2006

0

10

20

30

40

50

60

70

Cumulativ

e

p

erc

ent chang

e

Imaging

Tests

Other procedures

All physician services

Major procedure

Evaluation & management

Note: Includes only services paid under the physician fee schedule. 

Source: Analysis of physician claims data for 100 percent of Medicare beneficiaries. 

• Between 2000 and 2006, cumulative volume in physician fee schedule services grew about 

35 percent per beneficiary. Imaging and tests grew the most, at 67 and 52 percent 

respectively. 

• Across all services, volume grew 3.6 percent per beneficiary between 2005 and 2006. This 

growth rate is slightly lower then that seen in recent years. Volume for tests and imaging 

grew the most. From 2005 to 2006, tests grew 6.9 percent and imaging grew 6.2 percent per 

capita. Growth in major procedures and evaluation and management services was slower. 

• 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 SGR formula. 
A Data Book: Healthcare spending and the Medicare program, June 2008 103

Chart 8-5. Correlation between physicians’ 2002 and 2003 

efficiency scores, multilevel and Monte Carlo models 

MSA Multilevel Monte Carlo 

Boston 0.90 0.87 

Greenville 0.91 0.89 

Miami 0.88 0.86 

Minneapolis 0.86 0.84 

Orange County 0.89 0.84 

Phoenix 0.90 0.88 

Total 0.89 0.87 

Note: MSA (metropolitan statistical area). Physicians with less than 20 episodes were excluded from the analysis. Efficiency 

scores are weighted by each physician’s average number of episodes per year. 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: Houchens, Robert L., Scott McCracken, William Marder, et al. Forthcoming. The use of an episode grouper for physician 

profiling in Medicare. Washington, DC: MedPAC. 

• Medicare claims were analyzed using an episode grouper to identify physicians with lower, 

comparable, and higher than expected utilization in the treatment of Medicare patients. To 

test the stability of these results, each physician’s efficiency score for 2002 was compared to 

his or her score for 2003, using two statistical methods: multilevel regression and Monte 

Carlo randomization. 

• Using multilevel regression, physician-level residuals (variation from the mean) form the 

basis for each physician’s estimated efficiency score. This takes into account the correlation 

of episodes treated by individual physicians, unlike standard regression methods that 

assume physicians’ episodes are uncorrelated. 

• Monte Carlo randomization compares specific episode/severity/disease-stage combinations 

with other episodes with the same characteristics. The idea is to test whether the observed 

average episode payment for each physician’s sample is consistent with the complete 

distribution of average episode payments for similar samples drawn at random from the 

collection of all physicians’ episodes. Using this approach, physician outliers are based on 

how unlikely the physician’s observed average episode payment is, given the distribution of 

average episode payments for similar samples of randomly drawn episodes. 

• These correlations are quite high, indicating good year-to-year stability in the efficiency 

scores based on both multilevel regressions and Monte Carlo randomization. Physicians 

with high efficiency scores in 2002 also tended to have high scores in 2003 and vice versa. 
104 Ambulatory care

Chart 8-6. Spending on all hospital outpatient services, 

1997–2007 

9.4 8.6 9.0 9.3

12.8 13.3

15.3

17.7

19.8 20.8 21.0

7.7 7.9

8.9 8.7

8.1 8.2

7.9

8.3

8.5 8.0 7.7

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

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. The rate of growth in 

spending was slowed in 2006 and 2007 by large increases in the number of Medicare Advantage enrollees, who are not 

included in these aggregate totals. 

* Estimate. 

 

Source: CMS, Office of the Actuary. 

• Overall spending by Medicare and beneficiaries on hospital outpatient services (excluding clinical 

laboratory services) from calendar year 1997 to 2007 increased by 68 percent, reaching $28.8 

billion. The Office of the Actuary projects continued growth in total spending, averaging 4.0 

percent per year from 2004 to 2009. However, projected spending growth per beneficiary is even 

higher—4.7 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 2007, spending under the outpatient PPS is expected to rise to $26.2 billion 

($19.0 billion program spending; $7.2 billion beneficiary copayments). The outpatient PPS 

accounted for about 4 percent of total Medicare spending by the program in 2007. 

• Beneficiary cost sharing under the outpatient PPS is generally higher than for other sectors, 

about 28 percent in 2007. Chart 8-10 provides more detail on coinsurance. 
A Data Book: Healthcare spending and the Medicare program, June 2008 105

Chart 8-7. Most hospitals provide outpatient services 

 Percent offering 

 Outpatient Outpatient Emergency 

Year Hospitals services surgery services 

1991 5,191 92% 79% 91% 

1997 4,976 93 81 92 

2001 4,347 94 84 93 

2004 3,882 94 86 92 

2007 3,638 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 has declined, largely due to growth in the number of hospitals converting to 

critical access hospital status, which allows payment on a cost basis. However, the percent 

of hospitals providing outpatient services and emergency services has remained stable, and 

the percent providing outpatient surgery has increased. 

• Almost all hospitals in 2007 provide outpatient (94 percent) and emergency (91 percent) 

services. The vast majority (87 percent) provide outpatient surgery. 

• The share of hospitals providing outpatient services did not change after the introduction of 

the outpatient prospective payment system in 2000. 
106 Ambulatory care

Chart 8-8. Payments and volume of services under the 

Medicare hospital outpatient PPS, by type of 

service, 2006 

Separately paid drugs/

blood products

10%

Evaluation &

management

13%

Imaging

24%

Tests

4%

Procedures

47%

Evaluation &

management

11%

Separately paid drugs/

blood products

52%

Tests

8%

Pass-through

drugs

2%

Procedures

12%

Imaging

13%

 Payments Volume 

Pass-through

devices

1% Pass-through

devices

1%

Pass-through

drugs

1%

Note: PPS (prospective payment system). Payments include both program spending and beneficiary cost sharing but do not 

include transitional corridor payments (see Chart 8-11 for further information regarding transitional corridor 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 and separately paid drugs and blood 

products are classified by their payment status indicator. Percentages may not sum to 100 percent due to rounding. 

Source: MedPAC analysis of the 100 percent special analytic file of outpatient PPS claims for 2006 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 on services (47 percent), followed by imaging services 

(24 percent), and evaluation and management (13 percent). 

• In 2006, separately paid drugs and blood products accounted for 10 percent of payments. 

• The volume of separately paid drugs and blood products grew substantially from 2005 to 

2006. This is due primarily to radiologic contrast materials being separately paid in 2006, 

while being packaged with the associated imaging service in 2005. 
A Data Book: Healthcare spending and the Medicare program, June 2008 107

Chart 8-9. Hospital outpatient services with the highest 

Medicare expenditures, 2006 

 Share of Volume Payment 

APC title payments (thousands) rate

Total 46% 

All emergency visits 7 11,290 $153 

All clinic visits 4 15,768 63 

Cataract procedures with IOL insert 3 631 1,388 

Computerized axial tomography with contrast material 3 3,416 255 

Diagnostic cardiac catheterization 3 409 2,163 

Level I plain film except teeth 3 16,307 43 

Lower gastrointestinal endoscopy 3 1,327 509 

Computerized axial tomography and computerized 

angiography without contrast material 3 3,839 188 

MRI and magnetic resonance angiography without 

contrast material followed by contrast material 2 899 506 

MRI and magnetic resonance angiography without contrast material 2 1,229 349 

Level II radiation therapy 1 2,731 131 

Level I upper gastrointestinal procedures 1 897 480 

Level III angiography and venography except extremity 1 287 1,215 

Infusion therapy except chemotherapy 1 3,057 121

Computerized axial tomography and computerized angiography 

without contrast material followed by contrast material 1 907 304 

Level II laparoscopy 1 117 2,562 

IMRT treatment delivery1 936 319 

Level III nerve injections 1 810 358 

Level III cardiac imaging 1 616 397 

Non-coronary angioplasty or atherectomy* 1 115 2,515 

Rituximab cancer treatment* 1 493 463 

Hernia/Hydrocele procedures* 1 149 1,705 

Average APC 411 81 

 

Note: APC (ambulatory payment classification), IOL (intraocular lens), IMRT (intensity-modulated radiation therapy). The 

payment rates for “All emergency visits” and “All clinic visits” are weighted averages of payment rates from three APCs. 

 * Did not appear on the list for 2005. 

Source: MedPAC analysis of 100 percent analytic file of outpatient prospective payment system claims for calendar year 2006. 

• 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. 
108 Ambulatory care

Chart 8-10. Medicare coinsurance rates, by type of hospital 

outpatient service, 2006 

23

35

27

34

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 rate

Note: Services were grouped into categories of evaluation and management, imaging, procedures, and tests according to the 

Berenson-Eggers Type of Service classification developed by CMS. Pass-through drugs and separately paid drugs and 

blood products are classified by their payment status indicators. 

Source: MedPAC analysis of 2006 outpatient prospective payment system claims that CMS used to set payment rates for 2008. 

• Historically, beneficiary coinsurance payments for hospital outpatient services were based 

on hospital charges, while Medicare payments were based on hospital costs. As hospital 

charges grew faster than costs, coinsurance represented a large share of total payment over 

time. 

• In adopting the outpatient prospective payment system, the Congress froze the dollar 

amounts for coinsurance. Consequently, beneficiaries’ share of total payments will decline 

over time. 

• The coinsurance rate is different for each service. Some services, such as imaging, have 

very high rates of coinsurance—35 percent. Other services, such as evaluation and 

management, have coinsurance rates of 23 percent. 

• In 2006, the overall coinsurance rate was about 29 percent. 

• The coinsurance rate for imaging dropped substantially from 2005 to 2006 because of a drop 

in the maximum allowed coinsurance rate from 45 percent to 40 percent and because many 

X-ray services had sharp declines in coinsurance. 

29 
A Data Book: Healthcare spending and the Medicare program, June 2008 109

Chart 8-11. Transitional corridor payments as a share of 

Medicare hospital outpatient payments, 2004–2006 

 2004 2005 2006 

 Share of Share of Share of 

 payments payments payments

 from Number from Number from 

 Number of transitional of transitional of transitional 

Hospital group hospitals corridors hospitals corridors hospitals corridors 

 

All hospitals 3,495 0.8% 3,355 0.4% 3,260 0.3% 

 

Urban 2,413 0.4 2,385 0.1 2,314 0.0 

Rural ≤ 100 beds 823 5.4 709 4.7 693 2.7 

Rural >100 beds 268 0.6 260 0.4 251 0.3 

 

Major teaching 283 0.8 279 0.0 272 0.0 

Other teaching 770 0.3 753 0.1 723 0.0 

Nonteaching 2,441 1.3 2,323 0.9 2,264 0.5 

 

Note: A small number of hospitals could not be classified due to missing data. Transitional corridor payments for most hospitals 

expired on December 31, 2003. 

Source: MedPAC analysis of Medicare Cost Report files from CMS. 

• When Medicare implemented the hospital outpatient prospective payment system (PPS) in 

2000, Medicare moved from paying hospitals based on their costs to a fee schedule based 

on average (median) costs for all hospitals. 

• Recognizing that some hospitals might receive lower payments under the outpatient PPS 

than they had under the earlier system, the Congress included a transition mechanism, 

called transitional corridor payments. The corridors were designed to make up part of the 

difference between payments that hospitals would have received under the old payment 

system and those under the new outpatient PPS. (To provide incentives for efficiency, 

Medicare did not compensate the full difference, except for rural hospitals with 100 or fewer 

beds, cancer hospitals, and children’s hospitals.) 

• Transitional corridor payments represented 0.8 percent of total outpatient PPS payments in 

2004, declining to 0.4 percent in 2005, then to 0.3 percent in 2006. Transitional corridor 

payments expired for most hospitals on December 31, 2003. However, the payments 

continued for two more years—through December 31, 2005—for rural sole community 

hospitals and other rural hospitals with 100 or fewer beds. The Deficit Reduction Act of 2005 

extended most of the transitional corridor payments for rural hospitals with 100 or fewer beds 

through December 31, 2008. In 2006, rural hospitals with 100 or fewer beds received 2.7 

percent of their payments from transitional corridor payments. 
110 Ambulatory care

Chart 8-12. Medicare hospital outpatient, inpatient, and overall 

Medicare margins, 2000–2006 

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 2006, while the aggregate margin was –11.0 percent, 25 

percent of hospitals had margins of –21.6 percent or lower, and 25 percent had margins of –0.2 

percent or higher. 

• Given hospital accounting practices, margins for hospital outpatient services must be considered 

in the context of Medicare payments and hospital costs for the full range of services provided to 

Medicare beneficiaries. Hospitals allocate overhead to all services, so we generally consider 

costs and payments overall. 

• The improvement in outpatient margins from 2000 to 2001 is consistent with policies 

implemented under the outpatient prospective payment system that increased payments. 

Margins declined from 2001 to 2003. This may reflect the decline in the number of drugs and 

devices eligible for pass-through payments. The margin improved in 2004 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. 

