2-1 

SECTION 2-MEDICARE 

(Note: This chapter does not include information or data on the changes to the 

Medicare Program from Public Law 108-173, signed on December 8, 2003). 

CONTENTS 

Overview 

 Coverage 

 Benefits 

 Payments for Services 

 Administration 

 Financing 

 Federal Outlays 

Eligibility and Coverage 

Aged 

Disabled 

Benefits and Beneficiary Cost-Sharing 

Part A 

Part B 

Financing 

Hospital Insurance Trust Fund - Income 

Supplementary Medical Insurance Trust Fund - Income 

Financial Status of Hospital Insurance Trust Fund 

Financial Status of Supplementary Medical Insurance Trust Fund 

Part A Services - Coverage and Payments 

 Hospitals 

 Short-Term General Hospitals 

Specialty Hospitals and Distinct Part Units 

 Skilled Nursing Facility Services 

Home Health Services 

Hospice Services 

Part B Services - Coverage and Payments 

Physicians= Services 

Nonphysician Practitioner Services 

Clinical Laboratory Services 

Durable Medical Equipment and Prosthetics and Orthotics 

Hospital Outpatient Department Services 

Ambulatory Surgical Center Services 

Ambulance Services 

Home Health Services 

Prescription Drugs 

Other Part B Services 

End Stage Renal Disease Services 

 Coverage 
2-2 

 Treatment 

 Reimbursement 

Medicare+Choice 

Selected Issues 

Secondary Payer 

Supplementing Medicare Coverage 

Legislative History, 1997-2003 

Balanced Budget Act (BBA) of 1997 (P.L.105-33) 

Balanced Budget Refinement Act (BBRA) of 1999 (P. L. 106-113) 

Medicare, Medicaid, and SCHIP Benefits Improvement and 

Protection Act (BIPA) of 2000 (P.L. 106-554) 

Public Health Security and Bioterrorism Preparedness and Response 

Act (P.L. 107-188) 

Consolidated Appropriations Resolution, 2003 (P.L.108-7) 

To Extend the Temporary Assistance for Needy Families Block 

Grant Program, and for Other Purposes (P.L. 108-89) 

CBO Savings and Revenue Estimates for Budget Reconciliation and 

Related Acts, 1981-2003 

Medicare Historical Data 

References 

OVERVIEW 

 Medicare is a nationwide health insurance program for the aged and certain 

disabled persons. The program consists of two partsBPart A, hospital insurance (HI) 

and Part B, supplementary medical insurance (SMI). Total program outlays were 

$256.8 billion in fiscal year 2002. Net outlays, after deduction of beneficiary 

premiums, were $230.9 billion. 

COVERAGE 

Almost all persons over age 65 are automatically entitled to Medicare 

Part A. Part A also provides coverage, after a 24-month waiting period, for 

persons under age 65 who are receiving Social Security cash benefits on the basis 

of disability. Most persons who need a kidney transplant or renal dialysis also may 

be covered, regardless of age. In fiscal year 2003, Part A covered an estimated 

40.3 million aged and disabled persons (including those with chronic kidney 

disease). Medicare Part B is voluntary. All persons over age 65 and all persons 

enrolled in Part A may enroll in Part B by paying a monthly premium - $58.70 in 

2003. In fiscal year 2003, Part B covered an estimated 38.3 million aged and 

disabled persons. 

BENEFITS 

 Part A provides coverage for inpatient hospital services, up to 100 days of 
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post hospital skilled nursing facility (SNF) care, some home health services, and 

hospice care. Patients must pay a deductible ($840 in 2003) each time their hospital 

admission begins a benefit period. (A benefit period begins when a patient enters a 

hospital and ends when she has not been in a hospital or SNF for 60 days.) 

Medicare pays the remaining costs for the first 60 days of hospital care. The 

limited number of beneficiaries requiring care beyond 60 days are subject to 

additional charges. Patients requiring SNF care are subject to a daily coinsurance 

charge for days 21-100 ($105 in 2003). There are no cost-sharing charges for home 

health care and limited charges for hospice care. 

Part B provides coverage for physicians' services, laboratory services, 

durable medical equipment (DME), hospital outpatient department (OPD) services, 

and other medical services. The program generally pays 80 percent of Medicare's 

fee schedule or other approved amount after the beneficiary has met the annual 

$100 deductible. The beneficiary is liable for the remaining 20 percent. 

PAYMENTS FOR SERVICES 

 Taken together, spending for inpatient hospital and physicians’ and related 

services accounts for close to 75 percent of Medicare fee-for-service payments 

(spending for managed care plans is not broken down by service category). 

Medicare makes payments for inpatient hospital services under a prospective 

payment system (PPS); a predetermined rate is paid for each inpatient stay based on 

the patient's diagnosis at discharge. Payment for physicians' services is made on 

the basis of a fee schedule. Specific payment rules are also used for other services. 

ADMINISTRATION 

 Medicare is administered by the Centers for Medicare & Medicaid Services 

(CMS) within the U.S. Department of Health and Human Services (DHHS). (Prior 

to June 14, 2001, this agency was known as the Health Care Financing 

Administration (HCFA).) Much of the day-to-day work of reviewing claims and 

making payments is done by fiscal intermediaries (for Part A) and carriers (for Part 

B). These are commercial health insurers or Blue Cross Blue Shield plans. 

FINANCING 

 Medicare Part A is financed primarily through the HI payroll tax levied on 

current workers and their employers. Employers and employees each pay a tax of 

1.45 percent on all earnings. The self-employed pay a single tax of 2.9 percent on 

earnings. 

 Part B is financed through a combination of monthly premiums levied on 

program beneficiaries and Federal general revenues. In 2003, the premium is 

$58.70. Beneficiary premiums have generally represented about 25 percent of Part 

B costs; Federal general revenues (i.e., tax dollars) account for the remaining 

75 percent. 
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FEDERAL OUTLAYS 

 Total program outlays were $256.8 billion in fiscal year 2002. Net outlays 

(i.e., net of premiums beneficiaries pay for enrollment, largely for Part B) were 

$230.9 billion. Tables 2-1, 2-2, and 2-3 provide historical spending and coverage 

data for Medicare. 

