A DATA BOOK 

Healthcare Spending 

and the 

Medicare Program 

J UNE 2005
iii 

Introduction

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

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

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

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

links to MedPAC publications or other websites are included after the table or figure, or on a 

“Web links” page at the end of each section. 

• The first sections provide information on Medicare beneficiary demographics, dual eligible 

beneficiaries, quality and access in the Medicare program, Medicare beneficiary and other 

payer liability, retiree health benefits, and national health care and Medicare spending. 

• The next sections examine provider settings—such as hospitals or post-acute care—and 

present data on Medicare spending, percent of beneficiaries using the service, number of 

providers, volume, length of stay, and margins, if applicable. 

• The final sections cover Medicare Advantage and the availability of other supplemental 

options for Medicare beneficiaries, and prescription drug coverage for Medicare 

beneficiaries. 

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 Medicare beneficiary demographics .................................................................................1 

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

 population and program spending, 2002..........................................................................................3

1-2 Medicare spending rises as beneficiaries age, 2002 ........................................................................4

1-3 Beneficiaries who report being in poor health account for a disproportionate share 

 of Medicare spending, 2002.............................................................................................................5

1-4 Enrollment in the Medicare program is projected to grow fastest in the next 30 years...................6

1-5 Characteristics of the Medicare population, 2002 ...........................................................................7

1-6 Characteristics of the Medicare population, by rural and urban residence, 2002 ............................8

1-7 Arthritis and hypertension are the most common diseases reported by Medicare 

 beneficiaries, 2002 ...........................................................................................................................9

 Web links ...................................................................................................................................... 10 

2 Dual eligible beneficiaries .................................................................................................. 11

2-1 Dual eligible beneficiaries account for a disproportionate share of Medicare 

 spending, 2002 .............................................................................................................................. 13

2-2 Dual eligibles are more likely than nondual eligibles to be disabled or over 

 85 years old, 2002......................................................................................................................... 14

2-3 Dual eligibles are more likely than nondual eligibles to report poorer health status, 2002 .......... 15

2-4 Demographic differences between dual eligibles and nondual eligibles, 2002 ............................ 16

2-5 Differences in spending and service use between dual eligibles and nondual eligibles, 2002 ..... 17

2-6 Both Medicare and total spending are concentrated among dual eligible beneficiaries, 2002 ..... 18

2-7 Dual eligible beneficiaries report generally good access to care .................................................. 19

Web links ...................................................................................................................................... 20

3 Quality of care in the Medicare program..................................................................... 21

3-1 Hospital mortality decreased from 1998 to 2003.......................................................................... 23

3-2 Hospital processes of care improving, but many rates still low, 2001–2003................................ 24

3-3 Safety of care: Adverse events affect many hospitalized beneficiaries, 1998–2003 ................... 25

3-4 Rates of potentially avoidable admissions, 2001–2003 ................................................................ 26

3-5 Outside the hospital, processes of care are improving, but rates are 

 still low, 2001–2003...................................................................................................................... 27 
vi 

3-6 Patient-centeredness of care: Beneficiaries rate interactions with health care providers highly . 28

3-7 Post-hospital acute care episodes ended differently across settings and over time ...................... 29

3-8 SNF patients’ adjusted readmission rates for five potentially preventable conditions 

have increased............................................................................................................................... 30

3-9 Home health users experienced small improvements in outcomes, 2002–2004........................... 31

3-10 The quality of dialysis care has generally improved..................................................................... 32

3-11 Plans improve, but rates are still low on some measures, 2000–2003.......................................... 33

3-12 Patient experience scores: comparison of MA and FFS ............................................................... 34

Web links ...................................................................................................................................... 35

4 Access to care in the Medicare program....................................................................... 37 

4-1 Beneficiaries’ reports of difficulties obtaining care, 1993–2003.................................................. 39

4-2 Fewer aged beneficiaries delayed or failed to obtain care due to cost, compared with 

younger Americans ....................................................................................................................... 40

4-3 Access to physicians is similar for Medicare beneficiaries and privately insured people ............ 41

4-4 Percent of physicians accepting new patients, by type of insurance, 1999–2003......................... 42

4-5 Most beneficiaries had little or no problem accessing home health and 

 special therapy services ................................................................................................................ 43

4-6 Ethnic and racial disparities in delaying or failing to obtain care, 2003....................................... 44

4-7 Beneficiaries differ in their reports of obtaining needed, urgent, or routine care, 2004 ............... 45

Web links ...................................................................................................................................... 46

5 Medicare beneficiary and other payer financial liability ....................................... 47

5-1 Sources of supplemental coverage among noninstitutionalized Medicare beneficiaries, 2002.... 49

5-2 Sources of supplemental coverage among noninstitutionalized Medicare beneficiaries, 

 by beneficiaries’ characteristics, 2002.......................................................................................... 50

5-3 Total spending on health care services for noninstitutionalized FFS Medicare 

 beneficiaries, by source of payment, 2002.................................................................................... 51

5-4 Per capita total spending on health care services among noninstitutionalized 

 FFS beneficiaries, by source of payment, 2002............................................................................ 52

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

 FFS beneficiaries, by type of supplemental coverage, 2002......................................................... 53

5-6 Types of out-of-pocket spending among noninstitutionalized FFS beneficiaries, 2002............... 54

5-7 Sources of change in out-of-pocket spending among noninstitutionalized 

 FFS beneficiaries, 1993–2002 ...................................................................................................... 55

5-8 Out-of-pocket spending among noninstitutionalized FFS beneficiaries, 

 by out-of-pocket spending level, 2002.......................................................................................... 56

5-9 Out-of-pocket spending among noninstitutionalized FFS beneficiaries, 

 by type of supplemental coverage, 2002....................................................................................... 57

5-10 Out-of-pocket spending for premiums and health services per beneficiary, 

 by insurance and health status, 2002............................................................................................. 58

 Web links ...................................................................................................................................... 59
vii 

6 Retiree health benefits......................................................................................................... 61

Retiree health benefits, 2004: MedPAC’s supplement to the Kaiser/HRET survey of 

employer-sponsored health benefits ............................................................................................. 63

6-1 The percentage of firms with 200 or more workers offering retiree health 

benefits, 1988–2004...................................................................................................................... 64

6-2 Distribution of firms and retirees covered by health benefits, by firm size, 2004 ....................... 65

6-3 Firms offered health benefits to early retirees more often than to Medicare-age 

retirees, 1999–2004....................................................................................................................... 66

6-4 Jumbo firms were the most likely to offer health benefits to Medicare-age retirees in 2004....... 67

6-5 Two-thirds of workers in firms that offered supplemental retiree health benefits in 2004 

will be offered those benefits after they retire and enroll in Medicare ........................................ 68

6-6 Date of hire and union agreements often determine future retirees’ eligibility 

for health insurance coverage ....................................................................................................... 69

6-7 In 2004, firms reported they are more likely to eliminate benefits for new hires than 

for active employees who have not yet retired ............................................................................ 70

6-8 Medicare-age retirees paid about a quarter of their health benefit premiums in 2004.................. 71

6-9 Most Medicare-age retirees contribute to premiums for health benefits ...................................... 72

6-10 Most Medicare-age retirees had tiered prescription drug cost sharing in 2004 ........................... 73

6-11 Retirees and active workers are likely to pay a larger share of their health benefit premium ...... 74

Web links ...................................................................................................................................... 75

7 National health care and Medicare spending............................................................ 77 

7-1 Medicare made up about one-fifth of spending on personal health care in 2003 ......................... 79

7-2 Medicare’s share of total spending varies by type of service, 2003 ............................................ 80

7-3 Personal health care spending is increasing as a share of GDP .................................................... 81

7-4 Trustees project Medicare spending to increase as a share of GDP ............................................. 82

7-5 Changes in spending per enrollee, Medicare and private health insurance .................................. 83

7-6 Trustees and CBO project Medicare spending to grow about 10 percent over next 10 years ...... 84

7-7 Medicare spending is concentrated in certain services and has shifted over time ........................ 85

7-8 FFS program spending is highly concentrated in a small group of beneficiaries, 2002 ............... 86

7-9 Medicare HI trust fund is projected to be insolvent in 2020......................................................... 87

7-10 Medicare FFS providers: Spending, supply, and projected growth rates .................................... 88

 Web links ...................................................................................................................................... 89

8 Acute inpatient services....................................................................................................... 91 

Short–term hospitals 

8-1 Medicare’s hospital inpatient and outpatient spending, fiscal years 1992–2003.......................... 93

8-2 Diagnosis related groups with highest volume, fiscal year 2004.................................................. 94

8-3 Number of hospitals and Medicare discharges, by hospital group, 2003 ..................................... 95

8-4 Cumulative percentage change in Medicare acute inpatient PPS discharges, 1992–2003 ........... 96

8-5 Cumulative change in total admissions and total outpatient visits, 1992–2003............................ 97

8-6 Trends in Medicare and total hospital length of stay, 1992–2003 ................................................ 98
viii 

8-7 Cumulative change in Medicare inpatient days per beneficiary and discharges 

 per beneficiary, 1992–2002 .......................................................................................................... 99

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

reflecting 2005 payment policy under the MMA........................................................................100

8-9 Composition of the hospital market basket.................................................................................101

8-10 Cumulative change in Medicare acute inpatient PPS payments and costs per case, 

 and PPS operating update, 1992–2003 .......................................................................................102

8-11 Medicare acute inpatient PPS margin, 1992–2003 .....................................................................103

8-12 Medicare acute inpatient PPS margins, by urban and rural location, 1992–2003 ......................104

8-13 Medicare acute inpatient PPS margins, by teaching status, 1992–2003 .....................................105

8-14 Overall Medicare margin, 1997–2003 ........................................................................................106

8-15 Overall Medicare margins, by urban and rural location, 1997–2003 .........................................107

8-16 Overall Medicare margins, by teaching status, 1997–2003 ........................................................108

8-17 Overall Medicare margins, actual through 2003 and simulated for 2005 to account for 

 current policy, including MMA provisions.................................................................................109

8-18 Hospital total margin, 1992–2003...............................................................................................110

8-19 Total hospital margin, by urban and rural location, 1992–2003.................................................111

8-20 Total hospital margin, by teaching status, 1992–2003................................................................112

8-21 Hospitals with consistently negative overall Medicare margins tend to have 

above-average costs ....................................................................................................................113

8-22 Hospitals with consistently negative overall Medicare margins have a poor 

competitive position in their market areas ..................................................................................114

8-23 Relationship of acute inpatient PPS and overall Medicare margins, 2001 .................................115

8-24 Relationship of overall Medicare and total margins, 2001 .........................................................116

8-25 Change in Medicare hospital inpatient costs per discharge and private payer 

payment-to-cost ratio, 1986–2003 ..............................................................................................117

8-26 Mark-up of charges over costs for all patient care services, 1992–2003 ....................................118

8-27 Change in the number of critical access hospitals, 1999–2005 ..................................................119

 Specialty psychiatric facilities 

8-28 Medicare payments to inpatient psychiatric facilities, 1993–2004.............................................120

8-29 Inpatient psychiatric facilities, 1996–2005 .................................................................................121

 Web links ....................................................................................................................................122

9 Ambulatory care...................................................................................................................123

Physicians 

9-1 FFS Medicare spending and payment update for physician services, 1995–2009......................125

9-2 Medicare spending per FFS beneficiary on physician services, 1995–2013 ..............................126

9-3 The supply of physicians who furnish services to beneficiaries has increased...........................127

9-4 Spending growth varies by type of service, 2003–2004 .............................................................128

9-5 Volume grew more rapidly in 2004 than in previous years........................................................129

9-6 Medicare Economic Index input categories, weights, and projected price changes for 2006 ....130

9-7 Quarterly changes in professional liability insurance premiums, 1991–2004 ............................131

9-8 PLI payments vary by locality and service, as a percentage of total payments under 

 the Medicare fee schedule, 2002.................................................................................................132 

9-9 Work GPCI before the MMA established a floor of 1.00...........................................................133
ix 

Hospital outpatient services 

9-10 Spending on all hospital outpatient services, 1994–2004 ...........................................................134

9-11 Most hospitals provide outpatient services .................................................................................135

9-12 Payments and volume of services under the Medicare hospital outpatient PPS, 

by type of service, 2003..............................................................................................................136

9-13 Hospital outpatient services with the highest Medicare expenditures, 2003 ..............................137

9-14 Medicare coinsurance rates, by type of hospital outpatient service, 2003..................................138

9-15 Transitional corridor payments as a share of Medicare hospital outpatient 

 payments, 2001–2003 .................................................................................................................139

9-16 Medicare hospital outpatient, inpatient, and overall Medicare margins, 1997–2003 .................140

Ambulatory surgical centers

9-17 Medicare-certified ASCs increased over 50 percent, 1998–2004...............................................141

9-18 Over half of most common ambulatory surgical procedures were performed in 

hospital outpatient departments, 2001 ........................................................................................142

Imaging services

9-19 Medicare spending for imaging services, by type of service, 2003............................................143

9-20 Radiologists received almost half of Medicare payments for imaging services, 2003...............144

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

10 Post–acute care .....................................................................................................................147 

10-1 The number of post-acute care providers generally continues to grow ......................................149

10-2 Spending for post-acute care, by setting, 1999–2004 .................................................................150

10-3 One-third of beneficiaries discharged from hospitals use post-acute care, 2002........................151

Skilled nursing facilities 

10-4 Medicare spending for skilled nursing facility services generally increased 

 over the decade 1995–2004.........................................................................................................152

10-5 Medicare skilled nursing facility use increased between 1999 and 2002 ...................................153 

10-6 Medicare costs per day in freestanding SNFs grew at an average annual 

rate of 3.6 percent between 2000 and 2003 ................................................................................154

10-7 Medicare margins for freestanding skilled nursing facilities continue to be 

 in the double digits, 2001, 2003, and estimated 2005.................................................................155 

10-8 Distribution of SNF stays, by length of stay, in 2001.................................................................156 

10-9 RUG–III classification scheme ...................................................................................................157 

10-10 The highest percentage of Medicare-covered freestanding SNF days were in “very high” 

and “high” rehabilitation RUG–III groups in 2003 ....................................................................158

Home health services 

10-11 Spending for home health care, 1992–2004................................................................................159

10-12 Medicare home health care use, 1992–2003...............................................................................160

10-13 The home health product changed after the prospective payment system started ......................161

10-14 Therapy services provided in home health have increased.........................................................162 

10-15 Aggregate Medicare margins for all freestanding home health agencies 

remain in double digits, 2003, and estimated 2005.....................................................................163 
x 

10-16 Clinical, functional, and service information from OASIS determines 

patients’ home health case-mix classification.............................................................................164 

10-17 Top 10 resource groups in home health, 2002............................................................................165

Web links ....................................................................................................................................166 

11 Drugs ........................................................................................................................................167 

11-1 Sources of outpatient prescription drug coverage among noninstitutionalized 

beneficiaries, 2002 ......................................................................................................................169 

11-2 Sources of payment for prescription drugs 

among noninstitutionalized beneficiaries, 2002..........................................................................170 

11-3 Prescription drug spending per beneficiary, 2005 ......................................................................171 

11-4 Drug coverage among noninstitutionalized beneficiaries, 

by beneficiaries’ characteristics, 2002........................................................................................172 

11-5 Medicare spending and annual growth rates for Part B drugs ....................................................173 

11-6 Top 10 drugs covered by Medicare Part B, by share of expenditures, 2003 ..............................174

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

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

Dialysis 

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

are increasing over time..............................................................................................................179

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

 dialysis facilities, 1993–2003......................................................................................................180

12-3 Dialysis facilities’ capacity has increased steadily between 1994 and 2003 ..............................181

12-4 A disproportionate number of dialysis facilities that closed were small, 

 nonprofit, and hospital based ......................................................................................................182

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

12-6 Diabetics and the elderly are the fastest growing segments of the ESRD population ................184

12-7 Aggregate margins vary by type of freestanding dialysis facility, 2003.....................................185

Hospice 

12-8 The number of freestanding and for-profit hospices has increased the most..............................186

12-9 Hospice use has grown and remains higher for decedents in managed care...............................187

12-10 Growth in hospice use is greatest among beneficiaries with noncancer 

 diagnoses and those who are older..............................................................................................188

12-11 Recently, Medicare spending for hospice services has increased sharply ..................................189

12-12 Median stays remain stable while long stays grow rapidly ............................................190

Durable medical equipment 

12-13 Program payments continue to grow for durable medical equipment ........................................191

 Web links ....................................................................................................................................192 
xi 

13 Medicare+Choice and Medicare Advantage.............................................................193

13-1 Counties with MA plans, 2005 ...................................................................................................195

13-2 Enrollment in MA plans, 1994–2005..........................................................................................196

13-3 Counties, by MA payment rates, 2005........................................................................................197 

13-4 Lowest monthly premiums Medicare beneficiaries would have to pay to enroll 

 in an available Medicare plan, 2005 ...........................................................................................198

13-5 Distribution of plans and enrollees, by out-of-pocket cap, 2004 ................................................199

13-6 MA plan cost sharing for drugs covered under Medicare Part B, 2004......................................200

13-7 MA regions .................................................................................................................................201 

 Web links ....................................................................................................................................202

S E C T I O N 

Medicare beneficiary 

demographics 

 A Data Book: Healthcare spending and the Medicare program, June 2005 3

Chart 1-1. Aged beneficiaries account for the greatest 

 share of the Medicare population and program 

 spending, 2002 

 Percent of enrollees Percent of spending 

ESRD

0.5%

Aged

85.8%

ESRD

2.5%

Aged

87.2%

Disabled 

10.2%

Disabled 

13.4%

 

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

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

sum to 100 due to rounding. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

• Reflecting their greater share of the Medicare population, the highest percentage of 

Medicare expenditures is for aged beneficiaries. 

• A disproportionate share of Medicare expenditures is spent on 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: $6,211 is spent per aged 

beneficiary, $4,751 per (non-ESRD) disabled beneficiary, and $34,709 per ESRD beneficiary. 

On average, Medicare spending per beneficiary is $6,301. 
4 Medicare beneficiary demographics 

Chart 1-2. Medicare spending rises as beneficiaries age, 2002 

 Percent of enrollees Percent of spending 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

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

expenditures were $5,008 for those ages 65 to 74, $7,322 for those 75 to 84, and $9,053 for 

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

enrolled due to disability (both end-stage renal disease and non-ESRD), were $5,730. On 

average, Medicare spending per beneficiary was $6,301. 

• Much of the spending is concentrated in each age group among people with chronic 

conditions and those who die. 

Under 65

14%

65-74

43%

75-84

31%

85+

12%

Under 65

13%

65-74

34%

75-84

36%

85+

17%
 A Data Book: Healthcare spending and the Medicare program, June 2005 5

 Chart 1-3. Beneficiaries who report being in poor health 

 account for a disproportionate share of Medicare 

 spending, 2002 

 Percent of enrollees Percent of spending 

Poor

9%

Good or fair

52%

Poor

19%

Good or fair

59%

Excellent or 

very good

21%

Excellent or 

very good

39%

 

 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2002. Totals may not sum to 100 due to 

rounding. 

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

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

expenditures for those with excellent health are $3,502; $7,109 for those with good or fair 

health; and $13,099 for those with poor health. On average, Medicare spending per 

beneficiary is $6,301. 
6 Medicare beneficiary demographics 

Chart 1-4. 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

B

enefic ai r ei s (in mill oi ns)

Historical Projected

Source: MedPAC analysis of the Social Security Administration 2004 Trustees Report, Intermediate Assumptions. 

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

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

• The rate of increase in Medicare enrollment accelerates around 2010 when members of the 

“baby boom” generation start to become eligible and slows around 2030 when the entire 

baby boom generation has become eligible. 
 A Data Book: Healthcare spending and the Medicare program, June 2005 7

Chart 1-5. Characteristics of the Medicare population, 2002 

 Percent of the Percent of the 

Characteristic Medicare population Characteristic Medicare population 

Total (41,808,391*) 100% 

Sex Education 

 Male 44 No high school diploma 31% 

 Female 56 High school diploma only 29 

 Some college or more 38 

Race/ethnicity 

 White, non-Hispanic 79 Income status 

 African American, non-Hispanic 9 Below poverty 17 

 Hispanic 7 100–125% of poverty 9 

 Other 4 125–200% of poverty 20 

Age 200–400% of poverty 30 

 < 65 14 Over 400% of poverty 23 

 65–74 43 

 75–84 31 Supplemental insurance status 

85+ 12 Medicare only 10 

Health status Managed care 13 

 Excellent or very good 39 Employer 32 

 Good or fair 51 Medigap 22 

 Poor 9 Medigap/employer 4 

Residence Medicaid 16 

 Urban 76 Other 2 

 Rural 24 

Living arrangement 

 Institution 6 

 Alone 29 

 Spouse 49 

 Other 16 

 

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

MSAs. In 2002, poverty was defined as $8,628 for people living alone and as $10,885 for married couples. Totals may 

not sum to 100 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, 2002.

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

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

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

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

Chart 1-6. Characteristics of the Medicare population, 

 by rural and urban residence, 2002

 Percent of urban Percent of rural 

Characteristic Medicare population Medicare population 

Total 100% 100% 

 Urban 76% 

 Rural 24% 

Sex 

 Male 44 45 

 Female 56 55 

Race/ethnicity 

 White, non-Hispanic 77 86 

 African American, non-Hispanic 10 7 

 Hispanic 9 3 

 Other 4 4 

Age 

 < 65 14 15 

 65–74 43 44 

 75–84 32 30 

85+ 12 11 

Health status 

 Excellent or very good 40 37 

 Good or fair 52 51 

 Poor 8 13 

 

Income status

 Below poverty 16 20 

 100–125% of poverty 9 11 

 125–200% of poverty 20 22 

 200–400% of poverty 30 29 

 Over 400% of poverty 25 18 

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

MSAs. In 2002, poverty was defined as $8,628 for people living alone and as $10,885 for married couples. Totals may 

not sum to 100 due to rounding. 

 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

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

• Rural Medicare beneficiaries are more likely to be white (86 vs. 77 percent), to report being 

in poor health (13 vs. 8 percent), and to have income below 125 percent of poverty (31 vs. 

25 percent), compared to urban beneficiaries. 
 A Data Book: Healthcare spending and the Medicare program, June 2005 9

Chart 1-7. 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

Percent of benefic ai ries with disease/condition

Female

Male

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

• Arthritis, hypertension, osteoporosis, diabetes, and pulmonary disease 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. 
10 Medicare beneficiary demographics 

Web links. Medicare beneficiary demographics 

• The CMS Chart series provides information on the Medicare program, including beneficiary 

demographics. 

http://www.cms.gov/charts

• The CMS Data Compendium provides information on Medicare enrollment by state. 

http://www.cms.hhs.gov/researchers/pubs/datacompendium/current/ 

• 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/default.asp
S E C T I O N 

Dual eligible 

beneficiaries 

A Data Book: Healthcare spending and the Medicare program, June 2005 13

Chart 2-1. Dual eligible beneficiaries account for a 

disproportionate share of Medicare 

spending, 2002 

 Percent of enrollees Percent of spending

Dual eligible

16%

Nondual eligible

84%

Dual eligible

22%

Nondual eligible

78%

 

 

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

supplemental insurance. 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

• 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. (More information on dual eligibles can be found in Chapter 3 of MedPAC’s 

June 2004 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/June04_Ch3.pdf.) 

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

Dual eligibles account for 16 percent of Medicare beneficiaries and 22 percent of Medicare 

spending. 

• Dual eligibles cost Medicare about 1.5 times as much as nondual eligibles: $8,893 is spent 

per dual eligible beneficiary, and $5,815 is spent per nondual eligible beneficiary. 

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

and out-of-pocket across all payers⎯for dual eligibles averaged about $20,663 per person 

in 2002, almost twice the amount for other Medicare beneficiaries. 
14 Dual eligible beneficiaries

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

to be disabled or over 85 years old, 2002 

 Dual eligibles Nondual eligibles 

Under 65

37%

65-74

25%

75-84

23%

85+

15%

Under 65

10%

65-74

46%

75-84

33%

85+

11%

 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

• More than one-third of dual eligibles qualify for Medicare because they are disabled, and 

11 percent are age 85 or older. Dual eligibles are over three times more likely to be eligible 

for Medicare because they are disabled than the nondual eligible population. 
A Data Book: Healthcare spending and the Medicare program, June 2005 15

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

to report poorer health status, 2002 

 Dual eligibles Nondual eligibles 

Poor

18%

Good or fair

64%

Poor

7%

Good or fair

49%

Excellent or 

very good

43%

Excellent or 

very good

17%

 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

 Totals may not sum to 100 due to missing responses. 

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

good or fair status, but just under 20 percent of the dual eligible population report being in 

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

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

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

than do nondual eligibles. 

• Almost one-quarter of dual eligibles reside in an institution, compared with 3 percent of 

nondual eligibles. 
16 Dual eligible beneficiaries

Chart 2-4. Demographic differences between dual eligibles and 

nondual eligibles, 2002 

 Percent of dual Percent of nondual 

Characteristic eligible beneficiaries eligible beneficiaries 

Sex 

 Male 38% 45% 

 Female 62 55 

Race/ethnicity 

 White, non-Hispanic 55 84 

 African American, non-Hispanic 22 7 

 Hispanic 15 6 

 Other 8 3 

ADLs 

 No ADLs 43 70 

 1–2 ADLs 24 19 

 3–6 ADLs 33 11 

Residence 

 Urban 73 77 

 Rural 27 23 

Living arrangement 

 Institution 22 3 

 Alone 31 28 

 Spouse 16 55 

 Children, nonrelatives, others 31 13 

Education 

 No high school diploma 59 26 

 High school diploma only 21 31 

 Some college or more 16 42 

Income status 

 Below poverty 61 9 

 100–125% of poverty 18 8 

 125–200% of poverty 14 21 

 200–400% of poverty 4 35 

 Over 400% of poverty 2 27 

Supplemental insurance status 

 Medicare or Medicare/Medicaid only 91 12 

 Medicare managed care 0 16 

 Employer 1 38 

 Medigap 1 26 

 Medigap/employer 0 5 

 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 2002, poverty was defined as $8,628 for people living alone 

 and $10,885 for married couples. Totals may not sum to 100 due to rounding. 

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

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

• Dual eligibles are poor because they qualify for Medicaid due to low incomes: Over 60 

percent live below the poverty level, and 93 percent live below 200 percent of poverty. 

Compared to nonduals, dual eligibles are more likely to: be female, African American, or 

Hispanic; lack a high school diploma; have greater limitations in activities of daily living; 

reside in a rural area; and live in an institution, alone, or with persons other than a spouse. 
A Data Book: Healthcare spending and the Medicare program, June 2005 17

Chart 2-5. Differences in spending and service use between 

 dual eligibles and nondual eligibles, 2002 

 Dual eligible Nondual eligible 

 Service beneficiaries beneficiaries 

Average Medicare payment for all beneficiaries 

Total Medicare payments $8,893 $5,815 

Inpatient hospital 4,025 2,185 

Physiciana

 2,308 1,477 

Outpatient hospital 992 483 

Home health 421 219 

Skilled nursing facilityb

 823 260 

Hospice 203 91 

 

Percent of beneficiaries using service 

Percent using any type of service 91.2% 74.8% 

 

Inpatient hospital 26.9 16.8 

Physiciana

 89.5 73.0 

Outpatient hospital 73.0 53.8 

Home health 8.9 5.8 

Skilled nursing facilityb

 8.0 3.2 

Hospice 2.6 1.4 

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

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

 

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2002, which updates the previous 

analysis by Liu et al. in 1998. 

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

eligibles⎯$8,893 compared to $5,815. 

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

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

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

as on nonduals. 

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

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

those using services. A higher proportion of duals than nonduals uses at least one 

Medicare-covered service⎯91 versus 75 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. 
18 Dual eligible beneficiaries

Chart 2-6. Both Medicare and total spending are concentrated 

among dual eligible beneficiaries, 2002

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%

18%

30%

28%

40%

15%

39%

39%

5%

26%

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

Source: MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use files, 2002. 

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

beneficiaries. The costliest 20 percent of duals accounts for 79 percent of Medicare 

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

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

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

5 percent of beneficiaries, a quarter are dual eligible. 

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

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

duals accounts for 26 percent of total spending, which includes Medicare, Medicaid, 

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

spending). 

• On average, total spending for duals is almost twice as high as that for nonduals—$20,663 

compared to $11,073. 
A Data Book: Healthcare spending and the Medicare program, June 2005 19

Chart 2-7. Dual eligible beneficiaries report generally good 

access to care 

Question Dual eligible 

beneficiaries 

Nondual eligible 

beneficiaries 

Do you have a personal doctor or nurse? 

Yes 88.9% 93.6% 

In the last 6 months, if you needed care right 

away, did you usually or always get care as 

soon as you wanted? 

Yes 87.2 92.3 

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 

85.3 91.0 

Source: MedPAC analysis of CAHPS (Consumer Assessment of Health Plans Survey) for fee-for-service Medicare, 2003. 

• 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 rate their access to care lower than beneficiaries with 

other sources of supplemental insurance. 
20 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.gov/charts/medicaid/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 2005 23

Chart 3-1. Hospital mortality decreased from 1998 to 2003

 Risk-adjusted rates per 10,000

 Percent change Number of 

Diagnosis or procedure 1998 2002 2003 1998—2003 cases in 2003 

 

In-hospital mortality 

Pneumonia 1,032 949 876 –15.2% 72,160 

AMI 1,477 1,309 1,205 –18.4 39,549 

Stroke 1,240 1,159 1,081 –12.8 36,018 

CHF 585 474 409 –30.1 36,100 

GI hemorrhage 434 355 319 –26.5 10,624 

CABG 522 427 399 –23.6 7,768 

Craniotomy 963 930 881 –8.5 3,383 

AAA repair 1,178 1,130 1,096 –7.0 1,857 

30-day mortality

Pneumonia 1,531 1,557 1,543 0.8 123,792 

AMI 1,792 1,690 1,644 –8.3 53,571 

Stroke 1,808 1,807 1,812 0.3 58,814 

CHF 1,006 907 884 –12.1 72,252 

GI hemorrhage 718 649 638 –11.2 20,399 

CABG 496 412 399 –19.6 7,608 

Craniotomy 1,158 1,182 1,155 –0.2 4,374 

AAA repair 1,116 1,072 1,047 –6.2 1,786

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 1998 and 2003 on all conditions and 

procedures measured. The most substantial improvements occurred for congestive heart 

failure, gastrointestinal hemorrhage, and coronary artery bypass graft. 

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

of mortality following pneumonia, the most common precedent of mortality among the 

measures we examined, and stroke rose over the period. 

• However, 30-day mortality (as measured from admission) decreased more slowly than 

inpatient mortality between 1998 and 2003. 
24 Quality of care in the Medicare program

Chart 3-2. Hospital processes of care improving, but many 

rates still low, 2001–2003 

State median rate

Indicator 

Baseline 

2001 Q1-Q3 2003 Q3 Difference

AMI 

Aspirin at arrival 82.2% 88.1% 5.9 

Aspirin prescribed at discharge 84.0 90.1 6.1 

ACEI for LVSD* 65.0 68.7 3.7 

Adult smoking cessation advice/counseling 42.2 53.3 11.1 

Beta blocker prescribed at discharge 71.4 87.3 15.9 

Beta blocker at arrival 62.1 79.4 17.3 

Heart failure 

Appropriate discharge instructions 3.2 9.2 6.0 

LVF assessment 71.2 78.6 7.4 

ACEI for LVSD* 67.9 63.6 –4.3 

Adult smoking cessation advice/counseling 28.3 38.3 10.0 

Pneumonia 

Initial antibiotic received within 4 hours of hospital arrival 61.9 65.6 3.7 

Initial antibiotic selection for community-acquired pneumonia 59.8 73.2 13.4 

Blood cultures performed within 24 hours prior to or after hospital 63.2 63.9 0.7 

Blood cultures performed before first antibiotic received in hospital 82.4 82.9 0.5 

Influenza immunization 13.3 N/A N/A 

Pneumococcal immunization 16.3 33.1 16.8 

Adult smoking cessation advice/counseling N/A 41.7 N/A 

Oxygenation assessment 95.5 99.0 3.5 

SIP 

Prophylactic antibiotic received within 1 hour prior to surgery 47.3 63.2 15.9 

Prophylactic antibiotic selection 91.9 91.9 0.0 

Prophylactic antibiotic discontinued within 24 hours after surgery 42.0 40.8 –1.2 

Note: AMI (acute myocardial infarction), ACEI (angiotensin-converting enzyme inhibitor), LVSD (left ventricular systolic

dysfunction), LVF (left ventricular function), SIP (surgical infection prevention). CMS calculated each state rate and 

MedPAC calculated the state median rates. 

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

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

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

(100 percent is the goal on the measures). 

• Of the measures that had rates for both periods, 17 out of 19 improved. One of the 

measures that decreased (the ACEI for LVSD for heart failure) may have decreased due to 

a change in clinical practice. 

• Many of the rates remain too low. This is particularly true of the newer measures, 

such as whether patients discharged for heart failure were given appropriate discharge 

instructions, or whether prophylactic antibiotics were discontinued within 24 hours 

after surgery. 
 A Data Book: Healthcare spending and the Medicare program, June 2005 25

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

hospitalized beneficiaries, 1998–2003 

 Risk-adjusted rates per 10,000 Change in Observed 

 rate, 1998 adverse 

 1998 2000 2002 2003 to 2003 events, 2003 

 

Decubitus ulcer 206 225 251 267 61 151,376 

Failure to rescue 1,462 1,450 1,330 1,225 –237 65,216 

Postoperative PE 

or DVT 62 71 86 92 30 39,417 

Accidental puncture/ 

laceration 31 32 36 34 3 37,717 

Infection due to 

medical care 20 20 24 25 6 32,166 

Iatrogenic 

pneumothorax 9 8 8 8 –1 11,040 

Postoperative 

respiratory failure 25 34 46 50 25 10,208 

Postoperative sepsis 80 97 111 120 40 8,125 

Postoperative hemorrhage 

or hematoma 21 20 17 17 –4 7,589 

Postoperative physiologic 

and metabolic derangement 4 5 6 7 3 2,418 

Postoperative wound 

dehiscence 18 14 15 13 –4 1,990 

Postoperative hip fracture 3 3 3 3 0* 1,113 

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

*Increase not apparent due to rounding. 

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

 and methods. 

• From 1998 to 2003, 8 of 12 rates of adverse events experienced by hospitalized Medicare 

beneficiaries increased. 

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

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

Chart 3-4. Rates of potentially avoidable admissions, 

 2001–2003 

 2001 2003 Difference 

 (per 10,000) (per 10,000) (per 10,000) 

 

Congestive heart failure 1,052 1,077 25* 

COPD/Asthma 768 735 –33 

Diabetes long-term complications 193 178 –15 

Diabetes short-term complications 44 35 –9 

Hypertension 26 24 –2 

Unstable angina/ED** 13 9 –4 

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

65, in Medicare Advantage plans, hospice users, anyone not continuously enrolled for one of two time periods (2000–

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

 *Not a statistically significant result. All others are statistically significant at the 5 percent level or below. 

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

Source: MedPAC analysis of 5 percent sample of beneficiaries’ outpatient and inpatient claims for 2001 and 2003. 

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

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

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

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

hospital. 

 

• With the exception of congestive heart failure, all rates of potentially avoidable admissions 

(for persons with these conditions) decreased. 

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

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

both for long- and short-term complications. 

• It is also notable that persons with hypertension were hospitalized less, given that the 

 prevalence of hypertension has increased. 
 A Data Book: Healthcare spending and the Medicare program, June 2005 27

Chart 3-5. Outside the hospital, processes of care are 

improving, but rates are still low, 2001–2003 

2001 2003 Q3 Process State median rate State median rate Difference 

 

Adult immunization 

 Influenza 72 73 1 

 Pneumonia 65 67 2 

Breast cancer 

Mammography 60 59 –1 

Diabetes 

HgbA1c 77 82 5 

 Eye exam 69 69 0 

 Lipid profile 75 83 8 

Note: HgbA1c (hemoglobin A1c). CMS calculated each state rate and MedPAC calculated the state median rates. 

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

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

(a perfect performance is 100 percent). 

• Care has improved on four of six measures of ambulatory care used between 2001 

and 2003. 

• Because significant numbers of Medicare beneficiaries are still not receiving services 

necessary to manage a chronic condition or prevent acute episodes, many opportunities for 

further improvement exist. 
28 Quality of care in the Medicare program

Chart 3-6. Patient-centeredness of care: Beneficiaries rate 

interactions with health care providers highly

Question 2000 2001 2002 2003 

Do you have a personal doctor or nurse? 

 Yes N/A 89.0% 89.0% 88.0% 

Care (Percent who rated provider 8 or higher 

on a scale of 0 to 10)

 How would you rate your personal 

 doctor or nurse? 84.7 83.6 83.7 84.6 

 How would you rate the specialist you 

 saw most often in the last 6 months, including 

 a personal doctor if he or she is a specialist? 85.5 83.3 84.4 85.3 

 How would you rate all the health care you 

 got in the last 6 months from all doctors and 

 other health providers? 85.4 84.8 85.2 85.3 

Quality of interactions 

 In the last 6 months, how often did doctors or 

 other health providers: 

 Usually or always listen carefully to you? 94.8 94.8 94.6 95.0 

 Usually or always explain things in a way 

 you could understand? 93.4 93.7 93.8 94.3* 

 Usually or always show respect for what 

 you had to say? 94.9 94.7 94.8 95.2* 

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

Note: *Indicates a statistically significant change between 2000 and 2003, at a 95 percent confidence level (p<0.05). 

Percentages may not sum to 100 due to rounding. 

Source: MedPAC analysis of Consumer Assessment of Health Plans Survey (CAHPS) for fee-for-service Medicare, 2000–2003. 

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

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

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

last 6 months. 

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

For example, in 2003, between 94 and 95 percent of beneficiaries reported that their doctors 

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

in a way that they could understand, and showed respect for what they had to say. 
 A Data Book: Healthcare spending and the Medicare program, June 2005 29

Chart 3-7. Post-hospital acute care episodes ended differently 

across settings and over time 

 Percent of Episodes 

 Potentially avoidable 

 Lived, Lived, no readmissions as a 

 entered hospice, Returned fraction of all 

 Year Died hospice readmitted home readmissions

 

All Episodes 

1996 8% 1% 13% 78% 0.27 

 1999 9 1 15 75 0.29 

 2002 10 1 15 74 0.27 

 

 

Episodes with only one post-acute setting 

 

HHA 1996 6 1 13 80 0.30 

 1999 6 1 14 79 0.32 

 2002 6 1 10 83 0.28 

SNF 1996 21 1 22 56 0.26 

 1999 20 2 23 56 0.27 

 2002 18 2 25 54 0.28 

Long term care 1996 6 0 17 76 0.18 

hospital, IRF, or 1999 8 0 18 74 0.20 

psychiatric 2002 8 1 18 73 0.21 

hospital 

Episodes with two or more post-acute settings 

SNF + HHA 1996 5 1 11 84 0.27 

 1999 4 1 12 83 0.31 

 2002 5 1 9 85 0.30 

Other 1996 16 1 16 67 0.28 

 1999 16 1 18 65 0.30 

 2002 15 2 17 66 0.30 

Note: HHA (Home health agency), SNF (skilled nursing facility), IRF (inpatient rehabilitation facility). Other includes all episodes 

that included more than one post-acute setting, other than the combination of SNF and HHA, which is noted separately. 

• Though there were dramatic changes in payment systems throughout post-acute care 

between 1996 and 2002, there is little change in episode termination. In fact, the overall 

rates of potentially avoidable readmissions as a percent of all admissions were the same in 

1996 and 2002. 

• These data must be interpreted with caution because they have not been adjusted to 

account for differences in patient populations across settings. 
30 Quality of care in the Medicare program

Chart 3-8. SNF patients’ adjusted readmission rates for five 

potentially preventable conditions have increased 

Condition 1999 2000 2001 2002 

Electrolyte imbalance 3.7% 3.7% 4.1% 4.0% 

Respiratory infection 3.0 2.9 3.1 3.2 

Congestive heart failure 3.2 3.3 3.7 3.7 

Sepsis 1.2 1.2 1.3 1.3 

Urinary tract infection 2.1 2.2 2.4 2.4 

 

Note: Data for 2002 are based on stays beginning between January and May 2002; results from other years reflect a full year of

data. These rates were calculated using all Medicare SNF stays and are controlled for diagnosis and functional severity 

of patients. 

Source: MedPAC analysis of Medicare claims data. To perform this analysis, MedPAC used a program developed by Andrew M. 

Kramer, MD, and Ron Fish, MBA, at the Center on Aging, University of Colorado Health Sciences Center. 

• Researchers developed these specific indicators because they are affected by nurse staffing 

levels, are of a sufficiently high incidence to be stable, can be adjusted for risk, and have 

data available to measure their incidence. 
 A Data Book: Healthcare spending and the Medicare program, June 2005 31

Chart 3-9. Home health users experienced small improvements 

in outcomes, 2002–2004 

 

 June–May June–May 

Measure 2002–2003 2003–2004 

Improvement in: 

 walking around 34% 36% 

 getting out of bed 49 51 

 toileting 60 62 

 bathing 57 60 

 managing oral medications 35 38 

 getting dressed 62 65 

Stabilization at bathing 91 92 

Patients have less pain 57 59 

Patients who are confused less often 40 42 

Note: Scores are percent of patients with less than perfect scores who showed any improvement or patients with more than 

minimum scores who did not decline (stabilization). 

Source: 2003 and 2004 Home Care Compare from CMS. 

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

small improvement. 

• More information is available at www.medicare.gov/Hhcompare/Home.asp. 

 
32 Quality of care in the Medicare program

Chart 3-10. The quality of dialysis care has generally improved 

Outcome measure 1999 2000 2001 2002 

Percent of in-center 

hemodialysis patients: 

 Receiving inadequate dialysis 16 14 11 11 

 With low anemia levels 32 26 24 21 

 Who are malnourished 20 20 18 19 

 Dialyzed with an AV fistula 27 30 31 33 * 

Percent of peritoneal patients: 

 Receiving inadequate CAPD 32 31 32 29 

 Receiving inadequate CCPD 35 38 30 34 

 With low anemia levels 31 27 24 21 

 Who are malnourished 44 44 39 40 

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

dialysis). The two predominant types of peritoneal dialysis are CAPD and CCPD. 

 *An increase on this measure indicates improved quality, as opposed to the other measures, where a decrease indicates 

improved quality. 

Source: Compiled by MedPAC from 1999–2003 Annual Reports for ESRD Clinical Performance Measures Project from CMS. 

 

• The quality of dialysis care has improved on some measures. Between 1999 and 2002, the 

proportion of both hemodialysis and peritoneal patients receiving inadequate dialysis and 

having low anemia levels declined. 

• 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 27 to 33 percent of 

hemodialysis patients between 1999 and 2002. However, this rate still falls short of 

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

hemodialysis patients have an AV fistula. 

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

CMS website, available at http://www.cms.hhs.gov/esrd/3.asp.
 A Data Book: Healthcare spending and the Medicare program, June 2005 33

Chart 3-11. Plans improve, but rates are still low on some 

measures, 2000–2003 

Measure 2000 2001 2002 2003 

Advising smokers to quit 59.7% 60.8% 61.5% 63.3%* 

Beta-blocker treatment after heart attack 89.3 92.9 93.0 92.9* 

Breast cancer screening 73.9 75.3 74.5 74.0 

Cholesterol management 

 Control 52.9 58.4 62.3 66.7* 

 Screening 70.6 75.5 77.7 81.0* 

Controlling high blood pressure 46.7 53.6 56.9 61.4* 

Comprehensive diabetes care 

 Eye exams 62.8 66.0 68.4c

 64.9c 

 HbA1c testing 82.5 85.7 85.0 87.9* 

 Lipid control 50.9 57.5 62.6 67.7* 

 Lipid profile 80.5 85.7 87.9 91.1* 

 Monitoring diabetic nephropathy 45.0 51.9 57.3c

 53.6c 

 Poor HbA1c controla 33.4a 26.8a 24.5a 23.4* 

Antidepressant medication managementb 

 Acute phase N/A 51.3 52.1 53.3d 

 Continuation phase N/A 36.8 37.7 39.2d 

 Contacts N/A 11.9 10.8 10.5d 

Follow-up after hospitalization for mental illness 

 Less than 7 days 37.5 37.2 38.7 38.8 

 Less than 30 days 59.3 60.6 60.6 60.3 

Note: HbA1c (hemoglobin A1c). N/A (not available). Rates refer to patients for whom the treatments were clinically indicated.

 * The changes between 2000 and 2003 on these indicators are statistically significant. a

 Lower rates are better than higher ones for this measure. 

b

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

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

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

 The definition of these measures changed in 2003, making comparisons difficult. 

 d These rates were not compared from 2000 because no rate existed in 2000. 

 Source: National Committee For Quality Assurance 2003, The State of Health Care Quality. Washington, DC: NCQA. 

• Nine out of the 12 measures that are comparable between 2000 and 2003 improved. 

None went down, but three of the indicators did not improve at a statistically significant rate. 

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

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

Chart 3-12. Patient experience scores: comparison of 

MA and FFS 

 

 MA FFS 

Measure 2001 2002 2003 2001 2002 2003 

 

No or small problem getting care when needed 94% 93% 94% 97% 95% 95% 

Usually or always got care without long waits 87 81 83 87 81 84 

Doctors in health plan usually or always 

 communicate well 93 93 93 94 94 94 

None or small problem seeing a specialist N/A 92 92 N/A 95 95 

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

Rated health plan 8–10 77 76 70 78 77 69 

Note: MA (Medicare Advantage), FFS (fee-for-service), N/A (not available). The ratings on the last two indicators show the 

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

Source: 2001–2003 Consumer Assessment of Health Plans Survey (CAHPS) data for Medicare Advantage plans and the fee-forservice program from CMS. 

• FFS beneficiaries were asked to rate Medicare as a health plan, while MA beneficiaries 

were asked to rate the plan in which they were enrolled. 

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

stable over time. 

 

• Most beneficiaries report obtaining care when they need it and do not report long waits. 

• Overall health plan ratings for both MA and FFS plans declined between 2002 and 2003. 
 A Data Book: Healthcare spending and the Medicare program, June 2005 35

Web links. Quality of care in the Medicare program 

• 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 

• Chapter 2 of the MedPAC March 2005 Report to the Congress includes further information 

on quality in hospitals, skilled nursing facilities, home health agencies, and outpatient 

dialysis services. 

 http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02.pdf 

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

improve care through pay for performance incentives and information technology. 

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

• The CMS website provides further information on CMS quality initiatives. 

http://cms.hhs.gov/quality

• 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 2005 39

Chart 4-1. Beneficiaries’ reports of difficulties obtaining care, 

 1993–2003 

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

5

10

15

Percent of benef ci ai r ei s

10.4

7.0

8.2

7.4

5.0 5.1

3.4 3.6

4.7

Delayed health care due to cost

Did not see doctor

Trouble getting health care

a

b

 c

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

doctor or other medical person, but did not. 

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

 

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

• In 2003, 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, 10.4 percent of beneficiaries 

 answered yes in 1993, compared to 8.2 percent in 2003. 

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

 declined from 7.4 percent to 5.1 percent in 2003. 

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

relatively stable since 2000. However, since 1993, the beneficiaries who reported trouble 

getting health care increased from 3.4 percent to 4.7 percent in 2003. 

 
40 Access to care in the Medicare program

Chart 4-2. Fewer aged beneficiaries delayed or failed to obtain 

care due to cost, compared with younger Americans 

Delayed getting care due to cost 

7.8 7.9

9.1

3.6 3.6 3.7

1999 2001 2003

0

2

4

6

8

10

P

erc

ent of b

enef ci ai r ei s

*

Failed to obtain care due to cost 

5.4 5.7

6.7

2.1 2.2

2.7

1999 2001 2003

0

2

4

6

8

P

erc

ent of b

enef ci ai r ei s

45-64 65+

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

 *Statistically significant change from 1999. 

Source: National Center for Health Statistics, Center for Disease Control and Prevention: National Health Interview Survey, 1999, 

2001, 2003. 

 

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

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

than problems reported by persons 45–64 years old. Increases in reported problems for 

Medicare beneficiaries are not statistically significant. 
 A Data Book: Healthcare spending and the Medicare program, June 2005 41

Chart 4-3. Access to physicians is similar for Medicare 

beneficiaries and privately insured people 

Medicare Medicare Privately insured 

 beneficiaries beneficiaries people 

 (age 65+) (age 65+) (age 50-64) 

 2003 2004 2004 

 

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?” 

Primary care physician 

 No problem 75% 77% 73% 

 Small problem 18 11 15 

 Big problem 7 11 13 

Specialist 

 No problem 85% 89% 83% 

 Small problem 8 5 8 

 Big problem 5 5 8 

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 71% 73%* 66%* 

 Sometimes 21 21* 26* 

 Usually 3 4 5 

 Always 5 2 2 

For illness or injury 

 Never 80% 83%* 77%* 

 Sometimes 16 13* 19* 

 Usually 3 2 3 

 Always 1 2 2 

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% 6%* 11%* 

Note: Numbers may not sum to 100 percent due to rounding. Missing responses are not presented. For the 2003 survey, 

n=1040 Medicare beneficiaries; for the 2004 survey n=4122 (2087 Medicare; 2035 privately insured). 

 *Indicates a statistically significant difference between the 2004 Medicare and privately insured populations, at a 95% 

confidence level. 

 

Source: MedPAC sponsored telephone surveys, conducted September-October 2003 and August-September 2004. 

• The large majority of Medicare beneficiaries (88 percent) and people age 50 to 64 (also 88 

percent) reported either no problem or a small problem with access to physicians in 2004. For 

most indicators, Medicare beneficiaries enjoyed similar or better access than their privately 

insured counterparts. 

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

primary care physician than a specialist. 

• Most Medicare beneficiaries and people age 50 to 64 did not have to wait often to get an 

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

illness or injury appointments than for routine care. 

• In 2004, 6 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. 
42 Access to care in the Medicare program

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

type of insurance, 1999–2003 

Insurance type 1999 2000 2001 2002 

 

All specialties 

 Any patients 95.5% 91.7% 93.8% 94.9% 

 Private insurance 91.8 88.5 84.9 85.8 

 Medicare 90.0 87.9 88.4 87.0 

 Medicaid 72.5 71.1 71.6 70.4 

Primary care 

 Any patients 92.6 87.9 90.5 93.0 

 Private insurance 89.6 85.1 82.2 85.3 

 Medicare 88.1 84.2 86.0 83.1 

 Medicaid 71.0 65.8 66.5 66.0 

Surgical specialties 

 Any patients 98.8 97.9 98.2 98.6 

 Private insurance 95.4 96.5 89.5 92.3 

 Medicare 94.8 96.8 93.7 96.4 

 Medicaid 83.1 82.3 80.4 79.8 

Medical specialties 

 Any patients 97.2 92.1 94.6 94.3 

 Private insurance 91.7 86.1 84.4 79.3 

 Medicare 88.2 85.2 86.3 83.7 

 Medicaid 62.6 68.7 70.4 67.9 

Note: Survey excludes pediatric specialties, non-office-based specialties, and federally-employed physicians. Patients who fall

under the self-pay and no charge/charity insurance types are included in the calculation of the “any patients” insurance type 

category, but are not shown separately on this table. 

Source: The National Ambulatory Medical Care Survey (NAMCS), Physician Screen, 1999–2002. 

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

85 percent between 1999 and 2002. 

• Overall physician acceptance of new patients fell a little for patients with private insurance, 

Medicare, and Medicaid. The share of physicians accepting privately insured patients fell slightly 

more than Medicare patients. 

• For each year between 1999 and 2002, specialists and surgeons were more likely to accept new 

Medicare patients than primary care physicians. The share of primary care physicians who accept 

new patients dropped at about the same rate for both Medicare and privately insured patients. 

• Surgeons were most likely to accept new patients across all years (1999–2002) and all patient 

types. The share of surgeons who accept new Medicare patients increased slightly to 96 percent in 

2002, but decreased for privately insured patients to 92 percent. 

• For privately insured patients, the share of medical specialists accepting new patients dropped 

from 92 to 79 percent (13 percentage points); for Medicare patients, the share dropped less—from 

88 to 84 percent (4 percentage points). 
 A Data Book: Healthcare spending and the Medicare program, June 2005 43

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

 accessing home health and special therapy services 

 Home health Special therapy 

 2000 2001 2002 2003 2000 2001 2002 2003 

 

Did you experience a problem? 

No problem 76% 74% 76% 77%* 83% 84% 85% 85%** 

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

A big problem 11 12 12 11 8 7 7 6** 

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

 total 100 due to rounding. 

 *The difference between 2002 and 2003 is significant at the p<.05 level. 

 ** The difference between 2000 and 2003 is significant at the p<.05 level. 

Source: MedPAC analysis of Consumer Assessment of Health Plans Survey, 2000–2003. 

• Most beneficiaries had little or no problem accessing home health services (89 percent) and 

special therapy services (93 percent—which includes physical and occupational therapies 

and speech-language pathology services). 

• In 2003, 77 percent of beneficiaries reported having no problems accessing home health 

 services, a slight increase over the share in 2000. 

• In 2003, 85 percent of beneficiaries reported having no problems accessing special therapy 

 services, a slight increase over the share in 2000. 
44 Access to care in the Medicare program

Chart 4-6. Ethnic and racial disparities in delaying or failing 

 to obtain care, 2003 

Delayed getting care due to cost 

Failed to obtain care due to cost 

2.7

2.3

4.5

5.2

All White, non-Hispanic Black, non-Hispanic Hispanic

0

1

2

3

4

5

6

Percent of benef ci ai r ei s

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

Source: National Center for Health Statistics, Center for Disease Control and Prevention: National Health Interview Survey, 2003. 

 

• Few persons over 65, regardless of race or ethnicity, report delaying or failing to obtain care. 

• Hispanics were more likely to report problems and white, non-Hispanics were least likely to 

report problems. 

3.7

3.4

4.8

5.9

All White, non-Hispanic Black, non-Hispanic Hispanic

0

1

2

3

4

5

6

7

Percent of benefic ai ries
 A Data Book: Healthcare spending and the Medicare program, June 2005 45

Chart 4-7. Beneficiaries differ in their reports of obtaining 

needed, urgent, or routine care, 2004

 No problem Always got care as 

 getting soon as wanted 

Beneficiary characteristic needed care Urgent Routine 

 

Overall 90% 73% 63% 

Aged (65 years and older) 92 76 64 

Disabled (Under 65) 83 63 56 

White 92 75 64 

African American 85 68 63 

Hispanic 81 61 55 

Medicare only 84 66 61 

Dually eligible 81 67 59 

Supplemental Insurance 93 76 64 

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

Analysis 2004, submitted to CMS.

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

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

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

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

may not get it as soon as they want it. 

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

receiving necessary, urgent, or routine care. 

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

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

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

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

same experience. 

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

routine care. 
46 Access to care in the Medicare program

Web links. Access to care in the Medicare program 

• 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 

• Chapter 2B of the MedPAC March 2005 Report to the Congress provides more information 

on beneficiary access to physicians. 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02b.pdf 

• Section 5 of the MedPAC 2002 Survey of Physicians About the Medicare Program provides 

more information about beneficiary access to physicians. 

http://www.medpac.gov/publications/contractor_reports/Mar03_02PhysSurv_summary2.pdf

• The Commonwealth Fund released a chart book in Spring 2005 which had further 

information on access in the Medicare program. 

http://www.cmwf.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 2005 49

Chart 5-1. Sources of supplemental coverage among 

 noninstitutionalized Medicare beneficiaries, 2002 

Medigap

29.6%

Employer sponsored

31.4%

Medicaid

12.9%

Medicare managed care

15.0%

Other public sector

2.2%

No supplemental coverage

9.0%

Note: Beneficiaries are assigned to the supplemental coverage category that applied for the most time in 2002. They could have 

had coverage in other categories throughout 2002. 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 2002 or had Medicare as a second payer. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

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

Medicare benefit package. Ninety-one percent of beneficiaries have supplemental coverage 

or participate in Medicare managed care. 