11.9

10.3

6.5

2.2

-0.3 -0.6

-2.6

5.4 5.4

2.5

-1.3

-3.0 -3.0

-4.8

-13.9

-6.9

-8.3

-11.5 -10.7

-9.2

-11.0

2000 2001 2002 2003 2004 2005 2006

-20

-15

-10

-5

0

5

10

15

20

M

argin (percent)

Inpatient margin

Overall Medicare margin

Outpatient margin
A Data Book: Healthcare spending and the Medicare program, June 2008 111

Chart 8-13. Number of Medicare-certified ASCs increased over 

60 percent, 2000–2007 

 2000 2001 2002 2003 2004 2005 2006 2007 

Medicare payments (billions of dollars) $1.4 $1.6 $1.9 $2.2 $2.5 $2.7 $2.9 $2.9 

 

Number of centers 3,028 3,371 3,597 3,887 4,136 4,506 4,707 4,964 

 New centers 295 446 309 365 315 467 261 267 

 Exiting centers 53 103 83 75 66 97 60 10 

 

Net percent growth in number 

of centers from previous year 8.7% 11.3% 6.7% 8.1% 6.4% 8.9% 4.5% 5.5% 

 

Percent of all centers that are: 

 For profit 94 94 95 95 96 96 96 96 

 Nonprofit 6 5 5 5 4 4 4 4 

 Urban 88 88 87 87 87 87 88 88 

 Rural 12 12 13 13 13 13 12 12 

Note: ASC (ambulatory surgical center). Medicare payments include program spending and beneficiary cost sharing for ASC 

facility services. Payments for 2007 are preliminary and subject to change. Totals may not sum to 100 percent due 

to rounding. 

Source: MedPAC analysis of provider of services files from CMS, 2000–2007. Payment data are from CMS, Office of 

the Actuary. 

• Ambulatory surgical centers (ASCs) are entities that 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. 

• Most Medicare-certified ASCs are for-profit facilities and are located in urban areas. 

• Medicare uses 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 because of a budget neutrality requirement. 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 11.4 percent per year, on average, 

from 2000 through 2007. Payments per beneficiary grew by 10.2 percent per year during this 

period. The growth in spending was slowed in 2006 and 2007 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 7.3 percent from 

2000 through 2007. Each year from 2000 through 2007, an average of 341 new Medicarecertified facilities entered the market, while an average of 68 closed or merged with other 

facilities. 
112 Ambulatory care

Chart 8-14. Medicare spending for imaging services, by type of 

service, 2006 

MRI,

19%

Standard,

18%

CT,

17%

Nuclear medicine,

14%

Echocardiography,

14%

Other echography 

(ultrasound),

12%

Imaging procedure,

6%

Note: CT (computed tomography), MRI (magnetic resonance imaging). Imaging procedure includes cardiac catheterization and 

angiography. Medicare payments include program spending and beneficiary cost sharing for physician fee schedule 

imaging services. Totals may not sum to 100 percent due to rounding. 

Source: MedPAC analysis of 100 percent physician/supplier procedure summary file from CMS, 2006. 

• More than one-third of Medicare spending for imaging under the physician fee schedule is 

for computed tomography (CT) and magnetic resonance imaging (MRI) studies. Ultrasound 

services (echocardiography and other echography) account for one-quarter of imaging 

spending. 

• Medicare spending for imaging services under the physician fee schedule nearly doubled 

between 2000 and 2006, from $6.4 billion to $12.3 billion. Spending for MRI, 

echocardiography, CT, and nuclear medicine has grown faster than for other imaging 

services. Thus, these categories account for a larger share of total imaging spending in 2006 

than they did in 2000. 
A Data Book: Healthcare spending and the Medicare program, June 2008 113

Chart 8-15. Radiologists received about 40 percent of Medicare 

payments for imaging services, 2006 

Radiology, 43%

Cardiology, 25%

Surgical specialties, 

9%

IDTF, 8%

Internal medicine, 

6%

Other specialty, 5%

Other medical, 5%

Note: IDTF (independent diagnostic testing facility). Medicare payments include program spending and beneficiary cost sharing 

for physician fee schedule imaging services. Total fee schedule imaging spending was $12.3 billion in 2006. IDTFs are 

independent of a hospital and physician’s office and provide only outpatient diagnostic services. Other medical includes 

family practice, general practice, neurology, rheumatology, pulmonary disease, hematology/oncology, and endocrinology. 

Other specialty includes otolaryngology, pain management, osteopathic, physical medicine, nephrology, podiatry, cardiac 

surgery, oncology, and portable X-ray suppliers. 

Source: MedPAC analysis of 100 percent physician/supplier procedure summary file from CMS, 2006. 

• Imaging services paid under the physician fee schedule involve two parts: the technical 

component, which covers the cost of the equipment, supplies, and nonphysician staff, and 

the professional component, which covers the physician’s work in interpreting the study and 

writing a report. A physician who both performs and interprets the study submits a global bill, 

which includes the technical and professional components. 

• Although radiologists received three-quarters of Medicare payments for professional 

component services in 2006, they accounted for much smaller shares of spending for global 

bills (32 percent) and technical component services (12 percent). 

• Between 2002 and 2006, radiologists’ share of total imaging payments declined by 2.2 

percent per year while the shares for other providers increased. For example, other 

medical’s share of payments grew by 3.2 percent per year, independent diagnostic testing 

facilities by 3.0 percent per year, and cardiology by 2.4 percent per year. 
114 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_07_Physician.pdf 

• Chapter 2B of the MedPAC March 2008 Report to the Congress and Appendix A of the June 

2008 Report to the Congress provide additional information on physician services. 

 http://www.medpac.gov/chapters/Mar08_Ch02b.pdf 

http://www.medpac.gov/chapters/Jun08_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/tr2008.pdf 
A Data Book: Healthcare spending and the Medicare program, June 2008 115

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_07_opd.pdf

• Section 2A of the MedPAC 2008 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/Mar08_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_07_ASC.pdf 

• Chapter 3F of the MedPAC March 2004 Report to the Congress provides additional information on 

ambulatory surgical centers. 

http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3F.pdf 

S E C T I O N

Post-acute care

Skilled nursing facilities 

Home health agencies 

Long-term care hospitals 

Inpatient rehabilitation facilities 

A Data Book: Healthcare spending and the Medicare program, June 2008 119

Chart 9-1. Growth in post-acute care providers has moderated, 

but home health agencies continue to increase 

 Average 

 annual Percent 

 percent change change 

 2000 2003 2006 2007 2000–2006 2006–2007 

 

Home health 

agencies 6,881 7,223 8,880 9,227 4.3% 3.9% 

Long-term care 

hospitals 263 334 394 394 7.0 0.0 

Inpatient 

rehabilitation 

facilities 1,117 1,211 1,224 1,202 1.5 –0.6 

Skilled nursing 

facilities 14,777 14,876 15,008 15,060 0.3 0.3 

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 1996–2007 and CMS Provider of Service data. 

• Growth in the number of all post-acute care provider types moderated in 2006–2007. In all 

cases, the increase between 2006 and 2007 is lower than the recent average annual rate of 

growth. 

• Since 2006, the number of home health agencies has grown 3.9 percent per year. 

• The number of long-term care hospitals has increased, on average, 5.9 percent per year 

since 2000, although the number did not grow between 2006 and 2007. 

• The number of inpatient rehabilitation facilities (both rehabilitation hospitals and 

rehabilitation units) grew 1.5 percent annually between 2000 and 2006 but declined slightly 

in the last year. 

 

• The total supply of skilled nursing facilities has remained relatively constant since 2000, 

growing at an average of 0.3 percent per year. The number of hospital-based units 

declined nearly 6 percent per year on average, while freestanding facilities grew annually 

about 1 percent. 
120 Post-acute care

Chart 9-2. Spending for post-acute care has risen in each 

setting between 2000 and 2007 

2000 2001 2002 2003* 2004* 2005* 2006 2007

0

10

20

30

40

50

D

ol al rs (in billions)

24.7

27.1

32.7 33.7

38.1

42.0 42.8

45.1

10.3

12.1 14.8 14.9

16.7

18.6 19.2

21.0

8.5

8.6

10.0 9.9

11.3 12.5 13.1 14.1

4.2

4.5 5.7 6.2 6.4 6.4 6.0 5.6

1.7

1.9 2.2

2.7 3.7 4.5 4.5 4.4

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. 

*Estimated by CMS. 

Source: Centers for Medicare & Medicaid Services, Office of the Actuary. 

• Medicare has prospective payment systems (PPSs) for the four post-acute care settings. 

CMS implemented these PPSs at the following times: skilled nursing facilities, July 1998; 

home health agencies, October 2000; inpatient rehabilitation facilities, January 2002; and 

long-term care hospitals, October 2002. Although CMS intended to use these payment 

systems to control Medicare spending for post-acute care, spending has increased an 

average of 9 percent per year since 2000. 

• From 2000 through 2007, Medicare spending for long-term care hospitals (LTCHs) 

increased the fastest—an average 14.7 percent per year. During the same period, spending 

for skilled nursing facilities increased an average 10.7 percent, spending for home health 

agencies increased an average 7.5 percent, and spending for inpatient rehabilitation 

facilities (IRFs) increased an average 4 percent per year. For 2007, CMS estimated that 

total spending for post-acute care was about $45 billion. 

• Post-acute care currently makes up about 15 percent of Medicare’s fee-for-service 

spending. Spending during 2006–2007 moderated for all post-acute care services except 

home health care. During this same period, spending for IRFs and LTCHs declined. 

• The growth in spending was slowed in 2006 and 2007 by large increases in the number of 

Medicare Advantage enrollees, who are not included in these aggregate totals. 
A Data Book: Healthcare spending and the Medicare program, June 2008 121

Chart 9-3. Use of post-acute care after discharge from acute 

care hospitals, 2006 

 Percent Percent Most 

 discharged from Percent discharged common 

 hospital to PAC rehospitalized after Percent died to a second second PAC 

PAC setting setting using PAC setting in PAC setting PAC setting setting used 

 

SNF 17.3% 22.0% 5.4% 29.3% Home health 

Home health 16.0 18.1 0.8 2.3 Hospice 

Inpatient rehabilitation 3.2 9.4 0.4 56.8 Home health 

Hospice 2.1 4.5 82.2 2.4 Home health 

Long-term care hospital 1.0 10.0 15.5 53.4 SNF 

Inpatient psychiatric 0.5 8.7 0.4 25.4 SNF 

Total 40.0 18.0 6.2 19.8 Home health 

Note: PAC (post-acute care), SNF (skilled nursing facility). Use of home health care and hospice is based on care that starts 

within three days of discharge. Other PAC care starts within one day of discharge. Home health use includes episodes 

that overlap an inpatient stay. 

Source: MedPAC analysis of 2006 claims files from CMS. 

• Two out of five Medicare patients discharged alive from the hospital use post-acute care (PAC). 

• Skilled nursing facilities are the most common PAC setting, used by 17 percent of beneficiaries 

after discharge, followed by home health care, which is used by 16 percent of beneficiaries. 

Close to half the beneficiaries that were using home health care after discharge (47 percent) 

were also using home health care before their admission to the hospital. 

• A sizable share of SNF users (22 percent) and home health users (18 percent) are readmitted 

back to a hospital during their PAC episode. The rate of readmission back to the hospital is 10 

percent or less for the other PAC settings. 

• More than half of all inpatient rehabilitation facility (IRF) and long-term care hospital (LTCH) 

users go on to use a second PAC setting. The most common PAC setting used following IRF 

care is home health. The most common setting following LTCH care is the SNF. More than onequarter of SNF patients are also discharged to a second PAC setting, the most common setting 

being home health care. The discharge destination of SNF patients can very greatly between 

hospital-based and freestanding facilities (see Chart 9-11). 

• As would be expected, the vast majority of hospice patients die while in the hospice. A large 

share of long-term care hospital (LTCH) beneficiaries (15 percent) die while in a LTCH. The 

share of Medicare SNF patients that die in the SNF is 5 percent. Less than 1 percent of patients 

discharged to home health, inpatient rehabilitation, and inpatient psychiatric die during their PAC 

stay. 
122 Post-acute care

Chart 9-4. Ten most common diagnoses among Medicare SNF 

patients accounted for more than a third of SNF 

admissions in 2005 

Diagnosis code Share of SNF 

from hospital stay Diagnosis admissions 

209 Major joint and limb reattachment of lower extremity 5.6% 

 089 Simple pneumonia and pleurisy age >17, with CC 5.3 

 127 Heart failure and shock 4.9 

 210 Hip and femur procedures except major joint age >17, with CC 3.8 

 014 Intracranial hemorrhage and stroke with infarction 3.6 

 416 Septicemia, age >17 3.6 

 320 Kidney and urinary tract infections age >17, with CC 3.2 

 296 Nutritional and miscellaneous metabolic disorders age >17, with CC 2.6 

 079 Respiratory infections and inflammations age >17, with CC 2.4 

 316 Renal failure 2.2 

 Total 37.2 

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, 2005. 

• The most common diagnosis for a skilled nursing facility (SNF) admission in 2005 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 2005. 

• All SNFs (hospital-based and freestanding facilities, and nonprofit and for-profit facilities) 

had the same top 10 diagnoses, although the rank orderings of the top 4 conditions differed 

slightly by SNF type. 
A Data Book: Healthcare spending and the Medicare program, June 2008 123

Chart 9-5. SNF volume per fee-per-service enrollee continues 

to increase 

 Change 

 2004 2005 2006 2005–2006 

 

SNF users (unique count) 1,580,288 1,670,411 1,673,284 0.2% 

Total SNF volume 

 Covered admissions 2,419,943 2,549,408 2,543,133 –0.2 

 Covered days (in thousands) 62,364 66,002 67,143 1.7 

 Covered days per admission 25.8 25.9 26.4 1.9 

 

Volume per 1,000 fee-for-service enrollees 

 Covered admissions 67 70 72 2.9 

 Covered days 1,732 1,817 1,892 4.1 

Note: SNF (skilled nursing facility). 