TABLE 2-1--MEDICARE OUTLAYS, 

SELECTED FISCAL YEARS 1967-2008 

[In Millions of Dollars]

Fiscal 

Year Part A Part B Total Medicare 

Outlays 

Medicare 

Premium Offsets

Net Medicare 

Outlays 

Percent Increase 

(Over Prior Year) 

1967 $2,597 $798 $3,395 -$647 $2,748 NA 

1970 4,953 2,196 7,149 -936 6,213 9.1 

1975 10,612 4,170 14,782 -1,907 12,875 33.6 

1980 24,288 10,746 35,034 -2,945 32,089 21.1 

1985 48,667 22,730 71,397 -5,562 65,835 14.0 

1990 66,687 43,022 109,709 -11,607 98,102 15.5 

1991 70,742 47,021 117,763 -12,174 105,589 7.6 

1992 81,971 50,285 132,256 -13,232 119,024 12.7 

1993 91,604 54,254 145,858 -15,305 130,553 9.7 

1994 102,770 59,724 162,494 -17,747 144,747 10.9 

1995 114,883 65,213 180,096 -20,241 159,855 10.4 

1996 127,683 68,946 196,629 -20,088 176,591 10.5 

1997 137,884 72,553 210,437 -20,421 190,016 7.6 

1998 137,298 76,272 213,570 -20,747 192,823 1.5 

1999 131,500 80,518 212,018 -21,561 190,457 -1.2 

2000 130,030 88,992 219,022 -21,907 197,115 3.5 

2001 142,901 99,452 242,353 -23,748 218,605 10.9 

2002 148,013 108,825 256,838 -25,952 230,886 5.6 

2003 est. 152,925 120,019 272,944 -28,269 244,675 6.0 

2004 est. 162,358 121,518 283,876 -30,998 252,878 3.4 

2005 est. 170,228 128,467 298,695 -32,826 265,869 5.1 

2006 est. 174,506 131,909 306,415 -34,522 271,893 2.3 

2007 est. 185,245 140,504 325,749 -36,339 289,410 6.4 

2008 est. 195,550 149,601 345,151 -38,755 306,396 5.9 

Note-Excludes offsetting receipts (except for premiums). 

Source: Office of the President, 2003. 
2-5 

ELIGIBILITY AND COVERAGE

AGED 

Part A 

 Most Americans age 65 or older are automatically entitled to protection 

under Part A. These individuals (or their spouses) established entitlement during 

their working careers by paying the HI payroll tax on earnings covered by either the 

Social Security or Railroad Retirement Systems. 

 The HI tax was extended to Federal employment with respect to wages paid 

on or after January 1, 1983. Beginning January 1, 1983, Federal employment is 

included in determining eligibility for protection under Medicare Part A. A 

transitional provision allows individuals who were in the employ of the Federal 

Government both before and during January 1, 1983, to have their prior Federal 

employment considered as employment for purposes of providing Medicare 

coverage. Employees of State and local governments, hired after March 31, 1986, 

are also liable for the HI tax. 

 Persons age 65 or older who are not automatically entitled to Part A may 

obtain coverage, providing they pay the full actuarial cost. The 2003 monthly 

premium is $316 ($174 for persons who have at least 30 quarters of covered 

employment). 

Part B 

 Part B of Medicare is voluntary. All persons age 65 or older (even those not 

entitled to Part A) may elect to enroll in the SMI Program by paying the monthly 

premium. The 2003 premium is $58.70 per month. Persons who voluntarily enroll 

in Part A are required to enroll in Part B. 

DISABLED 

Part A 

 Part A also covers, after a 2-year waiting period, people under age 65 who 

are either receiving monthly Social Security benefits on the basis of disability or 

receiving payments as disabled Railroad Retirement System annuitants. 

(Dependents of the disabled are not eligible.) The 24-month waiting period is 

waived for persons with amyotrophic lateral sclerosis. In addition, most people 

who need a kidney transplant or renal dialysis because of chronic kidney disease 

are entitled to benefits under Part A regardless of age. 

Part B 

 Persons eligible for Part A by virtue of disability or chronic kidney disease 

may also elect to enroll in Part B. 
TABLE 2-2--NUMBER OF MEDICARE ENROLLEES BY TYPE OF COVERAGE AND TYPE OF 

ENTITLEMENT, SELECTED YEARS 1968-2001 

[In Thousands]

Year Average Annual Rate of Growth (Percent) Type of Entitlement and Coverage 1968 1975 1980 1985 1990 1995 2000 2001 1968-1975 1985-1995 1995-2001 

All Enrollees 

HI1 and/or SMI2 19,821 24,959 28,478 31,083 34,203 37,535 39,620 40,026 3.3 1.9 1.1 

Total HI 19,770 24,640 28,067 30,589 33,719 37,135 39,199 39,607 3.2 2.0 1.1 

HI Only 1,016 1,054 1,079 1,094 1,574 1,850 2,260 2,341 0.5 5.4 4.0 

Total SMI 18,805 23,905 27,400 29,989 32,629 35,685 37,360 37,685 3.5 1.8 0.9 

 SMI Only 51 318 411 493 484 400 421 419 29.9 -2.1 0.8 Aged 

HI and/or SMI 19,821 22,790 25,515 28,176 30,948 33,142 34,253 34,462 2.0 1.6 0.7 Total HI 19,770 22,472 25,104 27,683 30,464 32,742 33,833 34,044 1.8 1.7 0.7 

HI Only 1,016 845 835 865 1,263 1,000 1,663 1,713 -2.6 1.5 9.4 

Total SMI 18,805 21,945 24,680 27,311 29,686 31,742 32,590 32,749 2.2 1.5 0.5 

SMI Only 51 318 411 493 484 400 420 418 29.9 -2.1 0.7 

All Disabled 

HI and/or SMI 4 2,168 2,963 2,907 3,255 4,393 5,367 5,563 NA 4.2 4.0 

Total HI 4 2,168 2,963 2,907 3,255 4,393 5,367 5,563 NA 4.2 4.0 HI Only 4 209 244 229 311 451 597 626 NA 7.0 5.6 Total SMI 4 1,959 2,719 2,678 2,943 3,942 4,770 4,937 NA 3.9 3.8 

SMI Only 3 4 0 0 0 0 0 0 0 NA NA NA 

End-Stage Renal Disease Only 

HI and/or SMI 4 13 28 31 65 71 74 84 NA 8.6 2.8 

Total HI 4 13 28 31 65 71 74 84 NA 8.6 2.8 HI Only 4 1 1 2 6 8 5 7 NA 14.9 -2.2 Total SMI 4 12 27 29 59 63 69 77 NA 8.1 3.4 

SMI Only 3 4 NA NA 0 NA NA 0 0 NA NA NA 1 Hospital insurance. 

2 Supplementary medical insurance. 
TABLE 2-2--NUMBER OF MEDICARE ENROLLEES BY TYPE OF COVERAGE AND TYPE OF 

ENTITLEMENT, SELECTED YEARS 1968-2001-continued 

[In Thousands] 3 Disabled and end-stage renal disease only must have HI to be eligible for SMI coverage. 4 Medicare disability entitlement began in 1973. 

NA-Not available. Source: Centers for Medicare & Medicaid Services. 

TABLE 2-3--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE AND 

SERVICE, SELECTED CALENDAR YEARS 1975-2002 

[In millions of dollars]

Amount and Distribution of Payments for Enrollees 

1975 1980 1985 1990 1995 2000 2001 2002 

Type of 

Coverage and 

Service Amount % Amount % Amount % Amount % Amount % Amount % Amount % Amount % 

Total Payments 15,588 100.0 35,686 100.0 70,391 100.0 108,518 100.0 181,148 100.0 217,057 100.0 240,505 100.0 260,565 100.0HI 11,315 72.6 25,051 70.2 47,444 67.4 66,050 60.9 116,176 64.1 126,505 58.3 137,796 57.3 148,523 57.0 Inpatient 10,877 69.8 24,116 67.6 44,940 63.8 59,383 54.7 81,984 45.3 87,280 40.2 95,586 39.7 104,907 40.3

 SNF 254 1.6 395 1.1 548 0.8 2,620 2.4 9,236 5.1 10,928 5.0 13,448 5.6 14,646 5.6 

 HHA 104 0.7 540 1.5 1,913 2.7 3,689 3.4 16,373 9.0 3,902 1.8 4,239 1.8 5,138 2.0  Hospice NA NA NA NA 43 0.1 358 0.3 1,883 1.0 2,980 1.4 3,727 1.5 4,629 1.8 

 Managed  Care NA NA NA NA NA NA NA NA 6,701 3.7 21,415 9.9 20,796 8.6 19,203 7.4 

SMI 4,273 27.4 10,635 29.8 22,947 32.6 42,468 39.1 64,972 35.9 90,552 41.7 102,709 42.7 112,042 43.0 Physicians1 3,416 21.9 8,187 22.9 17,312 24.6 29,609 27.3 31,660 17.5 36,961 17.0 42,018 17.5 44,979 17.3

 Outpatient  Hospital 643 4.1 1,897 5.3 4,319 6.1 8,482 7.8 8,663 4.8 8,494 3.9 11,929 5.0 13,139 5.0  HHA 95 0.6 234 0.7 38 0.1 74 0.1 236 0.1 4,354 2.0 4,345 1.8 5,416 2.1 
TABLE 2-3--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY TYPE OF COVERAGE AND TYPE 

SERVICE, AND BY CALENDAR YEAR OR TYPE OF ENROLLEE- Continued 

[In millions of dollars]

Amount and Distribution of Payments for Enrollees 

1975 1980 1985 1990 1995 2000 2001 2

Type of 

Coverage and 

Type of Service Amount % Amount % Amount % Amount % Amount % Amount % Amount % Amou

 Group Practice 

 Plan/ Managed care 

80 0.5 203 0.6 720 1.0 2,827 2.6 6,610 3.6 18,358 8.5 17,560 7.3 17,49

Laboratory2 39 0.3 114 0.3 558 0.8 1,476 1.4 4,255 2.3 4,009 1.8 4,485 1.9 5,058 

Other NA NA NA NA NA NA NA NA 13,548 7.4 18,376 8.5 22,372 9.3 25,95

HI- Hospital Insurance. SNF- Skilled Nursing Facility. HHA- Home Health Agency. SMI- Supplementary Medical Insurance. NA- Not applicable. 1 Includes additional services. 2 Independent laboratory services 1975-1990. Source: Centers for Medicare & Medicaid Services. 
2-9 

BENEFITS AND BENEFICIARY COST-SHARING

PART A 

 Part A coverage includes: 

 Inpatient hospital care--The first 60 days of inpatient hospital services in a 

benefit period are subject to a deductible ($840 in calendar year 2003). A benefit 

period begins when a patient enters a hospital and ends when he or she has not been 

in a hospital or SNF for 60 days. For days 61-90 in a benefit period, a daily 

coinsurance amount ($210 in calendar year 2003) is imposed. When more than 90 

days are required in a benefit period, a patient may elect to draw upon a 60-day 

lifetime reserve. A coinsurance amount ($420 in calendar year 2003) is imposed for 

each reserve day. No coverage is provided for stays in excess of 150 days in a 

benefit period. 

 Skilled Nursing Facility (SNF) care--The program covers up to 100 days of 

post-hospital SNF care for persons in need of continued skilled nursing care and/or 

skilled rehabilitation services on a daily basis. After the first 20 days, there is a 

daily coinsurance charge ($105 in calendar year 2003). 

 Home health care--Home health visits are provided to persons who need 

skilled care on an intermittent basis. The Balanced Budget Act (BBA) of 1997 

gradually transferred from Part A to Part B home health visits that are not part of 

the first 100 visits following a beneficiary's stay in a hospital or SNF (i.e., 

postinstitutional visits) and during a home health spell of illness. Beginning 

January 1, 2003, Part A covers only postinstitutional home health services for up to 

100 visits during a home health spell of illness, except for those persons with Part A 

coverage only, who are covered for services without regard to the postinstitutional 

limitation. 

 Hospice care--Hospice care services are provided to terminally ill Medicare 

beneficiaries with a life expectancy of 6 months or less for two 90-day periods, 

followed by an unlimited number of 60-day periods. The medical director or 

physician member of the hospice interdisciplinary team must recertify, at the 

beginning of 60-day periods, that the beneficiary is terminally ill. 

PART B 

 Part B of Medicare generally pays 80 percent of the approved amount 

(generally a fee schedule or other predetermined amount) for covered services in 

excess of an annual deductible ($100). Services covered include: 

 Doctor's services--This category includes surgery, consultation, and home, 

office and institutional visits. Certain limitations apply for services rendered by 

dentists, podiatrists, and chiropractors and for the treatment of mental illness. 

 Services of nonphysician practitioners--This category includes physician 

assistants, nurse practitioners, certified registered nurse anesthetists, clinical 

psychologists, and clinical social workers. 

 Other medical and health services--This category includes laboratory and 
2-10 

other diagnostic tests, x-ray and other radiation therapy, outpatient hospital 

services, rural health clinic services, DME, home dialysis supplies and equipment, 

artificial devices (other than dental), physical and speech therapy, and ambulance 

services. 

 Specified preventive services--These services include: an annual screening 

mammography for all women over age 40; a screening Pap smear and a screening 

pelvic exam once every 2 years, except for women who are at a high risk of 

developing cervical cancer; specified colorectal cancer screening procedures; 

diabetes self-management training services; bone mass measurements for high-risk 

persons; and prostate cancer screenings. 

 Drugs and vaccines--Generally Medicare does not pay for outpatient 

prescription drugs or biologicals. Part B does pay for immunosuppressive drugs 

following a covered organ transplant, erythropoietin (EPO) for treatment of anemia 

for persons with chronic kidney failure, and certain oral cancer drugs. The program 

also covers flu shots, pneumococcal pneumonia vaccines, and hepatitis B vaccines 

for those at risk. [Note: H.R. 1, the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003 (P.L. 108-173) provides for prescription drug benefits 

through Medicare.) 

 Home health services--Home health services include those not covered 

under Part A. (As noted above, BBA 1997 transferred some home health costs from 

Part A to Part B.) Part B also covers all medically necessary home health visits for 

persons not covered under Part A. The 20-percent coinsurance and $100 deductible 

do not apply for such benefits. 

 Table 2-4 illustrates the deductible, coinsurance, and premium amounts for 

both Part A and Part B services from the inception of Medicare. 

FINANCING 

 The Medicare Hospital Insurance (HI) Trust Fund finances services covered 

under Medicare Part A. The Supplementary Medical Insurance (SMI) Trust Fund 

finances services covered under Medicare Part B. The trust funds are maintained by 

the Department of the Treasury. Each trust fund is actually an accounting 

mechanism; there is no actual transfer of money into and out of the fund. Income to 

each trust fund is credited to the fund in the form of interest-bearing government 

securities. The securities represent obligations that the government has issued to 

itself. Expenditures for services and administrative costs are recorded against the 

fund. 

HOSPITAL INSURANCE TRUST FUND--INCOME 

 The primary source of income to the HI fund is HI payroll taxes. This source 

accounted for $152.7 billion (85.5 percent) of the total $178.6 billion in income for 

fiscal year 2002. Additional income sources include premiums paid by voluntary 

enrollees, government credits, interest on Federal securities, and taxation of a 

portion of Social Security benefits. 
TABLE 2-4--PART A AND PART B DEDUCTIBLE, COINSURANCE, AND PREMIUMS,1

SELECTED YEARS 1966-2003 

Inpatient Hospital2 HI Monthly Premium6 SMI Premium 

Calendar 

Year 

First 

60 days 

deductible 

61st-90th Day 

coinsurance 

per day3

60 Lifetime reserve 

days (nonrenewable) 

coinsurance per day4

Skilled Nursing 

Facility 21st-100th 

day coinsurance 

per day5

Effective 

date 

Full 

amount

Reduced 

amount 

SMI 

deductible Effective 

date Amoun

1966 $40 $10 7 7 8 8 NA $50 7/66 $3.00 1970 52 13 $26 $6.50 8 8 NA 50 7/70 5.30 

1975 92 23 46 11.50 7/75 $40 NA 60 8 6.70 

1980 180 45 90 22.50 7/80 78 NA 60 7/80 8.70 1985 400 100 200 50.00 1/85 174 NA 75 1/85 15.50 

1990 592 148 296 74.00 1/90 175 NA 75 1/90 28.60 

1991 628 157 314 78.50 1/91 177 NA 100 1/91 29.90 1992 652 163 326 81.50 1/92 192 NA 100 1/92 31.80 1993 676 169 338 84.50 1/93 221 NA 100 1/93 36.60 1994 696 174 348 87.00 1/94 245 $184 100 1/94 41.10 

1995 716 179 358 89.50 1/95 261 183 100 1/95 46.10 1996 736 184 368 92.00 1/96 289 188 100 1/96 42.50 1997 760 190 380 95.00 1/97 311 187 100 1/97 43.80 1998 764 191 382 95.50 1/98 309 170 100 1/98 43.80 1999 768 192 384 96.00 1/99 309 170 100 1/99 45.50 2000 776 194 388 97.00 1/00 301 166 100 1/00 45.50 2001 792 198 396 99.00 1/01 300 165 100 1/01 50.00 2002 812 203 406 101.50 1/02 319 175 100 1/02 54.00 2003 840 210 420 105.00 1/03 316 174 100 1/03 58.70 1 For services furnished on or after January 1, 1982, the coinsurance amounts are based on the inpatient hospital deductible for the year in which the servic

were furnished. For services furnished prior to January 1, 1982, the coinsurance amounts are based on the inpatient hospital deductible applicable for tyear in which the individual's benefit period began. 

2 For care in psychiatric hospital there is a 190-day lifetime limit. 3 Always equal to one-fourth of inpatient hospital deductible through 1988 and for 1990 and later; eliminated for 1989. 
TABLE 2-4--PART A AND PART B DEDUCTIBLE, COINSURANCE AND PREMIUMS1

SELECTED YEARS 1966-2003- continued 

4 Always equal to one-half of inpatient hospital deductible through 1988 and for 1990 and later; eliminated for 1989. 5 Always equal to one-third of inpatient hospital deductible through 1988 and for 1990 and later. For 1989 it was equal to 20 percent of estimated Medica

covered average cost per day. 

6 Not applicable prior to July 1973. Applies to aged individuals who are not fully insured, and to certain disabled individuals who have exhausted oth

entitlement. The reduced amount is available to aged individuals who are not fully insured but who have, or whose spouse has or had, at least 30 quarters 

coverage under title II of the Social Security Act. The reduced amount is 75 percent of the full amount in 1994, 70 percent in 1995, 65 percent in 1996, percent in 1997, and 55 percent in 1998 and thereafter. 

7 Not covered. 8 Not applicable. 

NA-Not available. Note-In addition to the deductible and coinsurance amounts shown in the table, the first three pints of blood are not reimbursed by Medicare. Currently theis no deductible or coinsurance on home health benefits. From January 1973 to June 30, 1982, there was a $60 annual deductible and prior to July 1, 198

benefits were limited to 100 visits per benefit period under Part A and 100 visits per calendar year under Part B. Special limits apply to certain benefits: 

outpatient physician services for mental illness; 50 percent of approved charges, up to a maximum of $250 in benefits per year, July 1, 1966 throuDecember 31, 1987; $450 in benefits per year, January 1, 1988 through December 31, 1988; $1,100 in benefits per year, January 1, 1989 throu

December 31, 1989; beginning January 1, 1990, the limit was removed; (2) physical and occupational therapy services furnished by physical therapists 

independent practice: maximum annual approved charges July 1, 1973 through December 31, 1981, $80 per year; January 1, 1982 through December 3

1982, $400 per year; January 1, 1983 through December 31, 1989, $500 per year; January 1, 1990 through December 31, 1993, $750 per year; and Janua

1, 1994 through December 31, 1998; in 1999 there was an annual $1,500 limit on all physical therapy services (except those provided by a hospital) and annual $1,500 limit on all occupational therapy services (except those provided by a hospital); and no limit in 2000, 2001, 2002, and January-August 200Source: Centers for Medicare & Medicaid Services, Office of the Actuary. 
2-13 

Payroll taxes 

 The HI Trust Fund is financed primarily through Social Security payroll tax 

contributions paid by employees and employers. Each pays a tax of 1.45 percent on 

all earnings in covered employment. The self-employed pay 2.9 percent. Prior to 

1994, there was an upper limit on earnings subject to the tax. An upper limit 

($87,000 in 2003) continues to apply under Social Security. Therefore incomes up 

to $87,000 have a combined tax rate of 7.65 percent (6.2 percent for Social Security 

and 1.45 percent for Medicare). Only the Medicare tax applies to any income in 

excess of $87,000. 

Other income

 The following are additional sources of income to the HI fund: 

 Railroad retirement account transfers--In fiscal year 2002, $425 million was 

transferred from the railroad retirement fund. This is the estimated amount that 

would have been in the fund if railroad employment had always been covered under 

the Social Security Act. 

 Reimbursements for uninsured person--HI benefits are provided to certain 

uninsured persons who turned 65 before 1968. Persons who turned 65 after 1967 

but before 1974 are covered under transitional provisions. Similar transitional 

entitlement applies to Federal employees who retire before earning sufficient 

quarters of Medicare-qualified Federal employment provided they were employed 

before and during January 1983. Payments for these persons are made initially 

from the HI Trust Fund, with reimbursement from the general fund of the Treasury 

for the costs, including administrative expenses, of the payments. In fiscal year 

2002, $442 million was transferred to HI on this basis. 

 Premiums from voluntary enrollees--Certain persons not eligible for HI 

protection either on an insured basis or on the uninsured basis described above may 

obtain protection by enrolling in the program and paying a monthly premium ($316 

in 2003; for persons who have at least 30 quarters of covered employment, $174 in 

2003). This accounted for an estimated $1.6 billion of financing in fiscal year 

2002. 

 Payments for military wage credits--Periodic transfers are authorized 

between the general fund and the treasury and the HI trust fund, if needed, to adjust 

prior payments for the costs arising from wage credits granted to military service 

before 1957. The law authorizes a quinquennial adjustment to the amount 

transferred in 1983. No adjustment was made in FY 2002. 

 Tax on Social Security benefits--Beginning in 1994, the trust fund acquired 

an additional funding source. The Omnibus Budget Reconciliation Act of 1993 

(OBRA 1993) increased the maximum amount of Social Security benefits subject 

to income tax from 50 to 85 percent and provided that the additional revenues 

would be credited to the HI Trust Fund. Revenue from this source totaled $8.3 

billion in fiscal year 2002. 

 Interest--The remaining income to the trust fund consists almost entirely of 

interest on the investments of the trust fund. Interest amounted to an estimated 

$15.1 billion in fiscal year 2002. 
2-14 

SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND--INCOME 

 Part B is financed from premiums paid by the aged, disabled and chronic 

renal disease enrollees and from general revenues. The premium rate is derived 

annually based on the projected costs of the program for the coming year. The 

monthly premium amount in calendar year 2003 is $58.70. 

 When the program first went into effect in July 1966, the Part B monthly 

premium was set at a level to finance one-half of Part B program costs. Legislation 

enacted in 1972 limited the annual percentage increase in the premium to the same 

percentage by which Social Security benefits were adjusted for changes in cost of 

living (i.e., cost-of-living adjustments). Under this formula, revenues from 

premiums soon dropped from 50 to below 25 percent of program costs because Part 

B program costs increased much faster than inflation as measured by the Consumer 

Price Index (CPI) on which the Social Security cost-of-living adjustment is based. 

Beginning in the early 1980s, Congress regularly voted to set Part B premiums at a 

level to cover 25 percent of program costs, in effect overriding the cost-of-living 

adjustment limitation. BBA 1997 permanently set the Part B premium equal to 25 

percent of program costs. General revenues cover the remaining 75 percent of Part 

B program costs 

FINANCIAL STATUS OF HOSPITAL INSURANCE TRUST FUND 

 The Hospital Insurance (HI) Trust Fund balance is dependent on total 

income to the HI Trust Fund exceeding total outlays from the fund. Tables 2-5 and 

2-6 show historical information from the 2003 Trustees' Report on the operation of 

the trust fund. Each year, the HI Trustees make projections for the date the trust 

fund will become insolvent (Table 2-7). The 1997 report stated that under the 

Trustees intermediate assumptions, the fund would become insolvent in 2001. 

Subsequent reports significantly delayed the projected insolvency date. However, 

the 2003 report projects that the fund will become insolvent 4 years earlier (2026) 

than had been projected in the 2002 report. 

 The initial improvements after 1997 reflected a number of factors including 

improvements in the economy as a whole (which were reflected in higher payroll 

tax revenues) and a lower rate of growth in program expenditures. A key factor was 

the enactment of BBA 1997. This legislation provided for the transfer of a portion 

of home health spending (which at the time was the fastest growing component of 

Part A expenditures) from Part A to Part B. It also included additional provisions 

to stem the growth in Part A expenditures. These provisions included the 

implementation of new payment limits for home health services, a prospective 

payment system (PPS) for skilled nursing facility (SNF) services, and limits on the 

increases in hospital payments. BBA 1997 also established the Medicare+Choice 

(M+C) Program and modified the calculation of payments to managed care entities. 

 
TABLE 2-5--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, 

SELECTED FISCAL YEARS 1970-2012 

[In Millions of Dollars]

Income Disbursements 

Fiscal 

Year1 Payroll Taxes 

From 

Taxation 

of 

Benefits 

Railroad 

Retirement 

Account 

Transfers 

Reimbursement 

for 

Uninsured 

Persons 

Premiums 

From 

Voluntary 

Enrollees

Payment 

for 

Military 

Wage 

Credits

Interest 

and 

Other 

Income2

Total Benefits Payments3 Admini- strative Expenses 4 Total Net Increase in Fund Bal

at 

of Y

1970 $4,785 NA $64 $617 NA $11 $137 $5,614 $4,804 $149 $4,953 $661 $21975 11,291 NA 132 481 $6 48 609 12,568 10,353 259 10,612 1,956 9,1980 23,244 NA 244 697 17 141 1,072 25,415 23,790 497 24,288 1,127 14

1985 46,490 NA 371 766 38 86 3,182 50,933 47,841 813 48,654 4,1035 21

1990 70,655 NA 367 413 113 107 7,908 79,563 65,912 774 66,687 12,876 951995 98,053 3,913 396 462 998 61 10,963 114,847 113,583 1,300 114,883 -36 1291996 106,934 4,069 401 419 1,107 -2,2936 10,496 121,135 124,088 1,229 125,317 -4,182 125

1997 112,725 3,558 419 481 1,279 70 10,017 128,548 136,175 1,661 137,836 -9,287 116

1998 121,913 5,067 419 34 1,320 67 9,382 138,203 135,4877 1,653 137,140 1,063 117

1999 134,385 6,552 430 652 1,401 71 9,523 153,015 129,4637 1,978 131,441 21,574 138

2000 137,738 8,787 465 470 1,392 2 10,827 159,681 127,9347 2,350 130,284 29,397 1682001 151,931 4,903 470 453 1,440 -1,1758 12,793 171,014 139,3567 2,368 141,723 29,290 1972002 151,575 10,946 425 442 1,525 0 14,850 179,762 145,5677 2,464 148,031 31,731 229

2003 154,295 6,323 434 393 1,601 0 15,435 178,481 151,8887 2,772 154,661 23,820 252

2004 160,755 7,920 435 365 1,720 0 16,498 187,713 162,195 2,796 164,991 22,722 275

2005 172,103 8,952 444 200 1,828 0 17,922 201,448 172,219 2,869 175,088 26,360 302

2006 180,960 9,683 456 193 1,942 0 19,622 212,856 178,240 2,965 181,205 31,652 333

2007 191,435 10,526 472 200 2,066 0 21,496 226,195 190,544 3,063 193,607 32,588 3662008 201,522 11,744 484 209 2,186 0 23,564 239,708 202,020 3,164 205,184 34,524 4002009 211,646 13,097 496 219 2,317 0 25,661 253,436 214,925 3,274 218,199 35,237 4362010 223,552 14,582 509 227 2,477 0 27,733 269,081 229,415 3,394 232,809 36,272 4722011 235,320 16,580 523 234 2,638 0 29,758 285,053 247,384 3,524 250,908 34,145 506
TABLE 2-5--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, 

SELECTED FISCAL YEARS 1970-2012- Continued 

[In Millions of Dollars]

Income Disbursements 

Fiscal 

Year1 Payroll Taxes 

From 

Taxation 

of 

Benefits 

Railroad 

Retirement 

Account 

Transfers 

Reimbursement 

for 

Uninsured 

Persons 

Premiums 

From 

Voluntary 

Enrollees

Payment 

for 

Military 

Wage 

Credits

Interest 

and 

Other 

Income2

Total Benefits Payments3 Admini- strative Expenses 4 Total Net Increase in Fund Balan

at E

of Y

2012 246,111 18,925 538 239 2,794 0 31,761 300,367 259,669 3,658 263,327 37,040 543,1 Fiscal years 1970 and 1975 consist of the 12 months ending on June 30 of each year; fiscal years 1980 and later consist of the 12 months ending on 

September 30 of each year. 

2 Other income includes recoveries of amounts reimbursed from the trust fund which are not obligations of the trust fund and a small amount of 

miscellaneous income. 

3 Includes costs of peer review organizations from 1983 (beginning with the implementation of the prospective payment system on October 1, 1983) 

through 2001 and costs of quality improvement organizations beginning in 2002. 

4 Includes costs of experiments and demonstration projects. Beginning in 1997, includes fraud and abuse control expenses. 5 Includes repayment of loan principal from the Old-Age and Survivors Insurance Trust Fund of $1,824 million. 6 Includes the lump-sum general revenue adjustment of -$2,366 million. 7 For 1998-2003, includes moneys transferred to the SMI Trust Fund for home health agency costs. 8 Includes a lump-sum general revenue adjustment of -$1,177 million. NA-Not applicable. Note-Totals do not necessarily equal the sums of rounded components. Source: Board of Trustees, Federal Hospital Insurance Trust Fund (2003). 
TABLE 2-6--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, 

SELECTED CALENDAR YEARS 1970-2012 

[In Millions of Dollars]

Income Disbursements 

Year Payroll 

Taxes 

From 

Taxation 

of 

Benefits 

Railroad 

Retirement 

Account 

Transfers

Reimbursement for 

Uninsured 

Persons 

Premiums 

From 

Voluntary 

Enrollees

Payments 

for Military 

Wage 

Credits 

Interest 

and 

Other 

Income1

Total Benefits Payments2 Adminis- trative Expenses3 Total 

Net 

Increase 

in Fund

Balan

at End 

Yea

1970 $4,881 NA $66 $863 NA $11 $158 $5,979 $5,124 $157 $5,281 $698 $3,201975 11,502 NA 138 621 $7 48 664 12,980 11,315 266 11,581 1,399 10,5

1980 23,848 NA 244 697 18 141 1,149 26,097 25,064 512 25,577 521 13,741985 47,576 NA 371 766 41 -7194 3,362 51,397 47,580 834 48,414 4,8085 20,49

1990 72,013 NA 367 413 122 -9936 8,451 80,372 66,239 758 66,997 13,375 98,93

1995 98,421 $3,913 396 462 954 61 10,820 115,027 116,368 1,236 117,604 -2,577 130,21996 110,585 4,069 401 419 1,199 2,2937 10,222 124,603 128,632 1,297 129,929 -5,325 124,9

1997 114,670 3,558 419 481 1,319 70 9,637 130,154 137,762 1,690 139,452 -9,298 115,6

1998 124,317 5,067 419 34 1,316 67 9,327 140,547 133,9908 1,782 135,771 4,776 120,4

1999 132,306 6,552 430 652 1,447 71 10,139 151,597 128,7668 1,866 130,632 20,965 141,32000 144,351 8,787 465 470 1,382 2 11,729 167,185 128,4588 2,636 131,095 36,090 177,42001 151,994 7,533 470 453 1,370 -1,1759 13,986 174,630 141,1838 2,195 143,379 31,521 208,72002 152,708 8,316 425 442 1,626 0 15,114 178,631 149,9448 2,582 152,526 26,105 234,82003 155,117 6,323 434 393 1,592 0 15,981 179,840 153,369 8 2,765 156,134 23,705 258,5

2004 163,629 7,920 435 365 1,763 0 17,163 191,275 164,419 2,806 167,225 24,050 282,5

2005 173,701 8,952 444 200 1,849 0 18,749 203,894 172,648 2,890 175,538 28,357 310,9

2006 183,445 9,638 456 193 1,973 0 20,540 216,289 182,454 2,990 185,444 30,486 341,7

2007 194,050 10,526 472 200 2,097 0 22,519 229,865 193,382 3,087 196,469 33,396 375,1

2008 204,389 11,744 484 209 2,216 0 24,612 243,653 205,164 3,189 208,353 35,300 410,4

2009 215,021 13,097 496 219 2,351 0 26,702 257,885 218,506 3,302 221,808 36,078 446,52010 225,944 14,582 509 227 2,519 0 28,752 272,534 233,389 3,425 236,814 35,720 482,2
TABLE 2-6--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, 

SELECTED CALENDAR YEARS 1970-2012- Continued 

[In Millions of Dollars]

Income Disbursements 

Calendar 

Year Payroll 

Taxes 

From 

Taxation 

of 

Benefits 

Railroad 

Retirement 

Account 

Transfers

Reimburs

e-ment for 

Uninsured 

Persons 

Premiums 

From 

Voluntary 

Enrollees

Payments 

for Military 

Wage 

Credits 

Interest 

and 

Other 

Income1

Total Benefits Payments2 Adminis- trative Expenses3 Total 

Net 

Increase 

in Fund

Balan

at End 

Yea

2011 237,346 16,580 523 234 2,677 0 30,765 288,124 249,461 3,557 253,018 35,106 517,32012 248,989 18,925 538 239 2,833 0 32,772 304,296 266,284 3,692 269,976 34,320 551,71 Other income includes recoveries of amounts reimbursed from the trust fund, receipts from the fraud and abuse control program, which are not 

obligations of the trust fund and a small amount of miscellaneous income. 

2 Includes cost of peer review organizations from 1983 (beginning with the implementation of the prospective payment system on October 1, 1983) 

through 2001 and costs of quality improvement organizations beginning in 2002. 

3 Includes costs of experiments and demonstration projects. Beginning in 1997, includes fraud and abuse control expenses. 4 Includes the lump-sum general revenue adjustment of -$805 million. 5 Includes repayment of loan principal from the Old-Age and Survivors Insurance Trust Fund of $1,824 million. 6 Includes the lump-sum general revenue adjustment of -$1,100 million. 7 Includes the lump-sum general revenue adjustment of -$2,366 million. 8 For 1998-2003, includes moneys transferred to the SMI Trust Fund for home health agency costs. 9 Includes a lump-sum general revenue adjustment of $1,177 million. NA-Not applicable. Note-Totals do not necessarily equal the sums of rounded components. Source: Board of Trustees, Federal Hospital Insurance Trust Fund (2003). 
2-19 

 Following enactment of BBA 1997, a number of observers claimed that the 

actual savings achieved by BBA 1997 were larger than was intended when the 

legislation was enacted. As a result, legislation was enacted in 1999 (Balanced 

Budget Refinement Act of 1999 (BBRA)) and in 2000 (the Medicare, Medicaid, 

and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA)) which 

mitigated the impact of BBA 1997 on providers. 

 

TABLE 2-7--HISTORICAL PROJECTIONS OF HI TRUST FUND 

INSOLVENCY, 1970-2003 

Year of Trustees’ 

 Report 

Projected Year of 

 Insolvency 

Projected Number of Years 

Until Insolvency 

1970 1972 2 

1971 1973 2 

1972 1976 4 

1973 none indicated NA 

1974 none indicated NA 

1975 late 1990s NA 

1976 early 1990s NA 

1977 late 1980s NA 

1978 1990 12 

1979 1992 13 

1980 1994 14 

1981 1991 10 

1982 1987 5 

1983 1990 7 

1984 1991 7 

1985 1998 13 

1986 1996 10 

1986 amended 1998 12 

1987 2002 15 

1988 2005 17 

1989 1

 NA 

1990 2003 13 

1991 2005 14 

1992 2002 10 

1993 1999 6 

1994 2001 7 

1995 2002 7 

1996 2001 5 

1997 2001 4 

1998 2008 10 

1999 2015 16 

20002

 2025 25 

2001 2029 28 

2002 2030 28 

2003 2026 23 

1 Contained no long-range projections. 

2

 As amended. 

NA-Not applicable. 

Source: Intermediate projections of various HI Trustees' Reports, 1970-2003. 
2-20 

 The 2003 report projects a shift in direction. The Trustees project that HI tax 

income will fall short of outlays beginning in 2013, three years earlier than 

projected in 2002. The fund is expected to become insolvent four years earlier, 

2026, rather than 2030. The change represents both a lower estimate of taxable 

wages resulting in lower taxable payroll and a higher estimate for hospital 

spending due to increases in admissions and increases in the average complexity of 

admissions. 

 Future operations of the trust fund will be very sensitive to future economic, 

demographic, and health cost trends and could differ substantially from the 

intermediate projections. Beginning in 2011, the program will begin to experience 

the impact of major demographic changes. First, baby boomers (persons born 

between 1946 and 1964) begin turning age 65. Second, there will be a shift in the 

number of covered workers supporting each HI enrollee. In 2002, there were about 

4 workers for every beneficiary; in 2030 there will only be an estimated 2.4. 

FINANCIAL STATUS OF SUPPLEMENTARY MEDICAL INSURANCE 

TRUST FUND 

 Because the SMI Trust Fund is financed through beneficiary premiums and 

Federal general revenues, it does not face the prospect of depletion, as does the HI 

Trust Fund. However, the rising cost of the program is placing a burden on the 

trust fund, and by extension on beneficiaries (in the form of premiums) and Federal 

general revenues. Table 2-8 shows historical information from the 2003 Trustees’ 

Report. 

PART A SERVICES - COVERAGE AND PAYMENTS 

HOSPITALS 

Trends in Medicare Hospital Utilization and Spending

 As shown in Table 2-9, Medicare program spending on hospital services 

has increased from approximately $77.8 billion in calendar year (CY) 1995 to 

$92.5 billion in CY2001, about a 19 percent change over the time period. The 

number of acute, short-term general hospitals paid under the inpatient prospective 

payment system (IPPS) has declined from 5,166 to 4,361, a drop of over 15 percent 

that can be attributed, in part, to hospital closures, mergers, and the growth in 

Medicare=s critical access hospital program. Despite the drop in the number of IPPS 

hospitals, IPPS program spending has increased from over $69 billion in CY1995 

to over $81 billion in CY2001, an increase of approximately 17 percent. In contrast 

to the overall decline in number of hospitals, the number of specialty hospitals, 

particularly long-term care hospitals but also rehabilitation hospitals and distinct 

part units, has increased. Medicare program spending, particularly in long-term 

care hospitals and in rehabilitation units, has increased significantly over the period. 

Table 2-10 shows hospital utilization for Medicare enrollees by type of hospital in 

CY2001. 96.4 percent of Medicare=s hospital discharges were from IPPS hospitals 
2-21 

and averaged about $7,262 in program spending per discharge. Discharges from 

specialty hospitals comprised about 3.6 percent of total Medicare discharges in 

CY2001 and averaged about $9,178 in Medicare spending per discharge. Table 2-

11 shows the Medicare hospital discharges as well as program and beneficiary 

payments from short-stay hospitals, ranked by diagnosis-related groups (DRGs), for 

FY2001. The top 25 DRGs represented 51.5 percent of total discharges and close 

to 53 percent of total payments to these hospitals. In fact, over 31 percent of the 

total discharges and almost 28 percent of the total spending is represented by the 

top 10 DRGs on the list. Finally, Table 2-12 shows the trends in factors affecting 

hospital expenditures, from FY1983 to FY2002. The annual update represents a 

payment-weighted average annual increase for IPPS hospitals and IPPS excluded 

hospitals. A hospital=s case mix is a measure of the relative costliness and changes 

in coding of its Medicare patients compared with the national average. The change 

in case mix shown in the table represents the change in the average case mix for 

hospitals in one fiscal year compared to the preceding fiscal year. In FY2002, the 

average update received by hospitals was 2.56 percent, the case mix change for the 

average hospital increased 0.5 percent, and Medicare=s average payment per 

discharge increased 5.04 percent. 

Hospital payment systems

 This section will discuss the major provisions establishing Medicare=s 

payment systems for inpatient services provided by different types of hospitals. 

The section will first describe the separate operating and capital prospective 

payment systems (PPS) for acute inpatient care in short-term, general hospitals. 

Those costs that have been excluded from the inpatient PPS (IPPS) will then be 

described and this will be followed by a discussion of short-term hospitals that 

receive special treatment under IPPS: sole community hospitals (SCHs), rural 

referral centers (RRCs) and Medicare dependent hospitals (MDHs). Medicare=s 

swing bed program which permits certain small rural hospitals to provide Medicare 

covered acute and post acute care in the same bed (that is, are permitted to swing 

the bed from providing acute care to post-acute care) and the critical access hospital 

(CAH) program where certain small, limited service facilities can now opt out of 

IPPS will then be discussed. Geographic reclassification procedures for IPPS 

hospitals will also be described. This will be followed by description of the 

payment systems used to pay those hospitals that were originally exempt from 

IPPS: inpatient rehabilitation facilities (including distinct part units in general 

hospitals), long-term care hospitals, psychiatric facilities (including distinct part 

units in general hospitals) and finally cancer and children’s hospitals. 
TABLE 2-8--OPERATIONS OF THE SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND (CASH 

BASIS), SELECTED FISCAL YEARS 1970-2012 

[In Millions of Dollars]

Income Expenditures 

Fiscal 

Year1 Premium From Enrollees Government Contributions2 Interest and Other Income3 Total Income Benefit Payments4 Administrative Expenses Total Disbursements Balance at End of Year5

Historical data: 1970 $936 $928 $12 $1,876 $1,979 $217 $2,196 $57 1975 1,887 2,330 105 4,322 3,765 405 4,170 1,424 1980 2,928 6,932 415 10,275 10,144 593 10,737 4,532 1985 5,524 17,898 1,155 24,577 21,808 922 22,730 10,646 1990 11,4946 33,210 1,4346 46,1386 41,498 1,5246 43,0226 14,5276

1995 19,244 36,988 1,937 58,169 63,491 1,722 65,213 13,874 1996 18,931 61,702 1,392 82,025 67,176 1,771 68,946 26,953 1997 19,141 59,471 2,193 80,806 71,133 1,420 72,553 35,206 1998 19,427 59,919 2,608 81,955 74,8377 1,435 76,272 40,889 

1999 20,160 62,185 2,933 85,278 79,0087 1,510 80,518 45,649 2000 20,515 65,561 3,164 89,239 87,2127 1,780 88,992 45,896 2001 22,307 69,838 3,191 95,336 97,4667 1,986 99,452 41,780 2002 24,427 78,318 2,960 105,705 106,9957 1,830 108,825 38,659 

Intermediate Estimates: 2003 26,755 80,905 2,196 109,856 120,0637 2,139 122,202 26,313 2004 30,181 98,513 1,839 130,532 122,7837 2,328 125,112 31,734 2005 32,410 100,509 1,984 134,903 130,808 2,423 133,231 33,406 2006 34,462 106,333 2,204 143,000 136,059 2,527 138,586 37,820 2007 36,876 113,788 2,407 153,071 147,359 2,635 149,994 40,898 2008 39,710 122,373 2,610 164,693 158,426 2,746 161,172 44,419 2009 42,847 131,965 2,826 177,638 170,848 2,862 173,711 48,346 2010 46,347 142,668 3,056 192,071 184,674 2,981 187,655 52,763 2011 50,180 154,310 3,311 207,801 202,058 3,103 205,161 55,402 2012 54,355 167,036 3,592 224,983 214,547 3,231 217,777 62,609 
1 Fiscal years 1970 and 1975 consist of the 12 months ending June 30 of each year; fiscal years 1980 and later consist of the 12 months ending on 

September 30 of each year. 

2 General fund-matching payments, plus certain interest-adjustment items. 3 Other income includes recoveries of amounts reimbursed from the trust fund which are not obligations of the trust fund and other miscellaneous 

income. 

4 Includes costs of Peer Review Organizations from 1983 through 2001, and costs of Quality Improvement Organizations beginning in 2002. 5 The financial status of SMI depends on both the assets and the liabilities of the trust fund. 6 Includes the impact of the Medicare Catastrophic Coverage Act of 1988 (Public Law 100-360). 7 Benefit payments less moneys transferred from the HI Trust Fund for home health agency costs, as provided for by the Balanced Budget Act of 

1997. Source: Board of Trustees, Federal Supplementary Medical Insurance Trust Fund (2003).
TABLE 2-9--USE OF INPATIENT HOSPITAL SERVICES BY TYPE OF HOSPITAL, CALENDAR YEAR 2001 

Number Program Payments (Thousands)

Type of Hospital 1995 2001 

Percentage 

Change 

1995-2001 1995 2001 

Percentage 

Change 

1995-2001 

All Hospitals 6,325 6,022 -4.8 $77,796,093 $92,546,774 19.0 Short-Stay Hospitals 5,221 4,425 -15.2 74,825,729 88,323,316 18.0 

Hospitals Under IPPS 5,166 4,361 -15.6 69,279,252 81,052,957 17.0 

Non-IPPS Hospitals and Units -- -- -- 5,546,477 7,270,360 31.1 Special Exclusion Status Hospitals 55 64 16.4 1,569,196 2,250,176 43.4 

Psychiatric Units 1,426 1,436 0.7 1,840,090 2,254,273 22.5 Rehabilitation Units 831 936 12.6 2,137,190 2,765,910 29.4 

Specialty Hospitals 1,104 1,597 44.7 2,970,364 4,223,458 42.2 

Children’s Hospitals 69 75 8.7 24,831 24,131 -2.8 

Psychiatric Hospitals 667 493 -26.1 885,655 606,733 -31.5 

Rehabilitation Hospitals 190 216 13.7 1,293,442 1,474,704 14.0 

Long-Term Care Hospitals 178 270 51.7 758,164 1,780,935 134.9 Critical Access Hospitals NA 528 NA NA 334,309 NA Religious Nonmedical Health Care Institutions NA 15 NA NA 2,646 NA Source: Centers for Medicare & Medicaid Services, Office of Research, Development and Information. 
TABLE 2-10--USE OF INPATIENT HOSPITAL SERVICES BY TYPE OF HOSPITAL, CALENDAR YEAR 

Discharges Covered Days of Care Covered Charges Reimbur

Type of Hospital Number of 

Hospitals 

Number 

Percent 

of 

Total 

Number 

Percent 

of 

Total 

Per 

Discharge

Amount 

in 

(000) 

Percent 

of 

Total 

Per Discharge Per Day Amount in (000) P

D

ch

All Hospitals: 6,022 12,690,850 100.0 77,614,630 100.0 6.1 $235,188,032 100.0 $18,532 $3,030 $92,546,774 $7Short-Stay Hospitals 4,425 12,230,660 96.4 70,746,445 91.2 5.8 225,060,003 95.7 18,401 3,181 88,323,316 7

 Hospitals Under 

IPPS 4,361 11,304,080 89.1 61,568,955 79.3 5.4 211,130,270 89.8 18,677 3,429 81,052,957 7

 Non-IPPS Hospitals 

and Units - 926,580 7.3 9,177,490 11.8 9.9 13,929,733 5.9 15,033 1,518 7,270,360 7,

 Special Exclusion 

Status 64 265,580 2.1 1,470,850 1.9 5.5 2,864,199 1.2 10,806 1,947 2,250,176 8,

Psychiatric Units 1,436 366,865 2.9 4,065,215 5.2 11.1 5,169,345 2.2 14,091 1,272 2,254,273 6

Rehabilitation Units 936 294,665 2.3 3,641,425 4.7 12.4 5,896,188 2.5 20,010 1,619 2,765,910 9,

Specialty Hospitals 1,597 460,190 3.6 6,868,185 8.8 14.9 10,128,029 4.3 22,008 1,475 4,223,458 9

 Children’s Hospitals 75 1,930 0.0 13,155 0.0 6.8 63,379 0.0 32,839 4,818 24,131 12 Psychiatric Hospitals 493 114,280 0.9 1,623,140 2.1 14.2 1,420,878 0.6 12,433 875 606,733 5 Rehabilitation 

Hospitals 216 149,850 1.2 2,419,990 3.1 16.1 3,291,740 1.4 21,967 1,360 1,474,704 9,

Long-Term Care 

Hospitals 270 90,280 0.7 2,460,315 3.2 27.3 4,780,128 2.0 52,948 1,943 1,780,935 19

Critical Access  Hospitals 528 103,460 0.8 341,500 0.4 3.3 568,560 0.2 5,495 1,665 334,309 3,

Religious Nonmedical  Health Care  Institutions 

15 390 0.0 10,085 0.0 25.9 3,344 0.0 8,575 332 2,646 6,

Note-Reimbursements represent program payments under regular Medicare fee-for-service for (1) IPPS hospitals, the DRG price plus outlier paymentinpatient and blood deductibles and coinsurance, plus the estimated pass-throughs and for (2) non-IPPS hospitals, the associated billing reimbursemenNA- