A DATA BOOK 

Healthcare Spending 

and the 

Medicare Program 

J UNE 2007
A DATA BOOK 

Healthcare Spending 

and the 

Medicare Program 

J UNE 2007

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. 

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

MedPAC website: www.medpac.gov. 

v 

Table of contents 

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

Sections 

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

1-1 Medicare made up about one-fifth of spending on personal health care in 2005 ............................3

1-2 Medicare’s share of total spending varies by type of service, 2005 ................................................4

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

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

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

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

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

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

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

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

1-9 Medicare HI trust fund is projected to be insolvent in 2019..........................................................11

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

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

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

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

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

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

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

spending, 2004 ...............................................................................................................................19

2-2 Medicare spending rises as beneficiaries age, 2004 ......................................................................20

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

of Medicare spending, 2004...........................................................................................................21

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

2-5 Characteristics of the Medicare population, 2004 .........................................................................23

2-6 Characteristics of the Medicare population, by rural and urban residence, 2004 ..........................24

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

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

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

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

3-1 Dual-eligible beneficiaries account for a disproportionate share of Medicare spending, 2004.....29

3-2 Dual eligibles are more likely than nondual eligibles to be disabled or over 85 years old, 2004..30

3-3 Dual eligibles are more likely than nondual eligibles to report poorer health status, 2004 ...........31

3-4 Demographic differences between dual eligibles and nondual eligibles, 2004 .............................32

3-5 Differences in spending and service use between dual eligibles and nondual eligibles, 2004 ......33
vi 

3-6 Both Medicare and total spending are concentrated among dual-eligible beneficiaries, 2004......34

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

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

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

4-1 Hospital mortality decreased, 2003–2005......................................................................................39

4-2 Safety of care: Adverse events affect many hospitalized beneficiaries, 2003–2005 .....................40

4-3 Most ambulatory care indicators show improvement or stability, 2003–2005..............................41

4-4 Share of home health patients achieving positive outcomes continues to increase .......................42

4-5 The quality of dialysis care has generally improved......................................................................43

4-6 Changes in safety of care for long-term care hospital patients, 2003–2005 ..................................44

4-7 Medicare Advantage plans improve, but rates are still low on some 

quality measures, 2001–2005.........................................................................................................45

4-8 Changes in SNF quality measures between 2000 and 2004 ..........................................................46

Web links ......................................................................................................................................47

5 Access to care in the Medicare program .................................................................... 49 

5-1 Beneficiaries’ reports of difficulties accessing care, 2000–2005...................................................51

5-2 Access to physicians is similar for Medicare beneficiaries and privately insured people .............52

5-3 Physicians’ acceptance of new patients is highest for private (non-HMO) 

and Medicare patients, 2006 ..........................................................................................................53

5-4 Most beneficiaries had little or no problem accessing home health and special therapy services.54

5-5 Ethnic and racial disparities in delaying or failing to obtain care, 2005........................................55

5-6 Beneficiaries differ in their reports of obtaining needed, urgent, or routine care, 2004 ................56

Web links ...................................................................................................................................... 57

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

6-1 Sources of supplemental coverage among noninstitutionalized Medicare beneficiaries, 2004.....61

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

beneficiaries’ characteristics, 2004................................................................................................62

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

by source of payment, 2004...........................................................................................................63

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

beneficiaries, by source of payment, 2004.....................................................................................64

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

by type of supplemental coverage, 2004........................................................................................65

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

health status, 2004..........................................................................................................................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, 1995–2005 ........71

7-2 Major diagnostic categories with highest volume, fiscal year 2005 ..............................................72

7-3 Number of acute care hospitals and Medicare discharges, by hospital group, 2005 .....................73

7-4 Cumulative change in total admissions and total outpatient visits, 1995–2005.............................74

7-5 Trends in Medicare and total hospital length of stay, 1995–2005 .................................................75

7-6 Hospital occupancy rates, 1997–2005 ...........................................................................................76

7-7 Hospital construction spending, 1999–2006..................................................................................77

7-8 Cumulative change in Medicare discharges and days of care per beneficiary, 1994–2004...........78

7-9 Medicare inpatient payments, by source and hospital group, 2005 ...............................................79

7-10 Payment and cost changes for Medicare inpatient services, 1995–2005 .......................................80

7-11 Medicare acute inpatient PPS margin, 1995–2005 ........................................................................81

7-12 Medicare acute inpatient PPS margin, by urban and rural location, 1995–2005...........................82

7-13 Overall Medicare margin, 1997–2005 ...........................................................................................83

7-14 Overall Medicare margin, by urban and rural location, 1997–2005..............................................84

7-15 Hospital total margin, 1995–2005..................................................................................................85

7-16 Hospital total margin, by urban and rural location, 1995–2005 ....................................................86

7-17 Hospital total margin, by teaching status, 1995–2005 ...................................................................87

7-18 Hospitals with high adjusted overall Medicare margins have lower costs and have been under 

more financial pressure than other hospitals..................................................................................88

7-19 Hospitals receiving IME and DSH payments, 2005 ......................................................................89

7-20 Medicare margins by teaching and disproportionate share status, 2005........................................90

7-21 Relationship between hospitals’ uncompensated care costs and disproportionate 

share payments, 2003.....................................................................................................................91

7-22 Change in Medicare hospital inpatient costs per discharge and private payer payment-to-cost 

ratio, 1986−2005............................................................................................................................92

7-23 Markup of charges over costs for all patient care services, 1995–2005 ........................................93

7-24 Number of critical access hospitals, 1999–2007............................................................................94

Specialty psychiatric facilities

7-25 Medicare payments to inpatient psychiatric facilities (in billions), 1998–2006 ............................95

7-26 Inpatient psychiatric facilities, 2000–2006 ....................................................................................96

Web links ......................................................................................................................................97

8 Ambulatory care .......................................................................................................... 99 

Physicians

8-1 FFS Medicare spending and payment updates for physician services, 1997–2011....................101

8-2 Medicare spending per FFS beneficiary on physician services, 1997–2015 ..............................102

8-3 Number of physicians billing Medicare is increasing steadily, 2000–2005 ...............................103

8-4 Continued growth in the use of physician services per beneficiary, 2000–2005........................104

8-5 Quarterly changes in professional liability insurance premiums, 1993–2005 ............................105

8-6 Medicare episode costs vary by severity stage ...........................................................................106

8-7 Relative resource use ratios for selected MSAs, 2002................................................................107

8-8 Hypertension episode resource use by type of service ...............................................................108
viii 

Hospital outpatient services

8-9 Spending on all hospital outpatient services, 1996–2006 ...........................................................109

8-10 Most hospitals provide outpatient services .................................................................................110

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

by type of service, 2005..............................................................................................................111

8-12 Hospital outpatient services with the highest Medicare expenditures, 2005 ..............................112

8-13 Medicare coinsurance rates, by type of hospital outpatient service, 2005..................................113

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

payments, 2003–2005 .................................................................................................................114

8-15 Medicare hospital outpatient, inpatient, and overall Medicare margins, 1999–2005 .................115

Ambulatory surgical centers

8-16 Number of Medicare-certified ASCs increased over 50 percent, 2000–2006 ............................116

Imaging services

8-17 Medicare spending for imaging services, by type of service, 2005............................................117

8-18 Radiologists received about 40 percent of Medicare payments for imaging services, 2005 ......118

Web links ...................................................................................................................................119

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

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

continue to increase.....................................................................................................................123

9-2 Spending for post-acute care has risen in each setting, 1999–2005............................................124

Skilled nursing facilities

9-3 Most common diagnoses among Medicare SNF patients accounted for more than a third of 

patients in 2004...........................................................................................................................125

9-4 The number of Medicare admissions and covered days of SNF care is growing and 

stays are getting longer ...............................................................................................................126

9-5 Share of facilities, stays, and payments varies by type of SNF ..................................................127

9-6 A greater share of SNF patients was categorized into rehabilitation case-mix groups 

and received higher intensity rehabilitation................................................................................128

9-7 Growth in freestanding SNFs’ costs per day is accelerating, but nonprofits’ growth is steadier129

9-8 Freestanding SNF Medicare margins..........................................................................................130

9-9 Differences between hospital-based and freestanding skilled nursing facilities.........................131

9-10 Costs per day are higher in hospital-based SNFs........................................................................132

9-11 Percent of SNF cases discharged to different post-acute care settings .......................................133

Home health agencies

9-12 Spending for home health care, 1993–2006................................................................................134

9-13 Trends in the provision of home health care...............................................................................135

9-14 The home health product changed after the prospective payment system started ......................136

9-15 Margins for freestanding home health agencies .........................................................................137
ix 

Long-term care hospitals

9-16 The top 15 LTC–DRGs in 2005 made up more than 60 percent of LTCH discharges...............138

9-17 Medicare cases and Medicare spending have increased under the LTCH PPS ..........................139

9-18 Since the PPS, LTCHs’ payments have risen faster than their costs ..........................................140

9-19 LTCHs’ Medicare margins have increased under PPS...............................................................141

Inpatient rehabilitation facilities

9-20 Distribution of cases in inpatient rehabilitation facilities, 2006 .................................................142

9-21 The number of IRFs remained stable from 2004 to 2005 ...........................................................143

9-22 Prior trend in volume of IRF cases reversed between 2004 and 2005........................................144

9-23 Per case payments for IRFs have risen faster than costs, post-PPS ............................................145

9-24 Inpatient rehabilitation facilities’ Medicare margin by type, 1998–2005...................................146

Web links ...................................................................................................................................147

10 Medicare Advantage.................................................................................................. 149 

10-1 Access to MA plans available to all Medicare beneficiaries ......................................................151

10-2 Access to zero-premium plans with MA drug coverage, 2006 and 2007 ...................................152

10-3 Enrollment in MA plans, 1994–2007..........................................................................................153

10-4 Enrollment in PFFS plans grew faster than in other major plan types........................................154

10-5 Enrollment in types of plans, 2007 .............................................................................................155

10-6 Different requirements and provisions apply to different types of MA plans ............................156

10-7 Special needs plans have grown quickly.....................................................................................157

10-8 The number of SNPs and SNP enrollment increased from 2006 to 2007...................................158

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

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

11-1 Medicare spending for Part B drugs ...........................................................................................163

11-2 Top 10 drugs covered by Medicare Part B, by share of expenditures, 2005 ..............................164

11-3 Part D enrollment and other sources of drug coverage...............................................................165

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

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

11-6 Benefits in the coverage gap among PDPs .................................................................................168

11-7 Average Part D premiums...........................................................................................................169

11-8 Characteristics of MA–PDs ........................................................................................................170

11-9 Benefits in the coverage gap among MA–PDs ...........................................................................171

11-10 Geographic distribution of PDPs in 2007 ...................................................................................172

11-11 Distribution of Part D enrollees by organization ........................................................................173

11-12 In 2006, most Part D enrollees were in plans that distinguished between preferred and 

nonpreferred brands and include specialty tiers..........................................................................174

11-13 In 2006, the median PDP enrollee was in a plan that listed more than 1,300 drugs...................175

11-14 In 2006, the median MA–PD enrollee was in a plan that listed more than 1,200 drugs.............176

11-15 The number of drugs listed in a therapeutic category available to the median enrollee 

depends on therapeutic class size and regulation........................................................................177

11-16 Most enrollees are in Part D plans that target prior authorization to selected categories ...........178

Web links ...................................................................................................................................179
x 

12 Other services ............................................................................................................. 181 

Dialysis

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

dialysis providers is increasing ...................................................................................................183

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

facilities, 1996 and 2005.............................................................................................................184

12-3 Dialysis facilities’ capacity increased between 1995 and 2006..................................................185

12-4 Characteristics of dialysis patients, by type of facility, 2005 .....................................................186

12-5 The ESRD population is growing, and most ESRD patients undergo dialysis...........................187

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

ESRD population ........................................................................................................................188

12-7 Aggregate margins vary by type of freestanding dialysis facility, 2005.....................................189

Hospice

12-8 Use of hospice among Medicare beneficiaries increased from 2000 to 2005.............................190

12-9 Average length of stay in hospice by state, 2005........................................................................191

12-10 The number of proprietary hospices has increased, while the number of 

nonprofits has declined ...............................................................................................................192

12-11 Growth in freestanding hospices continues ................................................................................193

Clinical laboratory

12-12 Medicare spending for clinical laboratory services, in billions, FY 1996–2006 ........................194

Web links ...................................................................................................................................195
S E C T I O N 

National health care and 

Medicare spending 

 A Data Book: Healthcare spending and the Medicare program, June 2007 3

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

personal health care in 2005 

Medicare

20%

Medicaid and all SCHIP

18%

Other public

7%

Private health insurance

36%

Out of pocket

15%

Other private

4%

Total = $1.66 trillion

a

b

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

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

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

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

a

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

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

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

Source: CMS, Office of the Actuary, National Health Expenditure Accounts, 2007. 

• Of the $1.66 trillion spent on personal health care in the United States in 2005, Medicare 

accounted for 20 percent, or $331 billion. Spending by all public programs—including 

Medicare, Medicaid, SCHIP, and other programs—accounted for 45 percent of health care 

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

Thirty-six percent of spending was financed through private health insurance payers and 15 

percent was from consumer out-of-pocket spending. 

• Medicare and private health insurance spending includes premium contributions from 

enrollees. 

• Note that Part D, Medicare’s voluntary outpatient prescription drug benefit, began in 2006 

and therefore is not reflected in these data from 2005. 
4 National health care and Medicare spending 

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

service, 2005 

Hospital Physician and 

clinical services

Home health Nursing home Durable medical 

equipment

Service type

0

20

40

60

80

100

Share

of spending (percent)

29%

21%

38%

16%

28%

17%

7%

33%

44%

53%

72%

40%

72%

Medicare Medicaid and all SCHIP Other*

0.1%

29%

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, 2007. 

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

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

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

• In 2005, Medicare accounted for 29 percent, 21 percent, 38 percent, 16 percent, and 28 

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

nursing home care, and durable medical equipment, respectively. 
 A Data Book: Healthcare spending and the Medicare program, June 2007 5

Chart 1-3. 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%

Heal ht spend ni g 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, 2007. 

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

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

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

more than 16 percent in 2005. It is projected to reach 20 percent of GDP in 2016. Health 

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

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

managed plans as well as a strong economy. 

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

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

spending will make up nearly 4 percent of GDP by 2016. 

• In 2005, all public spending made up about 45 percent of total health care spending and 

private spending made up 55 percent. By 2016, those percentages are projected to be 49 

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

Chart 1-4. Trustees project Medicare spending to increase 

 as a share of GDP 

1970 1980 1990 2000 2005 2010 2020 2030 2040 2050 2060 2070 2080

0

2

4

6

8

10

12

Share

of G

D

P (p

erc

ent)

Part A

Part B

Part D

0.7

1.3

1.9 2.3

2.7

3.4

4.6

6.5

8.0

9.0

11.3

9.9

10.7

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

Source: 2007 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 more than 11 

percent of GDP in 2080. 

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

considerably faster over the period from 1980 to 2005 than nominal growth in the economy, 

which averaged 6.2 percent per year. For the future, Medicare spending is projected to 

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

6.5 percent per year between 2005 and 2080 compared with an annual average growth rate 

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

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

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

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

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

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

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

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

insurance coverage will also contribute to rapid increases in health care spending. 
 A Data Book: Healthcare spending and the Medicare program, June 2007 7

Chart 1-5. 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, 2007. 

• 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 less than 1 percentage point 

lower than that for private insurance over the 1970 to 2005 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 since the 1970s, benefits offered by private 

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

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

since Medicare’s benefits changed little over the same period. 

Average annual percent change by period: 

 Medicare ---PHI 

1970-2005 8.9 9.8 

1970-2003 10.8 12.0 

1993-1997 6.1 2.8 

1997-1999 1.3 4.4 

1999-2002 5.9 8.5 

2002-2005 6.6 8.0 
8 National health care and Medicare spending 

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

grow at an annual average rate of 7 percent to 

8 percent over the next 10 years 

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

0

200

400

600

800

1000

1200

D

ol al rs ( ni bill oi ns)

Trustees - high

Trustees - intermediate

CBO

Trustees - low

Actual Projected

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

expenses) by calendar year. 

Source: Medicare Trustees Report 2007. CBO March 2007 baseline. 

• Medicare spending has grown about 11-fold, from $37 billion in 1980 to $408 billion in 2006. 

• Medicare spending increased significantly in 2006 and will continue to increase in 

subsequent years 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 7.3 percent from 2006 to 2017. The Medicare trustees’ 

intermediate projections for 2007 to 2016 assume about 7.8 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 2007 9

Chart 1-7. Medicare spending is concentrated in certain 

services and has shifted over time 

Managed care

11%

Other feefor-service

settings

10%

b

Home 

health

9%

Hospital

inpatient

45%

Hospital

outpatient

4%

Skilled 

nursing

facility

5%

Physician

16%

Hospital

inpatient

29%

Hospital

outpatient

7%

Physician

15%

Skilled 

nursing

facility

5%

Home 

health

3%

Other feefor-service

settings

13%

Outpatient prescription 

drugs

12%

a

 a

b

Managed care

16%

 Total spending 1996 = $197 billion Total spending 2006 = $402 billion

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

earlier years. Excludes administrative expenses. Spending amounts are gross outlays, meaning that they include 

spending financed by beneficiary premiums but do not include spending by beneficiaries (or spending on their behalf) for 

cost-sharing requirements of Medicare-covered services. Values are reported on a calendar year, incurred basis and do 

not include spending on program administration. Totals may not sum to 100 percent due to rounding. a

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

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

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

facilities. 

 

Source: CMS, Office of the Actuary, 2007. 

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

 and settings can vary substantially over time. 

• In 2006, Medicare spent about $402 billion, or $10,221 per enrollee. Inpatient hospital 

services were by far the largest spending category (29 percent), followed by managed care 

(16 percent), physicians (15 percent), and other fee-for-service settings (13 percent). 

Medicare began its outpatient prescription drug benefit in 2006, which accounted for 12 

percent of spending that year. 

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

for those services was a smaller share of total Medicare spending in 2006 than it was in 

1996, falling from 45 percent to 29 percent. Spending on beneficiaries enrolled in managed 

care plans has grown from 11 percent to 16 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. 
10 National health care and Medicare spending 

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

small group of beneficiaries, 2002 

Percent of beneficiaries Percent of program spending

0

10

20

30

40

50

60

70

80

90

100

Percent

9%

21%

19%

3%

29%

Mostly 

costly 1%

Second

quartile

88%

19%

Next 15%

Next 5%

Next 4%

Least

costly

half

Note: FFS (fee-for-service). 

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

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

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

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

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

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

inpatient hospital care, and those who are in the last year of life. 
A Data Book: Healthcare spending and the Medicare program, June 2007 11

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

in 2019 

 Year costs Year HI trust 

Estimate exceed income fund assets exhausted

High 2008 2014 

Intermediate 2011 2019 

Low N/A 2042 

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

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

Source: 2007 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, the Hospital Insurance trust 

fund will be exhausted in 2019. 

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

Under low cost assumptions, it would remain solvent until 2042. 
12 National health care and Medicare spending 

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

 financing 

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

0%

2%

4%

6%

8%

10%

12%

Percent of G

D

P

Actual Projected

Total expenditures

General revenue transfers

State transfers

Premiums

Tax on benefits Payroll taxes

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: 2007 Annual Report of the Boards of Trustees of the Medicare Trust Funds. 

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

rapidly, from about 3 percent of gross domestic product today to 7.5 percent by 2036 and to 

more than 11 percent by 2080. 

• Medicare trustees project that under intermediate assumptions, the Hospital Insurance trust 

fund will be exhausted in 2019. 

• 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 2007 report, the Medicare trustees projected that the program would hit this 45 percent 

trigger in 2013—the last year of the seven-year projection window. Since this is the second 

such report, the administration must propose and policymakers must consider broad 

changes to Medicare's benefits and financing in the spring of 2008. 
A Data Book: Healthcare spending and the Medicare program, June 2007 13

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

sharing are projected to grow faster than the 

average monthly Social Security benefit 

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

$0

$500

$1,000

$1,500

$2,000

$2,500

Mon ht yl amounts per person ni 2003 dol al rs

Actual Projected

Average SMI benefit

Average Social

Security benefit

Average SMI premium

plus cost sharing

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

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

 2006 is not shown. 

Source: 2007 Annual Report of the Boards of Trustees of the Medicare Trust Funds. 

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

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

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

4.5 percent and 5.9 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, the increase in the Part B premium 

offsets 13 percent of the Social Security benefit increase. 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. One estimate suggests that in 2006, average OOP spending on drugs was 28 percent lower 

for Part D enrollees and 83 percent lower for recipients of Part D’s low-income subsidies. However, one 

in four enrollees was projected to face increases in OOP spending for drugs of $250 or less, on average. 

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 2006 and 2036, 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. 
14 National health care and Medicare spending 

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

 Number of Spending 

 providers CY 2006 

Provider type 2006 (billions) 

 

Inpatient hospitals 6,193a $ 121.0 

Hospital outpatient PPS 3,905b

 21.5 

Physicians 644,308c

 58.4c

Skilled nursing facilities 15,025 19.9 

Home health agencies 8,813 13.1 

Hospices 3,036 8.9 

Ambulatory surgical centers 4,707 2.3 

End-stage renal disease facilities 4,594 6.3d 

Clinical laboratories 196,296e

 7.1 

Durable medical equipment suppliers ~140,000f 8.4 

 

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 hospitals and critical access hospitals but does include psychiatric, 

rehabilitation, and children’s hospitals that bill under the outpatient PPS. c

Number of physicians does not include limited licensed practitioners or nonphysician practitioners. However, spending 

reflects all expenditures under the physician fee schedule. d

Spending estimate is for 2005. 

e

Count is for laboratories subject to the Clinical Laboratory Improvement Act in 2005. f Many suppliers do not file a claim every year. For example, in a sample of 2004 claims, about 70,000 suppliers filed 

claims for reimbursement. 

Source: U.S. Department of Health and Human Services, 2006 CMS Statistics. Data on number of hospital clinical PPS providers 

are from CMS’s Provider of Service file. Spending data are from Office of the Actuary. 

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

durable medical equipment suppliers. 

• Among the more than 6,000 hospitals, 3,377 operate under the inpatient prospective 

payment system, 1,283 are critical access hospitals, 481 are psychiatric hospitals, and 394 

are long-term care hospitals. 
A Data Book: Healthcare spending and the Medicare program, June 2007 15

 Web links. National health care and Medicare spending 

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

the Medicare program. 

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

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

provide information 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/ 

• The Congressional Budget Office provides projections of Medicare spending. 

http://www.cbo.gov/ftpdocs/78xx/doc7861/m_mschip.pdf 

• MedPAC’s March 2007 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/Mar07_Ch01.pdf 

S E C T I O N 

Medicare beneficiary 

demographics 

A Data Book: Healthcare spending and the Medicare program, June 2007 19

Chart 2-1. Aged beneficiaries account for the greatest 

share of the Medicare population and program 

spending, 2004 

 Percent of enrollees Percent of spending 

ESRD

0.5%

ESRD

3.7%

Disabled 

12.3%

Disabled 

14.6%

Aged

84.8%

Aged

83.6%

 

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, 2004. 

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

greater share of the Medicare population. 

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

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

least five times as much as beneficiaries in other categories: $6,782 is spent per aged 

beneficiary, $6,023 per (non-ESRD) disabled beneficiary, and $54,370 per ESRD 

beneficiary. On average, Medicare spending per beneficiary is $7,121. 
20 Medicare beneficiary demographics 

Chart 2-2. Medicare spending rises as beneficiaries age, 2004 

 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, 2004. 

• Per capita expenditures increase with age. Per capita expenditures were $5,226 for those 

ages 65 to 74, $8,059 for those 75 to 84, and $10,765 for those 85 and older. Per capita 

expenditures for Medicare beneficiaries under age 65, enrolled due to disability (both endstage renal disease (ESRD) and non-ESRD) were $7,634. On average, Medicare spending 

per beneficiary was $7,121. 

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

conditions and those who die. 

Under 65

15%

65-74

42%

75-84

31%

85+

12% Under 65

16%

65-74

31% 75-84

35%

85+

18%
A Data Book: Healthcare spending and the Medicare program, June 2007 21

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

account for a disproportionate share of Medicare 

spending, 2004 

 Percent of enrollees Percent of spending 

Poor

9% Poor

20%

Excellent or 

very good

23%

Excellent or 

very good

40%

Good or fair

51%

Good or fair

57%

 

 

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

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004. 

• 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 $4,082 for those with excellent health, $7,943 for those with good or fair 

health, and $15,448 for those with poor health. On average, Medicare spending per 

beneficiary is $7,121. 
22 Medicare beneficiary demographics 

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

 to grow fastest in the next 30 years 

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

0

10

20

30

40

50

60

70

80

90

100

110

Beneficiaries ( ni mill oi ns)

Historical Projected

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

Source: CMS, Office of the Actuary, 2007. 

• The total number of people enrolled in the Medicare program will nearly 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 2007 23

Chart 2-5. Characteristics of the Medicare population, 2004 

 Percent of the Percent of the 

Characteristic Medicare population Characteristic Medicare population 

Total (42,869,380*) 100% 

Sex Education 

 Male 44 No high school diploma 29% 

 Female 56 High school diploma only 30 

 Some college or more 40 

Race/ethnicity 

 White, non-Hispanic 78 Income status 

 African American, non-Hispanic 10 Below poverty 18 

 Hispanic 8 100–125% of poverty 10 

 Other 5 125–200% of poverty 21 

Age 200–400% of poverty 28

 < 65 15 Over 400% of poverty 23 

 65–74 42 

 75–84 31 Supplemental insurance status 

85+ 12 Medicare only 10 

Health status Managed care 13

 Excellent or very good 40 Employer 33 

 Good or fair 51 Medigap 21 

 Poor 9 Medigap/employer 5 

Residence Medicaid 17 

 Urban 76 Other 2 

 Rural 24 

Living arrangement 

 Institution 5 

 Alone 28 

 Spouse 48 

 Other 18 

 

 

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

MSAs. In 2004, poverty was defined as $9,060 for people living alone and as $11,430 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, 2004. 

• 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. 
24 Medicare beneficiary demographics 

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

and urban residence, 2004 

 Percent of urban Percent of rural 

Characteristics Medicare population Medicare population 

Total 76% 24% 

 Urban 

 Rural 

Sex 

 Male 44 45 

 Female 56 55 

Race/ethnicity 

 White, non-Hispanic 76 86 

 African American, non-Hispanic 10 7 

 Hispanic 9 3 

 Other 5 5 

Age 

 < 65 14 17 

 65–74 42 43 

 75–84 31 28 

85+ 12 11 

Health status 

 Excellent or very good 41 36 

 Good or fair 50 52 

 Poor 9 11 

 

Income status 

 Below poverty 17 20 

 100–125% of poverty 10 11 

 125–200% of poverty 20 23 

 200–400% of poverty 28 29 

 Over 400% of poverty 25 16 

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

MSAs. In 2003, poverty was defined as $9,060 for people living alone and as $11,430 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, 2004. 

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

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

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

percent of poverty (31 percent vs. 27 percent) compared to urban beneficiaries. 
A Data Book: Healthcare spending and the Medicare program, June 2007 25

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

diseases reported by Medicare beneficiaries, 2002 

62

60

29

19

14

17

15

48

54

6

21 20

16 16

Arthritis Hypertension Osteoporosis Diabetes Skin cancer Other cancer Pulmonary 

disease

0

10

20

30

40

50

60

70

P

ercent of benefic ai ries with dise

ase/condit oi n

Female

Male

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

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

conditions reported by Medicare beneficiaries. 

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

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

osteoporosis. 
26 Medicare beneficiary demographics 

Web links. Medicare beneficiary demographics 

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

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

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

enrollment. 

http://www.cms.hhs.gov/DataCompendium/018_2006_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 2007 29

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

disproportionate share of Medicare spending, 2004 

 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, 2004. 

• 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: $10,884 is spent 

per dual-eligible beneficiary, and $5,975 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 $23,543 per person in 

2004, just over twice the amount for other Medicare beneficiaries. 
30 Dual-eligible beneficiaries

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

to be disabled or over 85 years old, 2004 

 Dual eligibles Nondual eligibles

65-74

25%

75-84

22%

85+

13%

65-74

46%

75-84

32%

85+

12% Under 65

(disabled)

40%

Under 65

(disabled)

10%

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

age 65, they are counted as aged. 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, 2004. 

• More than one-third of dual eligibles are disabled, compared with only 10 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 2007 31

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

to report poorer health status, 2004 

 Dual eligibles Nondual eligibles 

Poor

21%

Good or fair

60%

Poor

7%

Good or fair

49%

Excellent or 

very good

44%

Excellent or 

very good

18%

 

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, 2004. 

 

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

good or fair status, but about 20 percent of the dual-eligible population 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. 
32 Dual-eligible beneficiaries

Chart 3-4. Demographic differences between dual eligibles and 

nondual eligibles, 2004 

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

Sex 

 Male 38% 45% 

 Female 62 55 

Race/ethnicity 

 White, non-Hispanic 55 83 

 African American, non-Hispanic 21 7 

 Hispanic 15 6 

 Other 9 4 

Limitations in ADLs 

 No ADLs 47 71 

 1–2 ADLs 24 19 

 3–6 ADLs 29 10 

Residence 

 Urban 72 77 

 Rural 28 23 

Living arrangement 

 Institution 19 2 

 Alone 30 28 

 Spouse 17 54 

 Children, nonrelatives, others 32 15 

Education 

 No high school diploma 55 23 

 High school diploma only 23 31 

 Some college or more 18 44 

Income status 

 Below poverty 59 9 

 100–125% of poverty 21 8 

 125–200% of poverty 16 22 

 200–400% of poverty 3 33 

 Over 400% of poverty 1 28 

Supplemental insurance status 

 Medicare or Medicare/Medicaid only 92 12 

 Medicare managed care 1 16 

 Employer 1 39 

 Medigap 1 25 

 Medigap/employer 0 6 

 Other* 6 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 2004, poverty was defined as $9,060 for people living alone and $11,430 

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, 2004. 

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

poverty level, and 96 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 2007 33

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

 dual eligibles and nondual eligibles, 2004 

 Dual-eligible Non-dual-eligible 

Service beneficiaries beneficiaries 

Average Medicare payment for all beneficiaries 

Total Medicare payments $10,884 $5,975 

Inpatient hospital 4,588 2,576 

Physiciana

 2,736 1,964 

Outpatient hospital 1,767 672 

Home health 601 279 

Skilled nursing facilityb

 851 322 

Hospice 260 137 

 

Percent of beneficiaries using service 

Percent using any type of service 91.5% 86.8% 

 

Inpatient hospital 28.6 18.3 

Physiciana

 89.3 85.7 

Outpatient hospital 72.8 62.6 

Home health 11.5 7.0 

Skilled nursing facilityb

 8.0 3.4 

Hospice 2.6 1.8 

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

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

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. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004, which updates the previous 

analysis by Liu et al. in 1998. 

• Average per capita spending for dual eligibles is over 80 percent higher than for nondual 

eligibles⎯$10,884 compared to $5,975. 

• 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 skilled nursing 

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

duals as on nonduals. 

• Higher average per capita spending for duals is a function of 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 87 percent. 

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

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

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

among dual-eligible beneficiaries, 2004

Medicare spending for 

dual eligibles

Share of 

dual eligibles

Total spending for 

dual eligibles

0

10

20

30

40

50

60

70

80

90

100

P

ercent

3%

50%

7%

19%

30%

27%

40%

15%

37%

38%

5%

29%

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

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

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use files, 2004. 

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

beneficiaries. The costliest 20 percent of duals account for 78 percent of Medicare spending 

on duals; in contrast, the least costly 50 percent of duals account for only 3 percent of 

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

spending is the highest, one-third are dual eligible. Similarly, of the costliest 5 percent of 

beneficiaries, a quarter are dual eligible. 

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

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

for 29 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 more than twice as high as that for nonduals—

$23,543 compared to $11,736. 
A Data Book: Healthcare spending and the Medicare program, June 2007 35

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 83.1% 90.4% 

In the last 6 months, if you needed care right 

away, did you usually or always get care as 

soon as you wanted? 

Yes 87.8 93.0 

In the last 6 months, if you made any 

appointments with a doctor or health care 

provider, how often did you get an 

appointment as soon as you wanted? 

Usually or always 85.8 92.2 

 

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

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

insurance. 

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

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

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

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

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

Web links. Dual-eligible beneficiaries 

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

dual-eligible beneficiaries. 

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

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

http://kff.org 

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

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

Quality of care in the 

Medicare program 

A Data Book: Healthcare spending and the Medicare program, June 2007 39

Chart 4-1. Hospital mortality decreased, 2003–2005 

 Risk-adjusted rates per 10,000 

 Percent change Number of 

Diagnosis or procedure 2003 2004 2005 2003–2005 cases in 2005 

 

In-hospital mortality 

 Pneumonia 876 789 689 –21% 55,147 

 Stroke 1,081 1,019 951 –12 32,848 

 AMI 1,205 1,110 1,017 –16 32,466 

 CHF 409 358 308 –25 32,179 

 GI hemorrhage 319 264 226 –29 9,506 

 CABG 399 355 300 –25 6,447 

 Craniotomy 881 814 737 –16 3,183 

 AAA repair 1,096 956 802 –27 1,803 

30-day mortality

 Pneumonia 1,543 1,452 1,339 –13 105,555 

 Stroke 1,812 1,767 1,702 –6 55,748 

AMI 1,644 1,570 1,489 –9 46,411 

 CHF 884 834 806 –9 70,084 

 GI hemorrhage 638 587 544 –15 19,366 

 CABG 399 366 312 –22 6,367 

 Craniotomy 1,155 1,094 1,007 –13 4,268 

 AAA repair 1,047 912 862 –18 1,852 

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

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

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

• Rates of in-hospital mortality decreased between 2003 and 2005 for all conditions and 

procedures measured. The most substantial improvements occurred for gastrointestinal 

hemorrhage, congestive heart failure, coronary artery bypass graft, and abdominal aortic 

aneurysm repair. 

• Thirty-day mortality (as measured from admission) has also decreased. The most 

substantial improvements occurred for coronary artery bypass graft, abdominal aortic 

aneurysm repair, and gastrointestinal hemorrhage. 
40 Quality of care in the Medicare program

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

 hospitalized beneficiaries, 2003–2005 

 Observed 

 Risk-adjusted rates per 10,000 Difference adverse 

 2003 2004 2005 2003–2005 events, 2005 

 

Decubitus ulcer 267 276 282 15 159,016 

Failure to rescue 1,225 1,114 1,058 –167 61,174 

Postoperative PE 

or DVT 92 98 100 8 43,108 

Accidental puncture/ 

laceration 34 34 35 1 38,771 

Infection due to 

medical care 25 25 15 –10 19,247 

Postoperative 

respiratory failure 50 53 59 9 11,944 

Iatrogenic 

pneumothorax 8 8 8 0 11,015 

Postoperative hemorrhage 

or hematoma 17 17 17 0 7,438 

Postoperative sepsis 120 131 121 1 6,715 

Postoperative physiologic 

and metabolic derangement 7 8 8 1 2,679 

Postoperative wound 

dehiscence 13 12 15 1 1,982 

Postoperative hip fracture 3 3 3 0 1,051 

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

difference in rates between 2003 and 2005 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 2003 to 2005, 6 of 12 rates of adverse events experienced by Medicare beneficiaries 

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

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

most common and—because it results in death—most severe. 
A Data Book: Healthcare spending and the Medicare program, June 2007 41

Chart 4-3. Most ambulatory care indicators show improvement 

 or stability, 2003–2005 

Number of indicators 

Indicators Improved Stable Worsened Total 

All 22 13 3 38 

Anemia and GI bleed 2 2 0 4 

CAD 3 1 0 4 

Cancer 1 3 3 7 

CHF 6 2 0 8 

COPD 2 0 0 2 

Depression 0 1 0 1 

Diabetes 6 1 0 7 

Hypertension 1 0 0 1 

Stroke 1 3 0 4 

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

pulmonary disease). 

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

Analytic Files. 

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

necessary care and rates of potentially avoidable hospitalizations for beneficiaries with 

selected medical conditions. 

• Out of 38 indicators, 22 improved, 13 did not change statistically, and 3 worsened from 2003 

to 2005. This finding suggests that in 2005 beneficiaries with these conditions were 

somewhat more likely to receive necessary care and avoid hospitalizations. 

• We found small declines in measures related to breast cancer. Specifically, we found 

declines of 2 to 3 percentage points in mammography screenings and clinically indicated 

breast imaging services. 

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

with the provision of necessary clinical care for that condition. For example, in 2005, smaller 

shares of beneficiaries with diabetes were hospitalized concurrent with more beneficiaries 

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

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

outcomes continues to increase 

 

Measure 2003 2004 2005 2006 

Improvement in: 

 Walking around 34 36 38 40 

 Getting out of bed 49 51 52 52 

 Bathing 57 60 61 67 

 Managing oral medications 35 38 39 41 

Patients have less pain 57 59 61 62 

Any hospital admissions 28 28 28 28 

Any unplanned ER use 21 21 21 21 

Note: ER (emergency room). 

Source: MedPAC analysis of CMS Home Health Compare data. The quality measures are reported for a May to June reporting 

year. 

• Most measures of quality from CMS’s public website Home Health Compare have shown 

improvement since 2003. Measures of function, pain, and medication management have 

improved, while those for adverse events such as readmission to a hospital or unplanned 

ER use have remained constant. 
A Data Book: Healthcare spending and the Medicare program, June 2007 43

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

Outcome measure 2001 2002 2003 2004 

Percent of in-center hemodialysis patients: 

 Receiving adequate dialysis 92 92 94 95 

 With anemia under control 76 76 80 83 

 Dialyzed with an AV fistula 31 31 35 39 

 Not malnourished 82 82 81 82 

 

Percent of all peritoneal dialysis patients: 

 Receiving adequate CAPD 68 68 70 73 

 Receiving adequate CCPD 70 70 65 59 

 With anemia under control 76 76 82 82 

 Not malnourished 61 61 63 62 

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

dialysis). Data on dialysis adequacy and use of fistulas represent percent of patients meeting CMS’s clinical performance 

criteria. Patients with anemia under control include those with hemoglobin > 11 g/dL. Not malnourished includes patients 

with serum albumin >3.5/dL. 

Source: MedPAC analysis of 2001–2005 Annual Reports for ESRD Clinical Performance Measures Project from CMS. 

 

• The quality of dialysis care has improved for some measures. Between 2001 and 2004, 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 31 percent to 39 percent of 

hemodialysis patients between 2001 and 2004. Clinical guidelines recommend that at least 

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

Chart 4-6. Changes in safety of care for long-term care 

 hospital patients, 2003–2005 

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

Patient safety Change in rate adverse of patients 

indicator 2003 2004 2005 2004–2005 events 2005 2005 

Decubitus ulcer 128.6 148.3 152.2 2.6 16,601 104,027 

Infection due to 

 medical care 19.4 27.9 31.6 13.3 835 117,765 

Postoperative 

 PE or DVT 53.5 54.3 55.9 2.9 872 15,526 

Postoperative 

 sepsis 125.3 164.0 160.6 –2.1 1,535 9,012 

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

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 2004 

to 2005, although the rate for one PSI, postoperative sepsis, declined. 

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

developed for LTCHs. 

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

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

treated in LTCHs in 2003, 2004, and 2005. 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 2007 45

Chart 4-7. Medicare Advantage plans improve, but rates are 

still low on some quality measures, 2001–2005 

Measure 2001 2002 2003 2004 2005 

Advising smokers to quit 60.8 61.5 63.3 64.7 75.5 

Beta-blocker treatment after heart attack 92.9 93.0 92.9 94.0 93.8 

Breast cancer screening 75.3 74.5 74.0 74.0 71.6 

Cholesterol management 

 Control 58.4 62.3 66.7 69.8 N/R 

 Screening 75.5 77.7 81.0 82.1 N/R 

Controlling high blood pressure 53.6 56.9 61.4 64.6 66.4 

Comprehensive diabetes care 

 Eye exams a

 66.0 68.4 64.9 67.1 66.5

 HbA1c testing 85.7 85.0 87.9 89.1 88.9 

 Lipid control (<130 mg/DL) 57.5 62.6 67.7 71.4 71.6 

 Lipid profile 85.7 87.9 91.1 93.5 93.3 

 Monitoring diabetic nephropathy 51.9 57.3c

 53.6 58.5 60.2

 Poor HbA1c control b 26.8 24.5 23.4 22.5 23.6 

Antidepressant medication management c 

 Acute phase 51.3 52.1 53.3 56.3 54.9 

 Continuation phase 36.8 37.7 39.2 42.1 41.0 

 Contacts 11.9 10.8 10.5 11.9 11.8 

 

Follow-up after hospitalization for mental illness 

 Less than 7 days 37.2 38.7 38.8 40.2 39.1 

 Less than 30 days 60.6 60.6 60.3 60.7 59.3 

Note: N/R (not reported), 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 smokers 

advised to quit smoking, or percent of enrollees who had a heart attack who received beta blockers). In the case of 

cholesterol management scores for 2005, the National Committee for Quality Assurance did not report results because 

there were errors in the coding specifications that led to incorrect lower rates. a The definition of these measures changed in 2003, making comparisons difficult. b

 Lower rates are better than higher ones for this measure. 

c

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

percent of patients remaining on antidepressant continuously for six months after initial diagnosis. Contacts 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. The State of Health Care Quality. Washington, DC: NCQA. 

National Committee for Quality Assurance. 2006. The State of Health Care Quality. Washington, DC: NCQA. 

• Results for 2005 were similar to 2004, with the exception of the improvement in advising smokers to quit and the 

decline in the rate of breast cancer screening, which we also see in the Medicare fee-for-service population. (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. 
46 Quality of care in the Medicare program

Chart 4-8. Changes in SNF quality measures between 2000 

and 2004 

2.80

-1.3

2.05

-0.4

2.03

Discharge to community rate Potentially avoidable rehospitalization rate

-2

-1

0

1

2

3

4

A

v

erage percen at ge po ni t change

Observed

Case-mix adjusted

Fully adjusted

-1.8

Note: SNF (skilled nursing facility). Table shows mean percentage point change in facility rates. Community discharges 

occurred within 30 days of the SNF admission. Potentially avoidable rehospitalizations include hospitalizations within 100 

days to an acute care hospital for heart failure, electrolyte imbalance, respiratory infection, sepsis, and urinary tract 

infection. Fully adjusted rates account for differences in case mix, staffing levels, length of the qualifying hospital stay, 

SNF location, facility type, and market characteristics. 

Source: Kramer et al. 2007. Understanding temporal changes in and factors associated with SNF rates of community discharge 

and rehospitalization. A study conducted by staff at the Division of Health Care Policy and Research University of 

Colorado at Denver and Health Sciences Center for MedPAC. Washington, DC: MedPAC. http://www.medpac.gov/. 

• Two outcome measures—rates of discharges to the community within 30 days and 

potentially avoidable hospital readmissions (which include hospitalizations for heart failure, 

electrolyte imbalance, respiratory infection, sepsis, and urinary tract infections) within 100 

days—worsened between 2000 and 2004. The average facility rate of community discharge 

decreased 1.8 percentage points, and the rate of potentially avoidable rehospitalizations 

increased 2.8 percentage points. 

• Controlling for differences in case mix and facility and market characteristics reduced but did 

not eliminate the differences in the quality measures between 2000 and 2004. Differences in 

case mix accounted for about one-third of the change in rates over the period. 

• Other factors, including unmeasured case-mix differences, could explain some of the 

differences. 
A Data Book: Healthcare spending and the Medicare program, June 2007 47

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 3 of the MedPAC March 2007 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://www.medpac.gov/chapters/Mar07_Ch03.pdf 

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/quality 

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

CMS website. 

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

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

http://www.medicare.gov/HHCompare/Home.asp 
48 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 2007 51

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

2000–2005 

2000 2001 2002 2003 2004 2005

0

5

10

15

P

erc

ent of b

eneficiar ei s

7.7 7.4

8.8

8.0

4.6 4.3

Delayed health care due to cost

Did not see doctor

Trouble getting health care

a

b

 c

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

doctor or other medical person, but did not. 

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

 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Access to Care file, 2005. 

• In 2005, more than 90 percent of beneficiaries reported good access to care, regardless of 

the question asked. 

• When asked whether they delayed health care due to cost, 7.4 percent of beneficiaries 

answered yes in 2005, compared to 7.7 percent in 2000. 

• Similarly, the percentage reporting that they did not see a doctor despite having a serious 

health problem or condition declined from 8.8 percent to 8.0 percent in 2005. 

• The percentage of beneficiaries who reported trouble getting health care declined from 4.6 

percent in 2000 to 4.3 percent in 2005. 

 
52 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 2005 2006 2005 2006 

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 74%* 75%* 67%* 69%* 

 Sometimes 21 18* 25 21* 

 Usually 3 3* 5 5* 

 Always 2 3 3 4 

 For illness or injury 

 Never 82 84* 75* 79* 

 Sometimes 15 11* 19 15* 

 Usually 1 2 3 2 

 Always 1 1* 2 2* 

 

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

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

 Primary care physician 

 No problem 75 76 75 75 

 Small problem 12 10 16 16 

 Big problem 13 14 9 9 

 Specialist 

 No problem 89 80 86 83 

 Small problem 6 7 7 9 

 Big problem 5 11 6 7 

 

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?” 

 7 8* 12 11* 

Note: Numbers may not sum to 100 percent due to rounding. Missing responses are not presented. For the 2005 survey n=4,021 

(2,012 Medicare; 2,009 privately insured). For the 2006 survey n=4,029 (2,005 Medicare, 2,024 privately insured). 

*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 2005 and 2006. 

• 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 2006, 8 percent of Medicare beneficiaries and 11 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 less common reasons for not seeing 

a doctor than other reasons, such as cost. 
 A Data Book: Healthcare spending and the Medicare program, June 2007 53

Chart 5-3. Physicians’ acceptance of new patients is highest 

for private (non-HMO) and Medicare patients, 2006 

Type of patient insurance 

 

 

Private, 

non-HMO 

 

FFS Medicare 

NonMedicaid 

HMO 

Medicaid 

 (including HMO) 

 

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). Proceduralists include physicians in medical specialties 

that are procedurally oriented (cardiology, dermatology, gastroenterology, and radiation oncology). Nonproceduralists 

include physicians in all other nonsurgical specialties. 

 *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, and 

a smaller share (80 percent) accept 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 non-HMO patients. 

• 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. 
54 Access to care in the Medicare program

 Chart 5-4. Most beneficiaries had little or no problem 

 accessing home health and special therapy services 

 Home health Special therapy 

 2001 2002 2003 2004 2001 2002 2003 2004 

Did you experience an access problem? 

 No problem 74% 76% 77% 78%* 84% 85% 85% 85%*

 A small problem 13 13 12 12* 9 8 8 8* 

 A big problem 12 12 11 11* 7 7 6 6 

Note: Percentages are proportions of those who answered the question. Missing responses were not included. Columns do not 

total 100 percent due to rounding. 

 *The difference between 2001 and 2004 is significant at the p<0.05 level. 

Source: MedPAC analysis of Consumer Assessment of Health Plans Survey, 2001–2004. Data for 2005 are not available. 

• Most beneficiaries had little or no problem accessing home health services (90 percent) and 

special therapy services (93 percent) in 2004. Special therapy services include physical and 

occupational therapies and speech–language pathology services. 

• In 2004, 78 percent of beneficiaries reported having no problems accessing home health 

services, a slight increase over the share in 2001. 

• In 2004, 85 percent of beneficiaries reported having no problems accessing special therapy 

services, a slight increase over the share in 2001. 
 A Data Book: Healthcare spending and the Medicare program, June 2007 55

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

 to obtain care, 2005 

Delayed getting care due to cost 

Failed to obtain care due to cost 

4.9

6.5 6.3

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, 2005. 

 

• Rates of delaying care due to cost are slightly higher for Hispanic than for non-Hispanic 

beneficiaries; rates of failing to get care due to cost are higher for both black and Hispanic 

beneficiaries than for white non-Hispanic beneficiaries. These differences may be related to 

income and presence of supplemental coverage. 

7.6 7.4

8.1

White, non-Hispanic Black, non-Hispanic Hispanic

0

2

4

6

8

10

Percent of U.S. population
56 Access to care in the Medicare program

Chart 5-6. Beneficiaries differ in their reports of obtaining 

needed, urgent, or routine care, 2004 

 No problem Always got care as 

 getting soon as wanted 

Beneficiary characteristic needed care Urgent Routine 

 

Overall 90% 73% 63% 

Aged (65 years and older) 92 76 64 

Disabled (Under 65) 83 63 56 

White 92 75 64 

African American 85 68 63 

Hispanic 81 61 55 

Medicare only 84 66 61 

Dually eligible 81 67 59 

Supplemental Insurance 93 76 64 

Source: Research Triangle Institute analysis of data from the Medicare Fee-for-Service National Implementation Subgroup 

CAHPS Analysis 2004, submitted to CMS.

• The percentage of beneficiaries reporting no problem getting needed care is significantly 

higher than those who reported that they could get urgent or routine care as soon as they 

wanted it. This may seem inconsistent, but the last two questions add the dimension of 

timing into their responses. It appears that while most beneficiaries are able to get care, they 

may not get it as soon as they want it. 

• Disabled beneficiaries under 65 were more likely than aged beneficiaries to report problems 

receiving needed, urgent, or routine care. 

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

obtain care with no problems. Sixty-seven percent of dually eligible beneficiaries reported 

they always got urgent care as soon as they wanted, compared with 73 percent of all 

beneficiaries. Seventy-six percent of beneficiaries with supplemental insurance reported the 

same experience. 

• Hispanics had a harder time than other ethnic and racial groups getting needed, urgent, and 

routine care. 
 A Data Book: Healthcare spending and the Medicare program, June 2007 57

Web links. Access to care in the Medicare program 

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

on beneficiary access to physicians. 

http://www.medpac.gov/chapters/Mar07_Ch02b.pdf 

• Chapter 3 of the MedPAC March 2003 Report to the Congress provides a broad overview 

about beneficiary access to health care. 

http://www.medpac.gov/publications/congressional_reports/Mar03_Ch3.pdf 

• The Commonwealth Fund released a chart book in spring 2005 which has further 

information on access in the Medicare program. 

http://www.cmwf.org 

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

http://www.hschange.org 

S E C T I O N 

Medicare beneficiary and 

other payer financial liability

A Data Book: Healthcare spending and the Medicare program, June 2007 61

Chart 6-1. Sources of supplemental coverage among 

 noninstitutionalized Medicare beneficiaries, 2004 

Medigap

28.8%

No supplemental

coverage

9.3%

Employer

sponsored

31.9%

Medicaid

14.0%

Other public

sector

1.5%

Medicare

managed care

14.5%

Note: Beneficiaries are assigned to the supplemental coverage category that applied for the most time in 2004. They could have 

had coverage in other categories throughout 2004. Other public sector includes federal and state programs not included in 

other categories. Analysis includes only beneficiaries living in the community. It excludes beneficiaries who were not in 

both Part A and Part B throughout their enrollment in 2004 or who had Medicare as a second payer. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2004. 

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

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

participate in Medicare managed care. 

• Almost 61 percent have private-sector supplemental coverage such as medigap (about 29 

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

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

• Fourteen 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 

14 percent) is much smaller than the proportion listed in Chapter 10 (19 percent). The 

difference is due the fact that the results in this chart reflect 2004 data, and the results in 

Chapter 10 reflect 2007 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, 2004 

 Number of Employer- Medicare Other 

 beneficiaries sponsored Medigap managed public Medicare 

 (thousands) insurance insurance Medicaid care sector only 

All beneficiaries 36,326 32% 29% 14% 14% 2% 9% 

Age 

 Under 65 5,025 16 6 46 7 2 23 

 65–69 7,869 38 30 9 12 1 10 

 70–74 7,709 35 30 9 17 1 8 

 75–79 6,833 33 34 8 18 2 5 

 80–84 4,999 32 35 9 17 2 6 

 85+ 3,891 32 37 10 15 1 6 

Income status 

 Below poverty 6,019 10 15 52 10 2 12 

 100 to 125% of poverty 3,507 16 26 29 14 3 13 

 125 to 200% of poverty 7,827 27 29 10 17 2 14 

 200 to 400% of poverty 10,630 42 32 1 16 1 7 

 Over 400% of poverty 8,270 46 36 0 13 0 4 

Eligibility status 

 Aged 31,148 34 33 9 16 1 7 

 Disabled 4,839 16 5 46 7 2 23 

 ESRD 302 27 20 32 12 0 9 

Residence 

 Urban 27,532 33 27 13 19 1 8 

 Rural 8,769 30 35 17 2 2 14 

Sex 

 Male 16,098 34 26 13 13 2 12 

 Female 20,228 30 31 15 16 1 7 

Health status 

 Excellent/very good 14,915 34 35 7 15 1 8 

 Good/fair 18,355 31 26 17 15 2 10 

 Poor 2,925 24 17 34 10 2 14 

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

time in 2004. They could have had coverage in other categories throughout 2004. 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 2004, poverty was defined as $9,060 for people living alone and $11,430 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 2004 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), urban 

dwelling, 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 2007 63

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

 noninstitutionalized FFS Medicare beneficiaries, 

 by source of payment, 2004 

Medicare

Private supplements

Per capita total spending = $11,080

Beneficiaries' 

direct spending

16%

12%

18%

54%

Public supplements

Note: FFS (fee-for-service). Private supplements include employer-sponsored plans and individually purchased coverage. 

Public supplements include Medicaid, Department of Veterans Affairs, and other public coverage. Direct spending is on 

Medicare cost sharing and noncovered services but not supplemental premiums. Analysis includes only FFS beneficiaries 

living in the community. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2004. 

• Among fee-for-service (FFS) beneficiaries living in the community, the total cost of health care 

services (defined as beneficiaries’ direct spending as well as expenditures by Medicare, other 

public-sector sources, and all private-sector sources on all health care goods and services) 

averages $11,080. Medicare is the largest source of payment; it pays 54 percent of the health 

care costs for FFS beneficiaries living in the community, or an average of $5,984 per beneficiary. 

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

medigap—pay 18 percent of beneficiaries’ costs, or an average of $2,013 per beneficiary. 

• Beneficiaries pay 16 percent of their health care costs out of pocket, or an average of $1,788 of 

spending per beneficiary. 

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

health care costs, or an average of $1,295 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, 2004 

< 10 10-25 25-50 50-75 75-90 > 90

Groups of beneficiaries ranked by total spending (percentile ranges)

0

10,000

20,000

30,000

40,000

50,000

60,000

Dol al rs

Medicare

Supplemental payers

Direct spending

$258 $1,495

$3,693

$8,088

$17,535

$52,539

Note: FFS (fee-for-service). Analysis includes FFS beneficiaries living in the community. Direct spending is on Medicare cost 

sharing and noncovered services. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2004. 

• 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 $52,539. Per capita spending for the 10 percent of 

beneficiaries with the lowest total spending averages $258. 

• 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 54 percent of total spending for all 

beneficiaries but pays 70 percent of total spending for the 10 percent of beneficiaries with 

the highest total spending. Beneficiaries’ direct spending covers 16 percent of total spending 

for all beneficiaries but only 10 percent of total spending for the 10 percent of beneficiaries 

with the highest total spending. 
A Data Book: Healthcare spending and the Medicare program, June 2007 65

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

 among noninstitutionalized FFS beneficiaries, 

 by type of supplemental coverage, 2004 

6,564 6,137 5,759

9,120

3,871

5,081

3,286

1,518

3,380

480

808

4,341

1,043

3,639

1,648

2,158

1,821

1,247

1,858

1,818

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

 4

30

42

 350

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

2004. They could have had coverage in other categories throughout 2004. Other public sector includes federal and state 

programs not included in the other categories. Private supplements include employer-sponsored plans and individually 

purchased coverage. Public supplements include Medicaid, Department of Veterans Affairs, and other public coverage. 

 Analysis includes only FFS beneficiaries living in the community. It excludes beneficiaries who were not in both Part A and 

 Part B throughout their enrollment in 2004 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, 2004. 

• 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, 116 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, 2004 

749

1,510

2,451 2,580

707

2,698

2,079

2,835

2,981

1,734

2,346

817

1,603

2,614 2,899

853

1,402

1,521

1,990 1,640

707

1,556

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

103

 - +

 − Beneficiaries who report they are in fair or poor health

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

Health - + - +

Status

 - + - + - +

106

Note: ESI (employer-sponsored supplemental insurance). 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2004. 

• 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 $749 in out-of-pocket spending on premiums and $2,698 on services. Those who 

have Medicare-only coverage and report good, very good, or excellent health had an average of $817 in out-of-pocket 

spending on premiums and $1,402 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. 

• In several categories, especially among those in Medicare only, the percentage of out-of-pocket spending that is 

attributable to premiums increased from 2003 to 2004. This reflects a sharp increase in the Part B premium. 

• What beneficiaries actually pay out of pocket varies by type of supplemental coverage. For those with medigap, out-ofpocket 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 2007 67

Web links. Medicare beneficiary and other payer 

financial liability 

• 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 2007 71

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

 inpatient and outpatient services, 1995–2005 

89 93 94 93 95 96 105 114 118 124 132

15 16 17 16 18 18

21

21 23

26

29

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Calendar year

0

20

40

60

80

100

120

140

160

180

Bill oi ns of dol al rs

Outpatient

Inpatient

 Notes: Analysis includes inpatient services covered by the acute inpatient prospective payment system (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. 

Source: CMS, Office of the Actuary. 

• Medicare hospital inpatient spending increased 48 percent (4.0 percent per year) and outpatient 

spending increased 92 percent (6.8 percent per year) from 1995 to 2005. 

• A freeze in inpatient payment rates in the Balanced Budget Act of 1997 (BBA), combined with lower 

Medicare discharges, reduced inpatient spending in 1998. More Medicare discharges, a higher 

update, case-mix change, and expansion of disproportionate share hospital (DSH) payments 

increased inpatient spending substantially in 2001 and 2002. In 2003 and 2004, slower Medicare 

discharge growth, slower case-mix change, and lower outlier spending led to slight moderation in the 

rate of spending growth. Increases in DSH payments enacted in the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003; liberalization of new technology payments; and onetime geographic reclassification led to a larger payment increase in 2005. More rapid case-mix growth 

and increases in outlier payments also increased payments in 2005. 

• 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. 

• Aggregate Medicare inpatient spending was $132 billion and outpatient spending was $29 billion in 

2005. 
72 Acute inpatient services

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

fiscal year 2005 

 

MDC Share of Share of Share of 

number MDC name all discharges medical discharges surgical discharges 

 5 Circulatory system 27% 26% 31% 

 4 Respiratory system 15 20 3 

 

 8 Musculoskeletal 12 4 30 

 system and connective 

 tissue 

 6 Digestive system 11 11 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 3 4 2 

 diseases 

 7 Hepatobiliary system 3 2 4 

 and pancreas 

 9 Skin, subcutaneous 2 3 2 

 tissue and breast 

Total 91 91 92 

Note: MDC (major diagnostic category). 

Source: MedPAC analysis of MedPAR data from CMS. 

• In fiscal year 2005, 10 major diagnostic categories accounted for 91 percent of discharges 

at hospitals paid under the acute inpatient prospective payment system. 

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

of surgical cases. 

• Respiratory cases accounted for 20 percent of medical discharges and musculoskeletal 

cases accounted for 30 percent of surgical discharges. 
A Data Book: Healthcare spending and the Medicare program, June 2007 73

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

 discharges, by hospital group, 2005 

 Hospitals Medicare discharges 

 Number 

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

 

All PPS and critical 4,432 100.0% 11,912 100.0% 

access hospitals 

PPS hospitals 3,377 76.2 11,554 97.0 

 Urban 2,395 54.0 9,805 82.3 

 Rural 982 22.2 1,749 14.7 

 Large urban 1,325 29.9 5,358 45.0 

 Other urban 1,070 24.1 4,448 37.3 

 Rural referral 221 5.0 782 6.6 

 Sole community 330 7.4 408 3.4 

 Medicare dependent 126 2.8 141 1.2 

 Other rural <50 beds 102 2.3 70 0.6 

 Other rural >50 beds 203 4.6 349 2.9 

 Voluntary 2,022 45.6 8,347 70.1 

 Proprietary 769 17.4 1,784 15.0 

 Government 586 13.2 1,423 11.9 

 Major teaching 293 6.6 1,834 15.4 

 Other teaching 769 17.4 4,061 34.1 

 Nonteaching 2,315 52.2 5,659 47.5 

Critical access hospitals 1,055 23.8 358 3.0 

Note: PPS (prospective payment system). Analysis includes all hospitals covered by Medicare’s inpatient prospective payment 

system along with critical access hospitals. Maryland hospitals are excluded. Large urban areas have populations of more 

than 1 million. Major teaching hospitals are defined by a ratio of interns and residents to beds of at least 0.25. Other 

teaching hospitals have a ratio of below 0.25. 

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

• In 2005, 3,377 hospitals provided almost 11.6 million discharges under Medicare’s acute 

inpatient prospective payment system (PPS) and 1,055 critical access hospitals provided 

almost 0.4 million discharges. 

• 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 7-24 for more information about critical access hospitals. 
74 Acute inpatient services

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

outpatient visits, 1995–2005 

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

10

20

30

40

50

60

P

ercent

0.0 0.2 1.6 2.1

3.9

6.7

9.2

11.3 12.3 13.6

15.3

0.0

5.9

8.3

14.3

19.4

25.7

29.3

33.7

35.8 37.4

41.4

Total outpatient visits

Total admissions

Note: Cumulative change is the total percent increase from 1995 through the year indicated. Data are admissions to and 

outpatient visits at approximately 5,000 community hospitals, excluding nursing home units. 

Source: American Hospital Association Annual Survey of Hospitals. 

• Hospital outpatient service use has grown much more rapidly than inpatient service use. 

Total hospital outpatient visits increased 41 percent from 1995 to 2005, while total 

admissions grew just 15 percent. 

• There were 594 million outpatient visits and 36 million admissions to community hospitals 

in 2005. 
A Data Book: Healthcare spending and the Medicare program, June 2007 75

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

 1995–2005 

6.8

6.4

6.1 5.9 5.9 5.8 5.7 5.7 5.6 5.5 5.4

4.7 4.7 4.6 4.6 4.6 4.5 4.5 4.5 4.5 4.5 4.4

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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 3,600 hospitals covered by the acute 

inpatient prospective payment system. Excludes critical access hospitals. 

Source: MedPAC analysis of Medicare cost report data from CMS. 

• Length of stay for all hospital discharges fell 5 percent, from 4.7 days in 1995 to 4.4 days in 

2005, dropping at an average annual rate of 1.3 percent from 1995 to 1997 and 0.6 percent 

from 1997 to 2005. 

• Length of stay for Medicare inpatients fell 21 percent, from 6.8 days in 1995 to 5.4 days in 

2005, dropping at an average annual rate of 5.4 percent from 1995 to 1997 and 1.5 percent 

from 1997 to 2005. 
76 Acute inpatient services

Chart 7-6. Hospital occupancy rates, 1997–2005 

1997 1998 1999 2000 2001 2002 2003 2004 2005

0

10

20

30

40

50

60

70

80

Occupancy ra

et (percent)

62 63 64 65 65 67 68 68 69

49 49 49 50 51 51 52 52 53

33 33 33 33 32 33 34

37 37

59 59 61 61 62 63 64 65 66

Urban PPS

Rural PPS

Critical access

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 1997–2005 period are based on their status at 

the end of 2005. 

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 66 percent in 2005. 

• Occupancy rates are higher in urban than rural hospitals covered by the acute inpatient 

prospective payment system (PPS); in 2005, occupancy rates stood at 69 percent for urban 

hospitals and 53 percent for rural hospitals, a 16 percentage point difference. The 

occupancy rate in major teaching hospitals was 78 percent in 2005, the highest of all 

hospital groups. 

• Since 1997, occupancy rates have gone up more for urban than rural hospitals, climbing 7 

percentage points for urban hospitals and 4 percentage points for rural hospitals. 

• Occupancy rates are much lower in critical access hospitals, averaging only 37 percent in 

2005. Their occupancy rate has risen 4 percentage points since 1999, the same as for rural 

hospitals covered by PPS. 
A Data Book: Healthcare spending and the Medicare program, June 2007 77

Chart 7-7. Hospital construction spending, 1999–2006 

12

13

14

17

19

21

23

30

1999 2000 2001 2002 2003r 2004r 2005r 2006

0

5

10

15

20

25

30

35

Bill oi ns of dol al rs

Note: Data for 2003 through 2005 are revised. 2006 data are estimated based on seasonally adjusted annual rate through 

August. 

Source: Census Bureau. http://census.gov/C30/private.xls. October 2006. 

• Hospital construction has increased substantially since 1999, expanding almost 30 percent 

in the last year alone to $30 billion. Over this seven-year period, the cumulative rate of 

growth in hospital construction costs was about two and half times the growth in overall 

hospital costs. 
78 Acute inpatient services

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

of care per beneficiary, 1994–2004 

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Calendar year

-25

-20

-15

-10

-5

0

5

10

15

20

25

P

ercent

0.0

1.5 3.0

5.4 6.0

9.0 8.4 9.3 9.0 8.4 7.2

0.0

-5.5

-9.7

-11.0

-12.9

-11.8

-13.6 -13.7 -14.2

-15.5

-17.6

Number of discharges per beneficiary

Total days of care per beneficiary

Note: Cumulative change is the total percent increase from 1994 through the year indicated. Data are short-stay hospital 

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

care enrollment. 

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

• While discharges per beneficiary have increased, length of stay has fallen faster, so total 

days of care have declined. Medicare discharge rates increased from 1994 to 2004, with 7.2 

percent more hospital discharges per enrollee at the end of the period. However, declining 

length of stay led to 17.6 percent fewer days of inpatient care for each enrollee in 2004 

compared to 1994. 

• There were 359 Medicare hospital discharges and 2,072 patient days per 1,000 

beneficiaries enrolled in Part A in calendar year 2004. 
A Data Book: Healthcare spending and the Medicare program, June 2007 79

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

group, 2005 

 Percent of total payments 

 Total 

 Additional rural payments 

Hospital group Base IME DSH Outlier hospital* (millions) 

All hospitals 82.4% 5.3% 8.4% 3.2% 0.5% $105,472 

 

Urban 81.7 5.9 8.7 3.5 0.1 93,950 

Rural 88.5 0.7 6.5 1.3 3.0 11,522 

 

Large urban 79.7 7.2 9.3 3.7 0.0 53,894 

Other urban 84.3 4.2 7.8 3.2 0.3 40,056 

Rural referral 87.5 1.3 7.2 1.7 2.3 5,788 

Sole community 87.4 0.1 4.3 0.8 7.5 2,540 

Medicare dependent 91.5 0.0 5.4 0.6 2.5 772 

Other rural <50 beds 91.2 0.1 8.0 0.7 0.0 363 

Other rural >50 beds 91.1 0.2 7.1 1.4 0.3 2,059 

 

Voluntary 83.0 5.7 7.6 3.2 0.4 77,527 

Proprietary 85.1 1.9 9.9 2.7 0.3 14,729 

Government 76.2 7.1 11.9 4.1 0.7 13,216 

Major teaching 66.9 17.0 11.3 4.6 0.1 24,793 

Other teaching 84.7 3.8 8.0 3.0 0.3 37,771 

Nonteaching 89.4 0.0 7.1 2.6 0.8 42,909 

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. Simulated payments reflect 2006 payment rules applied to actual number of cases in 2004. 

Actual payments in 2006 will likely be higher than shown due to growth in number of cases. 

 *Payments received by sole community and Medicare-dependent hospitals beyond what would have been received 

under PPS. A few sole community hospitals are located in urban areas. 

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

• Medicare payments in 2005 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 $11.5 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 3.2 percent of total inpatient payments in 2005. The legislative 

mandate for the level of outlier payments uses a different measure—outlier payments as a 

percent of base plus outlier. 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 4.9 percent in 2006. 
80 Acute inpatient services

Chart 7-10. Payment and cost changes for Medicare inpatient 

 services, 1995–2005 

 Market Change in 

 basket Change in payments per 

Fiscal year Update forecast costs per case case 

1995 2.00% 3.6% -1.4% 4.2% 

1996 1.50 3.5 -1.2 5.6 

1997 2.00 2.5 -0.6 2.6 

1998 0 2.7 1.1 -1.4 

1999 0.50 2.4 2.6 -0.2 

2000 1.10 2.9 2.4 0.5 

2001 3.40*

 3.4 5.1 3.1 

2002 2.75 3.3 8.1 3.6 

2003 2.95 3.5 6.6 1.9 

2004 3.40 3.4 5.6 3.0 

2005 3.30 3.3 5.1 4.6 

Note: Fiscal year 2001 update equals 2.3 percent (October 1, 2000, to March 31, 2001) and 4.5 percent (April 1, 2001, to 

September 30, 2001). 

 *Average value. 

Source: MedPAC analysis of CMS cost report data, IPPS final rules, Global Insights data. 

• Cost per discharge growth accelerated sharply after 2000 to a peak of 8.1 percent in 2002, 

as private sector financial pressure slackened (see Chart 7-22). The rate of cost growth has 

moderated since 2002 but still substantially exceeds inflation in the prices of the goods and 

services hospitals use for patient care as represented by CMS’s hospital market basket. 

• The update equaled the market basket forecast in 2001, 2004, and 2005. Under current law 

the update equaled the market basket forecast for fiscal year 2006 and after. 

• Increased disproportionate share payments, liberalization of new technology payments, onetime geographic reclassifications, higher outlier payments, and more rapid growth in case 

mix all contributed to the large growth in payments per case in 2005. 
A Data Book: Healthcare spending and the Medicare program, June 2007 81

Chart 7-11. Medicare acute inpatient PPS margin, 1995–2005 

9.0

14.7

17.9

15.8

13.5

11.9

10.2

6.9

2.0

-0.5

-0.9

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-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 (September 2006) 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 7-13). 

• 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 

2005, the margin was –0.9 percent, the lowest level since 1991. 

• Medicare inpatient margins vary widely. In 2005, one-quarter of hospitals had Medicare 

inpatient margins that were 10.2 percent or higher, and another quarter had margins that 

were –15.0 percent or lower. Between 1997 and 2003, this difference between the top and 

bottom quarter widened from 19 percent to 25 percent. About 46 percent of hospitals 

treating 46 percent of Medicare cases had positive inpatient Medicare margins in 2005. 
82 Acute inpatient services

Chart 7-12. Medicare acute inpatient PPS margin, by urban and 

rural location, 1995–2005 

15.3

18.7

16.6

14.4

12.8

11.0

7.0

2.3

-0.5 -1.0

4.4

9.7

11.4

8.4

6.1

4.2 4.0

1.6

-0.1 -0.4 0.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-10

-5

0

5

10

15

20

25

30

M

arg ni (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 (September 2006) from CMS. 

• Up until 2004, Medicare inpatient margins have consistently been higher for urban hospitals 

than for rural hospitals. A large part of this difference in financial performance can be 

explained by disproportionate share and indirect medical education adjustments that go 

primarily to urban hospitals. 

• The gap between urban and rural hospitals’ inpatient margins grew between 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 in 2004 and 2005 rural hospitals’ inpatient margins 

were for the first time 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. 
A Data Book: Healthcare spending and the Medicare program, June 2007 83

Chart 7-13. Overall Medicare margin, 1997–2005 

11.8

8.4

6.2

5.4 5.3

2.4

-1.4

-3.1 -3.3

1997 1998 1999 2000 2001 2002 2003 2004 2005

-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 (September 2006) from CMS. 

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

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

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

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

• The overall Medicare margin peaked in 1997 at 11.8 percent. In fiscal year 2005, it was 

–3.3 percent. 

• In 2005, one-quarter of hospitals had overall Medicare margins of 5.6 percent or higher, and 

another quarter had margins of –14.3 percent or lower. Between 1997 and 2005, the 

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

20 percent. About 40 percent of hospitals had positive overall Medicare margins in 2005, 

accounting for 39 percent of Medicare inpatient discharges. 
84 Acute inpatient services

Chart 7-14. Overall Medicare margin, by urban and rural 

 location, 1997–2005 

12.5

9.3

7.2

6.4 6.1

3.0

-1.0 -3.0 -3.3

6.2

1.7

-1.4 -2.1

-0.3

-2.2

-4.2 -3.8

-3.0

1997 1998 1999 2000 2001 2002 2003 2004 2005

-10

-5

0

5

10

15

20

M

arg ni (percent)

Urban

Rural

 

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

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

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

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

Source: MedPAC analysis of Medicare cost report data (August 2005) from CMS. 

• As with inpatient margins, overall Medicare margins have 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 2005. In 

1997, the overall margin for urban hospitals was 12.5 percent, compared with 6.2 percent 

for rural hospitals. In 2005, the overall margin for urban hospitals was –3.3 percent, 

compared with –3.0 percent for rural hospitals. Policy changes made in the Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003 targeted to rural hospitals 

helped to narrow the difference in overall Medicare margins between urban and rural 

hospitals. 
A Data Book: Healthcare spending and the Medicare program, June 2007 85

Chart 7-15. Hospital total margin, 1995–2005 

5.8 5.9

6.4

4.7

3.6 3.9 3.7 3.7

4.3 4.3

4.9

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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 (September 2006) 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 between 3.6 

percent and 4.3 percent in the 1999 to 2004 period. In 2005, the total margin climbed to 4.9 

percent, its highest level in eight years. 

• The fall in total margins from 1997 to 1999 reflected a drop in both Medicare and private 

payer margins. Medicare overall margins from 1997 through 2001 were higher than the total 

margin. 

• In 2005, 74 percent of hospitals had positive total margins. These hospitals accounted for 81 

percent of all hospital discharges and 81 percent of Medicare discharges. 

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

2005, one-quarter of prospective payment system hospitals had total margins that were 8.4 

percent or higher, while another quarter had margins that were 0.0 percent or lower, a 

spread of just 8 percentage points compared to a 20 percentage point spread for overall 

Medicare margins and a 25 percentage point spread for Medicare inpatient margins. 
86 Acute inpatient services

Chart 7-16. Hospital total margin, by urban and rural location, 

1995–2005 

6.8

7.2

7.9

5.7

5.2 5.2

4.6

4.0 4.2

5.0

5.8

5.7 5.8

6.2

4.6

3.5 3.7 3.6 3.6

4.3 4.2

4.8

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

5

10

15

M

argin (percent)

Rural

Urban

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

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

Source: MedPAC analysis of Medicare cost report data (September 6) 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 2005, total margins were 5.8 percent for rural and 4.8 percent for urban hospitals, the 

highest they have been for either group since 1997. 
A Data Book: Healthcare spending and the Medicare program, June 2007 87

Chart 7-17. Hospital total margin, by teaching status, 1995–2005 

6.8 7.0 6.8

5.2

4.5 4.6 4.8 4.6

5.0

4.6

5.2 6.1

6.7

7.1

5.3

4.4 4.3 4.1 4.3

4.7 4.8 5.1

4.0

3.4

4.9

3.5

1.5

2.3

1.5 1.6

2.9 3.2

4.2

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

5

10

15

Marg ni (percent)

Nonteaching

Other teaching

Major teaching

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

hospitals have a ratio of 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 (September 2006) 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 2005, the total margin of nonteaching hospitals stood at 5.2 percent compared 

with 4.2 percent for major teaching hospitals. 

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

only 1.0 percentage point in 2005, the smallest difference in over a decade. In 2005, major 

teaching hospitals’ total margins reached their highest level since 1997. 
88 Acute inpatient services

Chart 7-18. Hospitals with high adjusted overall Medicare 

margins have lower costs and have been under 

more financial pressure than other hospitals 

Hospitals with consistently: 

Hospital characteristic Low margins High margins 

Percent of hospitals 18% 18% 

Annual change in length of stay 

(1997–2005) 

 Medicare –2.3 –3.1 

 All payers –1.1 –1.7 

Average annual change in inpatient 

 cost per case (2002–2005) 6.3 5.2 

Standardized costs per case (2005) 

 Subject hospital $6,203 $4,527 

 Hospitals within 15 miles 5,742 5,103 

Distance to nearest hospital (in miles) 7 12 

Non-Medicare ratio of revenues to costs (2005) 1.16 0.99 

Note: Hospitals with consistently low or high margins had adjusted overall Medicare margins (margins calculated excluding 

indirect medical education and disproportionate share hospital payments over empirically justified amounts) from 2002 to 

2005 that were in the top or bottom third each year. Per case costs are standardized for wages, case mix, severity, outlier 

cases, and teaching intensity. The non-Medicare ratio of revenues to costs includes revenues and costs associated with 

private pay, Medicaid, and self-pay patients as well as nonpatient revenues and costs. Median values shown. 

Source: MedPAC analysis of impact file, MedPAR, and Medicare cost report files from CMS. 

• Hospitals with consistently low adjusted Medicare margins had smaller declines in length of 

stay (–2.3 percent) than hospitals with consistently high margins (–3.1 percent). 

• Hospitals with consistently low Medicare margins also had higher average annual cost 

growth (6.3 percent) than hospitals with consistently high margins (5.2 percent), indicating 

that lower cost growth is an important factor helping hospitals perform well under Medicare. 

• Differences in cost growth and changes in length of stay translate into big differences in 

Medicare costs. The median standardized cost per case in the low-margin group was 

$6,203 compared with only $4,527 in the high-margin group, a 37 percent difference. 

• Hospitals with consistently low Medicare margins are not under as much pressure to control 

costs. In 2005, the ratio of revenue to costs for all sources of revenue except Medicare was 

1.16 for this group. In contrast, this revenue-to-cost ratio for the high-margin group was 

0.99, which means that this group needs to do well under Medicare to perform well overall. 
A Data Book: Healthcare spending and the Medicare program, June 2007 89

Chart 7-19. Hospitals receiving IME and DSH payments, 2005 

 Percent of hospitals receiving: 

 Share of IME and DSH IME DSH Neither 

Hospital group hospitals payments payment payment payment 

All hospitals 100% 23% 28% 74% 21% 

Urban 69 31 38 72 21 

Rural 31 5 5 80 19 

Major teaching 8 91 100 91 0 

Other teaching 23 79 100 79 0 

Nonteaching 69 0 0 72 28 

Note: IME (indirect medical education), DSH (disproportionate share). 

Source: MedPAC analysis of 2005 cost report data from CMS. 

• Medicare paid more than $14 billion, or 14 percent of the total inpatient payments made to 

hospitals in the acute inpatient prospective payment system (PPS), in fiscal year 2005 

through the indirect medical education (IME) and disproportionate share (DSH) adjustments. 

• In fiscal year 2005, 28 percent of PPS hospitals received an IME adjustment and 74 percent 

received a DSH payment. Only 21 percent of hospitals received neither of these payments, 

whereas 23 percent received both. 

• A large share of urban hospitals, 38 percent, received IME payments, compared to only 5 

percent of rural hospitals. This difference results from the concentration of residency training 

programs in urban areas. 

• A large share of both urban and rural hospitals receives DSH payments—72 percent and 80 

percent, respectively. More than nine out of ten major teaching hospitals also receive a DSH 

payment. 

• Even though a large number of hospitals receive IME or DSH payments, these payments 

are highly concentrated. Of the $14 billion in total DSH and IME payments made in 2005, 47 

percent went to just 200 hospitals, an average of $34 million per hospital. 
90 Acute inpatient services

Chart 7-20. Medicare margins by teaching and disproportionate 

share status, 2005 

 Share of Medicare Overall 

 Share of inpatient inpatient Medicare 

Hospital group hospitals payments margin margin 

All hospitals 100% 100% –0.3% –3.3% 

Major teaching 8 23 10.7 4.2 

Other teaching 23 35 –2.2 –3.9 

Nonteaching 69 42 –6.3 –6.9 

Both IME and DSH 25 49 4.5 0.4 

IME only 6 10 –5.5 –6.1 

DSH only 51 30 –3.1 –4.6 

Neither IME nor DSH 18 11 –14.5 –12.9 

Note: IME (indirect medical education), DSH (disproportionate share). 

Source: MedPAC analysis of 2005 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 

2005, 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 17 

percentage points lower. 
A Data Book: Healthcare spending and the Medicare program, June 2007 91

Chart 7-21. 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. 
92 Acute inpatient services

Chart 7-22. Change in Medicare hospital inpatient costs per 

discharge and private payer payment-to-cost ratio, 

1986−2005 

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

-2

0

2

4

6

8

10

12

Change ni cost per discharge (in 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

6.6 5.6

5.1

1.16

1.2

1.22

1.22

1.27

1.3

1.31

1.29

1.24

1.24

1.22

1.18

1.14

1.12

1.13

1.16 1.18

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

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-to-cost 

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, we see the trend in private payer profit margins 

beginning to level off and cost growth getting somewhat closer to market basket. 
A Data Book: Healthcare spending and the Medicare program, June 2007 93

Chart 7-23. Markup of charges over costs for all patient care 

services, 1995–2005 

79.2

85.3 90.2

97.0

103.3

112.6

123.6

136.9

154.5

163.8

173.4

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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 1995 through 2005, hospitals’ patient care costs (covering all services and all payers) 

increased 6.0 percent per year but their charges went up by 10.4 percent per year, over 70 

percent more. Consequently, the markup of charges over costs rose from about 79 percent 

in 1995 to about 173 percent in 2005. Charges are now more than two and a half times 

costs. In 2002 and 2003, the growth in markup—about 15 percentage points per year—was 

the largest since Medicare’s acute inpatient payment system was implemented. The markup 

grew by about 9 percentage points in 2004 and 2005. 

• Since few patients pay full charges, hospitals’ increasing their charges more than their costs 

may not have had much impact on their financial performance. Some are concerned, 

however, that uninsured individuals may be asked to pay full charges and may have 

collection proceedings applied against them. Charges growing faster than costs may reflect 

hospitals’ attempting to maximize revenue from private payers (who often structure their 

payments as a discount off charges), and 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. 
94 Acute inpatient services

Chart 7-24. Number of critical access hospitals, 1999–2007 

41

139

341

563

722

875

1,055

1,280 1,283

1999 2000 2001 2002 2003 2004 2005 2006 2007

0

200

400

600

800

1,000

1,200

1,400

Number of C

A

Hs

Note: CAH (critical access hospital). Number of CAHs is as of January 1 of each year. 

Source: The Rural Hospital Flexibility Tracking Project. Third-Year Findings, February 2003, and additional data from CMS. 

• The increase in critical access hospitals (CAHs) is in part due to a series of legislative 

changes that made conversion to CAH status easier and expanded the services that qualify 

for cost-based reimbursement. Currently, CAHs 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. 

• The number of CAHs has grown steadily over the last eight years, from 41 in 1999 to 1,283 

at the beginning of 2007. 

• Prior to 2006, hospitals could convert to CAH status if they were (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 can 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 2007 95

Chart 7-25. Medicare payments to inpatient psychiatric facilities 

(in billions), 1998–2006 

3.3 3.2 3.2

3.4 3.5 3.6

3.8 3.9 4.0

1998 1999 2000 2001 2002 2003 2004 2005* 2006*

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

D

ol al rs ( ni bill oi ns)

Note: *Estimated spending. 

Source: CMS, Office of the Actuary. 

• Medicare program spending for beneficiaries’ care in inpatient psychiatric facilities grew an 

estimated 2.4 percent per year between 1998 and 2006. 

• The inpatient psychiatric facility payment system started January 1, 2005. 
96 Acute inpatient services

Chart 7-26. Inpatient psychiatric facilities, 2000–2006 

 2000 2001 2002 2003 2004 2005 2006 

Freestanding hospitals 491 477 473 466 463 477 481 

Hospital-based units 

 PPS hospital units 1,883 1,806 1,779 1,753 1,716 1,675 1,646 

 CAH units 1 3 6 9 26 68 72 

Total 2,375 2,286 2,258 2,228 2,205 2,220 2,199 

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

Source: CASPER from CMS, as of December of each year.

• Inpatient psychiatric facilities⎯both freestanding and hospital-based facilities⎯provide 

acute hospital care to beneficiaries with mental illnesses or alcohol- and drug-related 

problems. 

• In recent years, the number of critical access hospitals with Medicare-certified psychiatric 

units has grown substantially because of new authority to do so granted in the Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003. The number of psychiatric 

units in hospitals covered by the acute inpatient prospective payment system has declined, 

however, as has the number of freestanding facilities. Overall, the total number of certified 

psychiatric facilities has fallen 7.4 percent since 2000. 
A Data Book: Healthcare spending and the Medicare program, June 2007 97

Web links. Acute inpatient services 

Short-term hospitals 

• Chapter 2A of the MedPAC March 2007 Report to the Congress provides additional detailed 

information on hospital margins. 

http://www.medpac.gov/chapters/Mar07_Ch02a.pdf 

• MedPAC provides basic information about the acute inpatient prospective payment system 

in its Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_ 

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://www.access.gpo.gov/su_docs/fedreg/a070503c.html

Specialty psychiatric facilities 

• MedPAC provides basic information about the inpatient psychiatric facility (IPF) prospective 

payment system in its Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_briefs_psych.pdf 

• CMS provides information on the inpatient psychiatric facility prospective payment system. 

http://cms.hhs.gov/inpatientpsychfacilPPS/ 

• CMS describes updates to the inpatient psychiatric facility prospective payment system for 

the rate year beginning July 1, 2007 in the May 4, 2007 Federal Register.

http://www.access.gpo.gov/su_docs/fedreg/a070504c.html 

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 2007 101

Chart 8-1. FFS Medicare spending and payment updates 

 for physician services, 1997–2011 

31.9 32.4 33.4

37.0

42.0 44.8

48.3

54.1

57.7 58.4 59.6 59.1 58.2 57.2 56.3

1.00 1.02 1.05

1.10

1.16

1.10 1.12 1.14 1.15 1.16 1.16

1.04

0.99

0.94

0.89

1997 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

Cumulative 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 1997 with an assigned value of 1.0. 

Source: 2007 annual report of the Boards of Trustees of the Medicare trust funds. 

• Between 1997 and 1999, total Medicare spending on physician fee schedule services was 

relatively flat. More rapid growth 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, the 

Medicare Prescription Drug, Improvement, and Modernization Act of 2003 established 

minimum payment updates for physician services of 1.5 percent for 2004 and 2005. For 

2006, the Deficit Reduction Act froze the physician fee schedule conversion factor. This 

freeze, combined with refinements to the relative value units, results in an update of 0.2 

percent for 2006. Most recently, the Tax Relief and Health Care Act effectively held 2007 

payments at 2006 levels through a conversion factor bonus. 

• The SGR formula continues to call for payment rate cuts in 2008 through 2016. 
102 Ambulatory care

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

services, 1997–2015 

$1,038

$1,134

$1,374

$1,485

$1,730

$1,885 $1,832

$1,754

$1,669

$1,593

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

0

500

1,000

1,500

2,000

2,500

Spend ni g per beneficiary (dollars)

Historical Projected

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

Source: 2007 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 in 2008 because of scheduled negative payment updates. 

The volume of physician services per beneficiary, however, is expected to continue to grow. 
A Data Book: Healthcare spending and the Medicare program, June 2007 103

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

steadily, 2000–2005 

 Number of Medicare patients in caseload 

 ≥1 ≥15 ≥50 ≥100 ≥200 

 

Number of physicians 

 2000 514,419 444,187 398.905 351,012 274,059 

 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 

 Percent growth, 2000–2005 10.1% 10.8% 12.7% 14.7% 17.7% 

 

Physicians per 1,000 beneficiaries 

 2000 13.8 11.9 10.7 9.4 7.3 

 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 

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 more than kept pace with 

growth in the beneficiary population. From 2000 to 2005, the number of physicians who 

billed Medicare grew faster than Medicare Part B enrollment. During this time Part B 

enrollment grew 6.0 percent, while the number of physicians with at least 15 Medicare 

patients grew by 10.8 percent. 

• Overall, the number of physicians per 1,000 beneficiaries grew from 13.8 to 14.3. The 

number of physicians with 200 or more Medicare patients grew even faster at 17.7 percent. 
104 Ambulatory care

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

per beneficiary, 2000–2005 

2000 2001 2002 2003 2004 2005

0

10

20

30

40

50

60

70

Cumu al t vi 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 2005, cumulative volume in physician fee schedule services grew about 

30 percent per beneficiary. Imaging and tests grew the most, at 61 and 46 percent 

respectively. 

• Across all services, volume grew 5.5 percent per beneficiary between 2004 and 2005. This 

growth rate matches the average annual volume growth seen between 2000 and 2004. Per 

capita volume for imaging grew the most. From 2004 to 2005, the imaging volume growth 

rate was 8.7 percent. Growth in major procedures and evaluation and management services 

was slower. 

• Overall volume increases translate directly to growth in Part B spending and are largely 

responsible for the negative updates required by the SGR formula. 
A Data Book: Healthcare spending and the Medicare program, June 2007 105

Chart 8-5. Quarterly changes in professional liability insurance 

premiums, 1993–2005 

93 94 95 96 97 98 99 00 01 02 03 04 05

-10

-5

0

5

10

15

20

25

30

35

P

ercent

Source: MedPAC analysis of unpublished data from CMS. 

• Historically, the professional liability insurance (PLI) component of the Medicare Economic 

Index followed a strong cyclical pattern, illustrated by the changes in PLI premiums from 

1993 to 2001. The cycle was generally characterized by periods of low premiums, perhaps 

when insurers were building market share, and high premiums, perhaps when insurers were 

building reserves. 

• Since 2001, changes in PLI premiums have departed from this cyclical pattern. The increase 

in the fourth quarter of 2003, estimated at 30.3 percent, was the highest in over a decade. 

Since then, change in PLI premiums has slowed, falling to 11.7 percent in the third quarter of 

2005, but still remains greater than in the pre-2001 period. 
106 Ambulatory care

Chart 8-6. Medicare episode costs vary by severity stage 

 

 Percentage of episode costs, by type of service 

Selected Severity Average Post-acute 

episode stage costs Inpatient E&M care Procedures Imaging Tests Other 

 

Coronary artery 

disease 1 $1,037 32% 20% 5% 8% 19% 7% 9% 

 2 5,361 67 8 1 10 6 2 5 

 3 8,450 76 7 3 7 3 1 4 

 Total 3,079 64 10 3 8 8 3 4 

 

Essential 

hypertension 1 273 8 68 4 2 5 13 1 

 2 426 12 60 3 2 10 11 2 

 3 1,292 60 24 4 2 4 4 3 

 Total 423 28 50 4 2 4 9 2 

Type 1 diabetes 1 377 12 52 23 3 1 9 1 

 2 1,140 55 21 8 9 1 4 3 

 3 3,213 73 12 7 4 0 2 2 

 Total 833 48 27 12 6 1 5 2 

 

 

Sinusitis 1 153 4 64 0 15 9 5 3 

 2 402 5 34 0 34 13 5 9 

 3 428 15 36 0 26 15 4 4 

 Total 158 4 62 0 16 10 5 3 

 

 

Note: E&M (evaluation and management). Outlier episodes—those with total payments greater than the 99th percentile or less 

than the 1st percentile—have been removed. The Other type of service category includes services such as supplies, 

durable medical equipment, and ambulance. Analyzing claims data from 2001 through 2003 results in information for 2002 

episodes. 

Source: MedPAC analysis of 5 percent sample of 2001 through 2003 Medicare claims using Medstat Episode Group grouper. 

• Episode groupers use clinical logic to assign claims to clinically distinct episodes of care—a 

series of clinically related health care claims over a defined time period, such as all claims 

related to a patient’s diabetes. Episodes can be further divided into stages to adjust for 

disease severity. For example, average costs for Stage 1 coronary artery disease (CAD) 

(the least severe) were $1,037 and those for Stage 3 CAD (the most severe) were $8,450. 

• A physician’s resource use for selected episodes can be compared with the average 

resource use for similar episodes by similar physicians. 

• Episodes include all types of services. The service mix influences total costs per episode. 

For example, 64 percent of total costs for CAD (a high-cost service) are for inpatient 

services, but only 28 percent of total costs for essential hypertension (a lower cost service) 

are for inpatient services. 
A Data Book: Healthcare spending and the Medicare program, June 2007 107

Chart 8-7. Relative resource use ratios for selected MSAs, 2002 

 Type 1 Type 2 

 CHF CAD Diabetes Diabetes Hypertension Pneumonia

National average 

episode costs $1,394 $3,079 $833 $526 $423 $4,427 

MSA 

 Boston 1.00 0.86 0.99 0.95 0.96 0.96 

 Chicago 1.05 1.04 1.13 1.17 1.14 1.11 

 Denver 0.91 1.03 1.04 0.96 0.92 1.04 

 Detroit 0.90 0.79 1.07 1.08 1.15 0.91 

 Greenville 0.91 1.24 1.21 0.91 0.87 0.80 

 Houston 1.16 1.04 1.13 1.16 1.20 1.11 

 Kansas City 1.31 0.98 0.96 0.99 1.13 0.96 

 Miami 0.99 0.66 1.06 1.28 1.20 1.16 

 Minneapolis 1.00 1.28 0.72 0.88 0.87 0.76 

 New York 0.86 0.65 1.41 1.11 1.13 1.12 

 Orange County 1.01 0.76 1.17 1.31 1.00 1.03 

 Philadelphia 1.11 0.78 1.09 1.07 1.05 1.08 

 Phoenix 0.81 0.91 0.95 1.05 0.94 0.78 

Note: MSA (metropolitan statistical area), CHF (congestive heart failure), CAD (coronary artery disease). Relative resource use

ratios for individual MSAs are calculated by dividing the MSA’s average for a given episode by the national average for 

that episode. A ratio of more than 1.0 indicates higher-than-average episode costs and a ratio of less than 1.0 indicates 

lower-than-average episode costs. Analyzing claims data from 2001 through 2003 results in information for 2002 

episodes. 

Source: MedPAC analysis of 5 percent sample of 2001 through 2003 Medicare claims using Medstat Episode Group grouper. 

• Using a national sample of claims, relative resource use ratios—costs relative to national 

average costs—can be calculated by geographic region. 

• In this table we report relative resource use ratios for 6 episodes (congestive heart failure, 

coronary artery disease, type 1 diabetes, type 2 diabetes, hypertension, and pneumonia) in 

13 MSAs relative to the overall national average. 

• A relative resource use ratio of 1.0 (e.g., congestive heart failure in the Boston metropolitan 

statistical area (MSA)) would indicate that the MSA’s resource use for that episode was right 

at the national average. 

• Resource use ratios vary widely by MSA for any given episode. For example, resource use 

ratios for type 2 diabetes range from a low of 0.88 in the Minneapolis MSA to a high of 1.31 

in the Orange County MSA. 
108 Ambulatory care

Chart 8-8. Hypertension episode resource use by type 

of service 

 Total E&M Procedures Imaging Tests Other 

Stage 1 hypertension 

Selected Boston cardiologist $623 $359 $4 $50 $118 $92 

All Boston cardiologists 357 206 6 32 85 28 

Selected Boston cardiologist’s 

 relative resource use ratio 1.74 1.74 0.67 1.56 1.39 3.29 

Note: E&M (evaluation and management). Stage indicates the progression of the disease, with 1 being the mildest form. The 

relative resource use ratio measures the cardiologist’s resource use compared to the average for cardiologists in Boston. 

The Other type of service category includes services such as supplies, durable medical equipment, and ambulance. 

Analyzing claims data from 2001 through 2003 results in information for 2002 episodes. 

Source: MedPAC analysis of 5 percent sample of 2001 through 2003 Medicare claims using Medstat Episode Group grouper.

• Episode-based analyses can be linked back to individual claims to provide physicians with 

the specific drivers of their episode costs. 

• In this example, a selected Boston cardiologist is more resource intensive than his peers in 

his treatment of hypertension, even after we adjust for differences in patient severity. 

• For example, this cardiologist’s overall resource use ratio for stage 1 hypertension is 1.74. 

• This is primarily driven by his greater use of evaluation and management relative to other 

cardiologists in Boston ($359 vs. $206). 

• With this type of information the cardiologist can see why his resource use is greater than 

his peers. 
A Data Book: Healthcare spending and the Medicare program, June 2007 109

Chart 8-9. Spending on all hospital outpatient services, 

 1996–2006 

9.1 9.4 8.6 9.0 9.3

12.8 13.3

15.3

17.7

19.6

21.4

7.2 7.7 7.9

8.9 8.7

8.1 8.2

7.9

8.5

9.0

10.2

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

0

5

10

15

20

25

30

35

D

ollars ( ni billions)

Beneficiary cost sharing

Program payments

Note: Spending amounts are for services covered by the Medicare outpatient prospective payment system and those paid on 

separate fee schedules (e.g., ambulance services or durable medical equipment) or those paid on a cost basis (e.g., 

organ acquisition or flu vaccines). They do not include payments for clinical laboratory services. 

* Estimate. 

 

Source: CMS, Office of the Actuary. 

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

clinical laboratory services) almost doubled from calendar year 1996 to 2006, reaching $31.6 

billion. The Office of the Actuary projects continued growth in total spending, averaging 10.4 

percent per year from 2003 to 2008. 

• A prospective payment system (PPS) for hospital outpatient services was implemented in 

August 2000. Services paid under the outpatient PPS represent about 90 percent of 

spending on all hospital outpatient services. 

• In 2001, the first full year of the outpatient PPS, spending under the PPS was $19.2 billion, 

including $11.4 billion by the program and $7.7 billion in beneficiary cost sharing. The 

spending in the outpatient PPS represented 92 percent of the $20.9 billion in spending on 

hospital outpatient services in 2001. By 2006, spending under the outpatient PPS is 

expected to rise to $28.7 billion ($19.3 billion program spending; $9.4 billion beneficiary 

copayments). The outpatient PPS accounted for about 5 percent of total Medicare spending 

by the program in 2006. 

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

about 33 percent in 2006. Chart 8-13 provides more detail on coinsurance. 
110 Ambulatory care

Chart 8-10. Most hospitals provide outpatient services 

 Percent offering 

 Outpatient Outpatient Emergency 

Year Hospitals services surgery services 

1991 5,191 92% 79% 91% 

1997 4,976 93 81 92 

2001 4,347 94 84 93 

2002 4,210 94 84 93 

2003 4,079 94 86 93 

2004 3,882 94 86 92 

2006 3,651 94 86 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 2006 provide outpatient (94 percent) and emergency (91 percent) 

services. The vast majority (86 percent) provide outpatient surgery. 

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

the outpatient prospective payment system. 
A Data Book: Healthcare spending and the Medicare program, June 2007 111

Chart 8-11. Payments and volume of services under the 

Medicare hospital outpatient PPS, by type of 

service, 2005 

Separately paid drugs/

blood products

11%

Evaluation &

management

14%

Imaging

23%

Pass-through 

drugs

1%

Tests

4%

Procedures

47%

Evaluation &

management

16%

Separately paid drugs/

blood products

29%

Tests

13%

Pass-through 

drugs

4%

Procedures

18%

Imaging

19%

 Payments Volume 

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

include transitional corridor payments (see Chart 8-14 for further information regarding transitional corridor payments). 

Services are grouped into evaluation and management, procedures, imaging, 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 2005 from CMS. 

• The payments for services are distributed differently than volume. For example, procedures 

account for 47 percent of the payments, but 18 percent of the volume. 

• 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. 

• Procedures (e.g., endoscopies, surgeries, skin and musculoskeletal procedures) account 

for the greatest share of payments on services (47 percent), followed by imaging services 

(23 percent), and evaluation and management (14 percent). 

• In 2005, separately paid drugs and blood products accounted for 11 percent of payments. 
112 Ambulatory care

Chart 8-12. Hospital outpatient services with the highest 

Medicare expenditures, 2005 

 Share of Volume Payment 

APC title payments (1,000s) rate

Total 47% 

All emergency visits 7 11,510 $156 

All clinic visits 4 15,501 60 

Cataract procedures with IOL insert 4 691 1,329 

Computerized axial tomography with contrast material 4 3,398 271 

Diagnostic cardiac catheterization 3 414 2,067 

Level I plain film except teeth 3 16,812 44 

Lower gastrointestinal endoscopy 3 1,486 490 

Computerized axial tomography and computerized 

angiography without contrast material 3 3,593 193 

MRI and magnetic resonance angiography without 

contrast material followed by contrast material 2 847 523 

MRI and magnetic resonance angiography without contrast material 2 1,221 360 

Level II radiation therapy 2 3,012 124 

Level I upper gastrointestinal procedures 1 942 460 

Insertion of cardioverter-defibrillator* 1 19 17,964 

Level III angiography and venography except extremity 1 298 1,150 

Infusion therapy except chemotherapy 1 3,096 112 

Group psychotherapy 1 3,373 84 

Computerized axial tomography and computerized angiography 

without contrast material followed by contrast material 1 896 320 

Insertion/replacement/repair of cardioverter-defibrillator leads* 1 11 24,122 

Level II laparoscopy 1 111 2,436 

IMRT treatment delivery * 1 770 309 

Level III nerve injections* 1 797 332 

Level III cardiac imaging 1 640 402 

Average APC 276 122 

 

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. 

The share of payments in the APCs does not add to the total because of rounding. 

 * Did not appear on the list for 2004. 

Source: MedPAC analysis of 100 percent analytic file of outpatient prospective payment system claims for calendar year 2005. 

• Although the outpatient prospective payment system covers thousands of services, 

expenditures are concentrated in a handful of categories that have high volume, high 

payment rates, or both. 
A Data Book: Healthcare spending and the Medicare program, June 2007 113

Chart 8-13. Medicare coinsurance rates, by type of hospital 

 outpatient service, 2005 

23

42

29

36

20 20

Evaluation and 

management

Imaging Procedures Tests Pass-through 

drugs

Separately paid 

drugs/blood 

Type of service products

0

10

20

30

40

50

60

Coinsurance ra et

32

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 100 percent special analytic file of 2005 outpatient prospective payment system claims and payment 

rates. 

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

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

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

time. 

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

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

over time. 

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

very high rates of coinsurance—42 percent. Other services, such as evaluation and 

management, have coinsurance rates of 23 percent. 

• In 2005, the overall coinsurance rate was about 32 percent. 
114 Ambulatory care

Chart 8-14. Transitional corridor payments as a share of 

Medicare hospital outpatient payments, 2003–2005 

 2003 2004 2005 

 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 3,647 2.3% 3,470 0.9% 3,421 0.5% 

 

Urban 2,438 1.8 2,398 0.4 2,439 0.1 

Rural ≤ 100 beds 940 7.7 811 5.5 713 4.8 

Rural >100 beds 269 1.5 260 0.6 267 0.6 

 

Major teaching 295 3.4 289 0.8 291 0.0 

Other teaching 771 1.5 762 0.3 771 0.1 

Nonteaching 2,581 2.5 2,418 1.3 2,358 1.0 

 

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 2.3 percent of total outpatient PPS payments in 

2003, declining to 0.9 percent in 2004, then to 0.5 percent in 2005. The decline from 2003 to 

2004 is due to the expiration of transitional corridor payments for most hospitals on 

December 31, 2003. However, the payments continued for two more years—through 

December 31, 2005—for rural sole community hospitals and other rural hospitals with 100 or 

fewer beds. The Deficit Reduction Act of 2005 extended most of the transitional corridor 

payments for rural hospitals with 100 or fewer beds through December 31, 2008. 

• In 2005, rural hospitals with 100 or fewer beds received 4.8 percent of their payments from 

transitional corridor payments. 

 
A Data Book: Healthcare spending and the Medicare program, June 2007 115

Chart 8-15. Medicare hospital outpatient, inpatient, and 

 overall Medicare margins, 1999–2005 

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 2005, while the aggregate margin was –9.4 percent, 25 

percent of hospitals had margins of –19.7 percent or lower, and 25 percent had margins of 

–0.5 percent or higher. 

• Given hospital accounting practices, margins for hospital outpatient services must be 

considered in the context of Medicare payments and hospital costs for the full range of 

services provided to Medicare beneficiaries. Hospitals allocate overhead to all services, so 

we generally consider costs and payments overall. 

• The improvement in outpatient margins from 1999 to 2001 is consistent with policies 

implemented under the outpatient prospective payment system that increased payments. 

Margins declined somewhat from 2001 to 2003. This may reflect the decline in the number of 

drugs and devices eligible for pass-through payments. The margin improved in 2004 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. 

13.5

11.9

10.2

6.4

2.0

-0.5 -0.9

6.2 5.4 5.3

2.4

-1.4

-3.1

-3.3

-15.6

-13.9

-6.9

-8.3

-11.6 -10.8

-9.4

1999 2000 2001 2002 2003 2004 2005

-20

-15

-10

-5

0

5

10

15

20

M

argin (percent)

Inpatient margin

Overall Medicare margin

Outpatient margin
116 Ambulatory care

Chart 8-16. Number of Medicare-certified ASCs increased over 

50 percent, 2000–2006 

 2000 2001 2002 2003 2004 2005 2006 

Medicare payments (billions of dollars) $1.4 $1.6 $1.9 $2.2 $2.5 $2.7 $2.9 

 

Number of centers 3,028 3,371 3,597 3,887 4,136 4,506 4,707 

 New centers 295 446 309 365 315 467 261 

 Exiting centers 53 103 83 75 66 97 44 

 

Net percent growth from previous year 8.7% 11.3% 6.7% 8.1% 6.4% 8.9% 4.5% 

 

Percent of all centers that are: 

 For profit 94 94 95 95 96 96 96 

 Nonprofit 6 5 5 5 4 4 4 

 Urban 88 88 87 87 87 87 88 

Rural 12 12 13 13 13 13 12 

Note: ASC (ambulatory surgical center). Medicare payments include program spending and beneficiary cost sharing for ASC 

facility services. Payments for 2006 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, 2000–2006. Payment data from CMS, Office of the Actuary. 

• Ambulatory surgical centers (ASCs) are entities that only furnish outpatient surgical services 

not requiring an overnight stay. To receive payments from Medicare, ASCs must meet 

Medicare’s conditions of coverage, which specify minimum facility standards. 

• Medicare uses a simple fee schedule to pay for ASC services. The fee schedule divides 

procedures into nine payment groups. CMS has proposed a new payment system to be 

implemented on January 1, 2008, which would be linked to the hospital outpatient 

prospective payment system. 

• Total Medicare payments for ASC services are growing rapidly. Payments increased by 13.3 

percent per year, on average, from 2000 through 2006. 

• The number of Medicare-certified ASCs grew at an average annual rate of 7.6 percent from 

2000 through 2006. The growth rate slowed recently, from 8.9 percent in 2005 to 4.5 percent 

in 2006. Each year from 2000 through 2006, an average of 351 new Medicare-certified 

facilities entered the market, while an average of 74 closed or merged with other facilities. 

• Most Medicare-certified ASCs are for-profit facilities and are located in urban areas. 
A Data Book: Healthcare spending and the Medicare program, June 2007 117

Chart 8-17. Medicare spending for imaging services, by type of 

service, 2005 

MRI, 19%

Standard, 18%

CT, 17%

Nuclear medicine, 

14%

Echocardiography, 

14%

Other echography 

(ultrasound), 12%

Imaging procedure, 

5%

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, 2005. 

• 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 2005, from $6.4 billion to $12.0 billion. Spending for MRI, 

echocardiography, nuclear medicine, and CT has grown faster than for other imaging 

services. Thus, these categories represent an increasing share of total imaging spending. 
118 Ambulatory care

Chart 8-18. Radiologists received about 40 percent of Medicare 

payments for imaging services, 2005 

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 billion in 2005. 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, 2005. 

• 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 account for the largest share of Medicare payments for imaging, their 

share of payments declined by 2.8 percent per year from 2003 to 2005. During the same 

time frame, independent diagnostic testing facilities’ share of imaging payments increased 

by 6.0 percent per year, other medical’s share by 4.7 percent per year, and other specialty’s 

share by 4.3 percent per year. 
A Data Book: Healthcare spending and the Medicare program, June 2007 119

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/publications/other_reports/Sept06_MedPAC_Payment_Basics_Physician.pdf 

• Chapter 2B of the MedPAC March 2007 Report to the Congress and Appendix A of the 

June 2007 Report to the Congress provide additional information on physician services. 

 http://www.medpac.gov/chapters/Mar07_Ch02b.pdf 

http://www.medpac.gov/chapters/Jun07_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 on 

February 10, 2005, March 17, 2005, November 17, 2005, and July 18, 2006 discusses 

payment for physician services in the Medicare program, including imaging. 

 http://www.medpac.gov/documents/051507_WandM_Testimony_MedPAC_FFS.pdf 

 http://www.medpac.gov/documents/051007_Testimony_MedPAC_physician_payment.pdf 

 http://www.medpac.gov/documents/030607_W_M_testimony_SGR.pdf 

 http://www.medpac.gov/documents/030607_E_C_testimony_SGR.pdf 

 http://www.medpac.gov/documents/030107_Finance_testimony_SGR.pdf 

http://medpac.gov/publications/congressional_testimony/071806_Testimony_imaging.pdf

http://www.medpac.gov/publications/congressional_testimony/072506_Testimony_physician.pdf 

• The 2007Annual 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/tr2007.pdf 
120 Ambulatory care

Hospital outpatient services 

• For more information on Medicare’s payment system for hospital outpatient services, see 

MedPAC’s Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Sept06_medpac_payment_basics_opd.pdf

• Section 2A of the MedPAC 2007 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/Mar07_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/publications/other_reports/Sept06_MedPAC_Payment_Basics_ASC.pdf 

• Chapter 3F of the MedPAC March 2004 Report to the Congress provides additional 

information on ambulatory surgical centers. 

http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3F.pdf 
S E C T I O N

Post-acute care

Skilled nursing facilities 

Home health agencies 

Long-term care hospitals 

Inpatient rehabilitation facilities 

A Data Book: Healthcare spending and the Medicare program, June 2007 123

Chart 9-1. Growth in post-acute care providers has moderated, 

but home health agencies continue to increase 

 2000 2001 2002 2003 2004 2005 2006 

Home health 

agencies 6,817 6,689 6,807 7,151 7,633 8,140 8,813 

Long-term care 

hospitals 263 278 298 335 366 392 394 

Inpatient 

rehabilitation 

facilities 1,102 1,144 1,181 1,207 1,221 1,235 1,225 

Skilled nursing 

facilities 14,776 14,712 14,791 14,875 14,934 15,000 15,025 

Note: Does not include swing beds. 

Source: For inpatient rehabilitation facilities: MedPAC analysis of CMS provider of services files, 2000–2006. Other provider types: 

CMS Office of Survey and Certification Providing Data Quickly System, accessed June 1, 2007. 

• Growth in the number of all PAC provider types has moderated in 2005–2006; in all cases 

except home health, the increase between 2005 and 2006 is lower than the recent average 

annual rate of growth. 

• Since 2000, the number of home health agencies has grown nearly 4.5 percent per year; 

between 2005 and 2006, the number of agencies climbed more than 8 percent. 

• The number of long-term care hospitals has increased, on average, 7 percent per year since 

2000, although growth has slowed in recent years. 

• The number of inpatient rehabilitation facilities (both rehabilitation hospitals and 

rehabilitation units) grew by just under 2 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. 
124 Post-acute care

Chart 9-2. Spending for post-acute care has risen in each 

 setting, 1999–2005 

1999 2000 2001 2002 2003* 2004* 2005*

0

10

20

30

40

50

D

ol al rs ( ni bill oi ns)

25.0 25.4

28.0

32.9 34.1

38.9

42.1

10.9 10.8

13.2

15.2 14.7

17.2

18.5

8.4

8.7 9.9 9.9

11.3 12.3

4.0

4.1 4.2 5.3 6.4 6.6 6.7

1.7 2.5 3.1 3.8

4.6

All post-acute care

Skilled nursing facility

Home health

Inpatient rehabilitation

Long-term care hospitals

1.7 1.9

8.8

Note: These numbers are program spending only and do not include beneficiary copayments. 

*Estimated by CMS. 

Source: Centers for Medicare & Medicaid Services, Office of the Actuary. 

• Medicare has prospective payment systems (PPSs) for the four post-acute care settings. 

CMS implemented these PPSs at the following times: skilled nursing facilities, July 1998; 

home health agencies, October 2000; inpatient rehabilitation facilities, January 2002; and 

long-term care hospitals, October 2002. Although CMS intended to use these payment 

systems to control Medicare spending for post-acute care, spending has increased an 

average of 7 percent per year since 1999. 

• From 1999 through 2005, Medicare spending for long-term care hospitals has increased the 

fastest⎯at 18 percent per year. During the same period, spending for both skilled nursing 

facilities and inpatient rehabilitation facilities increased 9 percent per year, and spending for 

home health agencies increased 7 percent per year. For 2005, CMS estimated that total 

spending for post-acute care was about $42 billion. 

• Post-acute care currently makes up about 13 percent of Medicare’s total spending. 

 
A Data Book: Healthcare spending and the Medicare program, June 2007 125

Chart 9-3. Most common diagnoses among Medicare SNF 

 patients accounted for more than a third of patients 

 in 2004 

Diagnosis code Share of SNF 

from hospital stay Diagnosis admissions 

209 Major joint and limb reattachment of lower extremity 7.1% 

 127 Heart failure and shock 5.1 

 089 Simple pneumonia and pleurisy age >17 w CC 5.1 

 210 Hip and femur procedures except major joint age >17 w CC 4.1 

 014 Intracranial hemorrhage and stroke with infarction 3.4 

 320 Kidney and urinary tract infections age >17 w CC 3.1 

 416 Septicemia age >17 3.1 

 296 Nutritional and miscellaneous metabolic disorders age >17 w CC 2.8 

 079 Respiratory infections and inflammations age >17 w CC 2.5 

 088 Chronic obstructive pulmonary disease 2.0 

 Total 38.3 

Note: SNF (skilled nursing facility), CC (complication or comorbidity). The diagnosis code from hospital stay is the discharge 

diagnosis. 

Source: MedPAC analysis of DataPRO files from CMS, 2004. 

• The most common diagnosis for a skilled nursing facility (SNF) admission in 2004 was a 

major joint and limb reattachment procedure of the lower extremity, typically a hip or knee 

replacement. 

• Ten conditions accounted for about 38 percent of all admissions to SNFs in 2004. 

• Hospital-based and freestanding facilities and nonprofit and for-profit facilities had the same 

top 10 diagnoses in the same rank order. 
126 Post-acute care

Chart 9-4. The number of Medicare admissions and covered 

days of SNF care is growing and stays are 

getting longer 

 Percent Average annual 

 change percent change 

 2002 2003 2004 2005 2004–2005 2002–2005 

 

Admissions (in millions) 2.2 2.4 2.4 2.5 5% 5% 

Covered days 

 (in thousands) 54,674 59,416 62,364 65,905 6 6 

Average days per 

 admission 24.6 24.9 25.8 25.9 0.4 2 

Note: SNF (skilled nursing facility). 

 

Source: SNF calendar year MedPAR data from CMS, Office of Research, Development and Information. 

• Between 2004 and 2005, the volume of SNF services increased. Admissions grew by 5 

percent to about 2.5 million. This translates to 70 admissions per 1,000 fee-for-service 

enrollees in 2005, compared with 67 the year before. 

• Covered days grew slightly faster than admissions, resulting in a small increase in the 

average length of stay. 
A Data Book: Healthcare spending and the Medicare program, June 2007 127

Chart 9-5. Share of facilities, stays, and payments varies by 

type of SNF 

 Facilities Medicare-covered stays Medicare payments 

Type of SNF 2004 2005 2004 2005 2004 2005 

 

Freestanding 91% 92% 85% 87% 92% 93% 

Hospital based 9 8 15 13 8 7 

Urban 67 67 79 79 81 81 

Rural 33 33 21 21 19 19 

For profit 67 68 65 66 71 72 

Nonprofit 28 28 31 30 25 25 

Government 5 5 4 4 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. 

• Skilled nursing facilities (SNFs) may be freestanding or hospital based. In 2005, 92 percent 

of SNFs were freestanding and 87 percent of stays were in freestanding facilities. 

• In 2005, urban facilities made up 67 percent of SNFs but accounted for 79 percent of 

Medicare-covered SNF stays and 81 percent of Medicare SNF payments. 

• In 2005, 68 percent of SNFs were for-profit. The majority of Medicare-covered stays were in 

for-profit SNFs and 72 percent of Medicare payments went to for-profit SNFs. 
128 Post-acute care

Chart 9-6. A greater share of SNF patients was categorized into 

rehabilitation case-mix groups and received higher 

intensity rehabilitation 

ultra high very high high medium low nonrehabilitation 

RUG categories

Rehabilitation RUG categories

0%

5%

10%

15%

20%

25%

30%

35%

P

ercent of S

N

F da

ys

2002

2003

2004

2005

Note: SNF (skilled nursing facility), RUG (resource utilization group). Days are for freestanding SNFs with valid cost report data. 

Source: MedPAC analysis of freestanding SNF cost reports. 

• Beneficiaries’ use of skilled nursing facilities (SNFs) continued to be increasingly 

concentrated in the rehabilitation resource utilization groups (RUGs). 

• Two categories of RUGs, ultra-high rehabilitation and very high rehabilitation, grew as a 

share of all freestanding Medicare-covered SNF days, while the share of days in other 

rehabilitation and nonrehabilitation RUGs declined. 

• Among the rehabilitation groups, patients shifted toward the highest payment RUGs with the 

most therapy minutes. The three ultra-high rehabilitation RUGs and the three very high 

rehabilitation RUGs accounted for 42 percent of SNF days in 2005, an increase of 14 

percentage points from three years earlier. 
A Data Book: Healthcare spending and the Medicare program, June 2007 129

Chart 9-7. Growth in freestanding SNFs’ costs per day is 

 accelerating, but nonprofits’ growth is steadier 

All freestanding For profit Nonprofit

0

1

2

3

4

5

6

7

P

ercent change

2002

2003

2004

2005

Note: SNF (skilled nursing facility). Costs per day are unadjusted for case mix. 

Source: MedPAC analysis of freestanding SNF cost reports, August 2006 file. 

• Among freestanding skilled nursing facilities (SNFs), cost growth accelerated from 2004 to 

2005. 

• The cost growth may reflect a shift toward higher rehabilitation resource utilization groups 

(RUGs). Average ancillary growth was higher than routine cost growth, consistent with the 

shift toward higher payment therapy case-mix groups. 

• For-profit and nonprofit SNFs experienced different trends in cost growth. Growth in for-profit 

SNFs’ costs accelerated between 2002 and 2005, while nonprofit SNFs’ costs climbed at a 

steady rate of about 3 percent per year. Nonprofit SNFs also have considerably lower per 

day costs than for-profit SNFs. 
130 Post-acute care

Chart 9-8. Freestanding SNF Medicare margins 

Type of SNF 2001 2002 2003 2004 2005

All 17.6% 17.4% 10.8% 13.7% 12.9% 

 

Urban 17.4 16.8 10.0 13.0 12.3 

Rural 18.4 20.0 14.1 16.5 15.4 

 

For profit 20.0 20.1 14.0 16.7 15.5 

Nonprofit 10.2 8.9 1.3 4.0 4.5 

Government 4.5 3.1 –6.8 –3.6 –5.4

Note: SNF (skilled nursing facility). Margins are calculated as payments minus costs, divided by payments for each group; 

margins are based on Medicare-allowable costs. 

Source: MedPAC analysis of freestanding SNF cost reports, August 2006 file. 

• The aggregate Medicare margin for freestanding SNFs in 2005 was 12.9 percent. Over the 

past five years, the margin has fluctuated from a high of 17.6 percent in 2001 to 10.8 in 

2003. In part, changes in the margin reflect the expiration of temporary payment add-ons. 

• There was considerable variation in the financial performance of freestanding SNFs. Onequarter of all freestanding SNFs had margins at or below 4.7 percent, but half of the facilities 

had margins of at least 15.5 percent, and one-quarter had Medicare margins of nearly 25 

percent. 

• There were also large differences in Medicare margins between for-profit and nonprofit 

freestanding facilities. In 2005, for-profit SNFs reported Medicare margins of 15.5 percent 

compared with 4.5 percent for nonprofit SNFs. The margins reported for government 

facilities may not be as reliable as those reported for other ownership types. 
A Data Book: Healthcare spending and the Medicare program, June 2007 131

Chart 9-9. Differences between hospital-based and 

 freestanding skilled nursing facilities 

Characteristic Hospital-based SNFs Freestanding SNFs 

Facility 

 Beds 26 98 

 Medicare patient share 73% 12% 

 Average length of stay 13 days 27 days 

 Staffing per bed 1.00 FTEs 0.82 FTEs 

Medicare patient 

 Average age 78.8 80.4 

 Percent SOI 3 or 4 42.1% 46.6% 

 Share of inpatient days in ICU 27.0 23.4 

 Percent in MDC8 (musculoskeletal) 27.0 18.3 

 Percent nursing home residents 2.4 5.2 

Note: SNF (skilled nursing facility), FTE (full-time equivalent) SOI (severity of illness), ICU (intensive care unit), MDC (major 

diagnostic category). SOI is measured using all patient refined diagnosis related groups from 3M; values range from 1 to 

4, with 4 being the most severely ill. Median values shown for facility characteristics; patient-level averages shown for 

patient-level characteristics. 

Source: MedPAC analysis of 2004 SNF cost reports and claims files from CMS. 

• Hospital-based and freestanding skilled nursing facilities (SNFs) differ in size and payer mix. 

Hospital-based SNFs are generally much smaller; the median hospital-based facility has 26 beds 

whereas the median freestanding facility has 98 beds. Medicare accounts for 73 percent of 

patients in hospital-based SNFs, compared with 12 percent in freestanding SNFs. Hospitalbased facilities also have more full-time staff per bed than freestanding facilities. 

• The average length of stay in a hospital-based SNF is about half the length of stay in a 

freestanding SNF. This difference can be observed across inpatient diagnosis related groups 

(DRGs). 

• Inpatients that go on to use freestanding SNFs after being discharged from the hospital tend to 

be slightly older than patients who use hospital-based SNFs. In addition, the share of patients 

that were nursing home residents before their admission to the hospitals was also higher in 

freestanding SNFs (5.2 percent) than in hospital-based SNFs (2.4 percent). 

• The severity level of patients as measured by all patient refined DRGs for the inpatient care 

preceding the SNF stay is higher for patients using freestanding SNFs. However, the share of 

inpatient days spent in an intensive care unit before the SNF stay is higher for patients 

discharged to hospital-based SNFs. 

• Hospital-based SNFs see a higher proportion of patients that had been treated in the hospital for 

musculoskeletal conditions, such as hip and knee replacements, compared with freestanding 

SNFs. Differences in the types of patients seen between hospital-based and freestanding SNFs 

may reflect the hospitals’ ability to select certain patients. 
132 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 4 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 2007 133

Chart 9-11. Percent of SNF cases discharged to different postacute care settings 

9.0

25.4

1.8

0.2 0.4

1.8

5.2

1.7

12.3

0.2 0.0 0.2

1.4

7.3

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

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. Discharge to a nursing home is based on a different source. It is 

determined based on the discharge destination field on the claim and not on a matched claim. Total percent of cases 

discharged from hospital-based SNFs to other post-acute care settings was 43.8 percent; total percent of cases 

discharged from freestanding SNFs to other post-acute care settings was 23.1 percent. Patient-level averages are shown. 

Source: MedPAC analysis of 2004 claims files from CMS. 

• Patients using hospital-based skilled nursing facilities (SNFs) are more likely to use another 

post-acute 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. Twenty-five 

percent of patients from hospital-based SNFs are discharged to home health care, compared 

with 12 percent of patients discharged from freestanding SNFs. 

• Compared to hospital-based SNFs, freestanding SNFs discharge more patients back to the 

hospital. Twenty-three 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 hospitalbased SNF (not shown). 

• In total, 41 percent of hospital-based SNF patients are discharged directly home without any 

additional acute or post-acute care compared with 48 percent of patients discharged from 

freestanding SNFs. Some of these differences may reflect differences in patient selection rather 

than differences in practice patterns. 
134 Post-acute care

Chart 9-12. Spending for home health care, 1993–2006 

9.7

12.9

15.7

17.4 17.9

12.8

8.4 8.8 8.7

9.9 9.9

11.3

12.5

13.1

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

2

4

6

8

10

12

14

16

18

20

Dollars ( ni billions)

Note: In 2004, the payment system changed from fiscal year to calendar year. 

Source: CMS, Office of the Actuary, 2007. 

• Medicare home health care spending grew at an average annual rate of 20 percent from 

1993 to 1997. During that period, the payment system was cost based. Eligibility had been 

loosened just before this period, and enforcing the program’s standards became more 

difficult. 

• Spending began to fall in 1997, concurrent with the introduction of the interim payment 

system (IPS) based upon costs with limits, tighter eligibility, and increased scrutiny from the 

Office of Inspector General. 

• In 2000, the prospective payment system replaced the IPS. At the same time, eligibility for 

the benefit was broadened slightly. Enforcement of the Medicare program’s integrity 

standards continues at the regional home health intermediaries and survey and certification 

units. 
A Data Book: Healthcare spending and the Medicare program, June 2007 135

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

 Average annual 

 percent change

 2002 2003 2004 2005 2002–2005 

Beneficiaries (in millions) 2.4 2.6 2.7 2.9 5.6% 

Number of episodes* 

 (in millions) 3.9 4.2 4.5 4.9 8.1 

Average visits per 

 episode 21.4 21.1 20.9 20.8 –0.9 

Average payment per 

 episode* (in dollars) 2,325 2,267 2,371 2,479 2.1 

Note: *Includes low utilization payment adjustment episodes. 

Source: MedPAC analysis of home health Standard Analytic file. 

• Since the advent of the prospective payment system (PPS) for home health in 2000, the 

number of beneficiaries using the benefit has grown. The number of episodes has grown as 

well, while the number of visits provided in an average episode has declined. 

• Payments per episode have increased since 2002 by an annual average rate of 2.1 percent. 

Average payments per episode briefly fell in 2003 because of a budget neutrality adjustment 

to PPS payments required by statute. Though payments per episode fell, aggregate 

payments for home health remained level in 2003 (see Chart 9-12), as the number of 

beneficiaries served increased. Average payments increased after this adjustment. 
136 Post-acute care

Chart 9-14. The home health product changed after the 

 prospective payment system started 

 1997 2003 

Average visits per episode 36 20 

Average minutes per episode 1,500 931 

Percent therapy visits 9% 26% 

Note: The prospective payment system (PPS) began in October 2000. 

Source: Pre-PPS CMS data link file analysis of the National Claims History. 

• The types and quantity of home health care services that beneficiaries receive are changing. 

In 1997, before the prospective payment system, the average number of visits per episode 

was 36. By 2003, that had fallen to 20 visits. The average length of stay fell from 106 days in 

1997 to 56 days in 2002. 

• The mix of visits (therapy, aide, or skilled visits as a percent of total visits provided during an 

episode) has shifted toward therapy (physical therapy, occupational therapy, and speech 

pathology) and away from home health aide services. The home health payment system 

rewards the provision of these therapy services: Meeting the therapy threshold for a 

payment episode produces substantially higher payments for otherwise similar patients. 
A Data Book: Healthcare spending and the Medicare program, June 2007 137

Chart 9-15. Margins for freestanding home health agencies 

 Percent of 

 agencies 

 2003 2004 2005 2005 

 

All 13.6% 16.0% 16.7% 100% 

Geography 

 Urban 14.1 15.9 16.5 62 

 Rural 13.2 11.8 13.7 12 

 Mixed 10.6 17.0 17.7 25 

Type of control 

 Nonprofit 10.6 12.4 13.3 16 

 For profit 15.8 18.1 18.2 77 

 Government 5.0 8.1 10.7 7 

Volume quintile 

 First 10.6 13.1 16.3 20 

 Second 10.1 10.5 12.0 20 

 Third 10.9 12.9 12.5 20 

 Fourth 15.5 15.9 17.2 20 

 Fifth 14.1 17.5 17.9 20 

Note: Analysis includes 4,049 agencies for 2004 and 4,535 agencies for 2005. 

Source: MedPAC analysis of 2004–2005 Cost Report files. 

• In 2005, 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. 
138 Post-acute care

Chart 9-16. The top 15 LTC–DRGs in 2005 made up more than 60 

 percent of LTCH discharges 

LTC–DRG Description Discharges Percentage 

 475 Respiratory system diagnosis with ventilator support 15,699 11.7% 

 271 Skin ulcers 6,470 4.8 

 87 Pulmonary edema and respiratory failure 5,900 4.4 

 79 Respiratory infections and inflammation 5,813 4.3 

 88 Chronic obstructive pulmonary disease 5,366 4.0 

 249 Aftercare, musculoskeletal system and connective tissue 5,339 4.0 

 89 Simple pneumonia 5,206 3.9 

 12 Degenerative system disorders 5,138 3.8 

 466 Aftercare, without history of malignancy 4,976 3.7 

 462 Rehabilitation 4,832 3.6 

 416 Septicemia 4,678 3.5 

 127 Chronic heart failure 4,023 3.0 

 263 Skin graft and/or debridement for skin ulcer 3,946 2.9 

 316 Renal failure 2,558 1.9 

 430 Psychoses 2,398 1.8 

 Top 15 LTC–DRGs 82,342 61.3 

 

 Total 134,003 100.0 

Note: LTC–DRG (long-term care diagnosis related group), LTCH (long-term care hospital). LTC–DRGs is the case-mix system 

for these facilities. 

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 for patients on ventilator support. These 

beneficiaries make up almost 12 percent of all Medicare LTCH patients. 
A Data Book: Healthcare spending and the Medicare program, June 2007 139

Chart 9-17. Medicare cases and Medicare spending have 

 increased under the LTCH PPS 

 Average 

 TEFRA PPS annual 

 Change change 

 2001 2002 2001–2002 2003 2004 2005 2003–2005 

Number of cases 85,229 98,896 16.0% 110,396 121,955 134,003 10.2% 

Medicare spending 

 (in billions) $1.9 $2.2 15.8 $2.7 $3.7 $4.5 29.1 

Payment per case $22,009 $22,486 2.2 $24,758 $30,059 $33,658 16.6 

Length of stay (in days) 31.3 30.7 –1.9 28.8 28.5 28.2 –1.0 

Note: LTCH (long-term care hospital), PPS (prospective payment system), TEFRA (Tax Equity and Fiscal Responsibility Act of 

1982). 

Source: MedPAC analysis of MedPAR data from CMS. 

• The number of beneficiaries discharged from long-term care hospitals (LTCHs) has 

increased about 10 percent annually since the implementation of a prospective payment 

system. 

• From 2003 to 2005, Medicare spending for LTCHs increased about 29 percent per year. 

• From 2003 to 2005, Medicare’s payment per case increased more than 16 percent annually, 

while length of stay—usually positively associated with costs per case—decreased 1 

percent. 
140 Post-acute care

Chart 9-18. Since the PPS, LTCHs’ payments have risen faster 

than their costs 

1999 2000 2001 2002 2003 2004 2005

-10

-5

0

5

10

15

20

25

30

35

40

Cumulativ

e percent change

Payment per case

Costs per case

TEFRA PPS

Note: PPS (prospective payment system), LTCH (long-term care hospital), 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 increased 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 2007 141

Chart 9-19. LTCHs’ Medicare margins have increased under PPS 

 TEFRA PPS 

Type of LTCH 2001 2002 2003 2004 2005

 

All LTCHs –1.6% 0.4% 5.3% 8.9% 11.8% 

Urban –1.2 0.0 5.4 7.9 10.9 

Rural –2.1 –0.5 5.1 9.7 12.8 

Freestanding –1.6 –0.2 5.4 9.0 11.8 

Hospital within 

 hospital –3.2 –3.1 1.3 5.1 12.5 

Nonprofit –1.5 0.2 2.1 6.4 9.3 

For profit –1.5 –0.2 6.4 10.1 13.1 

Government* –4.8 –3.0 0.5 –4.9 –1.5 

Note: LTCH (long-term care hospital), PPS (prospective payment system), TEFRA (Tax Equity and Fiscal Responsibility Act of 

1982). 

*Margins reported for government facilities may not be as reliable as those reported for other ownership types. 

Source: MedPAC analysis of cost report data from CMS. 

• Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and before the long-term 

care hospital (LTCH) prospective payment system (PPS) was implemented, these facilities’ 

Medicare margins were close to zero, ranging from –1.7 percent to 0.4 percent. Under PPS, 

margins have increased rapidly, from 5.3 percent in 2003 to 11.8 percent in 2005. 

• In 2005, urban, rural, freestanding, hospital-within-hospital, and for-profit LTCHs all had 

double-digit margins. 
142 Post-acute care

Chart 9-20. Distribution of cases in inpatient rehabilitation 

 facilities, 2006 

Neurological

6.7%

Brain injury

5.8%

Other 

orthopedic

5.0%

Spinal cord 

injury

4.6%

Cardiac

4.0%

Major joint 

replacement

18.4%

Hip fracture

16.0%

Burns

10.2%

Stroke

20.3%

Other

9.0%

Note: Other includes conditions such as amputation, pain syndrome, and pulmonary. 

Source: MedPAC analysis of Inpatient Rehabilitation Facility–Patient Assessment Instrument data from CMS. 

• In 2006, the most frequent diagnosis for Medicare patients in inpatient rehabilitation facilities 

(IRFs) was stroke, representing about 20 percent of cases, a significant change from 2004, 

when stroke represented just over 16 percent of cases. 

• The second most common diagnosis, major joint replacement, represented just over 18 

percent of IRF admissions, down from 24.6 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 2007 143

Chart 9-21. The number of IRFs remained stable from 2004 

to 2005 

 Average annual 

 TEFRA PPS change Change 

Type of IRF 2000 2001 2002 2003 2004 2005 2002–2004 2004–2005 

All IRFs 1,117 1,157 1,188 1,211 1,227 1,231 1.6% 0.0% 

Urban 950 971 988 1,001 1,009 1,000 1.1 –0.9 

Rural 167 186 200 210 218 231 4.4 6.0 

Freestanding 195 214 215 215 217 217 0.5 0.0 

Hospital based 922 943 973 996 1,010 1,014 1.9 0.4 

Nonprofit 731 733 755 765 772 765 1.1 –0.9 

For profit 240 271 277 290 294 305 3.0 3.7 

Government 146 153 156 156 161 161 1.6 0.0 

Note: IRF (inpatient rehabilitation facility), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment 

system). 

 

Source: MedPAC analysis of Provider of Service files from CMS. 

• The number of inpatient rehabilitation facilities (IRFs) in 2005 remained almost unchanged 

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 PPS. 

• Increases in the number of rural IRFs and for-profit IRFs slightly more than offset small 

declines in the number of urban and nonprofit facilities. 
144 Post-acute care

Chart 9-22. Prior trend in volume of IRF cases reversed 

 between 2004 and 2005 

 

 Average annual 

 change Change 

 2002 2003 2004 2005 2002–2004 2004–2005 

Number of cases 439,631 478,723 496,695 449,321 6.4% –9.5% 

Medicare spending 

 (in billions) $4.9 $6.2 $6.6 $6.4 15.5 –3.0 

Payment per case $11,152 $12,952 $13,275 $14,248 9.1 7.3 

Average length of stay 

 (in days) 13.3 12.8 12.7 13.1 –2.4 3.1 

Note: IRF (inpatient rehabilitation facility). 

Source: MedPAC analysis of MedPAR data from CMS. 

• The number of Medicare inpatient rehabilitation facility (IRF) admissions decreased by 

nearly 10 percent between 2004 and 2005. 

• Medicare payments per discharge increased by over 7 percent over this period, following 

average annual increases of about 9 percent between 2002 and 2004. 

• Overall Medicare spending on IRF services decreased slightly from 2004 to 2005. 

• Theses trends are not inconsistent with expectations under the more rigorously enforced 

75% rule. 
A Data Book: Healthcare spending and the Medicare program, June 2007 145

Chart 9-23. Per case payments for IRFs have risen faster than 

 costs, post-PPS 

1999 2000 2001 2002 2003 2004 2005

-10

-5

0

5

10

15

20

25

Cumu al tiv

e percent change

-3.4

-4.8 -5.2

1.1

12.3

15.4

23.0

-1.6

-3.2 -3.9 -3.5

-2.1

2.7

13.1

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’ 

(IRFs’) Medicare per case costs and payments changed at similar rates. Under PPS, IRFs’ 

Medicare per case payments have increased much faster than their per case costs. 
146 Post-acute care

Chart 9-24. Inpatient rehabilitation facilities’ Medicare margin by 

 type, 1998–2005 

 

 TEFRA PPS 

Type of IRF 1998 1999 2000 2001 2002 2003 2004 2005* 

All IRFs 2.8 1.1 1.3 1.5 11.0 17.8 16.2 13.0 

Hospital based 2.6 1.1 1.3 1.4 6.1 14.9 12.0 8.5 

Freestanding 3.3 1.2 1.2 1.5 18.5 23.0 24.3 20.9 

Urban 2.9 1.2 1.3 1.5 11.5 18.6 16.8 13.5 

Rural 2.4 0.8 0.9 1.1 4.7 10.0 10.5 8.4 

Nonprofit 2.8 1.2 1.5 1.6 6.5 14.3 12.4 9.6 

For profit 3.1 1.0 0.9 1.3 19.1 24.5 24.5 20.0 

Government 2.5 0.8 1.3 1.6 2.5 10.8 9.0 5.0** 

Note: IRF (inpatient rehabilitation facility), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective 

payment system). 

 * 2005 data include imputed margins. 

 ** Margins reported for government providers may not be as reliable as those reported for other provider types. 

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, and then declined slightly to about 16 percent in 2004. MedPAC 

estimates a 13 percent margin for 2005. Margins declined for all inpatient rehabilitation 

facility (IRF) types in 2005. 

• Freestanding and for-profit IRFs had more than double the margins of 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 2007 147

Web links. Post-acute care 

• Chapter 3 of MedPAC’s March 2007 Report to the Congress provides information on postacute care providers. 

http://www.medpac.gov/chapters/Mar07_Ch03.pdf 

Skilled nursing facilities 

• Chapter 8 of MedPAC’s March 2007 Report to the Congress and Chapter 3A of MedPAC’s 

March 2007 Report to the Congress provide information on Medicare margins for skilled 

nursing facilities. 

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

http://www.medpac.gov/chapters/Mar07_Ch03a.pdf 

• The official Medicare website provides information on the prospective payment system and 

other related issues. 

http://www.cms.hhs.gov/center/snf.asp 

Home health services 

• Chapter 4 of MedPAC’s June 2007 Report to the Congress, Chapter 3B of MedPAC’s March 

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/Jun07_Ch04.pdf 

http://www.medpac.gov/chapters/Mar07_Ch03b.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/center/hha.asp 

Long-term care hospitals 

• Chapter 3D of MedPAC’s March 2007 Report to the Congress provides information on longterm care hospitals. 

http://www.medpac.gov/chapters/Mar07_Ch03d.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/01_overview.asp 
148 Post-acute care

Inpatient rehabilitation facilities 

• Chapter 3C of MedPAC’s March 2007 Report to the Congress provides information on 

 inpatient rehabilitation facilities. 

 http://www.medpac.gov/chapters/Mar07_Ch03c.pdf 

• CMS provides information on the inpatient rehabilitation facility prospective payment system. 

http://www.cms.hhs.gov/InpatientRehabFacPPS/01_overview.asp 
S E C T I O N

Medicare Advantage 

A Data Book: Healthcare spending and the Medicare program, June 2007 151

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 

Note: MA (Medicare Advantage), CCP (coordinated care plan), HMO (health maintenance organization), PPO (preferred 

provider organization), PFFS (private fee-for-service). 

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 82 percent of Medicare beneficiaries in 2007—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 2007—up from 45 

percent in 2005. In both 2006 and 2007, 100 percent of Medicare beneficiaries have MA 

plans available, up from 84 percent in 2005. 

• The number of plans from which beneficiaries may choose has increased. In 2007, 

beneficiaries can choose from an average of 20 plans operating in their counties, up from a 

choice of 12 plans in 2006 and 5 plans in 2005. 

• 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 other demonstration plans are excluded. 
152 Medicare Advantage

Chart 10-2. Access to zero-premium plans with MA drug 

coverage, 2006 and 2007 

48

11

25

15

73

60

19

55

25

86

HMO PPO PFFS Regional PPO Any MA plan

0

10

20

30

40

50

60

70

80

90

100

P

erc

en at g

e

of b

eneficiaries

2006 2007

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 2007 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 2007, 86 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. 

• Sixty 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 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 55 percent in 2007. 

• 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 2007 153

Chart 10-3. Enrollment in MA plans, 1994–2007 

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

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

2

4

6

8

10

B

eneficiaries (in millions)

Note: MA (Medicare Advantage). 

Source: Medicare Managed Care Contract (MMCC) Plans, Monthly Summary Reports, CMS. 

• Medicare enrollment in private health plans paid on an at-risk capitated basis is at an alltime high at 8.1 million enrollees (19 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. 
154 Medicare Advantage

Chart 10-4. Enrollment in PFFS plans grew faster than in other 

major plan types 

 Total enrollees 

 (in thousands) 

 July February Percentage 

Plan type 2006 2007 change 

Local CCPs 5,480 6,065 11% 

PFFS 774 1,328 72 

Regional PPOs 82 121 48 

Note: PFFS (private fee-for-service), CCP (coordinated care plan), PPO (preferred provider organization). CCPs include 

health maintenance organizations and local PPOs. 

Source: CMS health plan monthly summary reports. 

• Enrollment in private fee-for-service (PFFS) has been growing rapidly. While local 

coordinated care plans grew about 11 percent between July 2006 and February 2007, 

enrollment in PFFS plans accounted for nearly half the growth in Medicare Advantage, rising 

from about 774,000 to 1.3 million—a 72 percent increase. 
A Data Book: Healthcare spending and the Medicare program, June 2007 155

Chart 10-5. Enrollment in types of plans, 2007 

 Medicare eligibles Distribution (in percent) of MA enrollees by plan type 

State (in thousands) HMO Local PPO Regional PPO PFFS Cost Total 

Alaska 55 0% 0 % 0 % 0 % 0% 1% 

Alabama 782 11 1 0 2 0 15 

Arkansas 489 2 0 0 7 0 9 

Arizona 819 30 1 0 4 0 35 

California 4,386 32 0 1 1 0 33 

Colorado 541 22 1 0 3 5 31 

Connecticut 541 9 0 0 1 0 10 

District of Columbia 78 1 0 0 1 6 8 

Delaware 132 0 0 0 1 0 2 

Florida 3,130 21 0 2 2 0 25 

Georgia 1,077 2 1 0 7 0 10 

Hawaii 189 12 2 1 1 20 36 

Iowa 503 1 0 1 6 3 11 

Idaho 199 8 2 0 9 2 21 

Illinois 1,749 4 1 0 2 1 8 

Indiana 935 0 1 0 6 2 9 

Kansas 410 2 1 0 3 1 8 

Kentucky 705 3 1 0 7 1 11 

Louisiana 643 13 0 0 3 0 17 

Massachusetts 1,007 14 1 0 2 0 17 

Maryland 718 2 1 0 0 2 6 

Maine 243 0 0 0 1 0 2 

Michigan 1,538 3 0 0 11 0 14 

Minnesota 722 10 0 1 8 10 30 

Missouri 943 11 1 0 3 0 16 

Mississippi 472 1 0 0 6 0 7 

Montana 153 0 1 0 11 0 12 

North Carolina 1,319 6 0 0 7 0 14 

North Dakota 106 0 0 0 5 1 6 

Nebraska 268 3 0 1 5 1 9 

New Hampshire 194 0 0 0 2 0 2 

New Jersey 1,270 8 1 0 0 0 9 

New Mexico 278 16 3 0 3 0 22 

Nevada 309 28 0 1 1 0 31 

New York 2,879 20 1 0 1 0 23 

Ohio 1,812 11 1 0 3 1 17 

Oklahoma 560 9 0 0 3 0 12 

Oregon 558 23 8 0 3 5 39 

Pennsylvania 2,189 26 3 0 2 0 32 

Puerto Rico 620 52 4 0 0 0 56 

Rhode Island 178 33 1 0 1 0 34 

South Carolina 674 0 0 1 8 0 9 

South Dakota 955 13 0 0 4 0 17 

Texas 2,641 10 1 0 3 1 15 

Utah 245 2 6 0 13 1 22 

Virginia 1,022 1 0 0 7 1 9 

Vermont 100 0 0 0 1 0 1 

Washington 852 14 1 0 4 0 20 

Wisconsin 855 5 1 0 11 1 19 

West Virginia 367 1 2 0 3 4 11 

Wyoming 74 0 0 0 3 1 5 

U.S. Total 43,597 14 1 0 4 1 19 

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 data, May 2007. 

• 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 and Vermont. The highest penetration of Medicare private plans is in 

Oregon and Puerto Rico, with 39 percent and 56 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. 
156 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 

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 bids approved by CMS. Also, beginning in 2008, non-network 

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 2007 157

Chart 10-7. Special needs plans have grown quickly 

11

125

276

476

2004 2005 2006 2007

0

50

100

150

200

250

300

350

400

450

500

550

Number of special ne

eds plans

Source: CMS special needs plans fact sheet and data summary, February 14, 2006, and CMS special needs plans comprehensive 

 report, March 21, 2007. 

• 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 2007, 476 SNPs are approved to operate. 

• SNPs were authorized for only five years. Absent congressional action, SNP authority will 

expire at the end of 2008. 
158 Medicare Advantage

Chart 10-8. The number of SNPs and SNP enrollment 

 increased from 2006 to 2007 

July 2006 March 2007

0

100

200

300

400

500

600

Number of S

N

Ps

Dual eligible

Institutional

Chronic or disabling condition

276

476

July 2006 March 2007

S

N

P enrollment (in thousands)

532,000

843,000

0

100

200

300

400

500

600

700

800

900

Note: SNP (special needs plan). 

Source: CMS special needs plans fact sheet and data summary, February 14, 2006; CMS special needs plans comprehensive 

report, March 21, 2007; and CMS annual report by plan, July 26, 2006. 

 

• In 2007, most special needs plans (SNPs) (67 percent) are for dual-eligible beneficiaries, 

while 15 percent are for beneficiaries with chronic conditions, and 18 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 2006 when 82 percent of SNPs were for dual eligibles. 

• Enrollment in SNPs has grown quickly from 532,000 in July 2006 to 843,000 in March 2007. 

• The rate of enrollment growth was especially rapid for dual-eligible SNPs (42 percent) and 

institutional SNPs (530 percent). The institutional SNP enrollment growth is largely 

accounted for by the re-designation of the SCAN demonstration Social-HMO as an 

institutional SNP. This change added nearly 90,000 enrollees, 76 percent of institutional 

SNP enrollment growth. (For more information, see Chapter 3 of MedPAC’s June 2007 

Report to the Congress at http://medpac.gov/chapters/Jun07_Ch03.pdf.) 
A Data Book: Healthcare spending and the Medicare program, June 2007 159

Web links. Medicare Advantage 

• Chapter 3 of MedPAC’s June 2007 Report to the Congress provides information on 

Medicare Advantage plans. 

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

• Chapter 4 of MedPAC’s March 2007 Report to the Congress provides information on 

Medicare Advantage plans. 

http://medpac.gov/chapters/Mar07_Ch04.pdf 

• More information on the Medicare Advantage program payment system can be found in 

MedPAC’s Medicare Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_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 2007 163

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

1997 1998 1999 2000 2001 2002 2003 2004 2005

0

5

10

15

20

M

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

Medicare spending

Source: MedPAC analysis of unpublished CMS data. 

• MedPAC estimates that spending for Part B drugs totaled $10.1 billion in 2005. 

• 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 to 2004. 

• This total does not include drugs provided through outpatient departments of hospitals or to 

patients with end-stage renal disease in dialysis facilities. MedPAC estimates that payments 

for separately billed drugs provided in hospital outpatient departments equaled about $2 

billion in 2005. We estimate that freestanding and hospital-based dialysis facilities billed 

Medicare an additional $2.9 billion for drugs. 

• The primary reason for the decline in Part B drug expenditures is the change in the 

Medicare payment rate from one based on the average wholesale price to 106 percent of 

the average sales price. The volume of drugs provided to Medicare beneficiaries continued 

to rise. 
164 Drugs

Chart 11-2. Top 10 drugs covered by Medicare Part B, by share 

of expenditures, 2005 

 FDA Percent of 

Drug name Clinical indications Competition approval date spending 

Darbepoetin alfa Anemia Sole source 2001 8.4% 

Non-ESRD erythropoietin Anemia Multisource 1989 7.7 

 biological 

Rituximab Non-Hodgkin’s Sole source 1997 7.6 

 lymphoma 

Infliximab Rheumatoid arthritis, Sole source 1999 5.3 

 Crohn’s disease biological 

Pegfilgrastim Cancer Sole source 2002 5.2 

Bevacizumab Cancer Sole source 2004 2.8 

Albuterol Asthma and other Generic 1982 2.8 

 lung conditions 

Docetaxel Cancer Sole source 1996 2.8 

Oxaliplatin Cancer Sole source 2004 2.8 

Zoledronic acid Cancer related Sole source 2001 2.6 

Note: FDA (Food and Drug Administration), ESRD (end-stage renal disease). 

Source: MedPAC analysis of 2005 Medicare claims data from CMS and unpublished FDA data. 

• Medicare covers about 550 outpatient drugs under Part B, but spending is very 

concentrated. The top 10 drugs account for about 48 percent of all Part B drug spending. 

• Spending for new drugs dominates the list. Of the top 10 drugs covered by Medicare in 

2005, eight received Food and Drug Administration approval in 1996 or later. 

• Treatment for cancer dominates the list—8 out of the top 10 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 2007 165

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

 coverage 

 Percent of total 

 Millions as of Medicare 

 January 16, 2007 beneficiaries 

Enrollment that leads to Medicare program spending: 

 Voluntary enrollees in stand-alone PDPs 10.98 25% 

 Enrollees in MA–PDs (including some duals) 6.65 15 

 Individuals dually eligible for Medicare and Medicaid 

 auto-enrolled in Part D plans 6.27 14 

 Individuals covered by Medicare RDS 6.94 16

 Subtotal 30.84 71 

 

Enrollment that does not lead to Medicare program spending: 

 Estimated federal retirees in FEHB and Tricare 3.33 8 

 Total 34.17 79 

Additional sources of creditable coverage* 4.86 11 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]), RDS (retiree drug subsidy), 

 FEHB (Federal Employees Health Benefits program). TRICARE is the health program for military retirees and their 

dependents. Columns do not sum to 100 percent because the remaining share of beneficiaries either have no drug 

coverage or have coverage of less value than Part D benefits. 

* Drug coverage of equal or greater value to Part D benefits through the Department of Veterans Affairs, Indian Health 

Service, former employers that do not receive Medicare’s RDS, current employers, or state pharmaceutical assistance 

programs. 

Source: Presentation by Cynthia Tudor, Director, Medicare Drug Benefit Group, at the National Health Policy Forum, Feb. 22, 2007. 

• As of January 2007, CMS estimated that 30.8 million of the 43 million Medicare beneficiaries 

(71 percent) were either signed up for Part D plans or had prescription drug coverage 

through employer-sponsored coverage under Medicare’s retiree drug subsidy (RDS). (If an 

employer agrees to provide primary drug coverage to its retirees with an average benefit 

value that is equal or greater in value to Part D (called creditable coverage), Medicare 

provides the employer with a tax-free subsidy for 28 percent of each eligible individual’s 

drug costs that fall within a specified range of spending.) 

• Voluntary enrollees in stand-alone drug plans numbered 11.0 million, or 25 percent of all 

Medicare beneficiaries. Individuals who are enrollees in Medicare Advantage–Prescription 

Drug plans and those dually eligible for Medicare and Medicaid and numbered 6.7 million 

and 6.3 million, or 15 percent and 14 percent, respectively, of all beneficiaries. Individuals 

whose employers received Medicare’s RDS numbered 6.9 million, or 16 percent. Those four 

groups of beneficiaries directly affect Medicare program spending. 

• Other Medicare beneficiaries have creditable drug coverage, but that coverage does not 

affect Medicare program spending. For example, 3.3 million beneficiaries (8 percent) were 

federal retirees who receive drug coverage through the Federal Employees Health Benefits 

program or TRICARE. Approximately 4.9 million (11 percent) had prescription drug 

coverage through the Department of Veterans Affairs, Indian Health Service, other former 

employers that are not a part of Medicare’s RDS, current employers because the individual 

is still an active worker, or state pharmaceutical assistance programs. 
166 Drugs

Chart 11-4. Defined standard benefit parameters increase 

over time 

2006 2007 

 

Deductible $250.00 $265.00 

Initial coverage limit 2,250.00 2,400.00 

True out-of-pocket spending limit 3,600.00 3,850.00 

Total covered drug spending at true out-of-pocket limit 5,100.00 5,451.25 

Minimum cost sharing above true out-of-pocket limit 

 Copay for generic/preferred multisource drug prescription 2.00 2.15 

 Copay for other prescription drugs 5.00 5.35 

 

Source: CMS, Office of the Actuary, 2006. Medicare Part D benefit parameters for standard benefit: Annual adjustments for 2007 

 (May 22). 

• 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 and 2007 are shown in the table 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 2007 167

Chart 11-5. Characteristics of Medicare PDPs 

 2006 2007 

 Plans Enrollees a

 Plans 

 Number 

 Number Percent (in millions) Percent Number Percent 

Total 1,429 100% 15.5 100% 1,866 100% 

 

Type of organization 

 National b

 886 62 8.3 54 1,507 80 

 Near national c 339 24 4.0 26 159 8 

 Other 204 14 3.1 20 200 11 

 

 

Type of benefit 

 Defined standard 132 9 3.4 22 219 12 

 Actuarially equivalent d

 689 48 9.5 61 760 41 

 Enhanced 608 43 2.6 17 887 48 

 

 

Type of deductible 

 Zero 834 58 8.7 56 1,127 60 

 Reduced 112 8 0.3 2 157 8 

 Defined standard 483 34 6.5 42 582 31 

Note: PDP (prescription drug plan). The PDPs and enrollment described here exclude employer-only plans and plans offered in 

 U.S. territories. Numbers may not add to totals due to rounding. a

 Number of enrollees as of July 2006. 

b

 Reflects total numbers of plans for 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. 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

• Part D drew even more stand-alone prescription drug plans (PDPs) into the field for 2007 

than it did in 2006. Plan sponsors are offering 1,866 PDPs in 2007 compared with 1,429 in 

2006—about 30 percent more. 

• In 2007, 80 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. 

• Sponsors are offering larger proportions of PDPs with the defined standard benefit structure 

or enhanced benefits (basic plus supplemental coverage) for 2007 and a smaller proportion 

of benefits with the same average value as the standard benefit but with alternative benefit 

designs (called actuarially equivalent benefits). 
168 Drugs

 Chart 11-6. Benefits in the coverage gap among PDPs 

 2006 2007 

 Enrollees 

 Plans Total With LIS Plans 

 Number Number Percent 

 Number Percent (in millions) Percent (in millions) of total Number Percent

 

Total 1,429 100% 15.48 100% 8.02 52% 1,866 100%

 

Drugs covered in the gap 

 Generic only 187 13 0.44 3 0.05 10 511 27

 Generic and 

 brand name* 33 2 0.47 3 0.03 6 27 1 

 None 1,209 85 14.56 94 7.95 55 1,328 71 

Note: PDP (prescription drug plan), LIS (low-income subsidy). LIS enrollees receive extra help to cover some or all premiums 

and cost sharing. Their benefit effectively has no gap in coverage. The PDPs and enrollment described here exclude 

employer-only plans and plans offered in U.S. territories. Gap coverage refers to benefits provided within the range of 

beneficiary drug spending above the standard benefit’s initial coverage limit and below its out-of-pocket threshold. Part 

D’s defined standard benefit requires the enrollee to pay 100 percent coinsurance in this coverage gap. Number of total 

enrollees and number of enrollees with LIS are not available for 2007. Sums of percentages may not add to totals due to 

rounding. 

*Not all brand name drugs are necessarily covered. Most plans cover preferred brand name drugs in the coverage gap 

and only two plans cover all branded drugs on the plan’s formulary. 

 

 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

 

• More prescription drug plans (PDPs) include some benefits in the coverage gap for 2007 

than for 2006. Nearly all cover only generic drugs in the gap─27 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 drugs on the preferred tier 

of the plan’s formulary. 

• In 2006, 94 percent of PDP enrollees were in plans that offered no additional benefits in the 

coverage gap: 55 percent of the 94 were beneficiaries who receive Part D’s low-income 

subsidies (LISs) and thus do not face a coverage gap. In addition, many enrollees were 

unlikely to exceed the initial coverage limit for drug spending. Estimates suggest that 3 

million to 4 million individuals (or between 25 percent and 40 percent of plan enrollees who 

did not receive LISs) had spending in the coverage gap in 2006. Those numbers made up 

between 13 percent and 18 percent of all Part D enrollees in 2006. 
A Data Book: Healthcare spending and the Medicare program, June 2007 169

Chart 11-7. Average Part D premiums 

 2006 2007 

 Unweighted Weighted by Unweighted 

 plan offers 2006 enrollment plan offers 

All plans 

 Basic coverage $29.01 $23.49 $25.86 

 Enhanced coverage 27.80 20.64 29.16 

 Any coverage 28.38 22.61 27.85 

PDPs 

 Basic coverage 33.11 24.16 28.79 

 Enhanced coverage 43.27 35.34 45.66 

 Any coverage 37.43 26.03 36.81 

MA–PDs* 

 Basic coverage 21.88 16.84 18.79 

 Enhanced coverage 16.47 10.42 17.14 

 Any coverage 18.43 12.08 17.24 

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. 

 *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 plans chose to use to offset Part D premium costs. 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

• In 2006, the average (unweighted) premium offered for basic or enhanced Part D plans was 

$28.38 per month. However, beneficiaries tended to enroll in lower premium plans. On 

average, enrollees paid about $22.61 per month in 2006. 

• 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. 

• Part D basic plans that had premiums at the higher end of the distribution in 2006 tended to 

lower their bids for 2007, while those with the lowest bids tended to raise them. In 2007, the 

average premium offered for basic plans—not weighted by enrollment—was lower ($25.86 

versus $29.01). However, the average (unweighted) premium for plans offering enhanced 

coverage was higher ($29.16 versus $27.80). 
170 Drugs

Chart 11-8. Characteristics of MA–PDs 

 2006 2007 

 Plans Enrollees a

 Plans 

 Number 

 Number Percent (in millions) Percent Number Percent 

Total 1,303 100% 5.0 100% 1,622 100% 

 

Type of organization 

 Local HMO 856 66 4.1 82 947 58 

 Local PPO 275 21 0.2 4 274 17 

 PFFS 124 10 0.6 12 367 23 

 Regional PPO 48 4 0.1 1 34 2 

 

Type of benefit 

 Defined standard 96 7 0.1 3 84 5 

 Actuarially equivalent b 376 29 1.1 23 321 20 

 Enhanced 831 64 3.7 74 1,217 75 

 

Type of deductible 

 Zero 1,045 80 4.5 90 1,461 90 

 Reduced 41 3 0.1 2 38 2 

 Defined standard 217 17 0.4 8 123 8 

Note: MA–PD (Medicare Advantage–Prescription Drug [plan]), HMO (health maintenance organization), PPO (preferred 

provider organization), PFFS (private fee-for-service). 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. 

Numbers may not add to totals due to rounding. 

a

Number of enrollees as of July 2006. 

b

Benefits labeled actuarially equivalent to Part D’s standard benefit include what CMS calls “actuarially equivalent 

standard” and “basic alternative” benefits. 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

• As with stand-alone prescription drug plans (PDPs), there were more Medicare Advantage–

Prescription Drug plans (MA–PDs) for 2007 than for 2006. Sponsors are offering 1,622 MA–

PDs around the country, compared with 1,303 the year before (about 25 percent more). 

Although local HMOs offer the most MA–PD plans, there was a sizable increase in the 

number of drug plans offered by private fee-for-service plans—growing from 10 percent of 

all (unweighted) offerings in 2006 to 23 percent in 2007. 

• A larger share of MA–PDs than PDPs offer enhanced benefits. In 2006, 43 percent of all 

PDPs had enhanced benefits (see Chart 11-5) compared with 64 percent of MA–PDs. In 

2007, 48 percent of PDPs were enhanced compared with 75 percent of MA–PDs. In 2006, 

enhanced MA–PDs attracted 74 percent of total MA-PD enrollment. 

• Most MA–PD plans have no deductible: 80 percent of MA–PD offerings in 2006 and 90 

percent in 2007. MA–PDs with no deductible attracted about 90 percent of total MA–PD 

enrollment in 2006. 
A Data Book: Healthcare spending and the Medicare program, June 2007 171

Chart 11-9. Benefits in the coverage gap among MA–PDs 

 2006 2007 

 Enrollees 

 Plans Total With LIS Plans 

 Number Number Percent 

 Number Percent (in millions) Percent (in millions) of total Number Percent

 

Total 1,303 100% 5.02 100% 0.75 15% 1,622 100%

 

Drugs covered in the gap 

 Generic only 300 23 1.21 24 0.18 15 448 28 

 Generic and 

 brand name* 60 5 0.19 4 0.03 14 78 5 

 None 943 72 3.62 72 0.55 15 1,096 68

Note: MA–PD (Medicare Advantage–Prescription Drug [plan]), LIS (low-income subsidy). LIS enrollees receive extra help to 

cover some or all premiums and cost sharing. Their benefit effectively has no gap in coverage. The PDPs and enrollment 

described here exclude employer-only plans and plans offered in U.S. territories. Gap coverage refers to benefits provided 

within the range of beneficiary drug spending above the standard benefit’s initial coverage limit and below its out-of-pocket 

threshold. Part D’s defined standard benefit requires the enrollee to pay 100 percent coinsurance in this coverage gap. 

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. Numbers may not add to totals due to rounding. 

*Not all brand name drugs are necessarily covered. Most plans cover preferred brand name drugs in the coverage gap 

and only two plans cover all branded drugs on the plan’s formulary. 

 

Source: MedPAC analysis of CMS landscape, bid, and enrollment data. 

 

• Medicare Advantage–Prescription Drug plans (MA–PDs) are more likely than prescription 

drug plans (PDPs) to provide some additional benefits in the coverage gap, although mostly 

for generics. In 2006, 28 percent of MA–PDs included some gap coverage─23 percent had 

generic drugs only and 5 percent had both generic and brand name drug coverage. Those 

plans accounted for 28 percent of MA–PD enrollment. 

• Among MA–PD enrollees with no gap coverage, 15 percent of the 72 percent were 

beneficiaries who received low-income subsidies. 

• For 2007, 33 percent of MA–PDs provide some gap coverage (28 percent generics only and 

5 percent generic and brand names). 
172 Drugs

Chart 11-10. Geographic distribution of PDPs in 2007 

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. 

• New stand-alone prescription drug plans (PDPs) emerged in every region of the country, 

and the median number of plans offered in each region rose from 43 in 2006 to 55 in 2007. 

• Alaska and Hawaii had the fewest stand-alone plans with 45 and 46 PDPs, respectively. 

The Pennsylvania–West Virginia PDP region had the most, with 66 PDPs.

59 to 66 55 to 59 51 to 55 45 to 51 
A Data Book: Healthcare spending and the Medicare program, June 2007 173

Chart 11-11. Distribution of Part D enrollees by organization 

Humana

22%

Member Health

6%

Other

26%

Coventry

4%

WellCare 6%

Humana

18%

Kaiser Permanente

10%

Other

47%

United and

PacifiCare

29%

United and 

PacifiCare

21%

Wellpoint

7%

Tufts 

Associated

Health plans

4%

PDP enrollment = 15.5 million MA-PD enrollment = 5.0 million 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Data are as of July 2006. 

Source: MedPAC analysis of 2006 CMS enrollment data. 

• As of July 2006, Part D enrollment was concentrated among plans offered by a small 

number of parent organizations. Several of those organizations offer both stand-alone 

prescription drug plans (PDPs) and Medicare Advantage–Prescription Drug plans (MA–

PDs). For example, United and PacifiCare (which merged in 2006) had 29 percent of the 

15.5 million enrollees in PDPs and 21 percent of the 5.0 million enrollees in MA–PDs. 

Similarly, Humana had a considerable portion of both markets: 22 percent of PDP enrollees 

and 18 percent of MA–PD enrollees. 
174 Drugs

Chart 11-12. In 2006, most Part D enrollees were in plans that 

distinguished between preferred and nonpreferred 

 brands and include specialty tiers 

 Generic/preferred brand/ 

 Generic/brand nonpreferred brand 

 25% Without With Without With 

 coinsurance, specialty specialty specialty specialty 

Plan characteristics all tiers tier tier tier tier Other Total 

All Part D plans 17% 6% 14% 13% 50% 1% 100% 

All PDPs 22 2 17 13 46 1 100 

 National, near national 16 1 12 10 40 0 79 

 Non-national 6 <0.5 5 3 6 1 21 

 

 Auto-enrollment 21 1 15 7 33 1 78 

 No auto-enrollment <0.5 1 1 7 13 <0.5 22 

 

 Basic 22 1 16 9 35 1 83 

 Enhanced 0 1 1 4 11 0 17 

 

All MA–PDs 2 20 5 13 60 <0.5 100 

 Local HMO 2 18 4 10 47 1 82 

 Local PPO <0.5 1 <0.5 1 1 <0.5 4 

 Regional PPO <0.5 <0.5 <0.5 <0.5 1 0 1 

 PFFS <0.5 <0.5 <0.5 0 12 0 12 

 

 Basic 2 9 1 3 10 1 26 

 Enhanced <0.5 10 3 8 52 1 74 

 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]), HMO (health maintenance 

organization), PPO (preferred provider organization), PFFS (private fee-for-service). Enrollment numbers are as of July 1, 

2006. The group of PDPs analyzed here excludes employer-only plans, plans offered in U.S. territories, and plans with no 

enrollment. The group of MA–PDs excludes employer-only plans, demonstration programs, 1876 cost plans, plans offered 

in U.S. territories, and plans with no enrollment. Auto-enrollment refers to PDPs that were eligible for automatically 

enrolled beneficiaries based on low-income status. Cost-sharing structures are for before the initial coverage limit of Part 

D. A specialty tier generally includes expensive products and unique drugs and biologicals, such as biotechnology drugs, 

for which enrollees may not appeal for lower cost-sharing amounts. Benefits labeled basic include Part D’s standard 

benefit design as well as benefits that are actuarially equivalent to standard benefits. Enhanced plans include 

supplemental coverage. Numbers may not sum to 100 percent due to rounding. 

Source: National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for 

January 1, 2006. 

• In 2006, nearly 65 percent of Part D enrollees were in plans with formularies that distinguished between 

preferred and nonpreferred brands (13 percent without a specialty tier plus 50 percent with a specialty tier). 

Twenty percent of enrollees were in plans that distinguished only between brand name and generic drugs 

(6 percent without a specialty tier plus 14 percent with a specialty tier). About 17 percent of enrollees face 

25 percent cost sharing for all covered drugs. 

• Almost 60 percent of enrollees in stand-alone prescription drug plans (PDPs) (13 percent without a 

specialty tier and 46 percent with one) and nearly 75 percent of enrollees in Medicare-Advantage 

Prescription Drug (plans) (MA–PDs) (13 percent without a specialty tier and 60 percent with one) were in 

plans with the generic, preferred, and nonpreferred brand structure. 

• Enrollees in PDPs that used flat, 25 percent cost sharing were more likely to be in plans offered nationally 

or near nationally, providing basic coverage, and qualified to receive auto-assigned enrollees. Enrollees in 

enhanced plans almost never faced this structure. 
A Data Book: Healthcare spending and the Medicare program, June 2007 175

Chart 11-13. In 2006, the median PDP enrollee was in a plan that 

listed more than 1,300 drugs 

0 500 1000 1500 2000

Median number of drugs listed

All PDPs (N=1429)

National, near-national (N=1222)

Non-national (N=207)

Auto-enrollment (N=409)

No auto-enrollment (N=1020)

Basic (N=821)

Enhanced (N=608) 

25% Coinsurance (N=128)

G/B (N=108)

G/B/S (N=314)

G/PB/NPB (N=332)

G/PB/NPB/S (N=538)

Generic

Brand

Plan type

Tier structure

Note: PDP (prescription drug plan), G (generic), B (brand), PB (preferred brand), NPB (nonpreferred brand), S (specialty). 

Occasionally, plans list some generic drugs on brand tiers and vice versa. Plans with “other” tier structures are not 

displayed. The PDPs described here exclude employer-only plans offered in U.S. territories. Cost-sharing structures are 

for before the initial coverage limit of Part D. A specialty tier generally includes expensive products and unique drugs and 

biologicals for which enrollees may not appeal for lower cost sharing. 

Source: National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for 

January 1, 2006. 

• In 2006, enrollees in stand-alone prescription drug plans (PDPs) generally had a formulary that listed 

more than 1,300 drugs. About 60 percent of those listings were brand-name drugs while the 

remaining 40 percent were generic. 

 

• The median enrollee in a national or near-national PDP generally had slightly more drugs listed on 

their plan’s formulary than the median enrollee in a non-national plan. Enrollees in plans that qualified 

for auto-enrollees tended to have fewer drugs listed on their plans’ formularies than plans that did not 

qualify for auto-enrollees. 

• Enrollees in plans that used a flat, 25 percent coinsurance structure tended to have the most drugs 

listed on their plans’ formularies. Enrollees in plans with only one brand-name tier typically had fewer 

drugs listed on their plans’ formularies than enrollees in plans that distinguished between preferred 

and nonpreferred brand-name drugs. 

• The number of drugs on a plan’s formulary does not necessarily represent beneficiary access to 

medications. Beneficiaries may access coverage for unlisted drugs through the plan’s nonformulary 

exceptions process and may be denied coverage for listed drugs through prior authorization approval 

requirements.
176 Drugs

Chart 11-14. In 2006, the median MA–PD enrollee was in a plan 

that listed more than 1,200 drugs 

0 500 1000 1500 2000

Median number of drugs listed

All MA-PDs (N=1,302)

Local HMO (N=855)

Local PPO (N=275)

Regional PPO (N=48)

PFFS (N=124)

Basic (N=471)

Enhanced (N=831)

25% Coinsurance (N=92)

G/B (N=206)

G/B/S (N=83)

G/PB/NPB (N=193)

G/PB/NPB/S (N=696)

Generic

Brand

Plan type

Tie structure

Note: MA–PD (Medicare Advantage–Prescription Drug [plan]), HMO (health maintenance organization), PPO (preferred 

provider organization), PFFS (private fee-for-service), G (generic), B (brand), PB (preferred brand), NPB (nonpreferred 

brand), S (specialty). Occasionally, plans list some generic drugs on brand tiers and vice versa. Plans with “other” tier 

structures are not displayed. The MA–PDs described here exclude demonstration programs, 1876 cost plans, and plans 

offered in U.S. territories. Cost-sharing structures are for before the initial coverage limit of Part D. A specialty tier 

generally includes expensive products and unique drugs and biologicals for which enrollees may not appeal for lower cost 

sharing. 

Source: National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for 

January 1, 2006. 

• In 2006, enrollees in Medicare Advantage–Prescription Drug plans (MA–PDs) generally had a 

formulary that listed more than 1,200 drugs. About 55 percent of those listings were brand-name 

drugs while the remaining 45 percent were generic. 

• The median enrollee in private fee-for-service MA–PDs tended to have a larger number of drugs 

listed on their plan’s formularies than did the median enrollee in preferred provider organizations and 

local HMOs. 

• Enrollees in plans that distinguished between preferred and nonpreferred brand-name drugs tended 

to have more drugs listed on their plans’ formularies than did enrollees in plans with only one brandname tier or plans that used flat, 25 percent coinsurance. 

• The number of drugs on a plan’s formulary does not necessarily represent beneficiary access to 

medications. Beneficiaries may access coverage for unlisted drugs through the plan’s nonformulary 

exceptions process and may be denied coverage for listed drugs through prior authorization approval 

requirements. 
A Data Book: Healthcare spending and the Medicare program, June 2007 177

Chart 11-15. The number of drugs listed in a therapeutic category 

available to the median enrollee depends on 

therapeutic class size and regulation 

 For the median enrollee, the percent of drugs listed by selected therapeutic class 

 Cholinesterase Opioid Atypical 

 inhibitors Dyslipidemics analgesics nonphenothiazines* 

 (antidementia (anticholesterol (narcotic pain (atypical 

Plan type agents) agents) relievers) antipsychotics) 

 

Total drugs in class: 4 20 61 6 

Plan type: 

 PDPs 100% 80% 69% 100% 

 MA–PDs 75 80 59 100 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Occasionally plans list some 

generic drugs on brand tiers and vice versa. The population of MA–PDs described here excludes demonstration 

programs, 1876 cost plans, employer-group plans, and plans offered in U.S. territories. 

 *Under CMS regulation, plans are required to list all drugs in the atypical antipsychotic category. 

Source: National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for 

January 1, 2006. 

• For the median enrollee, the number of drugs listed within a therapeutic class of their 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 in a given class, plans are able to negotiate better 

prices by listing only selected drugs on their formulary, particularly when there are 

overlapping products. 

• In classes for which CMS requires that plans cover all or substantially all drugs, enrollees’ 

plans predictably list a larger share of drugs. 
178 Drugs

Chart 11-16. Most enrollees are in Part D plans that target prior 

authorization to selected categories 

 For the median enrollee, the percent of listed drugs 

 subject to prior authorization, 

among plans ever using prior authorization 

Therapeutic category PDPs MA–PDs 

All drugs 7% 8% 

Atypical antipsychotics* 33 20 

Dyslipidemics 15 17 

Immune suppressants* 86 86 

Metabolic bone disease agents 17 17 

Molecular target inhibitors* 50 50 

Opioid analgesics 9 10 

Oral hypoglycemics 5 8 

Proton pump inhibitors 50 67 

Renin-angiotensins 4 4 

Reuptake inhibitors* 5 5 

Note: PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Atypical antipsychotics (antipsychotics, 

nonphenothiazines); dyslipidemics (anticholesterol agents); immune suppressants (includes rheumatoid arthritis agents); 

metabolic bone disease agents (bone-loss inhibitors); molecular target inhibitors (selected anticancer drugs); opioid 

analgesics (narcotic pain relievers); oral hypoglycemics (blood sugar level); proton pump inhibitors (stomach acid reducers); 

renin-angiotensins (selected hypertension drugs); reuptake inhibitors (selected anti-depressants). The population of PDPs 

described here excludes those offered in U.S. territories. The population of MA–PDs described here excludes demonstration 

programs, 1876 cost plans, employer-group plans, and plans offered in U.S. territories. 

 *Plans are able to apply prior authorization to new-start enrollees—those not already taking a drug in these categories. 

Source: National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for January 

1, 2006. 

• Most Part D enrollees are in plans that apply utilization management tools to selected drugs. These 

tools include prior authorization (plans require preapproval before coverage), step therapy (enrollees 

must try specified drugs before moving to other drugs), and quantity limits (plans limit the number of 

doses of a particular drug covered in a given time period). 

• Plans use these tools for drugs that are expensive, potentially risky, subject to abuse, misuse, or 

experimental use, or to encourage use of lower-cost therapies. 

• All prescription drug plans (PDPs) and almost all Medicare Advantage–Prescription Drug plans (MA–

PDs) (98 percent) use prior authorization for at least one drug on their formularies. The median 

enrollee is in a plan that applies prior authorization to 7 percent to 8 percent of the drugs on its 

formulary. Step therapy is less commonly used among Part D plans and those that use it do so for a 

smaller proportion of drugs. 

• In the class of proton pump inhibitors (PPIs), which have low-cost and over-the-counter drugs among 

the choices, the median enrollee is in a plan that typically applies prior authorization to half (PDPs) 

and two-thirds (MA–PDs) of its listed PPIs. 

• PDPs and MA–PDs that use prior authorization typically require it for most of the drugs in the immune 

suppressant category that includes expensive rheumatoid arthritis drugs. Plans are likely applying 

prior authorization restrictions in this category (and several other categories) to assist in determining 

whether the drugs should be covered under Part B instead of Part D. 
A Data Book: Healthcare spending and the Medicare program, June 2007 179

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/Jun07_Ch07.pdf 

 http://www.medpac.gov/chapters/Mar07_Ch04.pdf 

 http://www.medpac.gov/publications%5Ccongressional_reports%5CJun06_Ch07.pdf 

 http://www.medpac.gov/publications%5Ccongressional_reports%5CJun06_Ch08.pdf 

 http://www.medpac.gov/publications%5Ccongressional_reports%5CJune05_ch1.pdf 

 http://www.medpac.gov/publications%5Ccongressional_reports%5CJune04_ch1.pdf 

 http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_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 Kaiser Family Foundation fact sheet, last updated in November 2006, provides information 

 on the Medicare Part D benefit. 

 

 http://www.kff.org/medicare/7044.cfm 

 

• A Kaiser Family Foundation analysis of formularies and other features of Medicare Part D plans. 

 

 http://www.kff.org/medicare/7589.cfm 

 

• A Kaiser Family Foundation fact sheet on low-income assistance under the Medicare Part D 

 benefit. 

 

 http://www.kff.org/medicare/med062804oth.cfm 

• CMS information on Part D enrollment. 

 http://www.cms.hhs.gov/PrescriptionDrugCovGenIn/02_EnrollmentData.asp#TopOfPage 

S E C T I O N

Other services

Dialysis 

Hospice 

Clinical laboratory 

A Data Book: Healthcare spending and the Medicare program, June 2007 183

Chart 12-1. Number of dialysis facilities is growing and share of 

for-profit and freestanding dialysis providers is 

increasing 

 Average annual 

 1996 2006 percent change 

Total number of 

 Dialysis facilities 2,721 4,594 5% 

 Hemodialysis stations 40,578 80,383 6 

 

Mean number of 

 Hemodialysis stations 15 17 1 

Percent of all facilities: 

 Nonchain N/A 23% N/A 

 Affiliated with any chain N/A 77 N/A 

 Affiliated with largest two chains N/A 60 N/A 

 Hospital based 26% 13 –2 

 Freestanding 74 87 6 

 Rural 23 25 6 

 Urban 77 75 5 

 For profit 65 79 7 

 Nonprofit 35 21 <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. 

 

• Between 1995 and 2006, the number of freestanding and for-profit facilities increased, while 

hospital-based and nonprofit facilities decreased. Freestanding facilities increased from 

74 percent to 87 percent of all facilities, and for-profit facilities increased from 65 percent to 

79 percent of all facilities. 

• Two national for-profit chains own about 60 percent of all facilities and 70 percent of all 

freestanding facilities. 

• Between 1995 and 2006, the proportion of facilities located in rural areas has remained 

relatively constant. 

• The number of facilities has increased 5 percent per year since 1995. The size of a facility 

has remained about the same, as evidenced by the mean number of hemodialysis stations 

per facility, which increased from 15 in 1995 to 17 in 2006. 
184 Other services

Chart 12-2. Medicare spending for outpatient dialysis services 

furnished by freestanding dialysis facilities, 

1996 and 2005 

2.1

4.4

1.0

2.5

1996 2005

0

1

2

3

4

5

6

7

D

ollars (in billions)

Drugs

Composite rate services

Source: Compiled by MedPAC from the 1996 and 2004 institutional outpatient files from CMS. 

• Between 1996 and 2005, 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 11 percent per 

year. 

• Two factors contributing to spending growth are the increasing size of the dialysis population 

and the growing use of injectable drugs, such as erythropoietin, iron supplements, and 

vitamin D analogues. 

• The number of dialysis patients increased by 6 percent annually between 1996 and 2005. 

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 2005, estimated spending for injectable drugs increased by 11 percent 

annually; in contrast, spending for dialysis increased by 8 percent annually during this time 

period. 
A Data Book: Healthcare spending and the Medicare program, June 2007 185

Chart 12-3. Dialysis facilities’ capacity increased between 1995 

and 2006 

2,721

4,594

40.6

80.4

1995 2006

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

dia

yl sis s at tions (in ht ousands)

Source: Compiled by MedPAC from the 1995 Facility Survey file from CMS and the 2006 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 2006, a facility had about 17 hemodialysis stations. 

• Between 1995 and 2006, the total number of dialysis facilities grew by about 5 percent 

annually, and the number of hemodialysis stations grew by 7 percent annually. 
186 Other services

Chart 12-4. Characteristics of dialysis patients, by type of 

facility, 2005 

Elderly (age 

75+ years)

Female African 

American

Hispanic Medicaid CHF Diabetes

Patient characteristics

0

10

20

30

40

P

erc

ent of p

at ei nts tre

a

et d

LDOs

Not LDOs

Freestanding

Hospital based

50

60

Note: LDO (large dialysis organization), CHF (congestive heart failure). 

Source: MedPAC analysis of dialysis claims files, denominator files, and the REMIS file from CMS. 

• Across the different provider types, the proportion of patients who are elderly, female, 

African American, Hispanic, dually eligible for Medicaid, have congestive heart failure, and 

have diabetes does not differ by more than 1 percentage point between 2004 and 2005 

(data not shown for 2004). 

• This analysis suggests that providers have not changed the mix of patients they care for in 

2004 and 2005, including the large dialysis organizations, which account for 60 percent of all 

facilities. 

• In 2004 and 2005, 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 2007 187

Chart 12-5. The ESRD population is growing, and most ESRD 

patients undergo dialysis 

 1994 1999 2004 

 Patients Patients Patients 

 (thousands) Percent (thousands) Percent (thousands) Percent 

Total 272.4 100% 377.3 100% 472.1 100% 

Dialysis 200.3 74 275.2 73 336.0 71 

 In-center hemodialysis 164.6 60 245.0 65 307.3 65 

 Home hemodialysis 3.8 1 2.4 1 2.0 <1 

 Peritoneal dialysis 29.5 11 26.0 7 25.8 5 

 Unknown 2.4 1 1.8 <1 0.9 <1 

 

Functioning graft and 

 kidney transplants 72.1 26 102.1 27 136.1 29 

 

Note: ESRD (end-stage renal disease). Totals may not equal sum of components due to rounding. 

Source: Compiled by MedPAC from the United States Renal Data System. 

• Persons with end-stage renal disease (ESRD) require either dialysis or a kidney transplant 

to maintain life. The total number of ESRD patients increased by 6 percent annually 

between 1994 and 2004. 

• In hemodialysis, a patient’s blood flows through a machine with a special filter that removes 

wastes and extra fluids. In peritoneal dialysis, the patient’s blood is cleaned by using the 

lining of his or her abdomen as a filter. Peritoneal dialysis is usually performed in a 

patient’s home. 

• Most ESRD patients undergo hemodialysis administered in dialysis facilities three times a 

week. Hemodialysis use is growing, while use of the two types of dialysis administered in 

patients’ homes—peritoneal dialysis and home hemodialysis—is declining. 

• Functioning graft patients are patients who have had a successful kidney transplant. 

Patients undergoing kidney transplant may receive either a living or a cadaveric kidney 

donation. In 2004, about 40 percent of the kidneys were from living donors and 60 percent 

were from cadaver donors. 

• Medicare is the primary payer for about 88 percent of all dialysis patients and for about half 

of all kidney transplant patients. 
188 Other services

Chart 12-6. Diabetics, the elderly, Asians, and Hispanics are 

among the fastest growing segments of the ESRD 

population 

 Percent Annual 

 of total percent change 

 in 2004 1996–2004 

Total (n = 452,957) 100% 5% 

Age 

 0–19 2 3 

 20–44 20 2 

 45–64 43 7 

 65–74 20 5 

 75+ 16 8 

Sex 

 Male 56 6 

 Female 44 5 

Race/Ethnicity 

 White 61 5 

 African American 32 5 

 Native American 1 6 

 Asian 4 8 

 Hispanic 14 9 

 Non-Hispanic 86 5 

Underlying cause of ESRD 

 Diabetes 37 7 

 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, about 35 percent are over age 65. About 

60 percent are white. 

• Diabetes is the most common cause of renal failure. 

• The number of ESRD patients increased by 5 percent annually between 1996 and 2004. 

Among the fastest growing groups of patients are those who are over age 75 and those with 

diabetes as the cause of kidney failure. 
A Data Book: Healthcare spending and the Medicare program, June 2007 189

Chart 12-7. Aggregate margins vary by type of freestanding 

 dialysis facility, 2005 

 Percentage of spending 

Type of facility by freestanding facilities Aggregate margin 

All facilities 100% 8.4% 

Urban 83 8.5 

Rural 17 7.9 

Large dialysis organizations 72 10.7 

Non large dialysis organizations 28 2.6 

 

Note: LDO (Large dialysis organization). Margins include payments and costs for composite rate services and injectable drugs. 

Margins are adjusted to reflect MedPAC’s analysis of audited cost reports, which found that the ratio of allowable to 

reported cost per treatment for composite rate services is 95.5 percent. 

Source: Compiled by MedPAC from the 2001 and 2003 cost reports and the 2003 institutional outpatient file from CMS. 

• For 2005, the aggregate Medicare margin for composite rate services and injectable drugs 

was 8.4 percent. 

• Aggregate margins vary based on a facility’s affiliation with the large dialysis organizations 

(LDOs). Our analysis indicates that total cost per treatment was 6 percent lower for the 

LDOs than their counterparts after adjusting for patient case mix and other facility-level 

characteristics. Lower costs drive the higher margins. 

• Since 2003, aggregate margins for composite rate services and dialysis drugs have trended 

upward (from 2 percent in 2003 to 8.4 percent in 2005). Changes in total payment and cost 

per treatment can explain the direction. Between 2003 and 2005, the total payment per 

treatment grew by 4 percent each year because of increasing drug use and the legislated 

increase in the composite rate by 1.6 percent in 2005. The total cost per treatment rose by 3 

percent between 2003 and 2004 but fell by 5 percent in 2005.
190 Other services

Chart 12-8. Use of hospice among Medicare beneficiaries 

 increased from 2000 to 2005 

 Average annual 

percent change 

 2000 2005 2000–2005 

Beneficiaries in hospice 513,840 869,201 11.1% 

Payment (in billions) $2.9 $8.2 23.0 

Days of care (in millions) 24.2 55.4 18.0 

Note: Data include Puerto Rico. 

Source: Beneficiaries, payment, and days of care from http://www.cms.hhs.gov/ProspMedicareFeeSvcPmtGen/downloads/ 

FY05update_hospice_expenditures_and_units_of_care.pdf. Accessed May 1, 2007. 

• Medicare spending on hospice increased 182 percent to about $8.2 billion between 2000 

and 2005, an average annual increase of 23 percent. The CMS Office of the Actuary 

estimates that spending on hospice will grow to $9.8 billion by 2006. 

• With the increase in the share of decedents electing hospice before they die, the total 

number of hospice users has increased. Between 2000 and 2005, the number of hospice 

users increased nearly 70 percent, or about 11 percent per year, on average, and the total 

number of covered days increased by nearly 130 percent in that same period. 
A Data Book: Healthcare spending and the Medicare program, June 2007 191

Chart 12-9. Average length of stay in hospice by state, 2005 

Source: MedPAC analysis of CMS data from Medicare Hospice Utilization by State, CY 2005. 

 http://www.cms.hhs.gov/MedicareFeeforSvcPartsAB/Downloads/HOSPICE05.pdf. Accessed May 1, 2007 

• Mean hospice lengths of stay were 67 days in 2005, an increase of 2 days over 2004. 

 

• Mean lengths of stay in hospice varied widely by state, from a low of 40 days in Connecticut 

to a high of 122 days in Mississippi in 2005. 

 

• States in the South and the Southwest had the highest numbers of days per patient in 2005. 

 

• Wyoming had the largest increase in hospice length of stay, going from 61 days per patient 

in 2004, to 97 days per patient in 2005. 

 

• Oregon had the largest decrease in hospice length of stay, going from 85 days per patient in 

2004, to 59 days per patient in 2005. 

MA

RI

NH

DE

MD

DC

NJ

CT

NY

VA

VT

WV

NC

IN

KY

OK SC AR

MO

MS AL

MN

KS

LA

HI

AK

NE

TX

NM

UT

WY

AZ

ID

CA

CO

FL

GA

IL

IA

ME

MI

MT

NV

ND

OH

OR

PA

SD

TN

WA

WI

Length of stay in days:

40-53 54-58 59-64 65-72 73-122
192 Other services

Chart 12-10. The number of proprietary hospices has increased,

 while the number of nonprofits has declined 

2000 2001 2002 2003 2004 2005 2006

0

200

400

600

800

1000

1200

1400

1600

Number of pro

v di ers

Voluntary

Proprietary

Government

Other

Source: MedPAC analysis of 2000–2006 Provider of Services files from CMS. 

• There was a small increase in the total number of hospices participating in Medicare in 

2006; in that year, 3,036 hospices participated, up 5 percent from 2005. 

• There have been substantial changes in the type of ownership of Medicare-participating 

hospices over time. 

• Between 2000 and 2006, the number of voluntary (nonprofit) hospices declined by 9 

percent. Over that same time, the number of proprietary (for-profit) hospices increased by 

nearly 140 percent. 

• For-profit hospices now account for 48 percent of hospices participating in Medicare. 
A Data Book: Healthcare spending and the Medicare program, June 2007 193

Chart 12-11. Growth in freestanding hospices continues 

908

975

1,048

1,180

1,390

1,660

1,810

749

699 672 648 648 671 651

553 549 553 556 557 543 561

20 20 17 16 14 13 14

2000 2001 2002 2003 2004 2005 2006

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Number of pro

viders

Freestanding

Home health agency

Hospital based

Skilled nursing facility

Source: MedPAC analysis of CMS Provider of Services (POS) file for December 2006. 

• The number of hospices participating in Medicare grew by 36 percent between 2000 and 

2006. 

• During this time, the number of provider-based hospices declined by 7 percent, with the 

most precipitous drop in this category represented by hospices based in skilled nursing 

facilities, which declined by 30 percent. 

• At the same time, the number of freestanding hospices doubled. 
194 Other services

Chart 12-12. Medicare spending for clinical laboratory 

 services, in billions, FY 1996–2006 

2.7 2.4 2.2 2.1 2.2 2.4 2.7 2.9 3.2 3.5 3.7

1.4

1.5 1.5 1.6 1.7

1.9

2.2

2.4

2.7

2.9

3.2

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

1

2

3

4

5

6

7

8

D

ol al rs (in billions)

Hospital based

Independent and physician office

4.0 3.9 3.7 3.7 3.9

4.3

4.8

5.4

5.9

6.4

6.9

Note: Spending is for services paid under the clinical laboratory fee schedule. Hospital-based services are furnished to 

outpatients in labs owned or operated by hospitals. Total spending appears on top of each bar. The segments of each bar 

may not sum to the totals on top of each bar due to rounding. 

Source: CMS, Office of the Actuary. 

• Repeated reductions in Medicare’s payment rates for clinical laboratory services contributed 

to declining spending during the 1990s for services furnished in independent and physician 

office labs. Since 1999, however, growth in volume has caused Medicare expenditures for 

all lab services to climb an average of 9 percent per year. 

• In 2006, Medicare spent $6.9 billion (2 percent of total program spending) on clinical lab 

services. 

• Hospital-based labs’ share of total clinical lab spending increased from 34 percent in 1996 to 

46 percent in 2006. 

 
A Data Book: Healthcare spending and the Medicare program, June 2007 195

Web links. Other services 

Dialysis 

• More information on Medicare’s payment system for outpatient dialysis services can be found in 

MedPAC’s Payment Basics series. 

http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_ 

dialysis.pdf 

• The US Renal Data System provides information about the incidence and prevalence of patients 

with renal disease, their demographic and clinical characteristics, and their spending patterns. 

http://www.usrds.org 

• The National Institute of Diabetes & Digestive & Kidney Diseases and the National Kidney 

Foundation provide health information about kidney disease for consumers.

http://www.niddk.nih.gov/ 

http://www.kidney.org/ 

• CMS provides specific information about each dialysis facility. 

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

• Chapter 2C of the MedPAC March 2007 Report to the Congress provides information about 

the financial performance of dialysis facilities. 

http://www.medpac.gov/chapters/Mar07_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 
196 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/publications/other_reports/Sept06_MedPAC_Payment_Basics_ 

hospice.pdf 

• Additional information and analysis related to the Medicare hospice benefit can be found in 

Chapter 3 of MedPAC’s June 2006 Report to the Congress, available at 

http://www.medpac.gov/publications/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 information on beneficiaries’ access to hospice care. 

 http://www.medpac.gov/publications/congressional_reports/may2002_HospiceAccess.pdf 

• CMS maintains a variety of information related to the hospice benefit. 

 http://www.cms.hhs.gov/center/hospice.asp 

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/publications/other_reports/Sept06_MedPAC_Payment_Basics_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