• Sixty-one percent have Medicaid supplemental coverage such as Medigap (30 percent) or 

employer-sponsored retiree coverage (31 percent). 

• Thirteen percent have Medicaid coverage. 

• Fifteen percent participate in Medicare managed care. This includes Medicare+Choice 

(now Medicare Advantage), cost, and health care prepayment plans. These types of 

arrangements generally replace Medicare coverage and often add to it. 
50 Medicare beneficiary and other payer financial liability

Chart 5-2. Sources of supplemental coverage among 

noninstitutionalized Medicare beneficiaries, by 

beneficiaries’ characteristics, 2002 

 Number of Employer- Medicare Other 

 beneficiaries sponsored Medigap managed public Medicare 

 (thousands) insurance insurance Medicaid care sector only 

All beneficiaries 35,684 31.4% 29.6% 12.9% 15.0% 2.2% 9.0% 

Age 

 < 65 4,499 17.2 5.7 44.7 8.5 3.6 20.2 

 65–69 8,039 36.8 28.1 8.7 15.3 2.1 8.9 

 70–74 7,791 33.9 32.5 7.1 16.4 2.3 7.7 

 75–79 6,889 32.7 34.3 7.9 17.2 1.5 6.4 

 80–84 4,882 33.0 35.9 8.9 14.5 1.7 6.1 

 85+ 3,585 26.6 38.9 10.0 15.6 1.8 7.2 

Income status 

 Below poverty 5,724 9.4 16.3 51.5 9.6 1.6 11.7 

 100–125% of poverty 3,413 16.6 24.5 26.4 15.4 3.3 13.9 

 125–200% of poverty 7,327 25.9 31.3 7.7 17.9 3.8 13.4 

 200–400% of poverty 10,959 39.9 33.1 1.4 17.4 1.5 6.7 

 Over 400% of poverty 8,190 46.3 34.9 0.4 12.6 1.4 4.4 

Eligibility status 

Aged 31,070 33.4 33.1 8.3 15.9 2.0 7.4 

 Disabled 4,346 16.6 5.7 44.4 8.8 3.7 20.7 

 ESRD 267 34.1 12.9 40.5 8.4 0.0 4.1 

Residence 

Urban 27,138 32.5 26.5 12.1 18.8 2.1 7.9 

 Rural 8,513 27.7 39.5 15.1 2.7 2.2 12.8 

Sex 

 Male 15,723 32.9 26.2 11.8 14.6 2.4 12.0 

 Female 19,961 30.1 32.3 13.7 15.2 2.0 6.7 

Health status 

 Excellent/very good 14,633 34.4 33.5 6.3 16.4 1.6 7.8 

 Good/fair 17,890 29.7 28.5 15.9 14.6 2.4 8.9 

 Poor 2,986 26.6 16.4 27.8 10.7 2.9 15.6 

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

time in 2002. They could have had coverage in other categories throughout 2002. Medicare managed care includes 

Medicare+Choice, cost, and health care prepayment plans. Other public sector includes federal and state programs not 

included in other categories. In 2002, poverty was defined as $8,628 for people living alone and as $10,885 for married 

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

outside MSAs. Analysis includes only beneficiaries living in the community. It only excludes beneficiaries who were not in 

both Part A and Part B throughout their enrollment in 2002 or had Medicare as a second payer. In previous editions of the 

Data Book, this analysis included beneficiaries only in Part A or Part B and those who had Medicare as a second payer. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

• Employer-sponsored supplemental coverage is most common among those who are age 65 to 84, higher income 

(above 200 percent of poverty), eligible due to age or ESRD, urban dwelling, male, and who report excellent or 

very good health. 

• Medigap is most common among those who are “older” aged (age 80 or older), middle or high income (above 

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

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

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

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

and 400 percent of poverty), eligible due to age, urban dwelling, and who report excellent or very good health. 

• Lack of supplemental coverage (Medicare coverage only) is most common among beneficiaries who are under 

age 65, with income between 100 and 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 2005 51

Chart 5-3. Total spending on health care services for 

 noninstitutionalized FFS Medicare beneficiaries, 

 by source of payment, 2002 

Medicare

Private supplements

Per capita total spending = $10,032

Beneficiaries' 

direct spending

16%

10%

20%

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, 2002. 

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

services (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) averages $10,032. 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 

$5,410 per beneficiary.

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

and Medigap—pay 20 percent of beneficiaries’ costs, or an average of $2,004 per beneficiary.

• Beneficiaries pay 16 percent of their health care costs out of pocket, with an average of 

$1,594 of spending per beneficiary.

• Public sources of supplemental coverage—primarily Medicaid—pay 10 percent of 

beneficiaries’ health care costs, or an average of $1,023 per beneficiary. 
52 Medicare beneficiary and other payer financial liability

Chart 5-4. Per capita total spending on health care services 

 among noninstitutionalized FFS beneficiaries, by 

 source of payment, 2002 

0-10 10-25 25-50 50-75 75-90 > 90

Groups of beneficiaries ranked by total spending (percentile ranges)

0

10,000

20,000

30,000

40,000

50,000

60,000

Dol al rs

Medicare

Supplemental payers

Direct spending

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

Medicare cost sharing and noncovered services. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

• Total spending on health care services varies dramatically among fee-for-service (FFS) 

beneficiaries living in the community. Spending for the 10 percent of beneficiaries with the 

highest total spending averages $49,200. Spending for the 10 percent of beneficiaries with 

the lowest total spending (including those with no spending) averages $208. 

• 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 68 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 9 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 2005 53

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

among noninstitutionalized FFS beneficiaries, 

by type of supplemental coverage, 2002

5,593 6,092

5,145

7,535

3,696

5,881

2,869 1,570 3,284

444

619

537

3,362

915

2,004

1,446 1,936

1,799

858

2,023

1,893

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

Dol al rs

Direct spending Public supplemental Private supplemental Medicare

13

50

57

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

time in 2002. They could have had coverage in other categories throughout 2002. 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 2002 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, 2002. 

• 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, 76 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, supplemental coverage is the second largest source of payment. However, 

among those with Medicare only, beneficiaries’ direct spending is the second largest source 

of payment. 
54 Medicare beneficiary and other payer financial liability

Chart 5-6. Types of out-of-pocket spending among 

 noninstitutionalized FFS beneficiaries, 2002 

Noncovered services

42.6%

Supplemental premiums

29.8%

Part B premiums

16.9%

Per capita out-of-pocket spending = $2,993

Cost sharing on Medicare services

 10.7%

Note: FFS (fee-for-service). Analysis includes only FFS beneficiaries living in the community. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2002 

• Many beneficiaries have substantial health care liabilities that Medicare does not cover. 

Medicare has cost sharing on services it covers, and in the year represented by the data 

(2002), Medicare did not cover services such as most outpatient prescription drugs and 

dental care. Beginning in 2006, Medicare will have a voluntary prescription drug program. 

• The cost sharing and noncovered services must be paid out of pocket by beneficiaries or 

through supplemental coverage. Beneficiaries often pay out of pocket for some or all 

premiums for supplemental coverage. Moreover, they generally pay out of pocket for the 

Part B premium. 

• Average per capita out-of-pocket spending in 2002 was $2,993 for fee-for-service 

beneficiaries living in the community. Noncovered services made up the largest share— 

43 percent—of that amount in 2002. The share of out-of-pocket spending attributable to 

noncovered services will likely decline in 2006, when the voluntary drug program begins. 
A Data Book: Healthcare spending and the Medicare program, June 2005 55

Chart 5-7. Sources of change in out-of-pocket spending 

 among noninstitutionalized FFS beneficiaries, 

 1993–2002 

Noncovered services

49.2%

Supplemental premiums

29.5%

9.7%

Part B premiums

11.6%

Cost sharing

on Medicare services

Note: FFS (fee-for-service). Analysis includes only FFS beneficiaries living in the community. Analysis does not adjust 

for inflation. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2002 

• Some components of out-of-pocket spending have contributed much more than others to 

overall increases in out-of-pocket spending. Among fee-for-service beneficiaries living in the 

community, per capita out-of-pocket spending increased from $1,784 in 1993 to $2,993 in 

2002, about 5.9 percent annually. Noncovered services, such as outpatient prescription 

drugs, account for the largest share—49 percent—of the increase. 

• Out-of-pocket spending may actually decline in 2006 when the voluntary prescription drug 

program begins. Moreover, the share of the growth that is attributed to noncovered services 

will likely decline. 
56 Medicare beneficiary and other payer financial liability

Chart 5-8. Out-of-pocket spending among noninstitutionalized 

 FFS beneficiaries, by out-of-pocket spending 

level, 2002 

250 560 608 605

264

451 785

1,159

1,924

613

1,050

3,245

< 25 25-50 50-75 75-100

Groups of beneficiaries ranked by out-of-pocket spending (percentile ranges)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Per capi at out-of-pocket spend ni g (dol al rs)

Noncovered services

Supplemental premiums

Cost sharing

Part B premiums

186

37

 50

 184

Note: FFS (fee-for-service). Sample of 9,835 includes only community-dwelling, FFS beneficiaries in 2002. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

• The level of out-of-pocket spending varies widely among fee-for-service beneficiaries living 

in the community. The 25 percent of beneficiaries with the lowest out-of-pocket spending 

average $523. The 25 percent of beneficiaries with the highest out-of-pocket spending 

average $6,600. 

• The composition of out-of-pocket spending changes as spending increases. Noncovered 

services and supplemental premiums tend to represent a larger share as out-of-pocket 

spending increases. Relative to the other categories, cost sharing maintains a more 

constant share as out-of-pocket spending increases. Finally, the Part B premium tends to 

represent a decreasing share as out-of-pocket spending increases, even though the 

magnitude of out-of-pocket spending on the Part B premium tends to increase. The 

relatively low level of out-of-pocket spending on the Part B premium in the lowest quartile 

($250) reflects, in part, the fact that beneficiaries eligible for Medicaid do not pay out of 

pocket for the Part B premium. 
A Data Book: Healthcare spending and the Medicare program, June 2005 57

Chart 5-9. Out-of-pocket spending among noninstitutionalized 

 FFS beneficiaries, by type of supplemental 

 coverage, 2002 

616 608 635 614 615

281 245 457

196

651 558

797

1,736

1,957

1,165

1,691

1,342

662

1,373 1,335

Employer 

sponsored

Medigap Medigap & 

employer

Medicaid No 

supplemental 

coverage

Other public 

sector

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

D

ol al rs

Noncovered services

Supplemental premiums

Cost sharing

Part B premiums

 27 10

 7

85

Note: FFS (fee-for-service). Beneficiaries are assigned to the supplemental coverage where they spent the most time in 2002. 

They could have had coverage in other categories throughout 2002. Other public sector includes federal and state 

programs not included in the other categories. 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 2002 or had Medicare as a 

second payer. 

 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use files, 2002. 

• Out-of-pocket spending varies widely by a beneficiary’s type of supplemental coverage. 

Beneficiaries with Medicaid coverage have the lowest average out-of-pocket spending, 

$950. Beneficiaries with Medigap, or Medigap with employer-sponsored supplemental 

coverage, have the highest average out-of-pocket spending, about $4,300, of which 

premiums make up between 55 and 60%. 

• The composition of out-of-pocket spending differs by type of supplemental coverage. 

Supplemental premiums are relatively high for beneficiaries with Medigap coverage, 

reflecting the lack of subsidy for this type of coverage. In contrast, employers often 

subsidize the cost of retiree health insurance. Noncovered services are the largest 

component of out-of-pocket spending for beneficiaries in the other categories of 

supplemental coverage. 
58 Medicare beneficiary and other payer financial liability

Chart 5-10. Out-of-pocket spending for premiums and health 

 services per beneficiary, by insurance and health 

 status, 2002 

627

1,374

2,269 2,521

613

2,900

2,084

2,472

3,994

1,007

2,004

650

1,424

2,364 2,608

632

1,493

1,246

1,784 1,293

696

1,845

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

75

 - +

 − Beneficiaries who report they are in fair or poor health

 + Beneficiaries who report they are in good, very good, 

 or excellent health

Health - + - +

Status

 - + - + - +

107

Note: ESI (employer-sponsored supplemental insurance). 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

• Insurance that supplements Medicare does not shield beneficiaries from all out-of-pocket 

costs. Beneficiaries who report being in fair or poor health spend more out of pocket for 

health services than those reporting good, very good, or excellent health, regardless of the 

type of coverage they have to supplement Medicare. 

• What beneficiaries actually pay out of pocket varies by type of supplemental coverage. For 

those with Medigap, out-of-pocket spending generally reflects the premiums and costs of 

prescription drugs and other services not covered by Medicare. Beneficiaries with employersponsored insurance (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 2005 59

Web links. Medicare beneficiary and other payer 

financial liability 

• 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 

• 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/June 05_ch1.pdf 

S E C T I O N

Retiree health 

benefits

A Data Book: Healthcare spending and the Medicare program, June 2005 63

Retiree health benefits, 2004: MedPAC’s supplement 

 to the Kaiser/HRET survey 

 of employer-sponsored health benefits

Employer-sponsored supplemental health benefits have been a primary source of supplemental 

coverage for Medicare beneficiaries for decades. To learn more about how retiree health 

benefits are changing, MedPAC sponsored a supplement to the 2004 HRET survey of 

employers, which is a stratified nationally representative sample of private and non-federal 

public firms of all sizes. To address questions about firms offering retiree benefits, we 

examined firm-level data, weighted by firm size to produce nationally representative information. 

The supplement was designed to explore retiree health coverage and benefits structure, and 

how changes that are taking place may affect Medicare beneficiaries’ supplemental coverage 

over time. 

The survey focused in particular on collecting information that is not available from other 

surveys, including whether active employees will be eligible for the benefits that Medicare-age 

retirees now receive, and how much of the premiums for supplemental benefits are paid by 

retirees. The survey supplement also provided an opportunity to obtain some early indications of 

how employers were thinking about how they might respond to the passage of the Medicare 

Modernization Act (MMA). 

A description of the survey methodology is available in the report on the full employer survey, 

The Kaiser Family Foundation and Health Research and Education Trust, Employer Health 

Benefits Annual Survey, 2004 Annual Survey. Menlo Park, CA, and Chicago, IL, 2004. The 

report is available at http://www.kff.org/insurance/7148/ 

loader.cfm?url=/commonspot/security/getfile.cfm&PageID=46288. 
64 Retiree health benefits

Chart 6-1. The percentage of firms with 200 or more 

 workers offering retiree health benefits, 

 1988–2004 

Note: Weighted by employers. Tests found no significant differences from the previous year among all large 

 firms at p<0.05. 

Source: MedPAC Survey of Employer-Sponsored Retiree Health Benefits: 2004; KFF/HRET Survey of Employer- 

 Sponsored Health Benefits: 1999, 2000, 2001, 2002, 2003; KPMG Survey of Employer-Sponsored Health 

 Benefits: 1991, 1993, 1995, 1998; HIAA Survey of Employer-Sponsored Health Benefits: 1998. 

• After a sharp decrease in coverage in the 1980s, the percent of all U.S. firms with 200 or 

more employees offering health insurance to their retirees leveled off at about 36 percent. 

The decline occurred after the 1990 change in Federal Accounting Standards Board 

accounting rules requiring employers to include the future costs of retiree health benefits in 

their financial accounting statements. 

1988 1991 1993 1995 1998 1999 2000 2001 2002 2003 2004

0

10

20

30

40

50

60

70

80

Percent

66%

46%

36%

40% 40% 40%

36% 37% 36% 38% 36%
A Data Book: Healthcare spending and the Medicare program, June 2005 65

<1%

Chart 6-2. Distribution of firms and retirees covered by health 

benefits, by firm size, 2004 

Firm size Covered retirees

0

20

40

60

80

100

Percent

5,000 or more 

1,000-4,999 workers

200-999 workers

50-199 workers

25-49 workers

10-24 workers

3-9 workers

<1%

81%

Source: MedPAC Survey of Employer-Sponsored Retiree Health Benefits, 2004.

• Eighty-one percent of Medicare-age retirees with employer-sponsored health benefits 

worked for firms with 5,000 or more employees. 
66 Retiree health benefits

Chart 6-3. Firms offered health benefits to early retirees more 

often than to Medicare-age retirees, 1999−2004 

Note: Weighted by employers. 

 *Significant from all large firms at p<0.05 

Source: MedPAC Survey of Employer-Sponsored Retiree Health Benefits: 2004; KFF/HRET Survey 

 of Employer-Sponsored Health Benefits: 1999−2003. 

• For some employers, the primary focus of retiree health benefits is the early retiree 

population. About three-fourths of employers that offer retiree health benefits extend these 

benefits to retirees who have reached Medicare age. This proportion has remained relatively 

stable over the past five years. 

Offer health benefits to early retirees Offer health benefits to Medicare-age retirees

0

10

20

30

40

50

60

70

80

90

100

P

ercent

93%

76%

89%

71%

98%

73%

96%

76%

93%

78%

96%

75%

1999

2000

2001

2002

2003

2004

*
A Data Book: Healthcare spending and the Medicare program, June 2005 67

Chart 6-4. Jumbo firms were the most likely to offer health 

benefits to Medicare-age retirees in 2004 

Note: Weighted by employers. 

 *Significant from all large firms at p<0.05 

• Among the firms that offer health benefits to active workers or retirees, the largest firms⎯socalled “jumbo” firms with 5,000 or more workers⎯are the most likely to offer retiree health 

benefits to Medicare-age retirees. 

75% 

88%* 

81% 

70% 

All large firms 

(200+ workers) 

5,000+ workers 

1,000-4,999 

workers

200-999 workers

 Of firms offering retiree benefits, percent offering benefits to Medicare-age retirees 

70% 

 75% 

88%*

81% 
68 Retiree health benefits

* 

Chart 6-5. Two-thirds of workers in firms that offered 

supplemental retiree health benefits in 2004 will be 

offered those benefits after they retire and enroll in 

Medicare 

Note: Categories depicted on the chart are not mutually exclusive. “Firms with union workers” is defined in the survey as having 

any employees who are under collective bargaining agreements. Weighted by active workers. 

 *Significant from all large firms at p<0.05 

 

• About two-thirds of active workers in firms offering retiree health benefits will be eligible to 

receive them when they retire and reach Medicare age. 

• State and local government workers are more likely than those in the private sector to be 

eligible for these benefits after they retire. 

• A small proportion of active workers in firms now offering benefits to retirees—about 8 

percent—are in firms that report that none of their current workforce will be eligible for 

supplemental health benefits in the future. 

All large firms 

(200+ workers) 

 State and local 

 government 

 Firms with union 

 workers 

 * 

*

67%

91%

25%

8%

29%

8%

1%

7%

All workers will be offered benefits in the future

Some workers will be offered benefits in the future

No workers will be offered benefits in the future

65%

*

*
A Data Book: Healthcare spending and the Medicare program, June 2005 69

Chart 6-6. Date of hire and union agreements often determine 

future retirees’ eligibility for health insurance 

coverage 

All large firms (200+ workers)

Jumbo firms (5,000+ workers)

Private sector

Note: Weighted by active workers. Tests found no significant difference from “All large firms” at p<0.05. 

 

• Among firms that will not be offering retiree health benefits to all their active workers upon 

retirement, most workers’ eligibility for the benefits will depend on whether they were hired 

before a specific cut-off date. 

• Collective bargaining terms will be a factor in determining eligibility for about half of the 

workers in these firms. 

• Date of retirement will be a factor in determining eligibility for about one in five workers. 

 Date of hire 

 Date of retirement 

Collective 

bargaining 

agreement terms 

 * 

59% 

60% 

62% 

21% 

17% 

17% 

45% 

54% 

47% 

How firms determine eligibility for retiree coverage 

percent 
70 Retiree health benefits

Chart 6-7. In 2004, firms reported they are more likely to 

eliminate benefits for new hires than for active 

employees who have not yet retired 

Note: Weighted by active workers. Tests found no significant difference from “All large firms” at p<0.05. 

• About one-fourth of firms currently offering retiree health benefits to Medicare-age retirees 

reported that it is likely or somewhat likely that they would eliminate retiree health benefits 

for new hires in the next two years; 13 percent indicated they might eliminate retiree health 

benefits for active employees. 

. 

All large firms 

In the next 2 years: 

Very 

likely 

Somewhat 

likely 

Somewhat 

unlikely 

Very 

unlikely 

Don’t 

know 

Eliminate Medicare-age retiree 

health benefits for new hires 17% 10% 18% 53% 3% 

Eliminate Medicare-age retiree 

health benefits for active 

employees who have not yet 

retired 

7% 6% 21% 63% 3% 
A Data Book: Healthcare spending and the Medicare program, June 2005 71

Chart 6-8. Medicare-age retirees paid about a quarter of their 

health benefit premiums in 2004

 Enrollee contribution 

 Monthly total as a percent of total 

 premiuma Enrollee premium premium 

All large firms $276 $68 25% 

5,000+ workers 268 58 23 

1,000-4,999 workers 297 122* 44* 

 200-999 workers 348* 139 40 

Note: Weighted by retirees. All numbers reflect single coverage. a Monthly premium for plan with the largest number of Medicare-age retirees. 

 *Significant from all large firms at p<0.05. 

• Premiums for retirees who worked for firms with less than 1,000 workers are higher. 

• The lower premiums of employees of jumbo firms may reflect economies associated with 

larger risk pools. 
72 Retiree health benefits

Chart 6-9. Most Medicare-age retirees contribute to premiums 

for health benefits

 Employer pays Retiree pays 

 full premium full premium 

 

All large firms, 2004 32% 5% 

5,000+ workers 32 3 

1,000-4,999 workers 34 19* 

 200-999 workers 25 11 

Union workers 37 5 

Nonunion worker 7* 7 

Note: Weighted by retirees. 

*Significant difference from all large firms at p<0.05. 

• Employers pay the full premium for almost one-third of retirees. 

• Five percent of retirees pay the full premium. 

• Retirees from firms with 1,000-4,999 workers and from nonunion firms are more likely to pay 

the full premium than retirees as a whole. 
A Data Book: Healthcare spending and the Medicare program, June 2005 73

Chart 6-10. Most Medicare-age retirees had tiered prescription 

drug cost sharing in 2004

 Percent of enrollees in plans with 

 different drug coverage structures 

 Same for 

 4-Tier 3-Tier 2-Tier all drugs 

State and local government 1% 40% 40% 18% 

Has union workers 2 46 34 17 

5,000+ workers 2 50 32 16 

Tiered benefits among active 

workers in all large firms, 2004a 3% 62% 28% 6% 

Note: Weighted by retirees. Tests found no significant difference from all large firms at p<0.05. a KFF/HRET Survey of Employer-Sponsored Retiree Health Benefits: 2004. 

• Tiered systems vary cost-sharing for some categories of drugs. Although retiree benefits 

are less likely to have tiered cost sharing than active worker plans, most (83 percent) do 

have some form of tiered structure. There are no statistically significant differences related 

to firm size, unionization, or between private versus state or local government firms. 

• The survey also found (not shown on this chart) that retiree plans were more likely to have a 

separate drug deductible than active worker plans (26 percent compared to 8 percent). The 

average drug deductible was lower for retiree plans ($103) than for active workers ($161). 
74 Retiree health benefits

Chart 6-11. Retirees and active workers are likely to pay a larger 

share of their health benefit premium

Likelihood of increases in 

workers’ premium share Very Somewhat Somewhat Very Don’t 

through 2005 by firm size: likely likely unlikely unlikely know 

All large firms 65% 8% 6% 20% <1% 

5,000+ workers 67 7 7 19 <1 

1,000-4,999 workers 63 7 2 29 1 

200-999 workers 48 27 4 19 2 

 

Note: The 2004 Kaiser HRET survey found that 61 percent of active workers with health coverage were “very likely,” 

 and 29 percent were “somewhat likely,” to pay more for premiums in the next 2 years. 

 Weighted by retirees. Tests found no significant difference from all large firms at p<0.05. 

• Most firms reported that they will be very likely or somewhat likely to require retirees to pay a 

larger proportion of the premium for health benefits over the next two years; 73 percent of 

retirees will likely pay a larger share. 

• There are no significant differences in planned increases associated with firm size. 

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

Web links. Retiree health benefits 

• The Kaiser/Hewitt 2004 survey on retiree health benefits documents current trends and the 

future outlook for retiree health benefits. 

http://www.kff.org/medicare/7194/index.cfm

• The Government Accountability Office (GAO) conducted an MMA-mandated study on the 

trends in employment-based retiree health coverage prior to the MMA and the MMA 

prescription drug options that employers and plan sponsors will pursue. 

http://www.gao.gov/new.items/d05205.pdf

• The Employee Benefit Research Institute provides information on a variety of employee 

benefit issues. 

http://www.ebri.org

S E C T I O N

National health care and 

Medicare spending

A Data Book: Healthcare spending and the Medicare program, June 2005 79

Chart 7-1. Medicare made up about one-fifth of spending on 

 personal health care in 2003 

Medicaid and all SCHIP

17%

Other public 

7%

PHI

37%

Out of pocket

16%

Other private

4%

Medicare

19%

Total = $1.44 trillion

a

b

Note: PHI (private health insurance), 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 Accounts, 2004. 

• Of the $1.44 trillion spent on personal health care in the United States, Medicare accounts 

 for about 19 percent or $274 billion. Spending by all public programs—including Medicare, 

 Medicaid, SCHIP, and other programs—accounts for 43 percent of health care spending. 

Medicare is the largest single purchaser of health care in the United States. Thirty-seven 

percent of spending is from private health insurance payers and 16 percent is from 

consumer out-of-pocket spending. 

• Medicare and private health insurance spending includes premium contributions from 

 enrollees. 
80 National health care and Medicare spending 

Chart 7-2. Medicare’s share of total spending varies by 

 type of service, 2002 

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 due to rounding. 

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

Source: CMS, Office of the Actuary, 2004; National Health Accounts, 2004. 

• 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. 

• Medicare accounts for 30.3 and 32.2 percent of revenues for hospitals and home health 

agencies, respectively. In contrast, it pays for only 1.6 percent of prescription drugs and 

12.4 percent of nursing home care. 

30.3%

19.9%

32.2%

12.4%

32.3%

17.0%

7.2%

24.8%

46.1%

18.9%

72.9%

43.0% 41.6%

79.5%

Hospital Physician and 

clinical services

Home health Nursing home Prescription 

drugs

Durable 

medical 

equipment

0

20

40

60

80

100

Share

of spending (percent)

Medicare Medicaid and all SCHIP Other*

1.6%

 0.1%

Service type

52.7%

67.6%
A Data Book: Healthcare spending and the Medicare program, June 2005 81

Chart 7-3. Personal health care spending is increasing as a 

share of GDP 

Note: GDP (gross domestic product). Personal health care spending includes spending for clinical professional 

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

Source: CMS, Office of the Actuary, National Health Accounts, 2005. 

• Personal health care spending consumes an increasing proportion of national resources, 

accounting for a double-digit share of gross domestic product (GDP) annually since 1990. 

• Personal health spending as a share of GDP has increased from 4.8 percent in 1965 to a 

high of 13.1 percent in 2003. Stability in this proportion throughout much of the 1990s was 

due to slower spending growth associated with the effects of larger enrollment in managed 

care and to a strong economy. 

Personal health care expenditures

Medicare expenditures

Historical Projected 

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

4%

6%

8%

10%

12%

14%

16%

Percent of G

D

P
82 National health care and Medicare spending 

Chart 7-4. Trustees project Medicare spending to increase 

 as a share of GDP

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

0

2

4

6

8

10

12

14

16

Share of G

D

P (percent)

Part A

Part B

Part D

0.7

1.3

1.9 2.3 2.6

3.7

5.1

7.0

8.4

9.6

10.9

12.5

13.9

Note: GDP (gross domestic product). Trustees’ data are incurred. 

Source: 2004 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 13.9 percent of 

 GDP in 2080. 

• Medicare’s share of GDP increased at a faster rate in the historical period than is projected 

 for the future. From 1980 to 2003, it grew at an average annual rate of 3.1 percent. In the 

 projection period, Medicare’s share of GDP is projected to increase steadily but at a slower 

 pace of 2.2 percent average annual growth. 

• The slower growth in Medicare’s share of GDP in 2000 was due to payment reductions 

 enacted in 1997 and faster economic growth. After 2011, the aging of the baby boom 

 generation, an expected increase in life expectancy, and the Medicare drug benefit are 

 expected to contribute to increases in this proportion. Additional factors such as innovation 

 in technology also contribute to the projected rapid increases in Medicare spending as a 

 portion of GDP. 
A Data Book: Healthcare spending and the Medicare program, June 2005 83

Chart 7-5. Changes in spending per enrollee, Medicare and 

private health insurance 

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

 hospital services, physician and clinical services, other professional services, and durable medical products. 

Source: CMS, Office of the Actuary, National Health Statistics Group, 2005. 

• Over a 32-year period, despite some fluctuation, Medicare’s per enrollee spending grew 

slightly less over the long term than the average for private health insurance. This may 

reflect the effects of the program’s size and policies that hold down spending, such 

as the provisions in the Balanced Budget Act of 1997. After adjustment for comparable 

benefits, national health accounts data show that spending over this period grew 9.0 

percent, compared to 10.1 percent for private health insurance. 

• This comparison is imperfect, however, and should be considered with an appreciation for 

 its limitations. Private insurers and Medicare do not buy the same mix of services, and 

 Medicare covers an older population that tends to be more costly. For example, Medicare 

 spending on services provided by home health agencies and skilled nursing facilities grew 

 rapidly in the 1990s, but these services generally are a small part of benefits paid by private 

 insurers. In addition, the data do not allow analysis of the extent to which spending trends 

were affected by changes in the generosity of covered benefits and, in turn, enrollees’ 

cost-sharing burden. 

• A discussion on comparing Medicare and private health insurance growth can be found in 

 Chapter 1 of the MedPAC March 2004 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/Mar04_Ch1.pdf.

1970 1974 1978 1982 1986 1990 1994 1998 2002

-5

0

5

10

15

20

25

Per enrol el e change (percent)

Medicare (average annual growth = 9.1%)

PHI (average annual growth = 10.1%)
84 National health care and Medicare spending 

Chart 7-6. Trustees and CBO project Medicare spending to 

grow about 10 percent over next 10 years 

Note: CBO (Congressional Budget Office). All data are nominal, gross mandatory program outlays. Trustee projections include 

administrative spending and are presented on a calendar year basis ending in 2013. 

Source: CMS, Trustees Report 2005 (projection); CBO 2005 (projection). 

• Medicare spending has grown more than eightfold, from $33.9 billion in 1980 to 

$297.2 billion in 2004. 

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

introduction of a new voluntary prescription drug benefit. 

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

9 percent from 2005 to 2015. The Medicare Trustees’ intermediate projection for 2005 to 

2015 also assumes 9 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 the growth in 

volume and intensity of services delivered to Medicare beneficiaries, among other factors. 

1980 1990 2000 2005 2010 2015

0

200

400

600

800

1000

1200

Dol al rs (in billions)

Trustees - high

Trustees - intermediate

CBO

Trustees - low
A Data Book: Healthcare spending and the Medicare program, June 2005 85

Chart 7-7. Medicare spending is concentrated in certain 

 services and has shifted over time 

Private plans

7%

Other feefor-service

settings

11% a

Home health

8%

Hospital

inpatient

47%

Hospital

outpatient

5%

Skilled nursing

facility

4%

Physician

18%

Hospital

inpatient

38%

Hospital

outpatient

6%

Physician

18%

Skilled nursing

facility

6%

Home health

4%

a

Other feefor-service

settings

15%

Private plans

13%

Total spending 1994 = $162 billion Total spending 2004 = $302 billion 

b

b

Note: Spending numbers are presented as 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 associated with Medicarecovered services. They are reported on a fiscal year, incurred basis and do not include spending on program 

administration. Totals may not sum to 100 due to rounding. a Includes hospice, outpatient laboratory, durable medical equipment, physician-administered drugs, ambulance service, 

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

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

Source: CMS, Office of the Actuary, 2005. 

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

or settings can vary substantially over time. 

• In 2004, Medicare spent about $302 billion, or $7,544 per enrollee. Inpatient hospital 

services were by far the largest spending category (38 percent), followed by 

physicians (18 percent), managed care (13 percent), and other fee-for-service 

settings (15 percent). 

• Although inpatient hospital services still comprise the largest spending category, the 

category has shrunk as a percentage of Medicare spending, falling from 50 to 38 percent. 

Spending on beneficiaries enrolled in managed care has grown from 6 to 13 percent over 

this period. While the number of beneficiaries enrolled in private plans has declined recently, 

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

Chart 7-8. FFS program spending is highly concentrated in a 

 small group of beneficiaries, 2002 

Percent of beneficiaries Percent of program spending

0

10

20

30

40

50

60

70

80

90

100

Percent

9%

21%

19%

3%

29%

Top 1%

Bottom

quartile

Third

quartile

Second

quartile

88%

19%

Next 15%

Next 5%

Next 4%

Note: FFS (fee-for-service). 

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

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

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

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

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

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

inpatient hospital care, and those who are in the last year of life. 

• Further discussion of this analysis can be found in chapter 2 of the MedPAC June 2004 

Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/June04_ch2.pdf. 
A Data Book: Healthcare spending and the Medicare program, June 2005 87

Chart 7-9. Medicare HI trust fund is projected to be 

 insolvent in 2020 

 Year costs Year HI trust 

Estimate exceed income fund assets exhausted

High 2006 2013 

Intermediate 2012 2020 

Low N/A 2059 

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: 2005 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: The Hospital Insurance (HI) trust 

fund and the Supplementary Medical Insurance (SMI) trust fund. Unlike the SMI fund, the HI 

trust fund can be exhausted if spending exceeds revenue plus reserves. The HI trust fund is, 

by law, separate from general revenues. Its receipts come primarily from current payroll 

taxes and interest earnings on assets held by the trust fund, with the remainder from 

beneficiary premiums, income taxes on Social Security benefits, and other sources. 

The SMI trust fund is financed by general revenue and beneficiary premiums and cannot 

be exhausted. 

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

Under low cost assumptions, it would remain solvent until 2059. 
88 National health care and Medicare spending 

Chart 7-10. Medicare FFS providers: Spending, supply, and 

projected growth rates 

 Projected 

 Number of spending 

 providers FY 2004 

Provider 2004 (billions) 

 

Inpatient hospitals 6,055a $ 113.7 

Hospital outpatient PPS 4,139b 14.6 

Physicians 584,783 51.6 

Skilled nursing facilities 14,943 15.7 

Home health agencies 7,235 11.2 

Hospices 2,438 7.0 

Ambulatory surgical centers 3,890 1.9 

Free-standing dialysis facilities 4,464 5.7 

Outpatient clinical laboratories 183,690 5.8 

Durable medical equipment suppliers ~50,000 7.8

 

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

not include cost-sharing. aIncludes inpatient acute, and specialty hospitals such as psychiatric, rehabilitation, children’s, cancer, and long-term care 

hospitals. bDoes not include alcohol and drug abuse and critical access hospitals, but does include psychiatric, rehabilitation, and 

children's hospitals that bill under the outpatient PPS. 

Source: Number of providers comes from a variety of CMS databases as of years 2002–2004, including the Provider of Service 

file; the Online Survey, Certification, and Reporting File; the standard Analytical File; the CMS data compendium; the 

CMS website; and unpublished CMS data. 

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

and durable medical equipment suppliers.

• Of inpatient hospitals, 3,845 are inpatient prospective payment system hospitals. 
A Data Book: Healthcare spending and the Medicare program, June 2005 89

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/publications/trusteesreport

• The National Health Accounts at CMS provide information and research on spending for 

health care in the U.S. 

http://cms.hhs.gov/statistics/nhe/default.asp

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

Medicare program spending. 

http://www.cms.gov/charts

• The Congressional Budget Office provides projections on Medicare spending: 

http://www.cbo.gov/factsheets/2005/Medicare.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 2005 93

Chart 8-1. Medicare’s hospital inpatient and outpatient 

spending, fiscal years 1992–2003

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Fiscal year

0

20

40

60

80

100

120

140

160

Bill oi ns of dol al rs

72 77 82 86 91 95 93 94 96 104 113 119

11

12

13 15

16 17 17 17 18

20

22

22

Outpatient Inpatient

 

Note: Includes inpatient services covered by the acute inpatient prospective payment system (PPS) and psychiatric, 

rehabilitation, long-term care, cancer, and children’s hospitals and units; includes outpatient services covered by the PPS 

and other outpatient services. Payments include both program outlays and cost sharing incurred by beneficiaries. 

 

Source: CMS, Office of the Actuary. 

• Medicare hospital inpatient spending increased 65 percent (4.7 percent per year), and 

outpatient spending increased 100 percent (6.5 percent per year) from fiscal year (FY) 

1992 to FY 2003. A freeze in inpatient payment rates in the Balanced Budget Act of 

1997 (BBA), combined with lower Medicare discharges, reduced inpatient spending in 

1998. An increase in Medicare discharges, larger updates, case mix change, and expansion 

of disproportionate share hospital payments contributed to increased inpatient spending in 

2001 and 2002. In 2003, slower Medicare discharge growth and slower case mix change 

led to moderation in inpatient spending growth. 

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

overpayments. Transitional corridor and new technology payments in the outpatient 

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

2001 and 2002. Slower volume growth and changes in pass-through payments led to a 

smaller spending increase in 2003. 

• In FY 2003, aggregate Medicare inpatient spending was $119 billion and outpatient 

spending was $22 billion. 
94 Acute inpatient services

Chart 8-2. Diagnosis related groups with highest volume, 

 fiscal year 2004 

 

 Percentage Number of 

DRG DRG of discharges 

number name discharges (thousands) 

 

 127 Heart failure and shock 6% 696 

 89 Simple pneumonia and pleurisy age > 17 with cc 5 551 

 209 Major joint and limb reattachment procedures of lower extremity 4 461 

 88 Chronic obstructive pulmonary disease 3 414

 182 Esophagitis, gastroenteritis, and miscellaneous digestive 

 disorders age > 17 with cc 2 292 

 296 Nutritional and miscellaneous metabolic disorders age > 17 with cc 2 255 

174 GI hemorrhage with cc 2 268 

 143 Chest pain 2 249 

 14 Intracranial hemorrhage or stroke with infarct 2 237 

 320 Kidney and urinary tract infections age > 17 with cc 2 219 

Total Medicare discharges 100 12,140 

 

Note: DRG (diagnosis related group), cc (complication or comorbidity), GI (gastrointestinal). 

Source: Federal Register, May 4, 2005, pp. 23,614–23,620. Available at www.gpoaccess.gov/fr/index.html. Based on FY 2004 

MedPAR (December 2004 update, Grouper version 22 FY 2005). 

• In fiscal year 2005, Medicare inpatient cases are assigned to 522 DRGs based on discharge 

diagnoses, procedures performed, age, sex, discharge destination, and presence of 

complications or comorbidities. 

• In fiscal year 2004, 10 diagnosis related groups (DRGs) accounted for 30 percent of 

discharges from hospitals paid under the acute inpatient prospective payment system.
A Data Book: Healthcare spending and the Medicare program, June 2005 95

Chart 8-3. Number of hospitals and Medicare discharges, 

 by hospital group, 2003 

 Hospitals Medicare discharges

 Number 

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

All hospitals 3,845 100.0% 11,065 100.0% 

Urban 2,608 67.8 9,263 83.7 

Rural 1,237 32.2 1,802 16.3 

Large urban 1,400 36.6 4,922 44.6 

Other urban 1,255 32.8 4,422 40.0 

Rural referral 192 5.0 666 6.0 

Sole community 424 11.1 456 4.1 

Small rural Medicare- 

 dependent 188 4.9 173 1.6 

Other rural < 50 beds 164 4.3 102 0.9 

Other rural ≥ 50 beds 203 5.3 310 2.8 

Voluntary 2,340 60.9 8,029 72.6 

Proprietary 758 19.7 1,652 14.9 

Government 742 19.3 1,383 12.5 

Major teaching 292 7.6 1,638 14.8 

Other teaching 806 21.0 3,869 35.0 

Nonteaching 2,747 71.4 5,559 50.2

Note: Analysis includes all hospitals covered by Medicare’s acute inpatient prospective payment system. Critical access 

 hospitals, hospitals in Maryland, and hospitals paid through other payment systems (long-term care, rehabilitation, and 

 psychiatric hospitals) are excluded. Large urban areas have populations of more than 1 million. Major 

 teaching hospitals are defined by a ratio of interns and residents to beds of at least .25. Other teaching hospitals 

 have a ratio of below .25.

Source: MedPAC analysis of impact file and Medicare cost report data (August 2004) from CMS. 

• In 2003, 3,845 hospitals provided 11.1 million discharges under Medicare’s acute inpatient 

 prospective payment system. These numbers exclude critical access, long-term, psychiatric, 

 and rehabilitation facilities, as well as hospitals in Maryland, all of which are covered by 

 different payment systems. 

• Two-thirds of the hospitals are located in urban areas, and this proportion has grown 

 substantially in recent years as many rural facilities converted to critical access hospitals 

 (see Chart 8-27). Urban hospitals are responsible for 84 percent of discharges. About 61 

 percent of hospitals are voluntary (non-profit, non-government) and provide 73 percent of 

 discharges. Major teaching hospitals compose 8 percent of the hospitals and provide 15 

 percent of the care. About 21 percent of hospitals are covered by special payment 

 provisions intended to help rural facilities that do not become critical access hospitals (rural 

 referral, sole community, and small rural Medicare-dependent hospitals), and these facilities 

 provide 12 percent of the discharges. 
96 Acute inpatient services

Chart 8-4. Cumulative percentage change in Medicare acute 

inpatient PPS discharges, 1992–2003 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

-2

0

2

4

6

8

10

12

14

P

ercent

0.0

-0.4

2.8

4.1 4.4

5.8

5.3

2.8

3.6

7.3

9.9

11.6 Medicare acute inpatient discharges

Note: Cumulative change is the total percentage increase from 1992 through year indicated. Data are Medicare discharges 

from approximately 3,800 hospitals covered by the acute inpatient prospective payment system. Excludes critical access 

hospitals. 

Source: MedPAR data from CMS. 

• In 2003, there were 11.9 million discharges covered by the acute inpatient prospective 

payment system. 

• Medicare discharges covered by the acute inpatient prospective payment system increased 

11.6 percent from 1992 to 2003. Discharges grew 6.2 percent from 1993 to 1997, followed 

by a decline of 3.0 percent from 1997 to 1999 as beneficiaries enrolled in managed care. 

Discharges then grew 8.8 percent from 1999 to 2003, in part reflecting increasing 

fee-for-service enrollment, as enrollment in Medicare managed care declined. 
A Data Book: Healthcare spending and the Medicare program, June 2005 97

Chart 8-5. Cumulative change in total admissions and total 

outpatient visits, 1992–2003 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

-10

0

10

20

30

40

50

60

70

80

P

ercent

0.0

5.2

10.1

19.0

26.1

28.8

36.0

42.1

49.6

53.9

59.1

61.7

0.0 -1.1 -1.2 -0.6 -0.4 1.1 1.5 3.3

6.0

8.6 10.6 11.7

Total outpatient visits

Total admissions

Note: Cumulative change is the total percent increase from 1992 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 62 percent from 1992 to 2003, with increases 

exceeding 4 percent in every year except 1997 and 2003. Total admissions grew more 

slowly than outpatient visits, increasing just 12 percent from 1992 to 2003—about 1 percent 

a year on average. 

• There were 571 million outpatient visits and 35 million admissions to community hospitals 

in 2003.
98 Acute inpatient services

Chart 8-6. Trends in Medicare and total hospital length of stay, 

1992–2003 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

1

2

3

4

5

6

7

8

9

D

a

ys

5.5 5.3

5.0

4.7 4.7 4.6 4.6 4.6 4.5 4.5 4.5 4.5

8.1

7.8

7.3

6.8

6.4

6.1 5.9 5.9 5.8 5.7 5.6 5.5

Total

Medicare

Note: Length of stay is calculated from admissions or discharges and patient days for approximately 3,800 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 admissions fell 18 percent from 5.5 days in 1992 to 4.5 days in 

2003, dropping at an average annual rate of 3.3 percent from 1992 to 1997 and 0.5 percent 

from 1997 to 2003. 

• Length of stay for Medicare inpatients fell by 32 percent from 8.1 days in 1992 to 5.5 days in 

2003, dropping at an average annual rate of 4.8 percent from 1992 to 1997 and 2.0 percent 

from 1997 to 2003. 

Fiscal year
A Data Book: Healthcare spending and the Medicare program, June 2005 99

Chart 8-7. Cumulative change in Medicare inpatient days 

per beneficiary and discharges per beneficiary, 

1992–2002 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Fiscal year

-20

-15

-10

-5

0

5

10

15

20

P

ercent

0.0

-1.9

7.4

9.0

10.6

13.1 13.8

17.0 16.3 17.3 17.0

0.0

-6.5

-3.8

-9.1 -13.1

-14.4

-16.2 -15.2

-16.9 -17.0 -17.5

Number of discharges per beneficiary

Total days of care per beneficiary

Note: Cumulative change is the total percent increase from 1992 through the year indicated. Data are short-stay hospital 

Medicare patient days and discharges. Rate is per beneficiary enrolled in Part A. Beginning with 1994 data, the statistics 

do not reflect managed care enrollment. 

Source: MedPAC analysis of data from CMS. 

• While discharges per beneficiary have increased, length of stay has fallen. Medicare 

hospital use rates increased from 1992 to 2002, with 17.0 percent more hospital discharges 

per enrollee at the end of the period. However, declining length of stay led to 17.5 percent 

fewer days of inpatient care for each enrollee in 2002 compared to 1992. 

• There were 365 Medicare hospital discharges and 2,158 patient days per 1,000 

beneficiaries enrolled in Part A in fiscal year 2002.

• Beginning in 1994, the number of beneficiaries excludes managed care enrollees, 

increasing the rate per 1,000 beneficiaries enrolled in Part A (see Chart 13-2).
100 Acute inpatient services

Chart 8-8. Simulated Medicare inpatient payments, by component and 

hospital group, reflecting 2005 payment policy under the MMA 

 Percent of total payments

 Total 

 Additional rural payments 

Hospital group Base IME DSH Outlier hospital1

 (millions) 

All hospitals 81.8% 5.0% 7.4% 3.9% 1.8% $99,406 

Urban 82.0 5.6 7.7 4.3 0.3 86,846 

Rural 80.8 0.5 4.7 1.3 12.7 12,560 

Large urban 80.2 6.8 8.5 4.4 0.1 48,338 

Other urban 84.3 4.1 6.8 4.2 0.6 39,036 

Rural referral 83.3 1.2 5.7 2.0 7.8 5,067 

Sole community 66.9 0.0 1.9 0.5 30.7 3,635 

Small rural Medicare- 

 dependent 93.3 0.0 4.6 0.7 1.3 906 

Other rural < 50 beds 91.9 0.0 6.5 0.8 0.9 532 

Other rural  ≥ 50 beds 90.9 0.1 6.7 1.8 0.4 1,791 

Voluntary 82.8 5.4 6.4 3.9 1.4 73,213 

Proprietary 83.3 1.6 9.6 4.1 1.3 13,655 

Government 74.4 6.3 10.4 4.2 4.7 12,534 

Major teaching 67.5 16.6 10.2 5.5 0.1 21,783 

Other teaching 84.5 3.7 7.2 3.9 0.5 35,540 

Nonteaching 87.0 0.0 6.0 3.1 3.9 42,083

Note: MMA (Medicare Prescription Drug, Improvement, and Modernization Act of 2003). IME (indirect medical education). DSH 

(disproportionate share). Analysis includes all hospitals covered by Medicare’s acute inpatient prospective payment 

system (PPS). Critical access hospitals, hospitals in Maryland, and hospitals paid through other payment systems (longterm care, rehabilitation, and psychiatric hospitals) are excluded. Graduate medical education (GME) payments are also 

excluded. Simulated payments reflect 2005 payment rules (which encompass provisions of the MMA) applied to actual 

number of cases in 2003. Actual payments in 2005 will likely be higher than shown due to growth in number of cases. 1

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

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

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

• If the discharges hospitals covered by the acute inpatient prospective payment system furnished 

in 2003 had been paid for under 2005 payment policies (reflecting the provisions of the Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003), then Medicare would have 

spent $99 billion. This figure is less than actual Medicare spending on hospital care in 2005 

because it does not reflect increases in admissions from 2003 to 2005 and because it excludes 

payments made to critical access, rehabilitation, psychiatric, and long-term facilities as well as 

hospitals in Maryland. 

• Special payments, which include disproportionate share (DSH), indirect medical education 

 (IME), outlier, and new technology add-ons as well as additional payments to rural hospitals 

 through the sole community and Medicare-dependent programs, account for 18 percent of 

 all inpatient payments. This proportion is slightly lower for urban than rural hospitals, although urban 

 hospitals get most of their assistance from DSH, IME, and outlier payments while rural programs 

account for most of rural facilities’ extra funds. Major teaching hospitals have the largest share of 

payments coming from special payments, about 33 percent. 

• The increase in payments resulting from MMA provisions, along with other policy changes 

occurring between 2003 and 2005, are highlighted in Chart 8-17. 
A Data Book: Healthcare spending and the Medicare program, June 2005 101

Chart 8-9. Composition of the hospital market basket 

 Market basket weights (share of total) Forecasted price 

Input FY 1997 based FY 2002 based change for 2006* 

Total 100.0% 100.0% 3.4% 

Compensation 61.7 60.0 3.6

 Wages and salaries 50.7 48.2 3.5 

 Employee benefits 11.0 11.8 4.2 

Professional fees 5.4 5.5 3.7

Utilities 1.4 1.3 2.0

 Fuel, oil, and gasoline 0.3 0.2 2.6 

 Electricity 0.8 0.7 0.8 

 Water and sewerage 0.2 0.4 3.5 

Professional liability insurance 0.8 1.6 6.3 

All other 30.7 31.7 2.9

 Other products 19.5 20.3 3.2 

 Pharmaceuticals 5.4 5.9 5.6 

 Direct purchase food 1.4 1.7 0.0 

 Contract service food 1.3 1.2 2.6 

 Chemicals 2.6 2.1 0.8 

 Blood and blood products** 0.9 N/A N/A 

 Medical instruments 2.2 1.9 2.8 

 Photographic supplies 0.2 0.2 2.9 

 Rubber and plastics 1.7 2.0 4.6 

 Paper products 1.4 1.9 3.4 

 Apparel 0.6 0.4 0.2 

 Machinery and equipment 1.0 0.6 0.9 

 Miscellaneous products 1.0 2.6 1.7 

All other services 11.2 11.3 2.3 

 Telephone services 0.4 0.5 1.2 

 Postage 0.9 1.3 1.0 

 All other: labor intensive 5.4 4.2 3.3 

 All other: non-labor intensive 4.5 5.3 2.0 

Notes: FY (fiscal year). Totals may not sum to 100 due to rounding. Categories in bold face include subcategories not in bold 

face. CMS used FY 1997-based market basket weights for updating payments in FY 2005 and proposes to use FY 2002-

based market basket weights in FY 2006. * Based on FY 2002 weights. ** Included in miscellaneous products in FY 

2002-based weights.

Source: Federal Register, May 4, 2005, p. 23,387-23,389. Available at http://www.gpoaccess.gov/fr/. Market basket forecasts, CMS. 

• CMS and the Congress use forecasts of the hospital market basket, a measure of the input prices paid by 

hospitals, to update payment rates. Over half of hospital operating costs—as measured by the market basket—are 

for labor expenses. These expenses are expected to increase by 3.6 percent in fiscal year 2006, more rapidly than 

growth in prices for other products and services. The forecast for the overall market basket is 3.4 percent. 

• The hospital market basket reflects costs for hospitals paid under the acute inpatient prospective payment system. 

A CMS contractor prepares forecasts of price indexes that measure price changes for the market basket cost 

categories. 

• For fiscal year 2006, CMS proposes to base the weights used in the market basket on 2002 data, rather than the 

1997 data used in the market basket in fiscal year 2005. This change reduces the labor compensation share by 1.7 

percentage points and increases the share of professional liability insurance by 0.8 percentage points. Effects on 

other cost categories are generally modest. The forecast for growth in fiscal year 2006 is 3.4 percent using either 

data source. 
102 Acute inpatient services

Chart 8-10. Cumulative change in Medicare acute inpatient 

PPS payments and costs per case, and PPS 

operating update, 1992–2003

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

-5

0

5

10

15

20

25

30

35

40

45

P

ercent

0.0

4.9

7.7

12.3

18.5

21.6

20.0 19.7 20.6

24.0

28.9

30.8

0.0

8.5

10.6 10.6 11.2 12.4

16.2

0.0

3.0 2.2

0.7 -0.5 -1.1 0.1

2.6

5.3

10.6

Medicare payments per discharge

Update

Medicare costs per discharge

4.8

6.8

27.0

22.9

19.4

19.6

2.7

Note: PPS (prospective payment system). Cumulative change is the total percent increase from 1992 to the year indicated. 

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

• Medicare payments per discharge increased 30.8 percent from 1992 to 2003, significantly 

more than the rise in hospitals’ costs per discharge (27.0 percent). The hospital market 

basket grew 39.7 percent over the period. The hospital update grew 22.9 percent. 

• From 1993 through 1997, hospitals’ payment increases exceeded the updates—due mostly 

to increases in case mix. Hospital costs grew more slowly than the market basket before 

2001 primarily due to reduced length of stay. The gap between payments and costs 

increased from 1992 through 1997. From 1993 to 1997, Medicare payments per discharge 

grew more quickly than Medicare costs per discharge—costs declined by 4 percent while 

payments grew by 16 percent. From 1997 to 2003, the trend reversed.
A Data Book: Healthcare spending and the Medicare program, June 2005 103

Chart 8-11. Medicare acute inpatient PPS margin, 

 1992–2003

-1.8

0.0

3.5

8.9

14.6

17.6

15.5

13.3

11.7

9.8

5.9

1.3

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

-5

0

5

10

15

20

25

30

Marg 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 PPS 

margin includes services covered by the acute care inpatient PPS. 

Source: MedPAC analysis of Medicare cost report data (August 2004) 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 for measuring the 

relationship between payments and costs without the influence of how overhead costs are 

allocated. 

• The Medicare inpatient margin increased steadily from 1992 through 1997, from a low of 

 –1.8 percent to a record high of 17.6 percent. After implementation of the Balanced Budget 

Act of 1997, inpatient margins fell. In 2003, the margin was 1.3 percent. 

• Medicare inpatient margins vary widely. In 2003, one quarter of hospitals had Medicare 

inpatient margins that were 10.7 percent or higher, and another quarter had margins that 

were –14.2 percent or lower. Between 1997 and 2003, this difference between the top and 

bottom quarter widened from 19 percent to 25 percent. About 48 percent of hospitals 

treating 49 percent of Medicare cases had positive inpatient Medicare margins in 2003. 
104 Acute inpatient services

Chart 8-12. Medicare acute inpatient PPS margins, by 

 urban and rural location, 1992–2003

-1.6

0.3

4.2

9.7

15.2

18.4

16.4

14.2

12.7

10.6

6.6

1.8

-1.7 -0.7 -0.5

4.1

9.2

11.1

7.9

5.7

3.8 3.0

0.1

-2.6

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

-10

-5

0

5

10

15

20

25

30

Margin (percent)

Urban

Rural

 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 PPS margin includes services 

covered by the acute care inpatient PPS. 

Source: MedPAC analysis of Medicare cost report data (August 2004) from CMS. 

• Medicare inpatient margins have consistently been higher for urban hospitals than for rural 

hospitals. A large part of this difference in financial performance can be explained by 

disproportionate share and indirect medical education adjustments that go primarily to urban 

hospitals. 

• The gap between urban and rural hospitals’ inpatient margins grew between 1992 and 2000. 

One factor in this widening 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 2003, this difference narrowed, as payment policies that increased payments 

to rural hospitals were implemented. This difference may narrow further as policy changes 

made in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 

targeted to rural hospitals go into effect (see Chart 8-17).
A Data Book: Healthcare spending and the Medicare program, June 2005 105

Chart 8-13. Medicare acute inpatient PPS margins, by teaching 

status, 1992–2003 

7.7

9.3

13.7

19.1

24.4

26.7

25.0

23.2 22.5

21.2

18.6

12.4

-2.8

-1.0

2.5

7.6

13.3

16.5

14.7

12.6

11.0

8.8

4.9

0.6

-5.7

-3.8

-1.2

4.3

10.2

13.3

10.8

8.1

5.9

4.1

-0.4

-3.9

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

-10

-5

0

5

10

15

20

25

30

Margin (percent)

Major teaching

Other teaching

Nonteaching

Note: PPS (prospective payment system). Major teaching hospitals are defined by a ratio of interns and residents to beds of 

0.25 or greater, while other teaching hospitals have a ratio of less than 0.25. A margin is calculated as revenue minus 

costs, divided by revenue. Data are based on Medicare-allowable costs and exclude critical access hospitals. Medicare 

acute inpatient margin includes services covered by the acute care inpatient PPS. 

Source: MedPAC analysis of Medicare cost report data (August 2004) from CMS. 

• Major teaching hospitals have consistently had higher inpatient PPS margins than other 

teaching hospitals and nonteaching hospitals. Major and other teaching hospitals’ better 

financial performance is due largely to the additional payments they receive from the indirect 

medical education and disproportionate share adjustments. 

• Margins rose substantially for all groups through 1997, peaking at 26.7 percent for major 

teaching hospitals and 13.3 percent for nonteaching hospitals. Since then, inpatient margins 

have fallen less for major teaching hospitals than for nonteaching hospitals, dropping 14.3 

and 17.2 percentage points, respectively, primarily reflecting lower growth in per case costs 

for major teaching hospitals. The larger drop in the Medicare inpatient margin for major 

teaching hospitals in 2003 is primarily due to the indirect medical education payment 

dropping that year. 
106 Acute inpatient services

Chart 8-14. Overall Medicare margin, 1997–2003 

11.5

8.2

6.1

5.2 5.0

2.3

-1.9

1997 1998 1999 2000 2001 2002 2003

-5

0

5

10

15

20

Marg ni (percent)

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

exclude critical access hospitals. Overall Medicare margins cover the costs and payments of acute 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 2004) 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 margin is lower than the inpatient margin, which may be influenced by how 

hospitals allocate overhead costs. Only by combining data for all major services can we 

estimate Medicare costs for measuring the relationship between payments and costs 

without the influence of how overhead costs are allocated. 

• The overall Medicare margin peaked in 1997 at 11.5 percent. In fiscal year 2003, it was 

−1.9 percent. 

• In 2003, one quarter of hospitals had overall Medicare margins of 5.6 or higher, and another 

quarter had overall margins of –14.7 percent or lower. Between 1997 and 2003, the 

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

20 percent. About 39 percent of hospitals had positive overall Medicare margins in 2003, 

accounting for 41 percent of Medicare inpatient discharges. 
A Data Book: Healthcare spending and the Medicare program, June 2005 107

Chart 8-15. Overall Medicare margins, by urban and rural 

 location, 1997–2003

12.3

9.1

7.1

6.2 5.8

3.0

-1.3

6.0

1.3

-1.8

-2.6

-1.3

-3.3

-6.2

1997 1998 1999 2000 2001 2002 2003

-10

-5

0

5

10

15

20

Marg 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 1996 are unavailable. 

Source: MedPAC analysis of Medicare cost report data (August 2004) from CMS. 

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

hospitals than for rural hospitals. 

• The difference in margins between the two groups grew between 1997 and 1999 but has 

since narrowed. In 1997, the overall margin for urban hospitals was 12.3 percent, compared 

with 6.0 percent for rural hospitals. In 2003, the overall margin for urban hospitals was –1.3 

percent, compared with –6.2 percent for rural hospitals. Policy changes made in the 

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

hospitals should further narrow the difference in overall Medicare margins between urban 

and rural hospitals (see Chart 8-17). 

• A large part of the difference in financial performance between urban and rural hospitals is 

attributable to urban hospitals receiving more disproportionate share and indirect medical 

education payments. 
108 Acute inpatient services

Chart 8-16. Overall Medicare margins, by teaching status, 

1997–2003 

18.8

16.1

14.3 14.2

13.4

11.5

5.8

11.0

8.0

6.0

5.0 4.5

2.0

-1.9

8.1

4.1

1.3

0.3 0.6

-2.6

-5.8

1997 1998 1999 2000 2001 2002 2003

-10

-5

0

5

10

15

20

Marg ni (percent)

Major teaching

Other teaching

Nonteaching

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

hospitals have a ratio of less than 0.25. A margin is calculated as revenue minus costs, divided by revenue. Data are 

based on Medicare-allowable costs and exclude critical access hospitals. Overall Medicare margins includes the costs 

and payment of acute hospital inpatient, outpatient, inpatient psychiatric and rehabilitation unit, skilled nursing facility, 

and home health services, as well as graduate medical education and bad debts. Data on overall Medicare margins 

before 1997 are unavailable. 

Source: MedPAC analysis of Medicare cost report data (August 2004) from CMS. 

• Major teaching hospitals consistently have had higher overall Medicare margins than other 

teaching hospitals and nonteaching hospitals primarily because of the additional payments 

they receive through the indirect medical education and disproportionate share adjustments 

under the acute inpatient payment system. 

• In 2003, overall Medicare margins for major teaching hospitals were 5.8 percent, compared 

with –1.9 percent for other teaching and –5.8 percent for nonteaching hospitals. 

• The difference in overall Medicare margins between major teaching hospitals and 

nonteaching hospitals grew from about 11 percentage points in 1997 to 14 percentage 

points in 2002, reflecting in part the lower cost growth of major teaching hospitals. The 

difference narrowed to 12 percentage points in 2003 as the IME adjustment was reduced. 
A Data Book: Healthcare spending and the Medicare program, June 2005 109

Chart 8-17. Overall Medicare margins, actual through 2003 and 

 simulated for 2005 to account for current policy, 

 including MMA provisions 

Hospital group 2000 2001 2002 2003 2005* 

 

All hospitals 5.2% 5.0% 2.3% –1.9% –1.5% 

Urban 6.2 5.8 3.0 –1.3 –1.3 

Rural –2.6 –1.3 –3.3 –6.2 –3.1 

Major teaching 14.2 13.4 11.5 5.8 5.0 

Other teaching 5.0 4.5 2.0 –1.9 –1.7 

Nonteaching 0.3 0.6 –2.6 –5.8 –4.7 

Note: MMA (Medicare Prescription Drug, Improvement, and Modernization Act of 2003). Data are for hospitals covered by the 

Medicare acute inpatient prospective payment system in 2003. A margin is calculated as revenue minus costs divided by 

revenue; margins are based on Medicare-allowable costs. Overall Medicare margin covers acute inpatient, outpatient, 

hospital-based skilled nursing facility and home health, and inpatient psychiatric and rehabilitation services, plus graduate 

medical education and bad debts. 

 * 2005 margins are projections that reflect the effects of policy changes to be implemented in 2004 through 2006. 

Source: MedPAC analysis of Medicare Cost Report files, MedPAR, and market basket file from CMS. 

• The overall Medicare margin has trended downward since 2000, falling to –1.9 percent in 

 2003. The drop from 2002 resulted mostly from high cost growth, but payment policy 

 changes also played a role. 

• We estimate that the Medicare margin in 2005—reflecting 2006 payment policies—will 

increase slightly to –1.5 percent. The improvement in the margin in part reflects Medicare 

Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) policy changes that 

increased inpatient payment rates to many rural and some urban hospitals. Consequently, 

the gap in margin between urban and rural hospitals is expected to narrow between 2003 

and 2005. 
110 Acute inpatient services

Chart 8-18. Hospital total margin, 1992–2003 

4.6 4.3 4.6

5.8 5.9

6.4

4.7

3.6 3.8 3.7 3.7

4.4

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

5

10

15

Marg ni (percent)

 

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

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

Source: MedPAC analysis of Medicare cost report data (August 2004) from CMS. 

• The total hospital margin for all payers⎯Medicare, Medicaid, and private payers⎯reflects 

the relationship of all hospital revenues to all hospital costs, including inpatient, outpatient, 

post-acute, and nonpatient services. 

• The total hospital margin gradually climbed from 4.3 percent in 1993 to 6.4 percent in 1997, 

before declining to between 3.6 percent and 3.8 percent in the 1999 to 2002 period. In 2003 

the total hospital margin climbed to 4.4 percent, its highest level in five years. 

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

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

margin. 

• In 2003, 69 percent of hospitals had positive total margins. These hospitals accounted for 

 76 percent of hospital discharges. 
A Data Book: Healthcare spending and the Medicare program, June 2005 111

Chart 8-19. Total hospital margin, by urban and rural 

 location, 1992–2003 

6.0

5.3

5.7

6.9

7.3

7.9

5.5

5.1 5.0

4.5

3.9

4.6 4.3

4.7

5.7 5.8

6.3

4.7

3.4 3.6 3.6 3.6

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

5

10

15

Margin (percent)

Rural

Urban

4.0

4.4

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

 services funded by all payers, plus non-patient revenue. Analysis excludes critical access hospitals. 

Source: MedPAC analysis of Medicare cost report data (August 2004) from CMS. 

• Until 2002, total margins for rural hospitals were consistently about 1 percentage point 

higher than total margins for urban hospitals. In 2003, for the first time, the total margin for 

urban hospitals, 4.4 percent, was higher than the margin for rural hospitals, 4.0 percent. 
112 Acute inpatient services

Chart 8-20. Total hospital margin, by teaching status, 

 1992–2003 

5.4 5.2 5.5

6.8 7.1 6.9

5.3 4.6 4.7 4.9 4.7

5.2

4.8 4.7 4.9

6.2

6.8 7.0

5.3

4.0 3.9 4.0 4.0

4.7

3.8

3.2 3.4

3.9

3.4

4.9

3.3

1.7

2.3

1.4 1.7

2.7

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

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 (August 2004) 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 2003, the total margin for nonteaching hospitals stood at 5.2 percent compared 

with 2.7 percent for major teaching hospitals. 

• Total margin for all three groups of providers in 2003 was at the highest level since 1998. 
A Data Book: Healthcare spending and the Medicare program, June 2005 113

Chart 8-21. Hospitals with consistently negative overall 

 Medicare margins tend to have above-average 

 costs

Negative Medicare Positive Medicare All 

Hospital characteristic margin hospitals margin hospitals hospitals 

Hospitals in group 861 1,106 2,991 

(Share of total) (29%) (37%) (100%) 

Occupancy rate 46% 57% 51% 

Annual change in length of stay 

(1994–2002) 

 Medicare –2.9% –3.2% –2.9% 

 All payers –1.2 –1.4 –1.3 

Average age of plant (years) 9.5 10.1 9.8 

Medicare share of patient days 54% 48% 52% 

Medicaid share of patient days 10 13 11 

Standardized Medicare costs per 

discharge (2001)* $5,934 $4,792 $5,315 

Annual change in Medicare costs per 

discharge (1999–2002)* 5.1% 4.8% 5.1% 

Note: Median values shown. Data are for 2002 unless otherwise noted. The term consistently negative refers to hospitals with 

negative margins each year from 1999-2002. 

*Standardized for differences in case mix and wage index. 

Source: MedPAC analysis of impact file, MedPAR, and Medicare Cost Report files from CMS. 

• Between 1999 and 2002, about 29 percent of hospitals had consistently negative overall 

Medicare margins while 37 percent had consistently positive overall Medicare margins. 

• Less than 2 percent of hospitals had consistently negative Medicare and consistently 

negative total (all payer) margins. 

• Hospitals with consistently negative margins tended to have lower occupancy rates (46%) 

and smaller declines in length of stay (–2.9 percent). The lower occupancy rates should 

translate into higher unit costs because fixed costs are spread over fewer units of output. 

• Medicare standardized costs per discharge were substantially above average for the 

negative margin hospital group ($5,934) and substantially below average for the positive 

margin group ($4,792). 

• The costs of positive margin hospitals increased more slowly than those of the 

negative margin hospitals over the four years analyzed, contributing to a widening 

gap in performance. 
114 Acute inpatient services

Chart 8-22. Hospitals with consistently negative overall 

 Medicare margins have a poor competitive position 

 in their market areas 

 Negative Negative Positive 

 Medicare and Medicare Medicare 

Variable total margin hospitals margin hospitals margin hospitals 

 

Number of hospitals in group 55 861 1,106 

(Share of total) (2%) (29%) (37%) 

 

Occupancy rate (2002) 

 For hospitals in group 42% 46% 57% 

 For other hospitals within 15 miles 57 55 59 

Standardized Medicare 

costs per discharge (2001)* 

 For hospitals in group $6,012 $5,934 $4,792 

 For other hospitals within 15 miles 5,630 5,654 5,182 

Note: Median values shown. The term consistently negative refers to hospitals with negative margins each year from 1999-

2002. 

* Standardized for differences in case mix and wage index. 

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

• Hospitals with consistently negative overall Medicare margins from 1999 through 2002 had 

poorer competitive positions in their market, with lower occupancy rates and higher costs 

per discharge than competitors within 15 miles. 

• Hospitals with both negative overall Medicare margins and negative total margins had even 

lower occupancy rates (42 percent) than those with negative Medicare margins alone (46 

percent). These hospitals only account for 2 percent of providers. 

• Hospitals with consistently positive margins had close to the same occupancy rate and 

lower costs than their neighboring facilities. 
A Data Book: Healthcare spending and the Medicare program, June 2005 115

Chart 8-23. Relationship of acute inpatient PPS and overall 

 Medicare margins, 2001 

Note: PPS (prospective payment system). A margin is calculated as revenue minus costs, divided by revenue. Data are based 

on Medicare-allowable costs. Analysis excludes critical access hospitals. The Medicare acute inpatient PPS margin 

includes services covered by the acute care inpatient PPS. Overall Medicare margins cover the costs and payments of 

acute hospital inpatient, outpatient, inpatient psychiatric and rehabilitation units, skilled nursing facilities, and home health 

services, as well as graduate medical education and bad debts. 

Source: MedPAC analysis of Medicare cost report data (third quarter 2003) from CMS. 

• The Medicare inpatient and overall margins are strongly correlated (R2

=0.883) in part 

because inpatient payments make up about three-quarters of total Medicare payments. 

• The Medicare overall margin tends to be lower than the inpatient margin, which may be 

 overstated due to cost allocation bias. 

-60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60

Medicare acute inpatient PPS margin (percent)

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

M

ed ci are

o

v

erall m

argin (percent)

Hospital
116 Acute inpatient services

Chart 8-24. Relationship of overall Medicare and total 

 margins, 2001

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

 allowable costs and imputed for hospitals for which 2001 cost reports were not available. Analysis 

 excludes critical access hospitals. Overall Medicare margins cover the costs and payments of acute 

 hospital inpatient, outpatient, inpatient psychiatric and rehabilitation units, skilled nursing facility, and home 

 health services, as well as graduate medical education and bad debts. Total margin includes all patient 

 care services funded by all payers, plus nonpatient revenues. 

Source: MedPAC analysis of Medicare cost report data (third quarter 2003) from CMS. 

• There is virtually no relationship between hospitals’ overall Medicare margins and 

 total (all payer) margins (R2

=0.02). That is, hospitals’ performance in Medicare is not 

 a good predictor of their performance across all payers and vice versa. 

• Hospitals with negative Medicare margins and those with positive Medicare margins were 

almost equally likely to have positive total margins: 66 percent of hospitals with negative 

overall Medicare margins had positive total margins, while 73 percent of hospitals with 

positive Medicare margins had positive total margins. 

• Hospitals in the upper right quadrant of the graph (38 percent) had positive overall 

 Medicare margins and positive total margins in 2001, whereas hospitals in the lower left 

 quadrant (16 percent) had negative overall Medicare margins and negative total margins. 

-60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60

Total hospital margin (percent)

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

Overall Med ci are margin (percent)

Hospital
A Data Book: Healthcare spending and the Medicare program, June 2005 117

Chart 8-25. Change in Medicare hospital inpatient costs per 

discharge and private payer payment-to-cost ratio, 

1986–2003 

1987 1989 1991 1993 1995 1997 1999 2001 2003

-2

0

2

4

6

8

10

12

P

ercent

R

atio

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

5.1

8.3

6.2

115.9

119.9

121.7

121.6

126.8

131.3

129.3

124.4

123.9

121.5

113.1

115.6

Medicare acute inpatient costs per discharge

Private payer payment-to-cost ratio

1.35

1.30

1.25

1.20

1.15

1.10

112.5

113.6

2.6

112.3

117.6

129.7

118.0

Note: Data are for community hospitals and cover all hospital services. Imputed values were used for missing data (about 33 

 percent of observations). Most Medicare and Medicaid managed care patients are included in the private payer category. 

Source: MedPAC analysis of Medicare Cost Report file from CMS and CMS’s rules for the acute inpatient prospective payment 

system, and American Hospital Association Annual Survey of Hospitals. 

• The pattern of growth in Medicare costs per discharge suggests that hospitals have 

 responded 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, which was more than 2 percentage points a 

 year below the increase in the market basket. 

• As pressure from private payers waned after 1999, the private payer payment-to-cost ratio 

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

 basket by more than 3 percentage points a year. 
118 Acute inpatient services

Chart 8-26. Mark-up of charges over costs for all patient care 

services, 1992–2003 

62.6 67.0

73.8

79.2

85.3

90.2

97.0

103.3

112.6

123.6

136.9

154.5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

25

50

75

100

125

150

175

P

erc

ent

Note: Analysis includes all community hospitals. 

Source: American Hospital Association Annual Survey of Hospitals. 

• From 1992 through 2003, hospitals’ patient care costs (covering all services and all payers) 

increased 81 percent but their charges went up by 181 percent, more than twice as 

much. Consequently, the markup of charges over costs rose from 63 percent in 1992 to 155 

percent in 2003. Charges are now two and a half times costs. In 2000 through 2003, the 

growth in mark-up—about 13 percentage points per year—was the largest since Medicare’s 

acute inpatient PPS was implemented. 

• Since few patients pay full charges, hospitals increasing their charges more than their costs 

may not have had much impact on their financial performance. Some are concerned, 

however, that uninsured individuals may be asked to pay full charges and may have 

collection proceedings applied against them. Faster growth rates for charges in recent 

years may have resulted from hospitals attempting to maximize revenue from private payers 

(who often structure their payments as a discount off charges) or their revenue from 

Medicare outlier payments. 

• Additional information on this outlier payment issue can be found in the Medicare 2002 

Hospital Outlier Payment Policy, available at 

http://www.medpac.gov/publications/other_reports/outlier%20memo.pdf. 
A Data Book: Healthcare spending and the Medicare program, June 2005 119

Chart 8-27. Change in the number of critical access hospitals, 

1999–2005

41

139

341

563

722

875

1055

1999 2000 2001 2002 2003 2004 2005

0

200

400

600

800

1000

1200

Number of C

A

Hs

Note: Numbers of critical access hospitals (CAHs) are as of January 1 of each year. 

Source: The Rural Hospital Flexibility Tracking Project. Third-Year Findings, February 2003, and additional data from CMS. 

• The increase in CAHs is in part due to a series of legislative changes that made conversion 

to CAH status easier and expanded the services that qualify for cost-based reimbursement. 

Currently, CAHs receive cost-based Medicare reimbursement for inpatient services, 

outpatient services (including laboratory and therapy services), and post-acute services in 

swing beds. 

• The number of CAHs has grown steadily over the last seven years, from 41 in 1999 to 1,055 

at the beginning of 2005. By the end of May 2005, the number had grown to 1,112. 
120 Acute inpatient services

Chart 8-28. Medicare payments to inpatient psychiatric 

 facilities, 1993–2004 

2.6

2.8 2.8

3.0 3.0 2.9 2.9 2.8 2.9

3.5

3.7

3.9

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003* 2004*

0

1

2

3

4

D

ollars (in billions)

Note: *Estimated spending. 

Source: CMS, Office of the Actuary. 

• Medicare program spending for beneficiaries’ care in inpatient psychiatric facilities increased 

1 percent per year on average, from $2.6 billion in 1993 to $2.9 billion in 2001. CMS 

estimates that program spending will increase 10 percent per year for 2002–2004 to 

$3.9 billion. 

• Spending on inpatient psychiatric facilities makes up about 1 percent of Medicare’s total 

spending. 

• The inpatient psychiatric facility payment system started January 1, 2005. A description 

of the payment system can be found on the CMS website, available at 

http://www.cms.hhs.gov/providers/ipfpps. 
A Data Book: Healthcare spending and the Medicare program, June 2005 121

Chart 8-29. Inpatient psychiatric facilities, 1996–2005 

 1996 1998 2000 2002 2004 2005 

Freestanding hospitals 642 627 582 503 478 468 

Hospital-based units 1,445 1,489 1,487 1,437 1,389 1,334 

Total 2,087 2,116 2,069 1,940 1,867 1,802 

Source: Online Survey, Certification, and Reporting system from CMS.

• Inpatient psychiatric facilities⎯both freestanding hospitals and hospital-based 

units⎯provide acute hospital care to beneficiaries with mental illnesses or alcohol- and 

drug-related problems. 

• From 1996 to 2005, the number of Medicare-certified freestanding hospitals decreased by 

32 percent while the number of hospital-based units decreased by 8 percent, with a total 

loss of 14 percent of psychiatric facilities. In 2005, there are 1,802 inpatient psychiatric 

facilities—468 freestanding and 1,334 hospital-based units. 

 
122 Acute inpatient services

Web links. Acute inpatient service 

Short-term hospitals 

• Chapter 2A of the MedPAC March 2005 Report to the Congress provides additional detailed 

information on hospital margins. 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02a.pdf

• Chapter 2A of the MedPAC March 2002 Report to the Congress provides information on the 

hospital market basket. 

http://www.medpac.gov/publications/congressional_reports/Mar02_Ch2A.pdf

• CMS also provides information on the hospital market basket. 

http://www.cms.gov/statistics/market-basket/pps-hospital.pdf

• CMS published the acute inpatient PPS proposed rule in the May 4, 2005 Federal Register. 

http://www.gpoaccess.gov/index.html 

Specialty psychiatric facilities 

• CMS provides information on the proposed inpatient prospective payment system. 

http://cms.hhs.gov/providers/ipfpps

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 2005 125

Chart 9-1. FFS Medicare spending and payment update 

 for physician services, 1995–2009 

31.7 31.6 31.9 32.5 33.4

37.0

42.0

45.0

48.2

53.8

57.7 56.7 54.9 54.5 53.2

1.00 1.01 1.01 1.04 1.06

1.12

1.16

1.12 1.13 1.15 1.16

1.12

1.07

1.02

0.97

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0

10

20

30

40

50

60

Medicare spending (dollars in billions)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Cumu al t vi e upda

et s (rat oi )

Medicare spending

Cumulative updates

Historical Projected

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

Source: 2005 annual report of the Boards of Trustees of the Medicare trust funds. 

• Between 1995 and 1999, Medicare spending on physician services was relatively flat. 

More rapid growth occurred between 1999 and 2004—averaging 10 percent annually. 

• The sustainable growth rate system (SGR) requires that future payment increases for 

physician services be adjusted for past actual physician spending relative to a target 

spending level. To avoid reductions in 2004 and 2005 physician fee schedule rates due 

 to the SGR, the Medicare Modernization Act established minimum payment updates for 

 physician services of 1.5 percent for 2004 and 2005. Under current law, payments for 

 physician services are slated to decline about 5 percent for seven consecutive years, 

 beginning in 2006. 

• Congressional testimony by the Chairman of MedPAC on physician payments 

and the SGR is available at 

http://www.medpac.gov/publications/congressional_testimony/050504_SGRTestimony_EC.pdf. 

• A full copy of the Trustees report is available at 

http://cms.hhs.gov/publications/trusteesreport/default.asp.
126 Ambulatory care

Chart 9-2. Medicare spending per FFS beneficiary 

on physician services, 1995–2013 

975 1,015

1,107

1,343

1,464

1,717 1,716 1,669

1,578

1,747

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

0

500

1,000

1,500

2,000

Spend ni g per benef ci ai ry (dol al rs)

Historical Projected

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

Source: 2005 annual report of the Boards of Trustees of the Medicare trust funds. 

• Fee-for-service (FFS) physician spending per beneficiary has increased annually since 

 1995 and is expected to continue increasing through 2006. 

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

projected to decline after 2006 because of scheduled negative payment updates. The 

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

• A full copy of the Trustees report is available at 

http://cms.hhs.gov/publications/trusteesreport/default.asp. 

• Additional information on Medicare payment for physician services can be found in 

 Chapter 3 of MedPAC’s March 2005 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch03.pdf. 
A Data Book: Healthcare spending and the Medicare program, June 2005 127

0

20

40

60

80

100

1995 1999 2001 2002 2003 2004

Percent

Participation rate Assignment rate

Chart 9-3. The supply of physicians who furnish services to 

beneficiaries has increased 

 Number of 

 beneficiaries 

 enrolled in Physicians 

 Number of Part B per 1,000 

Year physicians (millions) beneficiaries 

1999 432,355 37.022 11.7 

2000 444,187 37.315 11.9 

2001 457,292 37.657 12.1 

2002 466,299 37.946 12.3 

2003 470,213 38.364 12.3 

 

 

 

• The number of physicians providing services to beneficiaries has kept pace with growth in 

the beneficiary population. From 1999 to 2003, the number of physicians who regularly saw 

Medicare patients grew by 8.8 percent, but Medicare Part B enrollment grew by only 

3.6 percent. This difference in growth rates led to an increase in the number of physicians 

per 1,000 beneficiaries, from 11.7 to 12.3. 

• A 2003 General Accounting Office report stated that between 1991 and 2001, the number 

of physicians in the United States increased by 26 percent—twice the rate of total 

population growth. 

• The participation rate—that is, the percentage of physicians who can bill Medicare and who 

agree to accept assignment on all claims for payment during a year—has risen steadily over 

the past decade, reaching 92 percent in 2004. 

• When physicians accept assignment, they accept Medicare’s fee schedule amount as the 

service’s full charge (of which 20 percent is beneficiary coinsurance). In 2003, 99 percent of 

allowed charges for physician services were assigned. 

• Additional information and analysis related to this topic can be found in Chapter 2B of 

MedPAC’s March 2005 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02b.pdf. 

Note: Calculations include physicians (allopathic and osteopathic) 

treating at least 15 different beneficiaries in a given year. 

Nurse practitioners, physician assistants, psychologists, and 

other health care professionals are not included in these 

calculations. The beneficiary count includes those in FFS and 

Medicare Advantage, on the assumption that physicians are 

providing services to both types of beneficiaries. 

Source: MedPAC analysis of Health Care Information System, 

1999–2003 from CMS. 

Note: Participation rate is the percentage of physicians 

and nonphysician providers signing Medicare 

participation agreements. Assignment rate is the 

percentage of allowed charges paid on 

assignment. The assignment rate for 2004 is not 

shown; it requires calculations from claims not 

yet available. 

Source: Ways and Means Green Book (2004), 

unpublished CMS data, and MedPAC analysis of

 Medicare claims for a 5 percent random sample 

 of Medicare beneficiaries. 
128 Ambulatory care

Chart 9-4. Spending growth varies by type of service, 

 2003−2004 

Types of Percent of Spending 

services spending increase 

 

Visits 38% 11% 

Minor procedures 20 22 

Imaging 14 22 

Laboratory and other tests 12 17 

Part B drugs 10 17 

Major procedures 6 8 

Other 1 13 

Total 100 15 

 

Note: In both columns of numbers, percentages may not necessarily add to the total, due to rounding. The total spending 

increase is a weighted average, so the spending increases by type of service do not sum to the total. 

Source: Kuhn, H.B., CMS, Letter to MedPAC, March 31, 2005, and unpublished data from CMS. 

• Physician services can be classified by type of service. The visit category consists primarily 

of office visits but also includes consultations and visits to patients in facility settings. 

Examples of major procedures include open heart surgery, joint replacement, and back 

surgery. Minor procedures include colonoscopy, knee arthroscopy, and various eye 

procedures, such as cataract surgery. Tests range from laboratory specimen analysis to 

electrocardiograms and cardiovascular stress tests. Imaging includes x-rays of the chest, 

the musculoskeletal system, and other parts of the body as well as more advanced 

procedures, such as computed tomography and magnetic resonance imaging (MRI). 

Part B drugs consist of covered drugs furnished in physician offices. 

• Growth in spending for physician services varies by type of service. Between 2003 and 

2004, growth was highest for imaging and minor procedures. 

• CMS attributes much of the increase in minor procedures to spending for chemotherapy 

administration and physical therapy. The increase in spending for chemotherapy 

administration is at least partly due to an increase in payments for the services required by 

the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). 

• CMS attributes most of the overall rise in spending to growth in the volume of services. 

Growth in the number of beneficiaries accounts for only a small fraction of the increase, and 

CMS estimates that legislative changes—namely, provisions in the MMA—account for only 

about one-fifth of the increase. 
A Data Book: Healthcare spending and the Medicare program, June 2005 129

Chart 9-5. Volume grew more rapidly in 2004 than in 

 previous years 

4

6

10

3

7

18 18

4

Visits Minor procedures Imaging Major procedures

Type of service

0

5

10

15

20

P

ercent chang

e

Average annual volume growth, 1999-2003 Volume growth, 2003-2004

Note: For minor procedures, volume growth from 2003 to 2004 includes changes in the structure of payments for 

chemotherapy administration. 

Source: MedPAC analysis of claims for 100 percent of Medicare beneficiaries, 1999-2004. 

• Growth in the volume of physician services in 2004 was considerably higher than it was from 

 1999 to 2003. The biggest difference (12 percentage points) was in minor procedures, which 

increased 18 percent in 2004 compared with 6 percent average annual growth from 1999 to 

2003. Growth in the volume of imaging was also much higher in 2004: 18 percent in 2004 

compared with 10 percent annually from 1999 to 2003. 

• Some of the increase may be due to factors often cited as reasons for growth in spending 

and use of services: technological innovations, defensive medicine, direct-to-consumer 

advertising, shifts in the site of care, and adherence to clinical guidelines that call for more 

intensive treatment of chronic illness. However, these factors are not likely the whole story 

because all of them have been at work for at least several years. 

• It is not clear whether volume growth contributes to better health outcomes. 

• One consequence of volume and spending growth is that CMS now expects the monthly 

Medicare Part B premium to rise higher than previously expected. 

• For more information on this topic, see MedPAC’s December 2004 report on Growth in 

Volume of Physician Services, available at 

http://www.medpac.gov/publications/congressional_reports/Dec04_PhysVolume.pdf. 
130 Ambulatory care

Chart 9-6. Medicare Economic Index input categories, weights, 

and projected price changes for 2006 

 

 Category Price changes 

Input component weight for 2006 

Total 100.0% 3.5% 

Physician work 52.5 3.4 

 Wages and salaries 42.7 3.2 

 Fringe benefits (nonwage compensation) 9.7 4.2 

Physician practice expense 47.5 3.6

 Nonphysician employee compensation: 18.7 3.5 

 Wages and salaries 13.8 3.2 

 Fringe benefits (nonwage compensation) 4.8 4.3 

 Office expense 12.2 2.0 

 Professional liability insurance 3.9 8.4 

 Medical equipment 2.1 1.6 

 Drugs and supplies: 4.3 3.0 

 Pharmaceuticals 2.3 3.7 

 Medical materials and supplies 2.0 2.2 

 Other professional expense 6.4 2.1 

Note: Forecasted price changes for individual components are calculated by multiplying the component’s weight by its price 

proxy. Forecasted price changes are not adjusted for productivity. Numbers may not sum to 100% due to rounding. 

Source: Unpublished, fourth-quarter 2006 estimates from CMS, dated September 21, 2004. 

• An important factor in determining the payment update for physician services is the 

projected change in input prices for physician services as measured by the Medicare 

Economic Index (MEI). The MEI is a weighted average of price changes for physician time 

and effort (i.e., work) and practice expense. 

• CMS projects that input prices for physician work will increase 3.5 percent in 2006, based on 

increases of 3.2 percent in wages and salaries and 4.2 percent in nonwage compensation. 

Practice expenses are projected to increase 3.6 percent. This projection primarily reflects a 

3.5 percent increase in nonphysician employee compensation and a 2.0 percent increase in 

office expenses. 

• Professional liability insurance has the largest projected price change, 8.4 percent. 

• Additional information and analysis related to this topic can be found in Chapter 2B of the 

MedPAC March 2005 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02b.pdf. 
A Data Book: Healthcare spending and the Medicare program, June 2005 131

Chart 9-7. Quarterly changes in professional liability insurance 

premiums, 1991–2004

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

-10

-5

0

5

10

15

20

25

30

35

P

ercent Source: Unpublished CMS data. 

• 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 

1990 to 2001. The cycle is generally characterized by periods of low premiums, perhaps 

when insurers are building market share, and high premiums, perhaps when insurers are 

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. 
132 Ambulatory care

Chart 9-8. PLI payments vary by locality and service, as a 

percentage of total payments under the Medicare 

 fee schedule, 2002

0.9

1.5

4

7.1

7.8

0 2 4 6 8 10 12 14

Percent of total payment

South Carolina

Minnesota

Manhattan, NY

Miami, FL

Detroit, MI

2.1

2.2

3.6

6.8

10.8

0 2 4 6 8 10 12 14

Percent of total payment

Office visit

(internal medicine)

Cataract removal/lens

insertion (ophthalmology)

MRI

(diagnostic radiology)

CABG (cardiothoracic

surgery)

Excision of brain tumor

(neurosurgery)

Note: PLI (professional liability insurance), CABG (coronary artery bypass graft), MRI (magnetic resonance imaging). 

PLI payments for services are national averages. 

Source: MedPAC analysis of claims for 100 percent of Medicare beneficiaries in 2002. 

• Medicare accounts for physicians’ costs for professional liability insurance (PLI) in three 

 ways. One way is through the Medicare Economic Index (MEI), which is used to adjust 

 payments equally to account for PLI costs across all physicians serving Medicare 

 beneficiaries. The other two ways are through the physician fee schedule, which assigns 

 relative value units (RVUs) to services and geographic practice costs indexes (GPCIs) to 

 areas of the country. These two components of the fee schedule allow Medicare 

 payments to account for PLI differentially—by service and by geographic area—based 

 on PLI premium differences. 

• The fee schedule’s RVUs designate higher payments for services furnished by 

 neurosurgeons and cardiothoracic surgeons, who bear higher PLI premiums. Similarly, 

 the fee schedule’s GPCIs adjust payments to physicians who practice in geographic 

 areas with high PLI premiums, such as Detroit, Michigan. Given both of these factors, 

 over 20 percent of Medicare’s payments to a Detroit neurosurgeon under the fee 

 schedule can be attributable to PLI, if a fairly high proportion of the neurosurgeon’s 

 practice consists of major procedures. 

• Additional information and analysis related to this topic can be found in Chapter 2B of the 

 MedPAC March 2005 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02b.pdf.
A Data Book: Healthcare spending and the Medicare program, June 2005 133

Chart 9-9. Work GPCI before the MMA established a floor of 1.00 

Note: GPCI (geographic practice cost index), MMA (Medicare Prescription Drug, Improvement, and Modernization Act of 2003). 

Source: Geographic practice cost index from CMS. 

• Under Medicare’s physician fee schedule, geographic practice cost indexes (GPCIs) adjust 

payment rates to account for differences in the price of inputs used in furnishing physician 

services. There are three GPCIs, one corresponding to each component of the relative 

value scale: physician work, practice expense, and professional liability insurance (PLI). 

The three GPCIs are applied to determine rates for each of 89 payment areas. 

• Prior to the implementation of the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA), the work GPCI ranged from 0.94 to 1.09, as shown in the 

map. The MMA temporarily reduced this variation by establishing a three-year floor for the 

work GPCI of 1.00. 

• The work GPCI floor will expire on December 31, 2006, at which point it is expected that 

work GPCIs will again vary widely across the 89 payment areas nationwide. 

• Additional information on the GPCIs can be found in a MedPAC issue brief available at 

http://www.medpac.gov/publications/other_reports/Aug03_GPCI_2pgrKH.pdf. 

0.94–0.96 0.96–0.98 0.98–1.00 1.00–1.03 1.03–1.09
134 Ambulatory care

Chart 9-10. Spending on all hospital outpatient services, 

1994–2004 

7.8 8.6 9.1 9.4 8.6 9.0 9.3

12.8 13.3

15.3

17.8

5.9

6.5

7.2 7.7 7.9

8.9 8.7

8.1 8.2

7.9

8.6

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*

0

5

10

15

20

25

30

D

ollars ( ni billions)

Beneficiary cost sharing

Program payments

Note: Spending amounts are for services covered by the Medicare outpatient prospective payment system and those paid on 

separate fee schedules (such as ambulance services or durable medical equipment) or those paid on a cost basis (such 

as 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 almost 

doubled from calendar year 1994 to 2004. Growth was fast in the mid 1990s, slowed in the 

late 1990s, and accelerated again in 2001. The Office of the Actuary projects continued 

growth in total spending, averaging 7.9 percent per year from 2002 to 2007. 

• A prospective payment system (PPS) for hospital outpatient services was implemented in 

August 2000. Services paid under the outpatient PPS represent about 90 percent of 

spending on all hospital outpatient services (excluding clinical laboratory services, which is 

paid under a fee schedule). 

• In 2001, the first full year of the outpatient PPS, spending under the PPS was $19.2 billion, 

including $11.4 billion by the program and $7.7 billion in beneficiary cost sharing. By 2004, 

spending under the outpatient PPS is expected to rise to $24.0 billion ($15.9 billion program 

spending; $8.1 billion beneficiary copayments). The outpatient PPS accounted for about 

5 percent of total Medicare spending by the program in 2004. 

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

about 34 percent in 2004. Chart 9-14 provides more detail on coinsurance. 
A Data Book: Healthcare spending and the Medicare program, June 2005 135

Chart 9-11. 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 

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. 

• While the number of hospitals has fallen over the past decade, the percent providing 

outpatient services, outpatient surgery, and emergency services has grown.

• Almost all hospitals provide outpatient (94 percent) and emergency (93 percent) services. 

The vast majority (86 percent) provides outpatient surgery.

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

 the outpatient prospective payment system.
136 Ambulatory care

Chart 9-12. Payments and volume of services under the 

Medicare hospital outpatient PPS, by type of 

service, 2003 

 Payments Volume 

Procedures

 48%

Tests

 3%

Pass-through

 drugs

 1% Separately paid

drug/blood products

6%

Other

 1%

Evaluation 

and

management

 15%

Imaging

 25%

Procedures

 19%

Tests

 11%

Pass-through 

 drugs

 1% Separately-paid

 drugs/blood

 products

 21%

Other

 2%

Evaluation

 and

management

 24% Imaging

 23%

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

include transitional corridor payments (see chart 9-15 for further information regarding transitional corridor payments). 

Services are grouped into evaluation and management, procedures, imaging, tests, and other categories according to the 

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

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

Source: MedPAC analysis of the 100 percent special analytic file of outpatient PPS claims for 2003 from CMS. 

• The volume of services is distributed differently than payments. For example, procedures 

account for 19 percent of the volume, but 48 percent of the payments. 

• Hospitals provide many different types of services in their outpatient departments, including 

emergency and clinic visits, imaging and other diagnostic services, laboratory tests, and 

ambulatory surgery. 

• Almost half of the services provided in hospital outpatient departments are evaluation and 

management or imaging services. 

• Procedures (e.g., endoscopies, surgeries, skin and musculoskeletal procedures) account 

for the greatest share of spending on services (48 percent), followed by imaging services 

(25 percent), and evaluation and management (15 percent). 

• In 2003, separately paid drugs and blood products accounted for 6 percent of spending. 
A Data Book: Healthcare spending and the Medicare program, June 2005 137

Chart 9-13. Hospital outpatient services with the highest 

Medicare expenditures, 2003

 Share of 

APC Title payments

Total 50 

0610, 0611, 0612 All emergency visits 8% 

0246 Cataract procedures with IOL insert 4 

0600, 0601, 0602 All clinic visits 4 

0283 Computerized axial tomography (CAT) with contrast material 4 

0080 Diagnostic cardiac catheterization 3 

0260 Level I plain film except teeth 3 

0143 Lower gastrointestinal endoscopy 3 

0301 Level II radiation therapy 3 

0332 CAT and computerized angiography 

 without contrast material 3 

0336 Magnetic resonance imaging (MRI) and magnetic resonance 

 angiography without contrast 2 

0337 MRI and magnetic resonance angiography without 

 contrast material followed by contrast material 2 

0141 Upper gastrointestinal procedures 2 

0120 Infusion therapy except chemotherapy 1 

0280 Level III angiography and venography except extremity 1 

0286 Myocardial scans 1 

0325 Group psychotherapy 1 

0333 Computerized axial tomography and computerized 

 angio w/o contrast material followed by contrast 1 

0267 Level III diagnostic ultrasound except vascular 1 

0131 Level II laparoscopy 1 

0154 Hernia/hydrocele procedures 1 

 

Note: APC (ambulatory payment classification), IOL (intraocular lens). Payments include both program spending and beneficiary 

cost sharing. 

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

 year 2003. 

• 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. 
138 Ambulatory care

Chart 9-14. Medicare coinsurance rates, by type of hospital 

 outpatient service, 2003 

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

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

drugs and blood products are classified by their payment status indicators. 

Source: MedPAC analysis of 100 percent special analytic file of 2003 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 objective is for all cost sharing to move to 20 percent. 

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

very high rates of coinsurance—50 percent. Other services, such as clinic visits, have 

coinsurance rates of 20 percent. 

• In 2003, the overall coinsurance rate was about 34 percent. 

26

50

32

41

15

0

20

Evaluation and 

management

Imaging Procedures Tests Pass-through 

drugs

Pass-through 

devices

Separately 

paid drugs/ 

blood products

Type of Service

0

10

20

30

40

50

60

Co ni surance rate
A Data Book: Healthcare spending and the Medicare program, June 2005 139

Chart 9-15. Transitional corridor payments as a share of 

Medicare hospital outpatient payments, 2001–2003 

2001 2002 2003 

Hospital group 

Number of 

hospitals 

Share of 

payments 

from 

transitional 

corridors 

Number 

of 

hospitals 

Share of 

payments 

from 

transitional 

corridors 

Number of 

hospitals 

Share of 

payments 

from 

transitional 

corridors 

 

All hospitals 3,673 2.3 3,578 2.6 3,404 2.4 

Urban 2,531 2.2% 2,475 2.4% 2,352 1.9% 

Rural ≤ 100 beds 889 4.5 861 6.2 815 8.1 

Rural >100 beds 252 0.8 241 1.4 220 1.7 

 

Major teaching 288 5.2 284 5.2 259 3.4 

Other teaching 794 1.2 776 1.6 737 1.5 

Nonteaching 2,590 1.9 2,517 2.3 2,392 2.6 

Note: A small number of hospitals could not be classified due to missing data. 

Source: MedPAC analysis of Medicare Cost Report files from CMS. 

• When Medicare implemented the hospital outpatient prospective payment system (PPS) in 

2000, Medicare moved from paying hospitals based on their costs to a payment schedule 

based on average (median) costs for all hospitals. 

• Recognizing that some hospitals might receive lower payments under the outpatient PPS 

than they had under the earlier system, the Congress included a transition mechanism, 

called transitional corridor payments. The corridors were designed to make up part of the 

difference between payments that hospitals would have received under the old payment 

system and those under the new outpatient PPS. To provide incentives for efficiency, 

Medicare did not compensate the full difference, except for rural hospitals with 100 or fewer 

beds, cancer hospitals, and children’s hospitals. 

• Transitional corridor payments represented 2.3 percent of total outpatient PPS payments in 

2001, growing to 2.6 percent in 2002, then declining to 2.4 percent in 2003. 

• In 2003, rural hospitals with 100 or fewer beds received 8.1 percent of their payments from 

transitional corridor payments. 

• Major teaching hospitals also reported greater shares of transitional corridor payments, 

receiving over 5 percent of their payments from this source in 2001 and 2002, and 

3.4 percent in 2003. 
140 Ambulatory care

Chart 9-16. Medicare hospital outpatient, inpatient, and 

 overall Medicare margins, 1997–2003 

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 2003, while the aggregate margin was –11.5 percent, 

25 percent of hospitals had margins of –22.1 percent or lower, and 25 percent had margins 

of –3.8 percent or higher. 

• Given hospital accounting practices, margins for hospital outpatient services must be 

considered in the context of Medicare payments and hospital costs for the full range of 

services provided to Medicare beneficiaries. To avoid these allocation problems, MedPAC 

generally uses the overall Medicare margin to assess overall payment adequacy for hospital 

services. 

• The dip in outpatient margins in 1998 is due primarily to the elimination of inadvertent 

overpayments. These overpayments resulted from an error in payment formulas for certain 

services that did not adequately account for beneficiary coinsurance when determining 

program payments. 

• 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. 

15.5

13.3

11.7

9.8

5.9

1.3

11.5

8.2

6.1 5.2 5.0

2.3

-1.9

-5.0

-15.0

-15.8

-14.3

-7.7

-9.0

-11.5

1997 1998 1999 2000 2001 2002 2003

-20

-15

-10

-5

0

5

10

15

20

Margin (percent)

Inpatient margin

Overall Medicare margin

Outpatient margin

17.6
A Data Book: Healthcare spending and the Medicare program, June 2005 141

Chart 9-17. Medicare-certified ASCs increased over 50 percent, 

1998–2004 

 1998 1999 2000 2001 2002 2003 2004 

Medicare payments (billions of dollars) 1.1 1.2 1.4 1.6 1.9 2.2 N/A 

Number of centers 2,644 2,786 3,028 3,371 3,597 3,887 4,136 

 New centers 228 162 295 446 309 365 315 

 Exiting centers 46 20 53 103 83 75 66 

Net percent growth from previous year 7.4% 5.4% 8.7% 11.3% 6.7% 8.1% 6.4% 

 

Percent of all centers that are: 

 For profit 94% 94% 94% 94% 95% 95% 96% 

 Nonprofit 6 6 6 5 5 5 4 

 Urban 89 89 88 88 87 87 87 

Rural 11 11 12 12 13 13 13 

Note: ASC (ambulatory surgical center), N/A (not available). Medicare payments include program spending and beneficiary cost 

sharing for ASC facility services. Totals may not sum to 100 due to rounding. 

Source: MedPAC analysis of provider of services files from CMS, 1998–2004. Payment data from CMS, Office of the Actuary. 

• Ambulatory surgical centers (ASCs) are distinct 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. 

• The number of Medicare-certified ASCs grew at an average annual rate of 7.7 percent 

from 1998 through 2004. Each year from 1998 through 2004, an average of 303 new 

Medicare-certified facilities entered the market, while an average of 64 closed or merged 

with other facilities. 

• The overwhelming majority of Medicare-certified ASCs are for-profit facilities and are located 

in urban areas. 
142 Ambulatory care

Chart 9-18. Over half of most common ambulatory surgical 

procedures were performed in hospital outpatient 

departments, 2001 

 Share of volume, by setting 

 Share of ambulatory 

 surgical volume, Outpatient Physician 

Procedure category all settings* departments offices ASCs

Total 88.1% 53.1% 24.1% 22.8%

Colonoscopy 16.0 70.8 4.3 24.9 

Cataract removal and lens insertion 12.5 47.7 0.5 51.8 

Minor procedures—musculoskeletal 10.7 48.1 31.1 20.8 

Upper gastrointestinal endoscopy 9.5 72.0 4.5 23.5 

Cystoscopy 9.0 28.7 63.8 7.5 

Ambulatory procedures—skin 7.9 42.4 52.6 5.0 

Other ambulatory procedures 7.3 69.8 16.5 13.8 

Other eye procedures 6.9 27.5 33.6 39.0 

Other minor procedures 5.0 30.1 63.3 6.5 

Ambulatory procedures—musculoskeletal 3.4 59.8 17.4 22.9 

 

Note: ASC (ambulatory surgical center). Table only includes ambulatory surgical procedures that are on the list of services 

payable by Medicare when performed in an ASC. Procedure categories are arranged by their share of ambulatory surgical 

volume across all settings, from highest to lowest. Minor procedures—musculoskeletal includes interventional pain 

management procedures (such as epidural injection and facet joint block), soft tissue biopsy, and tumor excision. 

 Ambulatory procedures—skin includes skin debridement, excision of lesion, wound repair, and skin graft. Other 

ambulatory procedures include breast biopsy, nasal polyp excision, abscess drainage, and nerve graft. Other eye 

procedures includes after-cataract laser surgery. Other minor procedures includes nasal, oral, urological, and nerve 

procedures. Ambulatory procedures—musculoskeletal includes hammertoe operation, arthrotomy, tenotomy, and 

tendon repair. 

 *All settings includes outpatient departments, physician offices, and ASCs. 

 

Source: MedPAC and RAND analysis of the 5 percent Standard Analytic Files of physician, outpatient department, and ASC 

claims from CMS, 2001, and the Berenson-Eggers Type of Service classification scheme developed by CMS. 

• Outpatient departments account for 71 percent of colonoscopies—the most common 

ambulatory surgical procedure. 

• Over half of cataract removal and lens insertion procedures are provided in ASCs. 

• Physician offices account for a majority of cystoscopy procedures, ambulatory procedures—

skin, and other minor procedures. 
A Data Book: Healthcare spending and the Medicare program, June 2005 143

Chart 9-19. Medicare spending for imaging services, by type of 

service, 2003 

CT

16%

Standard

21%

MRI

18%

Nuclear medicine

15%

Echocardiography

14%

Other echography 

(ultrasound)

11%

Cardiac catheterization 

and related imaging

5%

Note: CT (computed tomography), MRI (magnetic resonance imaging). Cardiac catheterization includes placement of the 

catheter and the related imaging procedure, such as angiogram. Medicare payments include program spending and 

beneficiary cost sharing for physician fee schedule imaging services. Totals may not sum to 100 due to rounding. 

Source: MedPAC analysis of 100 percent physician/supplier procedure summary file, 2003. 

• Medicare spending for imaging services paid under the physician fee schedule grew by over 

60 percent between 1999 and 2003, from $5.7 billion to $9.3 billion. 

• The volume and complexity of imaging services grew by 45 percent between 1999 and 

2003, more than twice as fast as all physician services (22 percent). These growth rates are 

adjusted for increases in the number of fee-for-service beneficiaries and changes in 

payment rates. 

• Spending for MRI, CT, and nuclear medicine has grown faster than for other imaging 

services. Thus, these categories represent an increasing share of total imaging spending. 

MRI spending grew by 116 percent between 1999 and 2003, nuclear medicine by 104 

percent, and CT by 84 percent. 
144 Ambulatory care

Chart 9-20. Radiologists received almost half of Medicare 

payments for imaging services, 2003 

Radiology

45%

Cardiology

25%

Surgical specialties

8%

IDTF

7%

Internal medicine

6%

Other specialty

5%

Other medical

4%

Note: IDTF (independent diagnostic testing facility). Medicare payments include program spending and beneficiary cost sharing 

for physician fee schedule imaging services. Total fee schedule imaging spending was $9.3 billion in 2003. “Other 

specialty” includes otolaryngology, pain management, osteopathic, physical medicine, nephrology, podiatry, cardiac 

surgery, oncology, and portable x-ray supplies. 

Source: MedPAC analysis of 100 percent physician/supplier procedure summary file, 2003. 

• Imaging services paid under the physician fee schedule involve two parts: the technical 

component, which covers the cost of the equipment, supplies, and nonphysician staff, and 

the professional component, which covers the physician’s work in interpreting the study and 

writing a report. A physician who both performs and interprets the study submits a global bill, 

which includes the technical and professional components. 

• Independent diagnostic testing facilities (IDTFs) are independent of a hospital and 

physician office and only provide outpatient diagnostic services. Medicare pays for IDTF 

services under the physician fee schedule at the same rates as services provided in 

physician offices. 

• CMS applies specific rules to IDTFs that do not apply to physician offices that provide 

diagnostic tests. For example, IDTFs must have supervising physicians who oversee testing 

quality and nonphysician staff who are licensed or certified. However, enforcement of these 

standards is not rigorous; after initial enrollment in Medicare, IDTFs are generally not subject 

to periodic survey and certification. 
A Data Book: Healthcare spending and the Medicare program, June 2005 145

Web links. Ambulatory care 

Physicians 

• Chapter 2B of the MedPAC March 2005 Report to the Congress provides additional 

information on physician services. 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02b.pdf

• The 2005 Annual Report of the Boards of Trustees of the Hospital Insurance and 

Supplementary Medical Insurance Trust Funds provides details on historical and projected 

spending on physician services. 

http://www.cms.hhs.gov/publications/trusteesreport

• Congressional testimonies by the Chairman of MedPAC on May 5, 2004 and 

February 10, 2005, discuss payment for physician services in the Medicare program. 

http://www.medpac.gov/publications/congressional_testimony/050504_SGRTestimony_EC.pdf 

http://www.medpac.gov/publications/congressional_testimony/021005_WM_testimony.pdf

Hospital outpatient services 

• Chapter 3A of the MedPAC March 2004 Report to the Congress provides additional 

information on hospital outpatient services, including outlier and transitional corridor 

payments. 

http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3A.pdf 

• A description of coinsurance under the outpatient PPS can be found in Chapter 9 of the 

MedPAC March 2001 Report to the Congress. 

http://www.medpac.gov/publications/congressional_reports/Mar01%20Ch9.pdf 

• More information on new technology and pass-through payments can be found in Chapter 4 

of the MedPAC March 2003 Report to the Congress. 

http://www.medpac.gov/publications/congressional_reports/Mar03_Ch4.pdf 

Ambulatory surgical centers 

• 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 services 

A Data Book: Healthcare spending and the Medicare program, June 2005 149

Chart 10-1. The number of post-acute care providers generally 

continues to grow 

Percent change 

 1994 1996 1998 2000 2002 2004 2005 1994−2005 

Skilled nursing 13,945 14,548 16,079 16,275 15,089 15,784 15,632 12% 

facilities* 

Home health 8,003 9,808 9,284 7,317 6,888 7,148 7,874 –2 

agencies 

Inpatient 1,001 1,031 1,078 1,102 1,181 1,206 1,232 23 

rehabilitation 

Long-term care 

hospitals 146 183 209 240 286 307 365 147 

Note: * Includes swing bed hospitals. 

Source: Online Survey, Certification, and Reporting system from CMS. 

• The number of post-acute care providers increased in most settings from 1994 to 2005. 

• The number of skilled nursing facilities increased by 12 percent from 1994 to 2005, although 

it has declined since 2000. 

• The number of home health agencies increased by 50 percent from 1994 to their peak in 

1996 and then dropped back to 1994 levels. This may be due to many factors, including: the 

interim payment system, increased program integrity scrutiny, surety bond requirements, 

and other factors. The number has begun to increase again in the most recent periods. 

• Inpatient rehabilitation facilities increased by 23 percent from 1994 to 2005. 

• The number of long-term care hospitals more than doubled from 1994 to 2005.

• More information can be found in Chapter 5 of MedPAC’s June 2005 Report to the 

Congress, and Chapters 2C and 2D of MedPAC’s March 2005 Report to the Congress. 

These reports are available at 

http://www.medpac.gov/publications/congressional_reports/June05_Ch5.pdf, 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02c.pdf, and 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02d.pdf, respectively.
150 Post-acute care

Chart 10-2. Spending for post-acute care, by setting, 1999–2004 

1999 2000 2001 2002 2003* 2004*

0

10

20

30

40

Dollars ( ni billions)

25.0 25.4

28.0

32.9

31.1

35.9

8.4 8.8 8.7

9.9 9.9

10.9 11.2 10.8

13.2

15.2 14.7 15.7

4.0

4.1 4.2

5.3 5.7 5.9

1.7

1.7 1.9 2.5 2.8 3.1

All post-acute care

Home health

Skilled nursing facility

Inpatient rehabilitation

Long-term care hospitals

Note: These numbers are program spending only, and do not include beneficiary copays. 

*Estimated. 

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 2004, Medicare spending for long-term care hospitals has increased the 

most⎯at 13 percent per year. During the same period, spending for skilled nursing facilities 

and inpatient rehabilitation facilities each increased 8 percent per year, and home health 

agencies increased 6 percent per year. For 2004, CMS estimated that total spending for 

post-acute care was almost $36 billion. 

• Post-acute care currently makes up about 12 percent of Medicare’s total spending. 

• More information can be found in Chapter 5 of MedPAC’s June 2005 Report to the 

Congress, and Chapters 2C and 2D of MedPAC’s March 2005 Report to the Congress. 

These reports are available at 

http://www.medpac.gov/publications/congressional_reports/June05_Ch5.pdf, 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02c.pdf, and 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02d.pdf, respectively. 
A Data Book: Healthcare spending and the Medicare program, June 2005 151

Chart 10-3. One-third of beneficiaries discharged from hospitals 

use post-acute care, 2002 

67%

13%

11%

5%

4%

None Skilled nursing facility Home health services LTCH, IRF, IPF Multiple PAC settings

Note: LTCH (long-term care hospital), IRF (inpatient rehabilitation facility), IPF (inpatient psychiatric facility), 

PAC (post-acute care). 

Source: Medicare beneficiaries’ use of post-acute care trends, 1996 to 2002. Report submitted to MedPAC by Christopher Hogan, 

Direct Research, September 2, 2004. 

• The most common single post-acute care destination for beneficiaries discharged from 

acute hospitals is a skilled nursing facility. The second most common is home health care.

• Though some episodes involve multiple settings, the most common episode includes only 

one post-acute setting.

• Two-thirds of beneficiaries discharged from the hospital use no post-acute care. 
152 Post-acute care

Chart 10-4. Medicare spending for skilled nursing facility 

 services generally increased over the decade 

1995–2004 

8.9

10.6

12.8 13.1

10.9 10.8

13.2

14.5 14.7 15.7

2.1

2.3

2.5 2.5

2.3 2.3

2.5

2.7 2.9

3

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*

0

2

4

6

8

10

12

14

16

18

20

D

ollars (in billions)

Beneficiary copayments

Program spending

Note: Spending is for Part A services. 

 * Estimated. 

Source: CMS, Office of the Actuary, 2004. 

• Total Medicare spending on skilled nursing facility (SNF) services grew rapidly (averaging 

19 percent per year) from fiscal year 1993 through fiscal year 1998. 

• In fiscal year 1999, immediately following the implementation of the SNF prospective 

payment system, total Medicare spending on SNF services fell from $15.6 billion to 

$13.2 billion. Prior to fiscal year 1998, Medicare paid SNFs based on their costs, subject 

to some limits. 

• A number of factors contributed to the increase in total Medicare spending for SNF services 

from fiscal year 2000 to fiscal year 2004, including increases in the use of SNF services and 

increases in payment rates over the period. Payment rate increases occurred both because 

of annual updates and because of temporary payment add-ons mandated in the Balanced 

Budget Refinement Act of 1999 and the Medicare, Medicaid, and State Children’s Health 

Insurance Program Benefits Improvement & Protection Act of 2000. 
A Data Book: Healthcare spending and the Medicare program, June 2005 153

Chart 10-5. Medicare skilled nursing facility use increased 

 between 1999 and 2002 

 

 Number of admissions Number of days Days per 

Year (thousands) (millions) admission 

 

1999 1,796 42.4 23.6 

2000 1,824 43.8 24.0 

2001 1,950 47.9 24.6 

 2002 2,223 54.7 24.6 

 

 Increase 

 2001-2002 14.0% 14.1% .11% 

 Average annual increase 7.4% 8.8% 1.4% 

Note: Data include facilities in Puerto Rico, Virgin Islands, and “unknown.” Data do not include swing bed units. 

 

Source: SNF MedPAR stay records from CMS, Office of Research, Development, and Information. 

• The number of Medicare admissions to skilled nursing facilities (SNF) grew at an average 

annual rate of 7.4 percent between 1999 and 2002. Increased SNF use exceeds the rate of 

growth in the Medicare population; during this same period the average annual increase in 

the number of Part A enrollees was just 1.1 percent. 

• Growth in the number of admissions between 2001 and 2002 was almost twice the average 

annual rate of growth between 1999 and 2002. The number of SNF admissions increased 

14 percent between 2001 and 2002, the most recent years for which we have data. 

Similarly, the number of SNF days increased 14.1 percent between 2001 and 2002. 

• The average length of stay for Medicare patients in a SNF increased by one day between 

1999 and 2002. 
154 Post-acute care

Chart 10-6. Medicare costs per day in freestanding SNFs 

 grew at an average annual rate of 3.6 percent 

between 2000 and 2003 

2000-2001 2001-2002 2002-2003

0

1

2

3

4

5

Percent

2.8

3.8

4.4

Note: SNF (skilled nursing facility). Medicare cost growth per day was calculated from year to year among the 

 cohort of freestanding SNFs that submitted cost reports in all four years. 

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

• Per-day costs in freestanding SNFs for Medicare beneficiaries grew 3.6 percent annually 

between 2000 and 2003, with the most recent period seeing a higher rate of growth. 

• At the 25th percentile of the distribution, per-day costs in freestanding SNFs for Medicare 

beneficiaries grew 0.4 percent annually between 2000 and 2003; at the 75th percentile, 

these costs grew 7.9 percent. 
A Data Book: Healthcare spending and the Medicare program, June 2005 155

Chart 10-7. Medicare margins for freestanding skilled nursing 

 facilities continue to be in the double digits, 2001, 

 2003, and estimated 2005 

19%

11%

13%

0%

5%

10%

15%

20%

25%

Reported 2001 Reported 2003 Estimated 2005

 

Note: Margin is calculated as revenue minus costs, divided by revenue. 

 

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

• Additional information on Medicare margins for skilled nursing facilities can be found in 

 Chapter 2C of MedPAC’s March 2005 Report to the Congress available at 

http://www.medpac.gov/publications/congressional_reports/mar05_CH02C.pdf. 

• The Medicare margin in fiscal year 2005 is about 13 percent. This represents the 

combination of three changes in the payment rates since fiscal year 2001: 

-The expiration of two temporary payment add-ons at the end of fiscal year 2002. 

-An administration action which resulted in a 3.26 percent increase in SNFs’ fiscal year 2004 

base rates to correct for errors in forecasting the SNF market basket index for fiscal years 

2000 through 2003. This correction was in addition to the full market basket update of 3.0 

percent in fiscal year 2004. 

 -A full 3 percent update in these rates for fiscal year 2005. 
156 Post-acute care

Chart 10-8. Distribution of SNF stays, by length of stay, in 2001 

1-5 days

14%

6-14 days

31%

15-20 days

14%

21-30 days

15%

31-60 days

17%

61-90 days

6%

91-100 days

3%

Note: SNF (skilled nursing facility). 

Source: MedPAC analysis of SNF stay file for SNF admissions in 2001. 

• The SNF payment system pays hospital-based and freestanding SNFs a case-mix adjusted 

 daily rate for up to 100 days of care per beneficiary. However, about 60 percent of SNF 

 stays lasted just 20 or fewer days in 2001, and only about 9 percent of covered SNF stays 

 were longer than 60 days. 

 

• The mean length of stay (LOS) for all Medicare-covered SNF stays was about 24 days— 

with hospital-based SNFs having shorter mean LOS (14 days) than freestanding SNFs 

(28 days). 
A Data Book: Healthcare spending and the Medicare program, June 2005 157

Chart 10-9. RUG–III classification scheme 

Note: RUG-III (resource utilization group, version III). 

Source: Figure adapted from GAO 2002. 

• Medicare’s payment system adjusts SNF nursing and therapy base rates for expected 

resource use, employing weights associated with each of the 44 RUG–III categories. The 44 

groups fall into seven major categories: (1) rehabilitation, (2) extensive services, (3) special 

care, (4) clinically complex, (5) impaired cognition, (6) behavior only, and (7) reduced 

physical function. 

• Beneficiaries are assigned to a RUG–III category based on the number of minutes of 

therapy (physical, occupational, or speech) that the patient has used or is expected to use; 

the need for certain services (e.g., respiratory therapy); the presence of certain conditions 

(e.g., pneumonia); an index based on the patient’s ability to independently perform four 

activities of daily living (ADLs) (eating, toileting, bed mobility, and transferring); and—in 

some cases—signs of depression. 

• The RUG–III system is hierarchical; beneficiaries may qualify for multiple categories, 

but the classification system assigns them to the highest payment category for which they 

qualify. 

All 

 patients

 

Patients 

 receive 

 at least 

 45 minutes 

 of therapy 

 per week 

Rehabilitation

 patients

Patients 

require skilled 

 or extensive 

 services

Patients 

 typically do 

 not require 

 skilled 

 nursing care

 

Ultra high (over 720 minutes) 

Special care 

Clinically complex 

Impaired cognition 

Extensive services 

Behavior only 

Reduced physical function 

Very high (500-719 minutes)

High (325-499 minutes) 

Medium (150-324 minutes) 

Low (45-149 minutes) 

 

Patients 

 do not 

 receive 

 at least 

 45 minutes 

 of therapy 

 per week 

4 RUGs 

10 RUGs

4 RUGs 

6 RUGs 

3 RUGs 

3 RUGs 

2 RUGs 

3 RUGs 

3 RUGs 

3 RUGs 

3 RUGs 
158 Post-acute care

Chart 10-10. The highest percentage of Medicare-covered 

 freestanding SNF days were in “very high” and 

 “high” rehabilitation RUG–III groups in 2003 

RUG–III group Percent of Medicare days 

Rehabilitation 77.8% 

 Ultra high, 16–18 ADL 1.7 

 Ultra high, 9–15 ADL 5.7 

 Ultra high, 4–8 ADL 1.6 

 Very high, 16–18 ADL 3.2 

 Very high, 9–15 ADL 15.2 

 Very high, 4–8 ADL 5.2 

 High, 13–18 ADL 14.8 

 High, 8–12 ADL 12.0 

 High, 4–7 ADL 4.3 

 Medium, 15–18 ADL 4.7 

 Medium, 8–14 ADL 7.0 

 Medium, 4–7 ADL 2.3 

 Low, 14–18 ADL 0.2 

 Low, 4–13 ADL 0.2 

Extensive services 7.0 

 7–18 ADL, 4–5 services 3.0 

 7–18 ADL, 2–3 services 3.8 

 7–18 ADL, 0–1 services 0.2 

Special care 6.1 

 17–18 ADL 1.4 

 15–16 ADL 2.0 

 7–14 ADL 2.7 

Clinically complex 6.3 

17–18 ADL, depression 0.2 

 17–18 ADL, no depression 0.6 

 12–16 ADL, depression 0.6 

 12–16, no depression 2.1 

 4–11, depression 0.7 

 4–11, no depression 2.2 

 

Nonskilled RUGs 2.3 

Unknown RUG 0.3 

 

Note: SNF (skilled nursing facility), RUG–III (resource utilization group, version III), ADL (activity of daily living). 

Source: MedPAC analysis of Medicare cost report data from CMS, 2003. Total percent may not add to 100 due to rounding. ADLs 

are expressed in terms of an index. The higher the index, the greater the patient's limitation on activities of daily living. 

"Services" is a count of the services or conditions that qualify a beneficiary for the extensive services category. The higher 

the number of services, the greater the anticipated resource use within the extensive services category. 
A Data Book: Healthcare spending and the Medicare program, June 2005 159

Chart 10-11. Spending for home health care, 1992–2004 

7.2

9.7

12.9

15.7

17.4 17.9

12.8

8.4 8.8 8.7

9.9 9.9

11.2

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

2

4

6

8

10

12

14

16

18

20

Dol al rs ( ni bill oi ns)

 

Source: CMS, Office of the Actuary, 2004. 

• Medicare home health care spending grew at an average annual rate of 20 percent from 

1992 to 1997. During that period, the payment system was cost based. Eligibility had been 

loosened just before this period and enforcing the program’s standards became more 

difficult. 

• Spending began to fall in 1997, concurrent with the introduction of the interim payment 

system (IPS) based upon costs with limits, tighter eligibility, and increased scrutiny from the 

Office of Inspector General. 

• In 2000, the prospective payment system replaced the IPS. At the same time, eligibility for 

the benefit was broadened slightly. The regional home health intermediaries and survey and 

certification units continue to enforce the Medicare program’s integrity standards. 

• More information on changes in home health spending can be found on the CMS website, 

available at http://www.cms.hhs.gov/review/current.asp. 
160 Post-acute care

Chart 10-12. Medicare home health care use, 1992–2003 

People served Visits 

 Number Number Per person 

Year (thousands) (millions) served 

1992 2,506 132 53 

1993 2,874 164 57 

1994 3,179 209 66 

1995 3,469 249 72 

1996 3,600 265 74 

1997 3,558 258 73 

1998 3,062 155 51 

1999 2,720 113 42 

2000 2,461 91 37 

2001 2,426 74 30 

2002 2,550 78 31 

2003 2,685 83 31 

Source: CMS, Office of the Actuary, May 2005. 

• In the early 1990s, the rapid growth in home health use was a concern to policymakers. 

Between 1992 and 1996, the number of beneficiaries using home health care increased by 

more than one million. The total volume of home health was expanding rapidly as the 

number of visits per user increased along with the number of users. 

• In the mid-1990s, the Congress required home health agencies to begin the transition to a 

prospective payment system, CMS clarified the standards of eligibility for the home health 

benefit, and the Office of Inspector General increased its scrutiny of home health. Between 

1997 and 2000, the number of users fell by one million. 

• Many measures of home health use are available at http://www.cms.hhs.gov/providers/hha. 
A Data Book: Healthcare spending and the Medicare program, June 2005 161

Chart 10-13. The home health product changed after the 

 prospective payment system started 

 1997 2002 

Average visits per episode 36 19 

Average minutes per episode 1,500 940 

Percent therapy visits 9% 26% 

Note: The prospective payment system (PPS) began in October 2000. Columns do not sum to 100 percent because data were 

not available for all visit types. 

Source: Pre-PPS CMS analysis of the National Claims History file; post-PPS MedPAC analysis of 5 percent Standard 

 Analytic File. 

• The types and quantity of home health care services that beneficiaries receive are changing. 

In 1997, before the PPS, the average number of visits per episode was 36. By 2002, that 

had fallen to 19 visits. The average length of stay fell from 106 days in 1997 to 56 days 

in 2002. 

• The mix of visits (therapy, aide, or skilled visits as a percent of total visits provided during an 

episode) has shifted toward therapy (physical therapy, occupational therapy, and speech 

pathology) and away from home health aide services. 

• Information about the use of home health services after the PPS can be found on the CMS 

website, available at http://www.medicare.gov. 
162 Post-acute care

Chart 10-14. Therapy services provided in home health have 

increased 

 Average minutes per episode 

 

 2001 2002 Percent change 

 

Total 944 945 0.1 

Skilled nursing 354 355 0.3% 

Home health aide 279 270 -3.2 

Physical therapy 180 187 3.9 

Occupational therapy 32 34 6.3 

Speech (therapy) 7 7 0.0 

Medical social work 10 10 0.0 

Note: Excludes outlier episodes. Averages by visit type do not total the average total minutes because few episodes include 

visits of all types. 

Source: MedPAC analysis of 20 percent sample of the Datalink file from CMS. 

• The home health payment system rewards the provision of therapy services (physical, 

 occupational, or speech). Meeting the therapy threshold for a payment episode produces 

substantially higher payments for otherwise similar patients. For example, an episode for 

a patient with moderate clinical severity and moderate functional limitation would be paid 

 $2,440 (base payment × case weight 1.08) if the episode did not meet the therapy threshold 

and $4,420 (base payment × case weight 1.95) if the episode did meet the therapy 

threshold. 

• The outcomes of care—as measured by average gains in patients’ functional status—also 

showed slight improvements at the same time. More information is available at 

http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3D.pdf
A Data Book: Healthcare spending and the Medicare program, June 2005 163

Chart 10-15. Aggregate Medicare margins for all freestanding 

home health agencies remain in double digits, 

2003, and estimated 2005

Type of agency 2003 2005 

All agencies 13.6% 12.1% 

Caseload of agency 

 Urban 14.1 13.2 

 Mixed 13.2 11.6 

 Rural 10.6 6.1 

Type of control 

 Voluntary 10.6 9.1 

 Private 15.8 14.3 

 Government 5.0 3.3 

Volume 

 Very small (20th percentile) 10.6 9.1 

 Small (20th–40th) 10.1 8.6 

 Medium (40th–60th) 10.9 9.4 

 Large (60th–80th) 15.5 14.0 

 Very large (80th) 14.1 12.6 

Note: Margins are the difference between Medicare’s payments and costs, divided by payments. 

Source: MedPAC analysis of Medicare Cost Report file from CMS. 

• In 2003, 80 percent of agencies had positive margins. These estimated margins indicate 

that Medicare’s payments are well 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 two-thirds of all HHAs in 2001. 

Home health agencies are also based in hospitals. 

• More information on the adequacy of home health payments can be found in Chapter 3D of 

MedPAC’s March 2004 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3D.pdf. 
164 Post-acute care

Chart 10-16. Clinical, functional, and service information from 

OASIS determines patients’ home health case-mix 

classification 

Add the scores from each of these factors:

Primary home care diagnosis

IV/infusion or 

 parenteral/enteral therapy

Vision limitation

Pain

Wound/lesion

Multiple pressure ulcers

Most problematic 

 pressure ulcer stage

Add the scores from each of these factors:

Stasis ulcer status

Surgical wound status

Shortness of breath

Urinary incontinence

Bowel incontinence

Bowel ostomy

Behavioral problems

Clinical

Dressing

Bathing

Add the scores from each of these factors:

Toileting

Transferring

Locomotion

Functional

No hospital discharge

 past 14 days

IRF/SNF discharge

 past 14 days

10 or more therapy visits

Service utilization

Min.

Low

Mod.

High

Min.

Low

Mod.

High

Max

Min.

Low

Mod.

High

Case-mix

classification

(80 groups)

Clinical score

Functional score

Service utilization score

Note: OASIS (Outcome and Assessment Information Set), IV (intravenous), IRF (inpatient rehabilitation facility), 

SNF (skilled nursing facility). 

Source: CMS 2000. 

• Medicare adjusts payments for episodes of home health based on the expected resource 

needs of the patients. Patients’ clinical status, functional level, previous use of service, and 

anticipated need for therapy help to predict resource needs. 

• The single most common case mix group in 2002 had a low clinical score, a moderate 

functional score, and minimum service use score. The case-mix classification system 

includes every combination of scores in the three domains; some of the least likely 

combinations include a high clinical score but minimum functional impairments. 
A Data Book: Healthcare spending and the Medicare program, June 2005 165

Chart 10-17. Top 10 resource groups in home health, 2002 

Case mix group Percent of all episodes 

 HBGJ 9.4 

 HCGJ 9.1 

 HBFJ 6.2 

 HAFJ 5.8 

 HCGL 5.6 

 HAGL 5.4 

 HBGL 5.3 

 HCFJ 4.8 

 HDIJ 3.2 

 HCIJ 3.0 

Top 10 58.0 

Source: MedPAC analysis of a 20 percent sample of the Datalink file for 2002 from CMS. 

• All case mix groups in the home health system begin with the letter “H.” The letters A 

through D indicate patients’ clinical condition from minimum complications to high 

complications. Letters E through I indicate the extent of patients’ functional limitations from 

minimum limitations to maximum limitations. Letters J through M indicate patients’ service 

use from minimum to high. 

• Though the case-mix system of the home health payment system includes 80 different 

groups, these 10 account for almost 60 percent of episodes. Some case-mix groups have 

very few episodes; for example, the group HDEM had fewer than 200 episodes all year, 

across the country in 2002. 

• The “top 10” lists for other years are very similar to this list. 
166 Post-acute care

Web links. Post-acute care 

• Chapter 5 of MedPAC’s June 2005 Report to the Congress provides information on postacute care. 

http://www.medpac.gov/publications/congressional_reports/June05_Ch5.pdf 

Skilled nursing facilities 

• Chapter 2C of MedPAC’s March 2005 Report to the Congress, Chapter 3C of the MedPAC 

March 2004 Report to the Congress, and Chapter 2C of the MedPAC March 2003 Report to 

the Congress provide information on Medicare margins for skilled nursing facilities. 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02C.pdf 

 http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3C.pdf 

 http://www.medpac.gov/publications/congressional_reports/Mar03_Ch2C.pdf 

• The official Medicare website provides information on the prospective payment system and 

other related issues. 

http://www.cms.hhs.gov/providers/snfpps

Home health services 

• Chapter 2D of MedPAC’s March 2005 Report to the Congress provides information on home 

health services. 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02D.pdf

• The official Medicare website provides information on the quality of home health care, and 

additional information on new policies, statistics, and research. 

http://www.cms.hhs.gov/providers/hha

Rehabilitation hospitals and units

• CMS provides information on the inpatient rehabilitation facility prospective payment system. 

http://cms.hhs.gov/providers/irfpps

Long-term care hospitals 

• Chapter 5 of MedPAC’s June 2004 Report to the Congress provides information on longterm care hospitals. 

http://www.medpac.gov/publications/congressional_reports/June04_ch5.pdf

• CMS also provides information on long-term care hospitals, including the long-term care 

hospital prospective payment system. 

http://cms.hhs.gov/providers/longterm
S E C T I O N

Drugs

A Data Book: Healthcare spending and the Medicare program, June 2005 169

Chart 11-1. Sources of outpatient prescription drug coverage 

 among noninstitutionalized beneficiaries, 2002 

Medicaid

Employer sponsored

Medicare managed care

Medigap

Other public sector

No coverage

21.0%

8.6%

9.3%

12.2%

11.9% 

37.2%

Note: “Other public sector” includes federal or state programs not included in the other categories. Analysis 

 includes only beneficiaries living in the community. Totals may not sum to 100 due to rounding. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

• Most beneficiaries living in the community have some drug coverage at some point over a 

calendar year. Twenty-one percent did not have any drug coverage at any time in 2002. 

The most common source of drug coverage in 2001 was employer-sponsored retiree 

coverage, held by 37.2 percent of community-dwelling beneficiaries. 

• The sources of drug coverage will change substantially when the voluntary prescription drug 

program established under the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 begins in 2006. Starting in 2006, beneficiaries cannot obtain new 

drug coverage through a Medigap plan; old policies can be continued. However, 

beneficiaries with Medigap drug coverage may not also enroll in Part D. Further, Medicaid 

will no longer be a primary provider of drug coverage. 
170 Drugs

Chart 11-2. Sources of payment for prescription drugs 

among noninstitutionalized beneficiaries, 2002

Out of pocket

32.9%

Employer sponsored

31.6%

Medicaid

14.1%

Other public sector

11.0%

Medicare managed care

4.2%

Uncollected liability

 3.4% Medigap

2.8%

Note: “Other public sector” includes federal or state programs not included in the other categories. 

 Analysis includes only beneficiaries living in the community. 

Source: MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2002. 

• Beneficiaries living in the community have many sources paying for prescription drugs. 

The largest source of payment is beneficiaries’ out-of-pocket spending, comprising 

33 percent of total drug spending. The second-largest source of payment is 

employer-sponsored retiree coverage, which pays 32 percent of total drug spending. 

• In 2006, there will be a new drug benefit. 
A Data Book: Healthcare spending and the Medicare program, June 2005 171

Chart 11-3. Prescription drug spending per beneficiary, 2005 

0 0-500 500- 

1,000

1,000- 

2,000

2,000- 

3,000

3,000- 

4,000

4,000- 

5,000

5,000- 

6,000

6,000- 

7,000

7,000- 

8,000

8,000- 

9,000

9,000- 

10,000

>10,000

Per capita spending on drugs (dollars)

0

5

10

15

20

25

Percent

Percent of beneficiaries

Percent of drug spending

Source: Estimates from the Congressional Budget Office using data from Medicare Current Beneficiary Survey, 

 1999, projected to 2005. 

• The level of spending on prescription drugs varies widely across beneficiaries.

• About 37 percent of drug spending is concentrated among the beneficiaries with at least 

$6,000 in drug spending, but they are only 9 percent of all beneficiaries. 

• About 30 percent of drug spending is concentrated among the 72 percent of beneficiaries 

with less than $3,000 in drug spending. 
172 Drugs

Chart 11-4. Drug coverage among noninstitutionalized 

beneficiaries, by beneficiaries’ characteristics, 2002 

 

 Number of Percent without 

 beneficiaries drug coverage 

 

All beneficiaries 39,004 20.9% 

Age 

 < 65 5,505 19.4 

 65–69 9,315 19.3 

 70–74 8,354 19.8 

 75–79 7,162 21.0 

 80–84 5,003 22.4 

 85+ 3,666 28.3 

Income status 

 Below poverty 6,216 21.1 

 100–125% of poverty 3,584 23.6 

 125–200% of poverty 7,819 26.3 

 200–400% of poverty 11,916 20.4 

 Over 400% of poverty 9,388 16.1 

Health status 

 Excellent/very good 15,825 23.4 

 Good/fair 19,647 19.5 

 Poor 3,349 17.8 

Race/ethnicity 

 Hispanic 2,961 18.4 

 African American 3,687 20.8 

 White 30,673 21.4 

 Other 1,683 18.2 

Residence 

 Urban 29,752 18.1 

 Rural 9,191 30.2 

Sex 

 Male 17,444 20.4 

 Female 21,560 21.4

Note: Analysis includes only beneficiaries living in the community. In 2002, poverty was defined as $8,628 for people living 

alone and $10,885 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, 2002.

• Drug coverage among beneficiaries living in the community differs by demographic 

characteristics. Rural beneficiaries are much more likely to lack coverage than their urban 

counterparts. Other characteristics associated with lack of coverage include being age 85 

or older, having income between 100 and 200 percent of poverty, and having excellent or 

very good health. 

• In 2006, there will be new Medicare drug coverage.
A Data Book: Healthcare spending and the Medicare program, June 2005 173

Chart 11-5. Medicare spending and annual growth rates for 

 Part B drugs 

2.76 3.22

4.09

5.09

6.41

8.45

10.34

25.9

27.0

24.4

25.9

31.8

22.3

1997 1998 1999 2000 2001 2002 2003

0

5

10

15

20

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

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Annual growth rates (percent)

Medicare spending Annual growth rates

Source: MedPAC analysis of unpublished CMS data. 

• MedPAC estimates that spending for Part B drugs totaled $10.34 billion in 2003, 

an increase of 22.3 percent over 2002. This sum represents about 4 percent of total 

Medicare spending. 

• These totals do not include drugs provided through outpatient departments of hospitals or 

for end-stage renal disease patients in dialysis facilities. MedPAC estimates that in 2003, 

freestanding and hospital-based dialysis facilities alone billed Medicare an additional 

$2.8 billion for drugs. 

• The primary reason for growth in these expenditures is the increased volume of drugs used 

and the substitution of newer and more expensive medications for older therapies. 

• Further analysis can be found in Chapter 9 of MedPAC’s June 2003 Report to the 

Congress, available at 

http://www.medpac.gov/publications/congressional_reports/June03_Ch9.pdf
174 Drugs

Chart 11-6. Top 10 drugs covered by Medicare Part B, by share 

of expenditures, 2003 

 FDA Percent of 

Drug name Clinical indications Competition approval date spending 

Non-ESRD erythropoietin Anemia Multisource 1989 10.8% 

 biological 

Leuprolide acetate suspension Prostate cancer Multisource 1985 7.6 

 

Ipratropium bromide Asthma Generic 1993 6.9 

Rituximab Non-Hodgkins Sole source 1997 5.5 

 lymphoma biological 

Darbepoetin alfa Anemia Sole source 2001 5.1 

 

Albuterol Asthma Generic 1982 4.7 

 

Infliximab Rheumatoid arthritis, Sole source 1999 4.7 

 Crohn’s disease biological 

 

Goserelin acetate implant Prostate cancer Sole source 1989 4.2 

Unclassified new drugs Various N/A Post 4/1/03 4.1 

Docetaxel Cancer Sole source 1996 2.9 

Note: ESRD (end-stage renal disease), FDA (Food and Drug Administration), N/A (not available). 

Source: MedPAC analysis of 2003 Medicare claims data from CMS and unpublished FDA data. 

• Medicare covers about 450 outpatient drugs, but spending is very concentrated. The top 

10 drugs account for about 56 percent of all Part B spending. 

• Spending for new drugs dominates the list. Of the top 10 drugs covered by Medicare in 

2003, four received Food and Drug Administration approval in 1996 or later. In addition, 

spending on injectables too new to have received their own payment codes accounted for 

4 percent of Part B drug spending. 

• Treatment for cancer dominates the list—13 of the top 20 drugs treat cancer or the side 

effects associated with chemotherapy. 
A Data Book: Healthcare spending and the Medicare program, June 2005 175

Web links. Drugs 

• Chapter 9 of the MedPAC June 2003 Report to the Congress provides information on 

Medicare payments for outpatient drugs under Part B. 

http://www.medpac.gov/publications/congressional_reports/June03_Ch9.pdf 

• Fact sheet, last updated in May 2003, provides trend data for prescription drug coverage, 

expenditures, and the key factors that contribute to rising prescription drug spending. 

http://www.kff.org/rxdrugs/3057-03-index.cfm

S E C T I O N

Other services

Dialysis 

Hospice 

Durable medical equipment 

A Data Book: Healthcare spending and the Medicare program, June 2005 179

Chart 12-1. Total number of dialysis facilities is growing; for 

 profit and freestanding are increasing over time 

 1993 1998 2003 

Total number of 

 dialysis facilities 2,343 3,394 4,421 

Mean number of 

 hemodialysis stations 15 16 17 

Percent of all facilities: 

 Urban 77% 75% 75% 

 Rural 23 25 25 

 For profit 61 75 77 

 Nonprofit 39 25 23 

 Freestanding 70 79 84 

 Hospital based 30 21 16 

 Four largest chains N/A N/A 58 

 Any chain N/A N/A 74 

 Nonchain N/A N/A 26 

Note: N/A (not applicable). 

Source: Compiled by MedPAC from the CMS facility survey file. 

 

• Between 1993 and 2003, the number of freestanding and for-profit facilities increased, while 

hospital-based and nonprofit facilities decreased. Freestanding facilities increased from 

70 to 84 percent of all facilities, and for-profit facilities increased from 61 to 77 percent of 

all facilities. 

• During this time, the proportion of facilities located in rural areas has remained relatively 

constant. 

• Specific information about each dialysis facility can be found on the CMS website, available 

at http://www.medicare.gov/Dialysis/Home.asp. 
180 Other services

Chart 12-2. Medicare spending for outpatient dialysis 

services furnished by freestanding dialysis 

facilities, 1993–2003 

3.0

3.3

3.7

4.2 4.3

4.7

5.1

5.4

6.0

6.7

7.4

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

1

2

3

4

5

6

7

8

Dol al rs ( ni bill oi ns)

Source: CMS, Office of the Actuary, 2004. 

• Between 1993 and 2003, Medicare spending for both dialysis treatments (for which 

providers are paid a predetermined rate) and for injectable drugs administered during 

treatments (for which providers are paid on a per-unit basis) increased by about 9 percent 

per year. 

• Two factors contributing to spending growth are the increasing size of the dialysis population 

and the growing use of injectable drugs, such as erythropoietin, iron supplements, and 

vitamin D analogues. 

• The number of dialysis patients increased by 6 percent annually between 1993 and 2002. 

This growth is linked to a number of factors, including improvements in survival, as well as 

increases in the number of people with diabetes, a risk factor for end-stage renal disease. 

• Between 1996 and 2002, estimated spending for injectable drugs increased by 17 percent 

annually; in contrast, spending for dialysis increased by 6 percent annually during this time 

period. The year 1996 is the earliest year for which this data is available. 
A Data Book: Healthcare spending and the Medicare program, June 2005 181

Chart 12-3. Dialysis facilities’ capacity has increased 

steadily between 1994 and 2003 

2,502

2,732

2,940

3,172

3,394

3,619

3,805

3,961

4,132

4,421

20.9

23.1

25.2

27.3

29.9

32.3

34.6

36.2

38.1

41.5

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

1500

2000

2500

3000

3500

4000

4500

5000

D ai yl s si facilit ei s

15

20

25

30

35

40

45

50

Hemodia yl sis trea mt ents (in millions)

Facilities

Hemodialysis treatments

Source: Compiled by MedPAC from the 1993–2003 facility file from CMS. 

• Providers have met the demand for furnishing care to an increasing number of dialysis 

patients by opening new facilities. In 2003, a facility provided over 

9,400 treatments per year on average. 

• Between 1994 and 2003, the total number of dialysis facilities grew by about 

6.5 percent annually, and the number of hemodialysis treatments grew by 

7.9 percent annually. 

• Specific information about each dialysis facility can be found on the CMS website, available 

at http://www.medicare.gov/Dialysis/Home.asp. 
182 Other services

Chart 12-4. A disproportionate number of dialysis facilities that 

closed were small, nonprofit, and hospital based 

 Between 2003 and 2004 

Characteristics of facilities Facilities remaining open Closed facilities 

Mean number of hemodialysis stations 17.3 12.2 

Percent of all facilities: 

 Nonprofit 24% 46% 

 Hospital-based 15 44 

 Rural 24 26 

 In HPSAs 10 7 

Percent of households receiving public assistance 4 4 

Percent of population that was African American 18 24 

 

Note: HPSA (health professional shortage area). 

Source: Compiled by MedPAC from the 2003–2004 Facility Survey file from CMS and from the Bureau of the Census. 

• Facilities that closed in 2004 were no more likely to be in rural, health professional shortage, 

or low-income areas than were facilities that remained in business between 2003 and 2004. 

This suggests that beneficiaries should not be having systematic problems obtaining care in 

these areas. 

• But closures may be disproportionately occurring in areas where a higher proportion of the 

population is African American: 24 percent of the population was African American in areas 

served by facilities that closed compared with 18 percent of the population in areas served 

by facilities that remained open. However, the variables measuring race, income, and 

ethnicity are derived from area-level data. Area-level data cannot provide direct information 

about the causality of a relationship. 
A Data Book: Healthcare spending and the Medicare program, June 2005 183

Chart 12-5. The ESRD population is growing, and most ESRD 

patients undergo dialysis 

 1993 1997 2002 

 Patients Patients Patients 

 (thousands) Percent (thousands) Percent (thousands) Percent 

Total 248.2 100% 334.3 100% 431.3 100% 

Dialysis 180.9 73 244.2 73 308.9 72 

 In-center hemodialysis 149.1 60 210.0 63 280.4 65 

 Home hemodialysis 0.8 <1 1.7 1 1.2 <1 

 Peritoneal dialysis 27.3 11 28.6 9 24.9 6 

 Unknown 3.7 2 3.9 1 2.4 1 

 

Functioning graft and 

 kidney transplants 67.4 27 90.1 27 122.4 28 

 

Note: ESRD (end–stage renal disease). Totals may not equal sum of components due to rounding. 

Source: Compiled by MedPAC from the United States Renal Data System. 

• Persons with end-stage renal disease (ESRD) require either dialysis or a kidney transplant 

to maintain life. The total number of patients increased by 6.3 percent annually between 

1993 and 2002. 

• 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 and 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. Of the 15,712 kidney transplants performed in 2002, 40 percent of the kidneys 

were from living donors and 60 percent were from cadaver donors. 

• This table includes both patients who are and are not Medicare eligible. In 2002, about 93 

percent of dialysis patients were Medicare eligible; Medicare was the primary payer for 

about half of all kidney transplants. 

• Information on the incidence and prevalence of patients with renal disease can be found on 

the US Renal Data System website, available at http://www.usrds.org. 
184 Other services

Chart 12-6. Diabetics and the elderly are the fastest growing 

segments of the ESRD population 

 Percent Annual 

 of total percent change 

 in 2002 1996–2002 

Total (n = 431,284) 100% 6% 

Age 

 0–19 2 3 

 20–44 21 2 

 45–64 42 7 

 65–74 20 5 

 75+ 15 8 

Sex 

 Male 55 6 

 Female 45 5 

Race/Ethnicity 

 White 62 5 

 African American 31 5 

 Native American 1 5 

 Other 6 10 

Underlying cause of ESRD 

 Diabetes 36 8 

 Hypertension 24 5 

 Glomerulonephritis 16 4 

 Other causes 25 4 

 

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 hemodialysis patients, about 45 percent are over age 65. About 60 percent are 

white. 

• Diabetes is the most common cause of renal failure. 

• The number of hemodialysis patients increased by 6 percent annually between 1996 and 

2002. Among the fastest growing groups of hemodialysis patients are those who are over 

age 75 and those with diabetes as the cause of kidney failure. 

• Information on the incidence and prevalence of patients with renal disease and their 

demographic and clinical characteristics can be found on the U.S. Renal Data System 

website, available at http://www.usrds.org. 
A Data Book: Healthcare spending and the Medicare program, June 2005 185

Chart 12-7. Aggregate margins vary by type of freestanding 

dialysis facility, 2003 

Type of facility Aggregate margin 

All facilities 4.2% 

Urban 4.6 

Rural 3.1 

For profit 4.4 

Nonprofit 0.8 

Four largest chains 5.4 

Other chains 0.4 

Nonchain –0.7 

Furnishes per year: 

≤ 10,000 treatments –0.9 

 > 10,000 treatments 6.2 

 

Note: Margins include payments and costs for composite rate services and injectable drugs. Margins are adjusted to reflect 

MedPAC’s analysis of audited cost reports, which found that the ratio of allowable to reported cost per treatment for 

composite rate services is 95.5 percent. 

Source: Compiled by MedPAC from the 2001 and 2003 cost reports and the 2003 institutional outpatient file from CMS. 

• For 2003, the adjusted aggregate Medicare margin for composite rate services and injectable 

drugs was 4.2 percent. 

• Aggregate margins vary based on a facility’s size, affiliation with the four largest chains, and 

profit status. This finding stems from differences in the cost per treatment; for example, total cost 

per treatment was 7 percent lower for facilities affiliated with the four largest chains than for 

facilities not affiliated with these chains. In addition, this finding also reflects differences in the 

proportion of payments facilities receive from composite rate services, which are less profitable 

than dialysis injectables. 

• Aggregate margins for composite rate services and injectable drugs declined from 7.6 percent 

in 1999 to 4.2 percent in 2003. During this period the composite rate increased twice, by 1.2 

percent in 2000 and 2.4 percent in 2001. Providers’ cost per treatment for composite rate 

services spiked between 2000 and 2002, which is discussed earlier in this section. Although 

providers’ cost per treatment for dialysis injectables increased during this period, the difference 

between payments and costs remained about the same. 

• Between 1999 and 2003, the aggregate Medicare margin for composite rate services and 

injectable drugs remained positive for the majority of facilities. Among facilities that reported 

cost information in both 1997 and 2003, 67 percent had positive margins in both years. Only 

8 percent of facilities had negative margins in both years. 

• More information about the financial performance of dialysis facilities can be found in Chapter 2E 

of the MedPAC March 2005 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02e.pdf. 
186 Other services

Chart 12-8. The number of freestanding and for-profit hospices 

has increased the most 

 Number of hospice facilities Percent change 

 2001 2002 2003 2001–2003 

All hospices 2,266 2,323 2,454 8 

Hospice type 

 Freestanding 949 1,067 1,222 29% 

 HHA based 744 677 653 –12 

 Hospital based 553 560 562 2 

 SNF based 20 19 19 –20 

Ownership 

 Not for profit 1,340 1,339 1,384 3 

 For profit 706 762 883 25 

 Government 187 188 189 1 

 Other 35 34 34 –3 

Note: HHA (home health agency), SNF (skilled nursing facility). 

 

Source: MedPAC analysis of unpublished data from CMS. 

• The Medicare hospice benefit is specifically targeted to Medicare beneficiaries with a 

terminal illness. It covers a broad set of palliative services for beneficiaries whose physicians 

have determined that, if their illness runs a normal course, they have a life expectancy of 

six months or less. To elect the hospice benefit, beneficiaries must agree to forgo curative 

treatment for their terminal condition. The vast majority of hospice care is provided in 

patients’ residences (i.e., their home or their nursing home). 

• Hospice volume—measured by the hospice census—has also increased. Over the last 

several years, the number of high-volume hospices has grown, but the number of 

low-volume hospices has fallen. 

• Between 2001 and 2003, the number of for-profit hospices increased considerably more 

than hospices with other types of ownership. Specifically, the number of for-profit hospices 

grew by 25 percent, while the number of not-for-profit and government hospices grew only 

3 and 1 percent, respectively. 

• Similarly the growth in freestanding hospices (not owned by another type of provider) from 

2001–2003 has been much higher (29 percent) than other types (owned by home health 

agencies, hospitals and skilled nursing facilities). 

• Additional information and analysis related to the Medicare hospice benefit can be found in 

Chapter 6 of MedPAC’s June 2004 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/June04_ch6.pdf. 
A Data Book: Healthcare spending and the Medicare program, June 2005 187

Chart 12-9. Hospice use has grown and remains higher for 

decedents in managed care 

1998 1999 2000 2001 2002

0

5

10

15

20

25

30

35

40

Percent of decedents who used hosp ci e

Fee for service Managed care

16 

 25 

18 

 27

 25 

 30

 22 

 32 

25 

 34 

Source: MedPAC analysis of 5 percent enrollee database from CMS, 2003. 

• From 1998 to 2002, the total percentage of beneficiaries using hospice in the year before 

they died grew from 20 percent to 26 percent. Beneficiaries in managed care are more likely 

to use hospice care than beneficiaries in the fee-for-service program. Between 1998 and 

2002, the percentage of beneficiaries who used hospice before they died grew from 25 

percent to 34 percent in managed care, and from 16 percent to 25 percent in fee-for-service. 

• Additional information and analysis related to the Medicare hospice benefit can be 

 found in Chapter 6 of MedPAC’s June 2004 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/June04_ch6.pdf.
188 Other services

Chart 12-10. Growth in hospice use is greatest among 

beneficiaries with noncancer diagnoses and 

those who are older 

< 65 65-74 75-84 85-94 95+

Percent of decedents who used hospice

1998

2002

108

235 35

229

1992 2000

0

100

200

300

400

500

H

ospice beneficiaries (in thousands)

Noncancer

Cancer

10

14

20

25

18

26

14

26

12

23

0

5

10

15

20

25

30

Source: Direct Research, LLC. Note: Excludes beneficiaries in managed care. 

 Source: MedPAC analysis of 5 percent 

 enrollee database from CMS, 2003. 

• Growth in the use of hospice has occurred among beneficiaries in all age, race, and sex 

groups. 

• Growth in hospice use has been fastest among older Medicare decedents. Between 

 1998 and 2002, the share of beneficiaries age 95 or older who died while in hospice 

 care rose from 12 percent to 23 percent. 

• The growing use of hospice by the oldest Medicare decedents is consistent with 

 findings that hospice use has increased considerably among decedents in nursing 

 facilities. From 1992 to 2000, use of hospice by decedents in nursing facilities grew 

 from 11 percent to 36 percent. 

• The share of hospice patients with noncancer diagnoses has grown to be about half 

the hospice population. The three most common noncancer diagnoses for hospice 

 patients are congestive heart failure, dementia, and lung disease. 

• Additional information and analysis related to the Medicare hospice benefit can be 

 found in Chapter 6 of the MedPAC June 2004 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/June04_ch6.pdf. 
A Data Book: Healthcare spending and the Medicare program, June 2005 189

Chart 12-11. Recently, Medicare spending for hospice services 

 has increased sharply 

1.9 2.0 2.1 2.1

2.5

2.8

3.5

4.5

5.9

7.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*

0

1

2

3

4

5

6

7

8

Dollars (in billions)

Note: *Estimated spending for 2004. 

 

Source: CMS Office of the Actuary. 

• Consistent with increases in the number of hospice users, Medicare spending for hospice 

care has increased. Spending has grown from an estimated $3.5 billion in 2001 to an 

estimated $7.0 billion in 2003—a 26 percent average annual increase. 

• Medicare makes daily (per diem) payments to hospice agencies for each day a beneficiary 

is enrolled in the hospice benefit. Payments are made through a fee schedule with four 

different levels of care: routine home care, continuous home care, inpatient respite care, or 

general inpatient care. The majority of care—95 percent—is provided at the routine home 

care level. 
190 Other services

Chart 12-12. Median stays remain stable while long 

stays grow rapidly

 Length of stay (in days)

 

 25th 90th 

 Mean percentile Median percentile 

1998 52 6 18 123 

1999 51 6 17 129 

2000 51 6 16 130 

2001 50 6 16 133 

2002 55 5 16 147 

Source: MedPAC analysis of 5 percent enrollee database from CMS, 2003. 

• In most cases, a beneficiary’s length of enrollment in hospice is determined by the number 

of days a beneficiary lives after electing the hospice benefit. 

• Between 2001 and 2002, the average length of enrollment for a beneficiary in hospice care 

increased from 50 days to 55 days, but the median remained 16 days. 

• A consistent subset of the hospice population has short lengths of stay. From 1998 to 2002, 

more than 25 percent of hospice beneficiaries were enrolled in hospice for less than a week. 

• Long stays are getting longer. The length of stay at the 90th percentile has steadily 

increased. The increased prevalence of nursing home residents in the hospice population 

may be a factor in this long-stay trend.

• Additional information and analysis related to the Medicare hospice benefit can be found in 

Chapter 6 of the MedPAC June 2004 Report to the Congress, available at 

http://www.medpac.gov/publications/congressional_reports/June04_ch6.pdf. 
A Data Book: Healthcare spending and the Medicare program, June 2005 191

Chart 12-13. Program payments continue to grow for durable 

medical equipment 

2001 payment 

(millions) 

2002 payment 

(millions) 

2003 payment 

(millions) 

Percent change

2001-2003 

Medical/surgical 

supplies 

728 848 947 31% 

Hospital beds 364 380 414 14 

Oxygen, oxygen 

supplies 

1,543 1,734 1,913 24 

Wheelchairs 792 1,121 1,456 84 

Orthotic devices 739 877 1,087 47 

Drugs administered 

through DME 

694 855 1,067 54 

Other DME 557 667 817 47 

Total $5,417 $6,482 $7,701 42 

Note: DME (durable medical equipment). Beneficiaries are responsible for a 20 percent copayment for durable medical 

equipment. DME items are grouped by BETOS (Berenson-Eggers Type Of Service) codes into similar—but not 

necessarily homogenous—categories. 

Source: CMS physician/supplier data by BETOS. www.cms.hhs.gov/data/betos/cy2003.asp. 

• DME spending grew 20 percent from 2001 to 2002 and 19 percent from 2002 to 2003. 

• The fastest growing category from 2001 to 2003 was wheelchairs. This category has been 

growing rapidly for several years. CMS, the HHS Office of the Inspector General and others 

have investigated wheelchair suppliers in initiatives such as Operation Wheeler Dealer. 

CMS has also refined the current coverage of mobility assistive equipment. Information on 

the most recent national coverage decision is available at http://www.cms.hhs.gov/mcd. 

• Additional historic Medicare Part B physician and supplier data can be found on the CMS 

website, available at http://cms.hhs.gov/data/betos. 

• CMS will implement a system of competitive bidding to determine DME prices in 2007. 
192 Other services

Web links. Other services 

Dialysis 

• 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

• MedPAC’s June 2005 Report to the Congress recommends changes to how Medicare pays 

for composite rate services and injectable drugs. 

http://www.medpac.gov/publications/congressional_reports/June05_Ch4.pdf

• Chapter 2E of the MedPAC March 2005 Report to the Congress provides information about 

the financial performance of dialysis facilities. 

http://www.medpac.gov/publications/congressional_reports/Mar05_Ch02e.pdf

• MedPAC’s October 2003 report describes how Medicare could modernize the outpatient 

dialysis payment system. 

http://www.medpac.gov/publications/congressional_reports/oct2003_Dialysis.pdf 

• MedPAC’s comment on revisions to payment policies under the physician fee schedule for 

calendar year 2004, includes changes in how to pay for services furnished by nephrologists. 

http://www.medpac.gov/publications/other_reports/100603_RevPhysFeeSched_CB_comment.pdf

Hospice 

• Chapter 6 of the MedPAC June 2004 Report to the Congress: New approaches in Medicare 

reviews trends and policy issues for the Medicare hospice benefit. 

http://www.medpac.gov/publications/congressional_reports/June04_ch6.pdf

• The MedPAC May 2002 Report to the Congress: Medicare beneficiaries’ access to hospice 

provides information on beneficiaries’ access to hospice care. 

http://www.medpac.gov/publications/congressional_reports/may2002_HospiceAccess.pdf

• Chapter 7 of the MedPAC June 1999 Report to the Congress examines end-of-life care and 

makes policy recommendations. 

http://www.medpac.gov/publications/congressional_reports/Jun99%20Ch7.pdf

Durable medical equipment 

• Pages 30 and 31 of the March 2002 Report to the Congress provide information about the 

durable medical equipment benefit. 

http://www.medpac.gov/publications/congressional_reports/Mar02_Ch1.pdf
S E C T I O N

Medicare+Choice and 

Medicare Advantage 

A Data Book: Healthcare spending and the Medicare program, June 2005 195

Chart 13-1. Counties with MA plans, 2005 

Note: MA (Medicare Advantage), CCP (coordinated care plan), PFFS (private fee-for-service). 

Source: Medicare Health Plan Compare database, May 2005. Available at http://www.medicare.gov. 

• Coordinated care plans (CCPs) and private fee-for-service plans (PFFS) are the two current 

types of Medicare Advantage plans. CCPs coordinate care for their members, while PFFS 

plans act as indemnity insurers. 

• MA plans are available in at least parts of 45 states—CCPs are available in 

42 states, while 3 states have only PFFS plans available. Several states have CCPs 

available in a very limited area. 

• Coordinated care plans are available to 67 percent of Medicare beneficiaries in 2005—up 

from 61 percent in 2004. Private FFS plans are available to 45 percent of beneficiaries—up 

from 31 percent in 2004. Overall, 84 percent of beneficiaries live in a county where MA 

plans are available in 2005—up from 77 percent in 2004. 

• MA plans that include some coverage of outpatient prescription drugs are available to 74 

percent of all Medicare beneficiaries and to 88 percent of all beneficiaries who have access 

to any MA plan. 

• MA plan availability is likely to increase in 2006 as regional PPOs are introduced and MA 

plans receive some Medicare payment towards prescription drug costs. 
196 Medicare+Choice and Medicare Advantage

Chart 13-2. Enrollment in MA plans, 1994–2005 

2.3

3.1

4.1

5.2

6.1

6.4 6.3

5.5

4.9

4.6 4.7

4.9

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

0

1

2

3

4

5

6

7

B

eneficiaries (in millions)

Note: MA (Medicare Advantage). 

Source: Medicare Managed Care Contract (MMCC) Plans, Monthly Summary Report, CMS. May 2005. 

 Available at http://cms.hhs.gov/healthplans/statistics/mmcc. 

• Medicare enrollment in private health plans paid on an at-risk capitated basis rose rapidly 

 throughout the 1990s, peaking at 6.4 million enrollees in 1999 (17 percent of all Medicare 

 beneficiaries), and declined steadily to a low of 4.6 million enrollees in 2003 (12 percent 

 of all Medicare beneficiaries). 

• Following the MMA, the program was renamed Medicare Advantage, payments increased, 

and enrollment increased to 4.9 million enrollees by May of 2005 (13 percent of all Medicare 

beneficiaries). 

• Beginning in 2006, beneficiaries will be able to choose between local and regional 

MA plans. 
A Data Book: Healthcare spending and the Medicare program, June 2005 197

Chart 13-3. Counties, by MA payment rates, 2005 

 Under $600 $ 600-700 $700-800 over $800 

Note: MA (Medicare Advantage). 

Source: CMS website, 2005. 

• Medicare payment rates (standardized for demography) for MA plans in U.S. counties 

 range from $592 to $1,222 per month. 

• The counties with rates under $600 per month contain 18 percent of Medicare beneficiaries 

and only 3 percent of MA plan enrollees. 

• The counties with rates between $600 and $700 contain 47 percent of Medicare 

beneficiaries and 43 percent of plan enrollees. 

• The counties with rates between $700 and $800 contain 20 percent of Medicare 

beneficiaries and 28 percent of plan enrollees. 

• The counties with rates above $800 contain 15 percent of Medicare beneficiaries and 26 

percent of plan enrollees. 
198 Medicare+Choice and Medicare Advantage

Chart 13-4. Lowest monthly premiums Medicare 

beneficiaries would have to pay to enroll in an 

available Medicare plan, 2005 

 

Source: MedPAC analysis of CMS data, May 2005. Available at http://www.medicare.gov. 

 

• Twenty-five million beneficiaries (or 69 percent of beneficiaries with plans 

available) can enroll in zero-premium options, that is, no premiums beyond the Part B 

premium. Of those beneficiaries, 6 million can enroll in zero-premium options that rebate 

between $6.90 and the full $78.20 Part B monthly premium. 

• Almost one-third of beneficiaries with plans available have to pay a premium—in addition to 

the Part B premium—to enroll in any private plan option, and 7 percent have to pay a 

monthly premium of $50 or more. 

24%

7%

More than

50 dollars

Up to 50

 dollars

Zero 

dollars

 69%
A Data Book: Healthcare spending and the Medicare program, June 2005 199

Chart 13-5. Distribution of plans and enrollees, by out-ofpocket cap, 2004

29

18

53

30

20

50

Caps on Medicare-covered 

services, including inpatient 

care

Caps only on inpatient care No OOP cap

Type of cap

0

10

20

30

40

50

60

P

erc

ent

Plans Enrollees

Note: OOP (out-of-pocket). 

Source: MedPAC analysis of 2004 plan benefit package data from CMS. 

• Cost sharing for certain types of services, especially inpatient hospital stays, can reach high 

 dollar amounts. 

• Twenty-nine percent of plans and about the same percent of enrollees have OOP caps on 

some or all Medicare-covered services, including inpatient care. 

• Eighteen percent of plans covering 20 percent of beneficiaries have OOP caps for inpatient 

 hospital care. 

• The remaining 53 percent of plans covering 50 percent of beneficiaries do not have any 

limits on beneficiary OOP expenses. 
200 Medicare+Choice and Medicare Advantage

Chart 13-6. MA plan cost sharing for drugs covered 

 under Medicare Part B, 2004 

None Copays 5 10 15 20 30 50

0

10

20

30

40

50

60

P

ercent

19

24

0 1 1

54

1 0

19

29

0 1 2

48

1 0

Percent of plans

Percent of enrollees

Rate of coinsurance

Note: MA (Medicare Advantage). Less than 10 percent of the plans we analyzed require a combination of copayments and 

coinsurance, depending upon the type of drug administered. These plans are shown in the bars that reflect percent 

 coinsurance. 

Source: MedPAC analysis of 2004 Plan Benefit Package data from CMS. 

• Nearly 20 percent of MMA plans do not require cost sharing for Part B-covered drugs. 

• A quarter of plans require copayments for Part B-covered drugs. Most copayments are 

 $10 to $100 per administration, although some plans charge $500 or more per treatment. 

• Fifty-seven percent of plans require coinsurance, with the majority of plans charging 20 

percent coinsurance. Cost sharing under fee-for-service Medicare is 20 percent. 

• Additional information can be found in MedPAC’s mandated report on benefit design and 

cost sharing in Medicare Advantage plans, available at 

http://www.medpac.gov/publications/congressional_reports/Dec04_CostSharing.pdf. 
A Data Book: Healthcare spending and the Medicare program, June 2005 201

Chart 13-7. MA Regions 

Note: MA (Medicare Advantage). 

Source: CMS website, 2005. http://www.cms.hhs.gov/medicarereform/mmaregions/mamap/mamap.asp. 

• In 2006, regional preferred provider organizations (PPOs) will be offered in the Medicare 

Advantage program. 

• CMS chose 26 PPO regions based on factors including population size, sufficient numbers 

 of existing competitors, and preservation of geographic patient flows. 

• As of May 2005, plans had indicated an interest in becoming regional PPOs in 21 of the 

26 PPO regions. 
202 Medicare+Choice and Medicare Advantage

Web links. Medicare+Choice and Medicare Advantage 

• Chapter 3 of MedPAC’s June 2005 Report to the Congress provides information on 

Medicare Advantage plans. 

http://www.medpac.gov/publications/congressional_reports/June05_Ch3.pdf 

• CMS provides information on Medicare+Choice and other Medicare managed care plans. 

http://cms.hhs.gov/healthplans/

• The official Medicare website provides information on plans available in specific areas and 

the benefits they offer. 

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