Source: Beneficiary counts from MedPAC analysis of MedPAR data. Days and admissions data from CMS, Office of Research, 

Development and Information. 

• Between 2005 and 2006, admissions declined slightly and the number of days increased, 

resulting in longer average stays. However, during this period more beneficiaries 

participated in Medicare Advantage plans (whose volume is not included in the measures); 

therefore, admissions and days per fee-for-service enrollee increased. 

• Some of the growth in fee-for-service admissions and days may reflect a shift in site of care 

from inpatient rehabilitation facilities (IRFs) to skilled nursing facilities (SNFs). Of the top 10 

hospital diagnosis related groups (DRGs) with IRF destinations, the share of patients going 

to SNFs increased for 8 of the 10 DRGs between 2003 and 2006. 
124 Post-acute care

Chart 9-6. A growing share of Medicare stays and payments go 

to freestanding and for-profit SNFs 

 Facilities Medicare-covered stays Medicare payments 

Type of SNF 2004 2005 2006 2004 2005 2006 2004 2005 2006 

 

Freestanding 91% 92% 92% 85% 87% 89% 92% 93% 94% 

Hospital based 9 8 8 15 13 11 8 7 6 

Urban 67 67 67 79 79 79 81 81 81 

Rural 33 33 33 21 21 21 19 19 19 

For profit 67 68 68 65 66 67 71 72 73 

Nonprofit 28 28 28 31 30 29 25 25 24 

Government 5 5 5 4 4 4 3 3 3 

Note: SNF (skilled nursing facility). Totals may not sum to 100 due to rounding. 

Source: MedPAC analysis of the Provider of Services and Medicare Provider Analysis and Review files from CMS. 

• Freestanding skilled nursing facilities (SNFs) treated 89 percent of stays (up 4 percentage 

points from 2004) and accounted for 94 percent of Medicare payments (up 2 percentage 

points from 2004). 

• For-profit SNFs’ share of Medicare-covered stays and payments each increased 2 

percentage points between 2004 and 2006. 

• Urban SNFs’ share of facilities, Medicare-covered stays, and payments each remained the 

same between 2004 and 2006. 
A Data Book: Healthcare spending and the Medicare program, June 2008 125

Chart 9-7. Case mix in freestanding SNFs shifted toward 

extensive services plus rehabilitation RUGs 

2005 2006

0

10

20

30

40

50

60

70

80

90

100

Share

of patient da

ys

Rehabilitation

Extensive services + rehabilitation

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. 

• The nine new rehabilitation plus extensive services resource utilization groups (RUGs) 

established in 2006 accounted for 26 percent of all freestanding skilled nursing facilities’ 

(SNFs’) RUG days in 2006. 

• In 2005, rehabilitation RUGs accounted for 83 percent of freestanding SNFs’ RUG days; in 

2006 their share had declined to 60 percent. Rehabilitation and rehabilitation plus extensive 

service RUGs together accounted for 86 percent of all Medicare days in freestanding SNFs. 

 
126 Post-acute care

Chart 9-8. Rehabilitation stays in freestanding SNFs continue 

to shift toward high-intensity RUGs 

Ultra high Very high High Medium

Rehabilitation RUG categories

0%

10%

20%

30%

40%

50%

P

ercent of S

N

F da

ys

2001

2003

2005

2006

Note: SNF (skilled nursing facility), RUG (resource utilization group). Days are for freestanding SNFs with valid cost reports.

Source: MedPAC analysis of freestanding SNF cost reports. 

• The distribution of rehabilitation days in freestanding skilled nursing facilities (SNFs) 

continued to shift toward the highest therapy groups. The ultra high and very high groups 

made up 59 percent of the rehabilitation-only days in 2006, up 7 percentage points from the 

previous year. 

• The shifts toward higher intensity resource utilization groups (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 classify patients into higher paying rehabilitation RUGs. 
A Data Book: Healthcare spending and the Medicare program, June 2008 127

Chart 9-9. Freestanding SNF Medicare margins have exceeded 

10 percent for six years 

Type of SNF 2001 2002 2003 2004 2005 2006

All 17.6% 17.4% 10.8% 13.7% 12.9% 13.1% 

 

Urban 17.4 16.8 10.0 13.0 12.4 12.7 

Rural 18.4 20.0 14.1 16.5 15.3 14.5 

 

For profit 19.9 20.0 13.9 16.6 15.7 16.0 

Nonprofit 10.1 9.0 1.5 4.2 4.3 3.1 

Government* 4.9 3.1 –7.1 –3.0 –5.0 –5.9 

Note: SNF (skilled nursing facility). Margins are calculated as payments minus costs, divided by payments for each group. 

 * The results for government-owned providers are not necessarily comparable to other providers because they operate in 

a different context. 

Source: MedPAC analysis of freestanding SNF cost reports. 

• Aggregate Medicare margins for freestanding skilled nursing facilities (SNFs) have 

exceeded 10 percent every year since 2001. 

• Aggregate Medicare margins increased from 2005 to 2006 due to slower cost growth and 

higher payments for the nine new resource utilization groups (RUGs) (rehabilitation plus 

extensive services). 

• Examining the distribution of the 2006 margin, one-half of freestanding SNFs had margins of 

14.7 percent or more, while one-quarter had Medicare margins at or below 4 percent. 

• Freestanding SNFs in the top quartile of 2006 Medicare margins had costs per day that 

were one-third lower, a higher average daily census, and longer stays compared with SNFs 

in the bottom margin quartile. SNFs in the top quartile also treated a smaller share of 

patients in the clinical complex, special care, and extensive services RUGs than SNFs in the 

bottom margin quartile. 
128 Post-acute care

 Chart 9-10. Costs per day are higher in hospital-based SNFs 

$395

$78

$48 $53

$176

$80

$38

$13

Routine Therapy Drugs Other

Type of cost

0

100

200

300

400

500

Cost per day

Hospital based

Freestanding

Note: SNF (skilled nursing facility). Costs include associated overhead and capital expenses. Costs were not standardized for 

wages or case-mix differences. 

Source: Analysis of 2004 Medicare Provider Analysis and Review file and cost report data from CMS. 

• Costs per day differ substantially between hospital-based and freestanding skilled nursing 

facilities (SNFs). Routine costs—which include room, board, and nursing costs—are more 

than twice as high in hospital-based SNFs ($395) than in freestanding SNFs ($176). Part of 

the difference in routine costs may be due to the higher staffing ratios and greater use of 

registered nurses and licensed practical nurses in hospital-based facilities. 

• The average daily costs of therapy services, which are the second biggest category of SNF 

costs, are similar between hospital-based and freestanding facilities. 

• Per diem drug costs are 26 percent higher in hospital-based SNFs ($48) than in 

freestanding SNFs ($38). This difference may be attributable to differences in patient mix, 

particularly for patients that might require high-cost intravenous medications. 

• The average daily costs for other nontherapy ancillary services (supplies, lab, respiratory 

therapy, and other ancillary services) in total are four times as high in hospital-based SNFs 

($53) as in freestanding SNFs ($13). The higher costs for the other nontherapy ancillary 

services may be due to differences in the complexity of some patients but also are likely due 

to easier access to these services and practice pattern differences in the hospital-based 

setting. 
A Data Book: Healthcare spending and the Medicare program, June 2008 129

Chart 9-11. Percent of SNF cases discharged to different postacute care settings, 2006 

8.5

40.6

1.4 0.2 0.2

1.8

6.8

1.8

21.6

0.1 0.1 0.4

2.5

24.3

Other SNF Home health 

care

Inpatient 

rehabilitation 

facility

Long-term 

care hospital

Psychiatric 

hospital or 

unit

Hospice Nursing 

home

0

5

10

15

20

25

30

35

40

45

P

erc

ent of d si charg

es fro

m

S

N

F

 Discharged from:

Hospital-based SNF

Freestanding SNF

Note: SNF (skilled nursing facility). Subsequent use of a second post-acute care provider is determined using matched claims 

files for the different post-acute care services. Use of home health care and hospice is based on care that starts within 3 

days of discharge from the SNF. Other PAC care starts within one day of discharge from the SNF. Discharge to a nursing 

home is based on the discharge destination field on the claim and not on a matched claim, and includes patients that end 

their Medicare covered SNF stay with the discharge designation “still a patient” and have no other Medicare post-acute 

care or hospital care services. Total percent of cases discharged from hospital-based SNFs to other post-acute care 

settings was 52.7 percent; total percent of cases discharged from freestanding SNFs to other post-acute care settings 

was 26.5 percent. Patient-level averages are shown. 

Source: MedPAC analysis of 2006 claims files from CMS. 

• Patients using hospital-based skilled nursing facilities (SNFs) are more likely to use another postacute care provider after discharge from the SNF than patients using freestanding SNFs. Overall, 9 

percent of patients discharged from a hospital-based SNF are discharged to another SNF compared 

with fewer than 2 percent of patients using freestanding SNFs. Forty-one percent of patients from 

hospital-based SNFs are discharged to home health care, compared with 22 percent of patients 

discharged from freestanding SNFs. 

• Compared to hospital-based SNFs, freestanding SNFs discharge more patients back to the hospital. 

Twenty-four percent of patients discharged to a freestanding SNF are readmitted to the hospital 

within 30 days, compared with 19 percent of inpatients discharged to a hospital-based SNF (not 

shown). 

• Almost one-quarter of freestanding SNF patients continue receiving nursing home services after they 

have finished their Medicare-covered SNF stay either in the same facility or a different facility. This 

compares with just 7 percent of patients discharged from hospital-based SNFs. Some of these 

differences may reflect differences in patient selection rather than differences in practice patterns. 
130 Post-acute care

Chart 9-12. Spending for home health care, 1994–2007 

13.3

16.4

17.8 17.7

11.8

8.8 8.5 8.6

10.0 9.9

11.3

12.5

13.1

14.1

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

2

4

6

8

10

12

14

16

18

20

Dol al rs ( ni bill oi ns)

Source: CMS, Office of the Actuary, 2008. 

• 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 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 8.5 percent a year in 2001–

2007. In 2003, payments declined slightly because of a payment adjustment required by the 

Balanced Budget Act of 1997, but in every other year in this period spending increased. 

• 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 (see Chart 9-14). 
A Data Book: Healthcare spending and the Medicare program, June 2008 131

Chart 9-13. Trends in the provision of home health care 

 Average annual 

 percent change 

 2002 2004 2006 2002–2006 

 

Number of users (in millions) 2.5 2.8 2.9 4.0% 

 

Percent of beneficiaries who 

 used home health (percent) 7.1% 7.6% 8.1% 3.5 

 

Episodes by type (in thousands) 

 Less than 10 therapy visits 3,065 3,426 3,697 4.8 

 10 or more 951 1,229 1,426 10.6 

Total 4,016 4,655 5,123 6.3 

 

Episodes per user 1.62 1.68 1.76 2.1 

 

Visits per user 31 31 34 2.5 

 

Average payment per episode $2,317 $2,361 $2,569 2.6 

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 2006, almost 3 million beneficiaries used 

the home health benefit. 

• The number of home health episodes increased rapidly from 2002 to 2006. The growth in 

episodes that were therapy intensive—those with 10 or more therapy visits—was more than 

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. 
132 Post-acute care

Chart 9-14. The home health product changed after the 

prospective payment system started 

 Percent change 

 1997 2000 

 1997 2000 2006 –2000 –2006 

Users (in millions) 3.6 2.5 2.9 –31 18 

 

Number of visits (in millions) 258 91 98 –65 8 

 

Visit type (percent of total) 

 Home health aide 48% 31% 20% –37 –34 

 Skilled nursing 41 49 53 20 7 

 Therapy 10 19 26 101 37 

 Medical social services 1 1 1 1 –27 

Visits per user 73 37 34 –49 –8 

 

Percent of fee-for-service beneficiaries 

 who used home health 10.5% 7.4% 8.1% –30.1 10.7 

Note: The prospective payment system began in October 2000. 

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 9-12). 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 2006 is slightly below 2000. 

• Under PPS the mix of visits has continued to shift toward therapy (physical therapy, occupational 

therapy, and speech 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 have led CMS to revise the payments for these services in 

2008. The new system increases payment for therapy services more gradually than the previous 

approach, but it will still base payments on the amount of services provided and not the patient 

characteristics. 
A Data Book: Healthcare spending and the Medicare program, June 2008 133

Chart 9-15. Margins for freestanding home health agencies 

 Percent of 

 agencies 

 2005 2006 2006 

 

All 17.3% 15.4% 100% 

Geography 

 Urban 16.5 14.6 62 

 Rural 18.7 17.2 21 

 Mixed 14.1 14.3 17 

Type of control 

 For profit 19.2 17.4 77 

 Non profit 13.8 11.6 15 

 Government* 8.5 3.6 8 

Volume quintile 

 First 12.7 9.2 20 

 Second 13.5 11.0 20 

 Third 13.3 10.6 20 

 Fourth 17.4 15.4 20 

 Fifth 18.6 16.7 20 

Note: Analysis includes 4,290 agencies for 2005 and 4,078 agencies for 2006. 

 * The results for government-owned providers are not necessarily comparable to other providers because they operate in 

a different context. 

Source: MedPAC analysis of 2005–2006 Cost Report files. 

• In 2006, about 80 percent of agencies had positive margins. These estimated margins 

indicate that Medicare’s payments are above the costs of providing services to Medicare 

beneficiaries, for both rural and urban home health agencies (HHAs). 

• These margins are for freestanding HHAs, which composed about 85 percent of all HHAs in 

2006. HHAs are also based in hospitals and other facilities. 

• These margins are consistent with the historically high margins the home health industry 

has experienced under the PPS. The average margin in 2001–2006 was 16 percent, 

indicating that most agencies have been paid well in excess of cost under prospective 

payment. 
134 Post-acute care

Chart 9-16. The top 15 LTC–DRGs made up more than 60 

percent of cases in LTCHs in 2006 

 

 

LTC–DRG Description Discharges Percentage 

 

 475 Respiratory system diagnosis with ventilator support 15,698 12.1% 

 271 Skin ulcers 7,056 5.4 

 416 Septicemia age >17 6,676 5.1 

 87 Pulmonary edema and respiratory failure 6,540 5.0 

 79 Respiratory infections and inflammation age >17 with CC 6,061 4.7 

 466 Aftercare, without history of malignancy 4,835 3.7 

 89 Simple pneumonia and pleurisy age >17 with CC 4,717 3.6 

 249 Aftercare, musculoskeletal system and connective tissue 4,613 3.5 

 88 Chronic obstructive pulmonary disease 4,594 3.5 

 12 Degenerative nervous system disorders 4,193 3.2 

 263 Skin graft and/or debridement for skin ulcer with CC 3,921 3.0 

 127 Heart failure and shock 3,531 2.7 

 462 Rehabilitation 2,977 2.3 

 418 Postoperative and post-traumatic infections 2,663 2.0 

 316 Renal failure 2,500 1.9 

 Top 15 LTC–DRGs 80,575 61.9 

 

 Total 130,164 100.0 

 

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 12 percent of all Medicare LTCH patients. 
A Data Book: Healthcare spending and the Medicare program, June 2008 135

Chart 9-17. Spending for long-term care hospital services 

increased rapidly under PPS 

Average 

 TEFRA Change PPS annual Change 

 2001– change 2005– 

 2001 2002 2002 2003 2004 2005 2006 2003–2005 2006 

 

Spending (in billions) $1.9 $2.2 15.8 $2.7 $3.7 $4.5 $4.5 29.1 0.0 

Cases 85,229 98,896 16.0% 110,396 121,955 134,003 130,164 10.2% –2.9% 

 

Cases per 10,000 

 FFS beneficiaries 25.1 28.3 12.7 30.8 33.6 36.6 36.5 9.0 –0.4 

 

Spending per FFS 

 beneficiary $56.0 $63.0 12.5 $75.4 $101.9 $123.0 $126.1 27.7 2.5 

Payment per case $22,009 $22,486 2.2 $24,758 $30,059 $33,658 $34,859 16.6 3.4 

Length of stay 

 (in days) 31.3 30.7 –1.9 28.8 28.5 28.2 27.9 –1.0 –1.1 

Note: PPS (prospective payment system), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), FFS (fee for service). 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: MedPAC analysis of MedPAR data from CMS. 

• From 2003 to 2005, Medicare spending for long-term care hospitals (LTCHs) increased 

about 29 percent per year. In 2006 spending for 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 2.5 percent between 2005 and 2006. 

• The number of LTCH cases increased about 10 percent annually between 2003, when the 

prospective payment system was implemented, and 2005. Between 2005 and 2006, cases 

declined almost 3 percent; most of this was due to a drop in the number of FFS 

beneficiaries. 
136 Post-acute care

Chart 9-18. LTCHs’ payments have risen faster than their costs 

under the PPS 

1999 2000 2001 2002 2003 2004 2005 2006

-10

-5

0

5

10

15

20

25

30

35

40

45

Cumulativ

e percent change

Payment per case

Cost per case

TEFRA PPS

Note: LTCH (long-term care hospital), PPS (prospective payment system), TEFRA (Tax Equity and Fiscal Responsibility Act of 

1982). Data are from consistent two-year cohorts of LTCHs. 

Source: MedPAC analysis of cost reports from CMS. 

• Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and before the 

prospective payment system (PPS) was implemented in fiscal year 2003, long-term care 

hospitals’ (LTCHs’) Medicare per case costs and payments changed at similar rates. Since 

the PPS, LTCHs’ Medicare per case payments have increased much faster than their per 

case costs. 

• These similarities and differences are reflected in LTCHs’ Medicare margins, shown in Chart 

9-19. 
A Data Book: Healthcare spending and the Medicare program, June 2008 137

Chart 9-19. All types of LTCHs’ Medicare margins increased 

under PPS 

 TEFRA PPS 

Type of LTCH 2001 2002 2003 2004 2005 2006 

All LTCHs –1.6% –0.2% 5.4% 9.0% 11.9% 9.4% 

Freestanding –1.2 0.1 5.6 8.1 11.0 8.3 

HWH –2.2 –0.5 5.1 9.8 12.7 10.5 

 

Urban –1.6 –0.1 5.5 9.1 11.9 9.6 

Rural –3.2 –1.6 1.3 5.0 11.3 2.9 

Nonprofit –1.8 0.1 2.3 6.6 9.9 5.7 

For profit –1.4 –0.1 6.5 10.1 13.0 10.8 

Government* –4.8 –2.0 0.4 –2.5 –3.1 –1.7

Note: LTCH (long–term care hospital), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment 

system), HWH (hospital within hospital). 

 *Government-owned LTCHs are relatively few in number, have few Medicare patients, and operate under different budget 

and economic constraints than other LTCHs. 

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 5.4 

percent in 2003 to 11.9 percent in 2005. In 2006, margins declined to 9.4 percent. 

• In 2006, urban LTCHs had much higher margins than their rural counterparts. For-profit 

LTCHs and hospitals within hospitals were also more likely than other types of LTCHs to 

have higher margins. 
138 Post-acute care

Chart 9-20. Most common types of cases in inpatient 

rehabilitation facilities, 2007 

Impairment group description Share of cases 

Stroke 20.5% 

Hip fracture 16.4 

Major joint replacement 15.5 

Debility 7.9 

Neurological 7.5 

Brain injury 6.4 

Other orthopedic 5.5 

Spinal cord injury 4.3 

Cardiac 4.3 

Other 11.7 

Note: Other includes conditions such as major medical trauma, amputations, and pain syndrome. 

Source: MedPAC analysis of Inpatient Rehabilitation Facility–Patient Assessment Instrument data from CMS (January 1 through 

June 30, 2007). 

• In 2007, the most frequent diagnosis for Medicare patients in inpatient rehabilitation facilities 

(IRFs) was stroke, representing just over 20 percent of cases, a significant change from 

2004, when stroke represented 11.5 percent of cases. 

• Major joint replacement represented 15.5 percent of IRF admissions, down from over 30 

percent of cases in 2004, when major joint replacement was the most common IRF 

Medicare case type. 
A Data Book: Healthcare spending and the Medicare program, June 2008 139

Chart 9-21. The number of IRFs has remained generally stable 

under the PPS, but has declined in recent years 

 Average Average 

 annual annual

 TEFRA Prospective payment system change change 

Type of IRF 2001 2002 2003 2004 2005 2006 2007 2002–2005 2005–2007 

All IRFs 1,157 1,188 1,211 1,227 1,231 1,224 1,202 1.2% -1.2% 

 

Urban 971 988 1,001 1,009 1,000 969 953 0.4 -2.4 

Rural 186 200 210 218 231 255 249 4.9 3.8 

Freestanding 214 215 215 217 217 217 219 0.3 0.5 

Hospital-based 943 973 996 1,010 1,014 1,007 983 1.4 -1.5 

Nonprofit 733 755 765 772 765 757 740 0.4 -1.6 

For profit 271 277 290 294 305 299 288 3.3 -2.8 

Government 153 156 156 161 161 168 174 1.1 4.0 

Note: IRF (inpatient rehabilitation facility), PPS (prospective payment system), TEFRA (Tax Equity and Fiscal Responsibility Act 

of 1983). 

 

Source: MedPAC analysis of Provider of Service files from CMS. 

• The number of inpatient rehabilitation facilities (IRFs) in 2007 declined slightly from the prior 

year. 

• The number of rural IRFs grew at a higher rate than other types, perhaps fueled by the 20 

percent rural payment adjustment under the prospective payment system. Critical access 

hospitals (CAHs)―generally rural providers―were also allowed to operate IRF units 

beginning in 2004. 

• Small increases in the number of rural IRFs and for-profit IRFs slightly more than offset 

small declines in urban and non-profit facilities through 2006, but the number of most types 

of IRFs declined in 2007. 

• These changes may reflect changes in IRFs’ capacity predicated by the 75 percent rule. 
140 Post-acute care

Chart 9-22. Prior trend in volume of IRF cases reversed between 

2004 and 2006 

 Average Average 

 annual annual 

 change change 

 2002 2003 2004 2005 2006 2002–2004 2004–2006 

Number of cases 439,631 478,723 496,695 449,321 404,255 6.3% –9.8% 

Medicare spending 

 (in billions) $5.7 $6.2 $6.4 $6.4 $6.0 6.0 –3.2 

Payment per case $11,152 $12,952 $13,275 $14,248 $15,354 9.1 7.5 

Average length of stay 

 (in days) 13.3 12.8 12.7 13.1 13.0 –2.3 1.2 

Note: IRF (inpatient rehabilitation facility). Numbers of cases reflect Medicare fee-for-service utilization only. 

Source: MedPAC analysis of MedPAR data from CMS. 

• The number of Medicare admissions to inpatient rehabilitation facilities (IRFs) increased 

rapidly under the prospective payment system, rising to nearly 500,000 cases in 2004. 

• The number of Medicare IRF admissions decreased by nearly 10 percent annually between 

2004 and 2006, reflecting CMS’s renewed enforcement of the 75% rule. 

• Medicare payments per discharge increased by over 7 percent annually over this period, 

following average annual increases of 9 percent between 2002 and 2004. 

• Overall Medicare spending on IRF services declined by about 6 percent from 2004 to 2006. 

• Theses trends are not inconsistent with expectations under the more rigorously enforced 75 

percent rule, but may also reflect declining enrollment in fee-for-service Medicare as 

enrollment in Medicare Advantage plans has increased. 
A Data Book: Healthcare spending and the Medicare program, June 2008 141

Chart 9-23 Per case payments for IRFs have risen faster than 

costs, post-PPS 

1999 2000 2001 2002 2003 2004 2005 2006

-10

-5

0

5

10

15

20

25

30

35

Cumu al tiv

e percent change

-3.5

-4.9 -5.4

1.6

12.9

15.6

22.9

32.2

-1.7

-3.3 -4.0 -3.6

-2.1

-0.7

13.3

22.4

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. 

• Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and before the 

prospective payment system (PPS) was implemented in 2002, inpatient rehabilitation 

facilities’ Medicare per case costs and payments increased at similar rates. Under PPS, 

IRFs’ Medicare per case payments have increased much faster than their per case costs. 

• These similarities and differences are reflected in IRFs’ Medicare margins, shown in 

Chart 9-24. 
142 Post-acute care

Chart 9-24. Inpatient rehabilitation facilities’ Medicare margin by 

type, 2000–2006 

 TEFRA PPS 

 2000 2001 2002 2003 2004 2005 2006 

All IRFs 1.3% 1.5% 11.0% 17.8% 16.2% 13.2% 12.4% 

Hospital based 1.3 1.4 6.4 14.9 12.0 9.4 9.5 

Freestanding 1.2 1.4 18.5 23.0 24.3 20.5 17.9 

Urban 1.3 1.5 11.6 18.5 16.8 13.7 13.0 

Rural 0.9 1.1 5.0 10.4 10.5 9.2 7.8 

Nonprofit 1.5 1.6 6.8 14.5 12.7 10.0 10.7 

For profit 0.9 1.3 18.8 24.3 24.1 19.5 16.6 

Government* 1.1 1.4 2.4 10.2 9.1 8.2 6.2 

Note: IRF (inpatient rehabilitation facility), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment 

system). 

 * Margins reported for government providers are not necessarily comparable to other providers because they operate in a 

different context. 

Source: MedPAC analysis of cost report data from CMS. 

• From 2002 to 2003, the aggregate Medicare margin increased rapidly, from 11 percent to 

almost 18 percent. From 2003 to 2006, margins declined for all inpatient rehabilitation facility 

(IRF) types. 

• Freestanding and for-profit IRFs had substantially higher margins 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 2008 143

Web links. Post-acute care 

Skilled nursing facilities 

• Chapter 2D of MedPAC’s March 2008 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/Jun08_Ch07.pdf 

 http://www.medpac.gov/chapters/Mar08_Ch02d.pdf 

 http://www.medpac.gov/documents/MedPAC_Payment_Basics_07_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 2008 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. 

 http://www.medpac.gov/chapters/Mar08_Ch02e.pdf 

 

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

 

 http://www.medpac.gov/publications/congressional_reports/Jun06_Ch05.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 2008 Report to the Congress provides information on long-term 

care hospitals. 

http://www.medpac.gov/chapters/Mar08_Ch02g.pdf 

• CMS also provides information on long-term care hospitals, including the long-term care hospital 

prospective payment system. 

http://www.cms.hhs.gov/LongTermCareHospitalPPS/
144 Post-acute care

Inpatient rehabilitation facilities 

• Chapter 2F of MedPAC’s March 2008 Report to the Congress provides information on 

 inpatient rehabilitation facilities. 

 http://www.medpac.gov/chapters/Mar08_Ch02F.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 2008 147

Chart 10-1. Access to 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 

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. That is, special needs plans, cost-based plans, employer-only plans, 

and certain demonstration plans are excluded. 

Source: MedPAC analysis of plan finder data from CMS. 

• Local coordinated care plans (CCPs) are local preferred provider organizations (PPOs) and 

health maintenance organizations (HMOs), which have comprehensive provider networks 

and limit or discourage use of out-of-network providers. 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. Another 

type of Medicare Advantage (MA) plan is a private fee-for-service (PFFS) plan. PFFS plans 

are not required to have networks and members may go to any willing Medicare provider. 

• Local CCPs are available to 85 percent of Medicare beneficiaries in 2008—up from 67 

percent in 2005. Regional PPOs are available to 87 percent of beneficiaries. Virtually all 

beneficiaries live in a county where MA PFFS plans are available in 2008—up from 45 

percent in 2005. For the past three 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 2008, 

beneficiaries can choose from an average of 35 plans operating in their counties, up from a 

choice of 20 plans in 2007 and 5 plans in 2005. 
148 Medicare Advantage

Chart 10-2. Access to zero-premium plans with MA drug 

coverage, 2006, 2007, and 2008 

48

11

25

15

73

60

19

55

25

86

66

29

52

25

88

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 ai r ei s

2006 2007 2008

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 2008 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 2008, 88 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 86 percent in 2007. 

• Sixty-six 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 52 percent in 2008. 

• 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 2008 149

 Chart 10-3. Enrollment in MA plans, 1994–2008 

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

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

0

2

4

6

8

10

B

enef ci ai r ei s ( ni mill oi ns)

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 9.4 million enrollees (21 percent of all Medicare beneficiaries). Enrollment rose 

rapidly throughout the 1990s, peaking at 6.4 million enrollees in 1999, and declined steadily 

to a low of 4.6 million enrollees in 2003. 
150 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 Percentage change 

Plan type 2006 2007 2008 2007–2008 

Local CCPs 5,480 6,065 6,830 13% 

Regional PPOs 82 121 257 112 

PFFS 774 1,328 2,057 55 

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 22 percent from 

February 2007 to February 2008. 

 

• While still the dominant form of enrollment, local CCP enrollment grew 13 percent over the 

past year, while enrollment in regional PPOs grew by 112 percent and PFFS enrollment 

grew by 55 percent. 

• Almost half of the growth in regional PPOs from February 2007 to February 2008 can be 

attributed to regional special needs plans (SNPs). As of February 2008, 30 percent of 

regional PPO enrollees are enrolled in SNPs. 
A Data Book: Healthcare spending and the Medicare program, June 2008 151

Chart 10-5. MA enrollment by state and type of plan, 2008 

 

 Medicare eligibles Distribution (in percent) of MA enrollees by plan type 

State (in thousands) HMO Local PPO Regional PPO PFFS Cost Total 

Alabama 787 11% 3% 0% 3% 0% 16% 

Alaska 57 0 0 0 0 0 1 

Arizona 821 31 1 1 4 0 37 

Arkansas 495 2 0 2 7 0 11 

California 4,360 32 0 1 1 0 34 

Colorado 556 23 1 0 4 4 32 

Connecticut 536 11 1 0 1 0 13 

Delaware 135 1 0 0 2 0 3 

District of Columbia 74 1 0 0 1 6 9 

Florida 3,099 22 1 2 2 0 27 

Georgia 1,108 2 1 2 7 0 12 

Hawaii 189 12 2 1 1 20 37 

Idaho 206 9 3 0 11 1 24 

Illinois 1,739 4 1 0 3 0 9 

Indiana 939 0 1 1 8 2 12 

Iowa 499 1 0 1 7 1 11 

Kansas 410 2 2 0 4 1 9 

Kentucky 709 3 1 1 8 1 13 

Louisiana 637 15 0 0 4 0 20 

Maine 246 1 1 0 3 0 5 

Maryland 723 3 1 0 1 2 7 

Massachusetts 996 14 1 0 3 0 18 

Michigan 1,536 4 0 0 16 0 20 

Minnesota 730 11 0 2 9 11 33 

Mississippi 468 1 0 0 6 0 8 

Missouri 944 11 2 1 4 0 18 

Montana 156 0 1 0 12 0 14 

Nebraska 267 3 0 1 6 1 11 

Nevada 316 28 0 1 2 0 31 

New Hampshire 198 0 0 0 4 0 4 

New Jersey 1,257 9 1 0 0 0 10 

New Mexico 284 16 3 0 3 0 23 

New York 2,832 22 2 0 1 0 26 

North Carolina 1,351 7 0 0 9 0 16 

North Dakota 105 0 0 0 6 1 7 

Ohio 1,800 12 1 1 10 1 25 

Oklahoma 561 9 1 0 3 0 13 

Oregon 565 23 13 0 4 1 40 

Pennsylvania 2,176 26 4 0 3 0 34 

Puerto Rico 605 54 6 0 0 0 60 

Rhode Island 175 34 1 0 1 0 36 

South Carolina 692 1 0 3 9 0 12 

South Dakota 129 3 0 1 4 0 9 

Tennessee 970 14 0 0 5 0 20 

Texas 2,692 11 1 1 3 1 17 

Utah 253 3 9 0 13 1 26 

Vermont 102 0 0 0 2 0 3 

Virginia 1,042 1 0 0 9 1 11 

Washington 870 14 2 0 5 0 22 

West Virginia 366 1 2 0 14 4 22 

Wisconsin 854 6 1 0 14 1 23 

Wyoming 74 0 0 0 3 1 5 

U.S. Total 43,688 14 1 1 5 1 22 

Note: MA (Medicare Advantage), HMO (health maintenance organization), PPO (preferred provider organization), PFFS (private fee-forservice). 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 40 percent and 60 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 none of their enrollment in PFFS plans. 
152 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. In nonMSA plans, the Medicare program 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 2008 153

Chart 10-7. MA plan benchmarks, bids, and Medicare program 

payments relative to FFS spending, 2008 

All Plans HMOs Local PPOs Regional PPOs PFFS 

 

Benchmarks/FFS 118% 117% 122% 115% 120% 

Bids/FFS 101 99 108 103 108 

Payments/FFS 113 112 119 112 117 

 

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 2007. 

• 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 101 percent of FFS spending. We estimate that HMOs 

bid an average of 99 percent of FFS spending, while bids from other plan types average at least 

103 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 2008 MA payments will be 113 percent of FFS spending. That means that in 

2008 the Medicare program is paying about $10 billion more for the 21 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 112 percent of 

FFS, while payments to PFFS and local PPOs will average at least 117 percent. 
154 Medicare Advantage

Chart 10-8. Enrollment in employer group MA plans, 2006–2008 

Feb-08

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

Enrollment (in millions)

Feb-08

CCP

PFFS

May-06 Nov-07

Note: MA (Medicare Advantage), CCP (coordinated care plans), 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 2 years, enrollment in employer group plans has grown by more than 60 percent, while 

overall MA enrollment grew by about 20 percent. As of February 2008, there were about 1.55 million 

enrollees in employer group plans compared with about 7.5 million enrollees in individual MA plans. 

Thus, about 17 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. Over 80 percent of the growth in employer group enrollment over the past two years, and 

virtually all of the growth over the past year, has come from private fee-for-service enrollment. There 

are now more than half-a-million enrollees in employer group PFFS plans. PFFS plans now have 

about one-third of the enrollment in the MA employer group market, and employer group enrollment is 

now about a quarter 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 99 percent of FFS for individual plans. 

• We estimate that Medicare pays employer group plans 116 percent of average FFS Medicare 

spending, compared with 113 percent of FFS for individual market MA plans. 
A Data Book: Healthcare spending and the Medicare program, June 2008 155

Chart 10-9. Special needs plans have grown quickly 

11

125

276

476

769

2004 2005 2006 2007 2008

0

100

200

300

400

500

600

700

800

Number of spec ai l ne

eds p al ns

Source: CMS special needs plans fact sheet and data summary, February 14, 2006 and CMS special needs plans comprehensive 

reports, March 21, 2007, and April 2008. 

• 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 2008, there are 769 SNPs, a 62 percent increase over 2007 and a 179 percent increase 

over 2006. 

• SNPs were originally authorized for five years. The Medicare, Medicaid, and SCHIP 

Extension Act of 2007 extended SNP authority for an additional year while placing a 

moratorium on new plans and service area expansions for existing plans. Absent additional 

congressional action, SNP authority will expire at the end of 2009. 
156 Medicare Advantage

Chart 10-10. The number of SNPs and SNP enrollment increased 

from 2007 to 2008 

March 2007 April 2008

0

100

200

300

400

500

600

700

800

Number of SNPs

March 2007 April 2008

SNP enrollment (in thousands)

Dual eligible

Institutional

Chronic or disabling condition

0

200

400

600

800

1,000

1,200

843,000

1,147,000

476

769

Note: SNP (special needs plan). 

Source: CMS special needs plans comprehensive reports, March 21, 2007, and April 2008. 

 

• In 2008, most special needs plans (SNPs) (57 percent) are for dual-eligible beneficiaries, 

while 31 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). 

• This is a change from 2007 when 67 percent of SNPs were for dual eligibles. 

• Enrollment in SNPs has grown quickly from 843,000 in March 2007 to 1,147,000 in April 

2008, a 36 percent increase. 

• The rate of enrollment growth was especially rapid for chronic condition SNPs (55 percent). 

(For more information, see Chapter 3 of MedPAC’s March 2008 Report to the Congress at 

http://medpac.gov/chapters/Mar08_Ch03.pdf.) 

• Most beneficiaries (95 percent) live in an area served by a SNP. Eighty-nine percent of 

beneficiaries live in an area served by a chronic condition SNP, 77 percent in areas with 

dual-eligible SNPs, and 54 percent in areas with institutional SNPs. 
A Data Book: Healthcare spending and the Medicare program, June 2008 157

Web links. Medicare Advantage 

• Chapter 3 of MedPAC’s March 2008 Report to the Congress provides information on 

Medicare Advantage plans. 

http://medpac.gov/chapters/Mar08_Ch03.pdf 

• Chapter 3 of MedPAC’s June 2007 Report to the Congress provides information on 

 Medicare Advantage plans. 

http://medpac.gov/chapters/Jun07_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_07_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/Default.asp 

S E C T I O N

Drugs

A Data Book: Healthcare spending and the Medicare program, June 2008 161

Chart 11-1. Medicare spending for Part B drugs 

2.8 3.2

4.1

5.1

6.4

8.5

10.3 10.9

10.1 10.6

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

5

10

15

20

M

ed ci are spend ni g (dollars ni billions)

Medicare spending

Source: MedPAC analysis of unpublished CMS data. 

• MedPAC estimates that spending for Part B drugs totaled $10.6 billion in 2006. 

• Medicare spending on Part B drugs increased at an average rate of 25 percent per year 

from 1997 to 2003. Since then the rate has moderated. In 2005, spending declined by 7.8 

percent compared with 2004. Spending increased 4.7 percent in 2006 but remained below 

2004 levels. 

• 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 and pass-through drugs provided in hospital outpatient departments 

equaled about $3 billion in 2006. We estimate that freestanding and hospital-based dialysis 

facilities billed Medicare an additional $2.8 billion for drugs. 

• In 2005, the Medicare payment rate changed from one based on the average wholesale 

price to 106 percent of the average sales price. 
162 Drugs

Chart 11-2. Top 10 drugs covered by Medicare Part B, by share 

of expenditures, 2006 

 Percent of Rank in 

Drug name Clinical indications Competition spending 2005 

Darbepoetin alfa Anemia Sole source 10.6% 1 

Rituximab Non-Hodgkin’s Sole source 6.9 3 

 lymphoma 

Non-ESRD erythropoietin Anemia Multisource 6.4 2 

 biological 

Infliximab Rheumatoid arthritis, Sole source 5.6 4 

 Crohn’s disease 

Pegfilgrastim Cancer Sole source 5.1 5 

Bevacizumab Cancer Sole source 4.3 6 

Levalbuterol Asthma and other 

 lung conditions Sole source 3.5 not on list 

Unclassified drugs N/A 3.1 N/A 

Oxaliplatin Cancer Sole source 2.9 9 

Docetaxel Cancer Sole source 2.6 not on list 

Note: ESRD (end-stage renal disease), N/A (not applicable). This chart has been updated since the printed version of this data

book was published. 

Source: MedPAC analysis of 2005 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 51 percent of all Part B drug spending. 

• Spending for new drugs dominates the list. Of the top nine listed drugs covered by Medicare 

in 2006, eight received Food and Drug Administration approval in 1997 or later. Drugs too 

new to have their own codes (unclassified drugs) accounted for 3 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. 
A Data Book: Healthcare spending and the Medicare program, June 2008 163

Chart 11-3. Part D enrollment and other sources of drug 

 coverage 

 Percent of all 

 Millions as of eligible Medicare 

 January 16, 2008 beneficiaries 

Enrollment that leads to Medicare program spending: 

 Beneficiaries receiving LIS* 

 Full dual eligibles 6.2 14% 

 MSP and SSI recipients 1.7 4 

 Other individuals determined eligible by SSA 1.5 3 

 Other enrollees in stand-alone PDPs (excluding LIS) 9.5 21 

 Other enrollees in MA–PDs (excluding LIS) 6.6 15 

 Individuals covered by Medicare RDS 6.7 15

 Subtotal 32.1 73 

Enrollment that does not lead to Medicare program spending: 

 FEHB, TRICARE, VA, and active workers 5.5 12

 Total 37.5 85 

 Additional sources of creditable coverage** ~2 5 

Note: LIS (low-income subsidy), MSP (Medicare Savings Program), SSI (Supplemental Security Income), SSA (Social Security 

Administration), 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. Columns may not sum due to rounding. 

 * Includes approximately 7.9 million PDP enrollees and 1.5 million MA–PD enrollees. 

 ** Drug coverage of equal or greater value to Part D benefits through other sources such as state pharmaceutical 

assistance programs. 

Source: CMS Management Information Integrated Repository. 

• As of January 2008, CMS estimated that 32.1 million of the 44 million Medicare beneficiaries (73 percent) 

were either signed up for Part D plans or had prescription drug coverage through employer-sponsored 

coverage under Medicare’s retiree drug subsidy (RDS). (If an employer agrees to provide primary drug 

coverage to its retirees with an average benefit value that is equal or greater in value to Part D (called 

creditable coverage), Medicare provides the employer with a tax-free subsidy for 28 percent of each 

eligible individual’s drug costs that fall within a specified range of spending.) 

• About 9.4 million beneficiaries (21 percent) receive extra help with premiums and cost sharing through Part 

D's low-income subsidies (LISs). Of these individuals, 6.2 million are dually eligible to receive Medicare 

and all Medicaid benefits offered in their state. Another 3.2 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 7.9 million (18 percent) are enrolled in stand-alone prescription drug 

plans (PDPs) and 1.5 million (3 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 6.6 million enrollees (15 percent) are in MA–PDs. Individuals whose employers receive Medicare's 

RDS numbered 6.7 million, or 15 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, 5.5 million beneficiaries (12 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. 
164 Drugs

Chart 11-4. Defined standard benefit parameters increase 

over time 

2006 2007 2008 

 

Deductible $250.00 $265.00 275.00 

Initial coverage limit 2,250.00 2,400.00 2,510.00 

True out-of-pocket spending limit 3,600.00 3,850.00 4,050.00 

Total covered drug spending at true out-of-pocket limit 5,100.00 5,451.25 5,726.25 

Minimum cost sharing above true out-of-pocket limit 

 Copay for generic/preferred multisource drug prescription 2.00 2.15 2.25 

 Copay for other prescription drugs 5.00 5.35 5.60 

 

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. 

Source: CMS 2007. Notification of changes in Part D payment for calendar year 2008. CMS 2006. Medicare Part D benefits 

parameters for standard benefit: Annual adjustments for 2007. 

• The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 specified a 

defined standard benefit structure for 2006 that included a $250 deductible, 25 percent 

coinsurance on covered drugs until the enrollee reaches $2,250 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 their true out-of-pocket spending reaches $3,600. 

(“True out of pocket” refers to the fact that cost sharing paid by many sources of 

supplemental coverage does not count toward this $3,600 out-of-pocket spending limit.) A 

person with no other source of drug coverage that supplements Part D would reach this 

$3,600 true out-of-pocket limit at $5,100 in total drug spending (i.e., the combination of the 

enrollee’s spending plus spending that the Part D plan covered). Enrollees with drug 

spending even higher than that amount would pay just $2 to $5 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, 2007, and 2008 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 2008 165

Chart 11-5. Characteristics of Medicare PDPs 

 2007 2008 

 Plans Enrollees a

 Plans 

 Number 

 Number Percent (in millions) Percent Number Percent 

Totals 1,866 100% 16.1 100% 1,824 100% 

Type of organization 

 National b

 1,507 80 13.9 86 1,589 87 

 Near-national c

 149 8 0.6 4 0 0 

 Other 210 11 1.7 10 235 13 

Type of benefit 

 Defined standard 219 12 2.9 18 217 12 

 Actuarially equivalent d

 760 41 9.9 61 682 37 

 Enhanced 887 48 3.3 20 925 51 

Type of deductible 

 Zero 1,127 60 8.6 54 1,065 58 

 Reduced 157 8 0.5 3 150 8 

 Defined standard e

 582 31 7.0 43 609 33 

Drugs covered in the gap 

 Some generics but no 

 brand name drugs 511 27 1.3 8 528 29 

 Some generics and some 

 brand name drugs 27 1 0.1 1 1 <0.5 

 None 1,328 71 14.7 91 1,295 71 

Note: PDP (prescription drug plan). The PDPs and enrollment described here exclude employer-only plans and plans offered in 

 U.S. territories. Sums of percentage may not add to totals due to rounding. a

 Number of enrollees as of July 2007. 

b

 Reflects total numbers of plans for the 17 organizations with at least one PDP in all 34 PDP regions. c

 Totals for organizations offering 30 or more PDPs across the country, but without one in each PDP region. d

 Benefits labeled actuarially equivalent to Part D’s standard benefit include what CMS calls “actuarially equivalent 

standard” and “basic alternative” benefits. 

e $265 in 2007 and $275 in 2008. 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

• Part D drew about the same number of stand-alone prescription drug plans (PDPs) into the field for 2008 as in 

2007. Plan sponsors are offering 1,824 PDPs in 2008 compared with 1,866 in 2007. 

• In 2008, 87 percent of all PDPs were offered by sponsoring organizations that had at least one PDP in each of 

the 34 PDP regions across the country. In 2007, plans offered by those national sponsors accounted for 86 

percent of all PDP enrollment. 

• Sponsors are offering a slightly larger proportion of PDPs with enhanced benefits (basic plus supplemental 

coverage) for 2008 and a slightly smaller proportion of benefits with the same average value as the standard 

benefit but with alternative benefit designs (called actuarially equivalent benefits). 

• About the same proportion of PDPs include some benefits in the coverage gap for 2008 as in 2007. Nearly all 

plans with some gap coverage limit that coverage to generic drugs; 29 percent offer generics only while 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 2007, 91 percent of PDP enrollees were in plans that offered no additional benefits in the coverage gap; just 

under half were 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 91 

percent. In addition, many enrollees were unlikely to exceed the initial coverage limit for drug spending. 
166 Drugs

Chart 11-6. Average Part D premiums 

 

 Difference Percentage 

 Average Estimated between 2007 change in 

 2007 2007 premium average and 2008 weighted 

 enrollment weighted by 2008 average average

 in millions 2007 enrollment premium* premium premium 

 

PDPs 

 Basic coverage 12.8 $24.05 $28.32 $4.27 18% 

 Enhanced coverage 3.3 40.42 45.43 5.01 12 

 Any coverage 16.1 27.39 31.81 4.42 16 

 

MA–PDs** 

 Basic coverage 1.0 16.86 20.72 3.86 23 

 Enhanced coverage 4.0 8.68 10.51 1.83 21 

 Any coverage 5.0 10.35 12.59 2.24 22 

 

All plans 

 Basic coverage 13.8 23.52 28.15 4.63 20 

 Enhanced coverage 7.3 23.09 25.61 2.52 11 

 Any coverage 21.1 23.37 27.28 3.91 17 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). The PDPs and enrollment 

described here exclude employer-only plans and plans offered in U.S. territories. The MA–PDs and enrollment described 

here exclude employer-only plans and plans offered in U.S. territories, 1876 cost plans, special needs plans, 

demonstrations, and Part B-only plans. 

 *Premiums are the weighted average using July 2007 enrollment. New plans entrants are credited with no enrollment. 

Almost 99 percent of July 2007 PDP enrollees and about 96 percent of MA–PD enrollees that were in the scope of our 

analysis were in 2007 plans that could be matched to 2008 plans. Note that some beneficiaries chose to enroll in a 

different plan or were automatically reassigned to a different plan for 2008. 

 **Reflects the portion of MA 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. Note that lower average 

premiums for enhanced MA–PD plans reflect a different mix of sponsoring organizations and counties of operation than 

MA–PDs with basic coverage. 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

• On average, Part D enrollees pay $27 per month in 2008, up nearly $4 or 17 percent from 2007. 

 

• The average PDP enrollee pays about $32 per month, compared with $27 in 2007—a 16 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 2008, with 

the average MA–PD enrollee paying nearly $13 per month compared with $10 in 2007 (22 

percent higher). 
A Data Book: Healthcare spending and the Medicare program, June 2008 167

Chart 11-7. Characteristics of MA–PDs 

 2007 2008 

 Plans Enrollees a

 Plans 

 Number 

 Number Percent (in millions) Percent Number Percent 

Totals 1,622 100% 5.0 100% 1,932 100% 

Type of organization 

 Local HMO 947 58 3.7 75 1,025 53 

 Local PPO 274 17 0.3 7 353 18 

 PFFS 367 23 0.8 16 520 27 

 Regional PPO 34 2 0.1 2 34 2 

Type of benefit 

 Defined standard 84 5 0.1 1 79 4 

 Actuarially equivalent b

 321 20 1.0 19 132 7 

 Enhanced 1,217 75 4.0 80 1,721 89 

Type of deductible 

 Zero 1,461 90 4.7 95 1,665 86 

 Reduced 38 2 0.1 1 45 2 

 Defined standard c

 123 8 0.2 3 222 11 

Drugs covered in the gap 

 Some generics but no 

 brand name drugs 450 28 1.2 25 661 34 

 Some generics and some 

 brand name drugs 76 5 0.4 8 327 17 

 None 1,096 68 3.3 67 944 49 

Note: MA–PD (Medicare Advantage–Prescription Drug [plan]), PPO (preferred provider organization), PFFS (private fee-forservice). 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 of percentages may not add to totals due to 

rounding. a Numbers of enrollees as of July 2007. b Benefits labeled actuarially equivalent to Part D’s standard benefit include what CMS calls “actuarially equivalent 

standard” and “basic alternative” benefits. c $265 in 2007 and $275 in 2008. 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

• There were more MA–PDs in 2008 than in 2007. Sponsors are offering 1,932 MA–PDs compared with 1,622 the 

year before (about 19 percent more). Although local HMOs offer the most MA–PD plans, there were sizable 

increases in the number of drug plans offered by preferred provider organizations and private fee-for-service (PFFS) 

plans. PFFS plans made up 27 percent of all (unweighted) offerings in 2008 compared with 23 percent in 2007. 

• A larger share of MA–PDs than PDPs offer enhanced benefits (compare Chart 11-7 with Chart 11-5). In 2007, 48 

percent of all PDPs had enhanced benefits compared with 75 percent of MA–PDs. In 2008, 51 percent of PDPs 

were enhanced compared with 89 percent of MA–PDs. In 2007, enhanced MA–PDs attracted 80 percent of total 

MA–PD enrollment. 

• Most MA–PD plans have no deductible: 90 percent of MA–PD offerings in 2007 and 86 percent in 2008. MA–

PDs with no deductible attracted about 95 percent of total MA–PD enrollment in 2007. 

• MA–PDs are more likely than PDPs to provide some additional benefits in the coverage gap, although mostly for 

generics. In 2007, 32 percent of MA–PDs included some gap coverage—28 percent with some generics but no 

brand name drugs and 5 percent with some generics and some brand name drug coverage. Those plans 

accounted for 33 percent of MA–PD enrollment. 

• For 2008, 51 percent of MA–PDs provide some gap coverage (34 percent with some generics but no brand 

name drugs, and 17 percent with some generics and some brands). 
168 Drugs

Chart 11-8. Geographic distribution of PDPs in 2008 

Note: PDP (prescription drug plan). The PDPs shown here exclude employer-only plans and plans offered in U.S. territories. 

 

Source: MedPAC analysis of CMS plan benefit package and landscape data. 

• The number of stand-alone prescription drug plans (PDPs) stayed fairly steady around the 

country, with the median number of plans offered in each region at 53 compared with 55 in 

2007. 

• Alaska had the fewest stand-alone plans with 47. The Pennsylvania–West Virginia region 

had the most with 63 PDPs. 

59 to 63 55 to 59 51 to 55 47 to 51 
A Data Book: Healthcare spending and the Medicare program, June 2008 169

Chart 11-9. Distribution of 2007 Part D enrollees by organization 

Humana

Member Health 21%

7%

Other

25%

Coventry

4%

WellCare

 6%

Humana

15%

Kaiser Permanente

11%

Other

48%

UnitedHealthcare/

PacifiCare

27%

UnitedHealthcare/ 

PacifiCare

17%

Wellpoint

7%

Highmark

3%

PDP enrollment = 16.8 million MA−PD enrollment = 7.4 million 

Wellpoint

3%

Health Net

3%

Universal

American

3%

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Data are as of July 2007. 

Source: MedPAC based on CMS enrollment data. 

• As of July 2007, 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 and PacifiCare (which merged in 2006) had 27 

percent of the 16.8 million enrollees in PDPs and 17 percent of the 7.4 million enrollees in 

MA–PDs. Similarly, Humana had a considerable portion of both markets: 21 percent of PDP 

enrollees and 15 percent of MA–PD enrollees. 
170 Drugs

Chart 11-10. In 2007, most Part D enrollees were in plans that 

charged higher copayments for nonpreferred 

brand name drugs 

22% 19%

18%

11%

24%

8%

59%

69% 73%

87%

2006 2007 2006 2007

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

P

ercent of enrolle

es

25% coinsurance

Generic and brand name tiers

Generic, preferred brand, and nonpreferred brand name tiers

Other tier structure

2% 2%

1% 1% 1% 3%

 PDP enrollees MA-PD enrollees 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Percentages are weighted by 

enrollment. PDPs exclude employer-only groups and plans offered in U.S. territories. MA–PDs exclude employer-only 

groups, demonstration programs, 1876 cost plans, and plans offered in U.S. territories. Plans with one generic and one 

brand name tier have lower cost sharing for generic drugs. Plans that distinguish between preferred and nonpreferred 

brands tend to have the lowest cost sharing for generic drugs, somewhat higher copays for preferred brand name drugs, 

and the highest cost sharing for nonpreferred brands. Many plans also include a specialty tier that applies to expensive 

products and unique drugs and biologicals for which enrollees may not appeal for lower cost sharing. 

Source: MedPAC sponsored NORC/Georgetown University analysis of formularies submitted to CMS for January 2006 and 

January 2007. 

• The share of beneficiaries enrolled in plans that distinguish between preferred and 

nonpreferred brand name drugs grew between 2006 and 2007. Among PDPs, 69 percent of 

enrollees were in such a plan in 2007, compared with 59 percent in 2006. Similarly, 87 

percent of MA–PD enrollees were in such a plan in 2007, up from 73 percent in 2006. 

• For enrollees in either PDPs or MA–PDs that distinguished between preferred and 

nonpreferred brand name drugs, the median copay in 2007 was $28 to $29 for a preferred 

brand and $60 for a nonpreferred brand. The median copay for generic drugs was $5. 

• In 2007, about 19 percent of PDP enrollees and 2 percent of MA–PD enrollees were in 

plans that charged 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 paid nominal copays per prescription rather than 25 percent coinsurance. 
A Data Book: Healthcare spending and the Medicare program, June 2008 171

Chart 11-11. More enrollees were in Part D plans that used 

 specialty tiers in 2007 

63%

67%

74%

84%

PDPs MA-PDs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

P

erc

ent of enrol el es

2006 2007

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Percentages are weighted by 

enrollment. PDPs exclude employer-only groups and plans offered in U.S. territories. MA–PDs exclude employer-only 

groups, demonstration programs, 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 NORC/Georgetown University analysis of formularies submitted to CMS for January 2006 and 

January 2007. 

• Generally, plans use specialty tiers for expensive products, unique drugs, and biologicals. 

For 2007, CMS allowed plans to place drugs on a specialty tier if the drug’s negotiated price 

exceeded $500 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. 

• The share of enrollees in plans that use specialty tiers rose between 2006 and 2007. Among 

PDP enrollees, 74 percent were in such plans in 2007, and 84 percent of MA–PD enrollees 

were in plans with a specialty tier. The median PDP enrollee paid 30 percent coinsurance 

for specialty-tier drugs, while the median MA–PD enrollee paid 25 percent. 
172 Drugs

Chart 11-12. PDPs and MA–PDs listed similar numbers of drugs 

on their formularies in 2007 

54%

47%

87% 86%

PDPs MA-PDs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Percent of chem ci al entit ei s on wh ci h C

M

S requires p al ns ot report

Minimum Enrollment-weighted average Maximum

100% 100%

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, 1876 cost plans, employer-only 

groups, and plans offered in U.S. territories. Values reflect the percent of distinct chemical entities listed within CMS’s file 

of reference national drug codes. 

Source: MedPAC-sponsored NORC/Georgetown University analysis of formularies submitted to CMS for January 2007. 

• In 2007, enrollees in stand-alone PDPs and MA–PDs had similar numbers of drugs listed on 

their plans’ formularies. The average PDP enrollee was in a plan that listed 87 percent of all 

distinct chemical entities on which CMS requires plans to report, while the average MA–PD 

was in a plan listing 86 percent. 

• The number of drugs listed on any given plan’s formulary can vary considerably, from 

around 50 percent of reportable drugs for plans with the tightest formularies to 100 percent 

for some of the most popular plans. 
A Data Book: Healthcare spending and the Medicare program, June 2008 173

Chart 11-13. The average percent of drugs listed in each 

therapeutic category depends on therapeutic class 

size and regulation 

 Total drugs Average percent of drugs listed 

 in class PDPs MA–PDs 

Selected protected classes:* 

 Anticonvulsants 19 95% 100% 

 Antidepressants 24 100 100 

 Antipsychotics 18 94 94 

Selected other classes: 

 Analgesics 69 77 81 

 Antibacterial 119 77 81 

 Antivirals** 43 93 93 

 Cardiovascular 141 84 86 

 Gastrointestinal 37 78 81 

 Glucose regulators 37 86 86 

 Respiratory 48 83 88 

 Combination drugs (multiclass) 95 56 64 

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, 1876 cost plans, employer-only 

groups, and plans offered in U.S. territories. Values reflect the percent of distinct chemical entities listed within CMS’s file 

of reference national drug codes. 

 *Under CMS regulation, plans are required to list all or substantially all drugs in these classes. 

 **This class includes some protected drugs (those to treat HIV/AIDS) as well as unprotected drugs. 

Source: NORC/Georgetown University analysis for MedPAC of formularies submitted to CMS for January 2007. 

• The percent of drugs listed within a therapeutic class of a plan’s formulary can vary widely. 

That number depends on both regulatory coverage rules as well as the size of the class of 

drugs available within the marketplace. 

• In classes with fewer drugs available, plans typically list a larger share of them. Conversely, 

when there are more drugs available within a given class, plans are able to negotiate better 

prices by listing only selected drugs on their formulary, particularly when there are 

overlapping products. 

• In classes for which CMS requires that plans cover all or substantially all drugs, plans 

predictably list a larger share of drugs. For example, in the class of antidepressants, the 

average PDP and the average MA–PD typically list all of the available drugs. 
174 Drugs

Chart 11-14. PDPs and MA–PDs applied utilization management 

tools similarly in 2007 

12%

1%

8%

18%

12%

1%

8%

18%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

For the average enrollee, the percent of plans' listed chemical entities that were subject to utilization management

Quantity limits

Step therapy

Prior authorization

Any utilization management

MA-PDs

PDPs

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, 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 NORC/Georgetown University analysis of formularies submitted to CMS for January 2007. 

• 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 2007, the average enrollee in either a stand-alone prescription drug plan or Medicare Advantage 

prescription drug plan would have had similar experiences with respect to utilization management. 

The average enrollee was in a plan that used quantity limits on 12 percent of listed chemical entities 

(referred to hereafter as drugs), used step therapy for 1 percent of listed drugs, and required prior 

authorization for about 8 percent of listed drugs. Altogether, about 18 percent of listed drugs were 

subject to some form of utilization management for the average enrollee.
A Data Book: Healthcare spending and the Medicare program, June 2008 175

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/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_07_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 2008 179

Chart 12-1. Number of dialysis facilities is growing and share of 

for-profit and freestanding dialysis providers is 

increasing 

Average annual 

percent change

 1997 2003 2007 1997–2007 2003–2007 

Total number of 

 Dialysis facilities 3,172 4,240 4,798 4% 3% 

 Hemodialysis stations 49,223 72,171 83,918 5 4 

 

Mean number of 

 Hemodialysis stations 16 17 17 1 1 

Percent of all facilities: 

 Nonchain N/A 29% 21% N/A –5 

 Affiliated with any chain N/A 71 79 N/A 6 

 Affiliated with largest two chains N/A 56 58 N/A 4 

 Hospital based 23% 16 13 –2 –2 

 Freestanding 77 84 87 6 4 

 Rural 24 25 25 5 3 

 Urban 76 75 75 4 3 

 For profit 71 76 80 5 4 

 Nonprofit 29 24 20 <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 1997 and 2007, the number of freestanding and for-profit facilities increased, while 

hospital-based and nonprofit facilities decreased. Freestanding facilities increased from 

77 percent to 87 percent of all facilities, and for-profit facilities increased from 71 percent to 

80 percent of all facilities. 

• Two national for-profit chains own about 60 percent of all facilities and 70 percent of all 

freestanding facilities. 

• Between 1997 and 2007, the proportion of facilities located in rural areas has remained 

relatively constant. 

• The number of facilities has increased 4 percent per year since 1997. 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 1997 to 17 in 2007. 
180 Other services

Chart 12-2. Medicare spending for outpatient dialysis services 

furnished by freestanding dialysis facilities, 

1996 and 2006 

$2.1

$4.9 $1.0

$2.6

1996 2006

0

1

2

3

4

5

6

7

8

D

ol al rs ( ni bill oi ns)

Drugs

Composite rate services

32%

68%

35%

65%

Source: Compiled by MedPAC from the 1996 and 2006 institutional outpatient files from CMS. 

• Between 1996 and 2006, 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. 

• The number of dialysis patients increased by 5 percent annually between 1996 and 2006. 

This growth is linked to a number of factors, including improvements in survival and 

increases in the number of people with diabetes, a risk factor for end-stage renal disease. 

• Between 1996 and 2006, estimated spending for injectable drugs increased by 10 percent 

annually; in contrast, spending for dialysis increased by 9 percent annually during this time 

period. 
A Data Book: Healthcare spending and the Medicare program, June 2008 181

Chart 12-3. Dialysis facilities’ capacity increased between 1997 

and 2007 

3,172

4,798

49.2

83.9

1997 2007

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Dialysis fa

cilities

30

35

40

45

50

55

60

65

70

75

80

85

90

95

100

H

e

m

o

d

ai yl s si s at t oi ns ( ni ht ousands)

Source: Compiled by MedPAC from the 1997 Facility Survey file from CMS and the 2007 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 2007, a facility had about 17 hemodialysis stations. 

• Between 1997 and 2007, the total number of dialysis facilities grew by about 4 percent 

annually, and the number of hemodialysis stations grew by 5 percent annually. 
182 Other services

Chart 12-4. Characteristics of dialysis patients, by type of 

facility, 2006 

Elderly (age 75+ 

years)

Female African American Hispanic Medicaid 

Patient characteristics

0

10

20

30

40

P

erc

ent of p

atients

LDOs

Not LDOs

Freestanding

Hospital based

50

60

Note: LDO (large dialysis organization). 

Source: MedPAC analysis of dialysis claims files, denominator 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 2005 and 2006 (data not shown for 2005). 

• This analysis suggests that providers have not changed the mix of patients they care for 

between 2005 and 2006, including the large dialysis organizations, which account for about 

60 percent of all facilities. 

• In 2005 and 2006, freestanding facilities were more likely than hospital-based facilities to 

treat African Americans and dual eligibles. Freestanding facilities account for more than 85 

percent of all dialysis facilities. 
A Data Book: Healthcare spending and the Medicare program, June 2008 183

Chart 12-5. The ESRD population is growing, and most ESRD 

patients undergo dialysis 

 1995 2000 2005 

 Patients Patients Patients 

 (thousands) Percent (thousands) Percent (thousands) Percent 

Total 287.4 100% 391.9 100% 485.0 100% 

Dialysis 209.5 73 283.3 72 341.3 70 

 In-center hemodialysis 174.8 61 254.9 65 312.1 64 

 Home hemodialysis 3.0 1 2.2 1 2.1 <1 

 Peritoneal dialysis 30.2 11 25.2 6 25.9 5 

 Unknown 1.4 1 1.1 <1 1.2 <1 

 

Functioning graft and 

 kidney transplants 78.0 27 108.9 28 143.7 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 6 percent annually 

between 1995 and 2005. 

• 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 1995 and 2005, 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 2005, 38 percent of the kidneys were from living donors and 62 percent were 

from cadaver donors. 

• Medicare is the primary payer for about 81 percent of all dialysis patients and for about half 

of all patients with a kidney transplant. 
184 Other services

Chart 12-6. Diabetics, the elderly, Asians, and Hispanics are 

among the fastest growing segments of the ESRD 

population 

 Percent Average annual 

 of total percent change 

 in 2005 1997–2005 

Total (n = 485,012) 100% 5% 

Age 

 0–19 2 3 

 20–44 20 2 

 45–64 44 6 

 65–74 19 4 

 75+ 16 7 

Sex 

 Male 56 5 

 Female 44 5 

Race/Ethnicity 

 White 61 5 

 African American 32 5 

 Native American 1 5 

 Asian 4 8 

 Hispanic 14 9 

 Non-Hispanic 86 4 

Underlying cause of ESRD 

 Diabetes 37 6 

 Hypertension 24 5 

 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, 35 percent are over age 65. About 60 

percent are white. 

• Diabetes is the most common cause of renal failure. 

• The number of ESRD patients increased by 5 percent annually between 1997 and 2005. 

Among the fastest growing groups of patients include those who are over age 75 and those 

with diabetes as the cause of kidney failure. 
A Data Book: Healthcare spending and the Medicare program, June 2008 185

Chart 12-7. Aggregate margins vary by type of freestanding 

 dialysis facility, 2006 

 Percentage of spending 

Type of facility by freestanding facilities Aggregate margin 

All facilities 100% 5.9% 

Urban 82 6.2 

Rural 18 4.5 

Large dialysis organizations 69 7.6 

Non large dialysis organizations 31 2.0 

 

Note: LDO (large dialysis organization). Margins include payments and costs for composite rate services and injectable drugs. 

Source: Compiled by MedPAC from the 2006 cost reports and the 2006 institutional outpatient file from CMS. 

• For 2006, 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. 
186 Other services

Chart 12-8. Rapid growth in Medicare hospice spending 

projected to continue 

6.8

8.0

9.2

10.0 10.5 11.2

12.1

12.9

13.9

14.9

15.9

17.1

18.3

19.6

21.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Year

0

5

10

15

20

25

Billions of dollars

Note: 2004–2006 are incurred expenses; 2007 forward are projections. 

Source: Office of the Actuary 2008 Trustees Report, Current Services. 

• Medicare spending for hospice exceeded $10 billion in 2007. 

• Medicare spending for hospice is projected to more than double in the next 10 years. 
A Data Book: Healthcare spending and the Medicare program, June 2008 187

Chart 12-9. Number of Medicare-participating hospices has 

increased, largely driven by for-profit hospices 

2000 2002 2004 2005 2006 2007

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, February 25, 2008, https://pdq.cms.hhs.gov/report_select.jsp?which=8. 

• There were over 3,200 Medicare-participating hospices in 2007. 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 2007, just over 40 hospices voluntarily exited the Medicare program in 

any given year, on average. 
188 Other services

Chart 12-10. Hospices that exceeded Medicare’s annual 

payment cap, 2002–2005 

Year 2002 2003 2004 2005 

 

Total number of hospices 2,286 2,401 2,580 2,809 

 

Total spending (in millions) $4,517 $5,682 $6,897 $8,155 

Number of hospices exceeding cap 60 98 150 220 

Percent of hospices exceeding cap 2.6% 4.1% 5.8% 7.8% 

Payments over the cap subject to 

 recovery (in millions) $28.2 $65.1 $112.3 $166.0 

Payments over the cap as percent of 

 overall Medicare hospice spending 0.6% 1.2% 1.6% 2.0% 

Note: The cap year is defined as the period beginning September 28 and ending September 27 of the following year. 

Source: MedPAC analysis of 100 percent hospice standard analytical file (claims) data, 2002–2005; Medicare hospice cost 

reports, 2001–2005; CMS Provider of Services file data, 2002–2005; and CMS Providing Data Quickly file. 

• A small but growing number of hospices exceed Medicare’s aggregate average per 

beneficiary payment limit, or “cap.” 

• About 8 percent of hospices exceeded the cap in 2005. These hospices provided care for 

about 5 percent of Medicare hospice patients. 
A Data Book: Healthcare spending and the Medicare program, June 2008 189

Chart 12-11. Number of unique beneficiaries using hospice, 

fiscal years 1995–2005 

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Fiscal year

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

Number of beneficiaries

Source: Centers for Medicare & Medicaid Services, 2007. Data available at: 

 http://www.cms.hhs.gov/ProspMedicareFeeSvcPmtGen/downloads/FY05update_hospice_expenditures_and_units_of_ 

 care.pdf. 

• The number of Medicare decedents who had elected hospice continues to grow. 

• In 2005, about 40 percent of Medicare decedents died under the care of hospice. 
190 Other services

Chart 12-12. Long hospice stays are getting longer, while short 

stays persist 

2 5

16

53

144

1 4

15

65

212

10th percentile 25th percentile Median 75th percentile 90th percentile

0

50

100

150

200

250

L

ength of sta

y (d

a

ys)

2000

2005

Note: Data are for decedent beneficiaries in both fee-for-service Medicare and Medicare Advantage. 

Source: MedPAC analysis of 2007 100 percent MBD file from CMS. 

• The median length of stay in hospice was roughly two weeks (15 days) in 2005. 

• Short hospice stays (those at or below the median) have remained almost unchanged 

between 2000 and 2005. 

• Long hospice stays (those above the median) have grown longer. For example, at the 90th 

percentile, average length of stay increased from 144 days in 2000 to 212 days in 2005, an 

increase of nearly 50 percent. 
A Data Book: Healthcare spending and the Medicare program, June 2008 191

Chart 12-13. Average days per hospice patient, by disease 

category, below-cap and above-cap hospices, 

all diagnoses, 2005 

 Below-cap hospices Above-cap hospices 

 Difference 

 Percent of Percent of in ALOS, 

 Number of total Number of total cap vs. 

Disease category cases cases ALOS cases cases ALOS non-cap 

Cancer (except lung 

 cancer) 194,089 27.2 45.9 4,831 14.5 68.3 48.9% 

Lung cancer 79,560 11.2 43.6 1,914 5.8 53.6 22.9 

Circulatory, except heart 

 failure 77,653 10.9 51.4 5,200 15.7 114.2 122.1 

Heart failure 57,010 8 58.3 4,184 12.6 120.5 106.8 

Debility, NOS 51,616 7.2 65.1 2,485 7.5 115.5 77.3 

Chronic airway obstruction, 

 NOS 39,796 5.6 67.4 2,495 7.5 118.9 76.4 

Alzheimer’s and similar 

 disease 39,572 5.5 81.9 3,184 9.6 129.7 58.4 

Unspecific symptoms / 

 signs 36,770 5.2 66.1 2,567 7.7 107.2 62.1 

Dementia 28,830 4 71.3 2,136 6.4 119.2 67.3 

Genitourinary diseases 23,118 3.2 21.3 579 1.7 37.3 75.3 

Organic psychoses 22,907 3.2 71.6 1,282 3.9 116.1 62.1 

Respiratory diseases 18,300 2.6 41.7 444 1.3 89.9 115.9 

Nervous system, 

 except Alzheimer’s 18,179 2.5 77.9 996 3 134.4 72.7 

Other 14,168 2 43.8 572 1.7 104.3 138.1 

Digestive diseases 11,576 1.6 36.5 356 1.1 63.9 75.1 

Total 713,144 100 54.4 33,225 100 104.8 92.6 

Note: ALOS (average length of stay), NOS (not otherwise specified). 

Source: MedPAC analysis of 2005 100 percent hospice standard analytical file from CMS. 

• Hospices that exceed the cap have a different mix of patients than hospices that do not 

exceed the cap. 

• Above-cap hospices have a smaller share of cancer patients, on average, who tend to have 

shorter lengths of stay than patients with neurological or non-specific diagnoses. 

• Patients at hospices that exceeded the cap had longer lengths of stay than patients at 

below-cap hospices for all diagnoses. Stays for lung cancer patients at above-cap hospices 

were 23 percent longer than at below-cap hospices. Stays for patients with circulatory 

diseases were 122 percent longer at above-cap hospices than below-cap hospices. 
192 Other services

Chart 12-14. Hospice aggregate Medicare margins, 2001–2005 

 Percent of 

 hospices 

Category (2005) 2001 2002 2003 2004 2005 

All 100 1.0 3.1 4.5 3.2 3.4 

 

Freestanding 59 5.6 6.8 9.0 6.7 6.3 

Provider-based 41 -10.5 -7.6 -8.9 -7.5 -5.6 

For-profit 43 12.0 14.6 15.9 12.4 11.8 

Nonprofit 48 -4.4 -3.7 -2.9 -3.6 -2.8 

Urban 64 1.4 3.6 4.9 3.6 3.4 

Rural 36 -1.8 0.1 2.5 0 3.3 

Below-cap 91 N/A 2.1 3.3 1.8 1.5 

Above-cap (including overpayments) 9 N/A 30.1 23.0 17.4 18.9 

Above-cap (net of overpayments) 9 N/A 13.3 2.1 -4.6 -2.9 

 

Note: N/A (not available). Totals by ownership do not sum to 100 percent due to exclusion of government facilities. 

Source: MedPAC analysis of Medicare hospice cost reports, 100 percent hospice claims standard analytical file (SAF), and 

Medicare Provider of Services data from CMS. 

• Aggregate hospice margins are generally positive in all years from 2001 to 2005. 

• Freestanding hospices' margins are positive, at just over six percent in 2005. Providerbased hospices tend to have negative margins, on average. 

• Provider-based hospices’ costs tend to be higher than those of free-standing hospices, 

partly reflecting allocating of overhead costs from the parent provider. 

• For-profit hospice margins are strongly positive, at nearly 12 percent in 2005. Non-profit 

hospices' margins were –2.8 percent in that year. 

• Hospices that exceed Medicare’s payment cap have the highest margins of any category of 

hospices, prior to the return of overpayments to Medicare. 
A Data Book: Healthcare spending and the Medicare program, June 2008 193

Chart 12-15. Hospice Medicare margins increase with length of 

stay, 2001–2005 

1 2 3 4 5 6 7 8 9 10

LOS decile

-15

-10

-5

0

5

10

15

20

25

30

35

M

argin

2001

2002

2003

2004

2005

Source: LOS (length of stay). 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. 

• Extremely short hospice stays (those below the 20th percentile of the length of stay 

distribution) tend to be unprofitable. 

• Profitability of Medicare hospice episodes (prior to the return of overpayments received by 

above-cap hospices) increases almost linearly with length of stay. 
194 Other services

Chart 12-16. Hospice Medicare margins are greater for new 

hospices, 2001–2005 

2001 2002 2003 2004 2005

Year

0

2

4

6

8

10

12

14

Med ci are marg ni

2001 2002 2003 2004 2005

Year

2001 2002 2003 2004 2005

Year

Certified to participate in Medicare before 1/1/2000

Certified to participate in Medicare on or after 1/1/2000

Source: MedPAC analysis of Medicare cost reports, 100 percent hospice claims standard analytical file (SAF), and Medicare 

Provider of Services data from CMS. 

• Nearly all hospices newly participating in Medicare since 2000 are for-profit entities. 

• Consistent with this trend, newer hospices have margins five to six times higher than more 

established hospices. Again, these margins include overpayments that above-cap hospices 

are required to return to Medicare. 

 
A Data Book: Healthcare spending and the Medicare program, June 2008 195

Chart 12-17. Hospice access not compromised by the cap at the 

10 states with highest rate of Medicare patient 

hospice election, 2005 

 Percent of 

 Number of Hospices per hospices in Medicare 

 hospices, 10,000 state exceeding hospice users/ 

State 2005 beneficiaries the cap decedents 

 

Utah 52 2.4 21.2% 70.2% 

Arizona 50 0.7 20.0 67.6 

Oklahoma 145 2.9 28.3 60.0 

Colorado 45 0.9 0.0 57.4 

Florida 41 0.1 4.9 57.3 

Alabama 103 1.5 41.7 56.5 

New Mexico 39 1.6 17.9 56.3 

Oregon 48 1.0 2.1 53.2 

Mississippi 100 2.3 36.0 51.5 

Kansas 49 1.3 6.1 50.8 

Source: CMS Providing Data Quickly Query, October 18, 2007, https://pdq.cms.hhs.gov/report_select.jsp?which=8; MedPAC 

analysis of 100 percent Medicare hospice claims standard analytical files; and Medicare hospice cost reports from CMS. 

• Access to hospice, measured by the number of hospice users over Medicare decedents, is 

highest in Utah, Arizona, and Oklahoma. 

• Among the 10 states with the highest Medicare access to hospice by this measure, three 

are states with the highest rates of hospices exceeding the Medicare payment cap. 
196 Other services

Chart 12-18. Medicare spending for clinical laboratory services, 

in billions, fiscal years 1997–2007 

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

1

2

3

4

5

6

7

8

Dol al rs ( ni billions)

2.4 2.2 2.1 2.2 2.4 2.7 2.9 3.2 3.5 3.7 4.0

1.5 1.5 1.6 1.7

1.9

2.2

2.4

2.7

2.9

3.2 2.8

Hospital based

Independent and physician office

3.9 3.7 3.7 3.9

4.3

4.8

5.4

5.9

6.4

6.9 6.8

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. The rate of growth in spending was slowed in 2006 and 

2007 by large increases in the number of Medicare Advantage enrollees, who are not included in these aggregate totals. 

Source: CMS, Office of the Actuary. 

• After declining in the late 1990s, Medicare spending for clinical laboratory services grew by 

an average of 9 percent per year between 1999 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 1 percent between 2006 and 2007 due to a drop in hospital-based lab spending. 

• In 2007, Medicare spent $6.8 billion (2 percent of total program spending) on clinical lab 

services. 

• Hospital-based labs’ share of total clinical lab spending increased from 38 percent in 1997 to 

46 percent in 2006, but fell to 42 percent in 2007. 
A Data Book: Healthcare spending and the Medicare program, June 2008 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_07_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/Mar08_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 2005 includes changes in how to pay for dialysis drugs. 

http://www.medpac.gov/publications/other_reports/093005_physicianpayment_comment.pdf 

• MedPAC’s comment on revisions to payment policies under the physician fee schedule for 

calendar year 2006 on payment for composite rate services. 

http://www.medpac.gov/publications/other_reports/101106_PartB_comment_AW.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_07_hospice.pdf

• Additional 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_Ch03.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_07_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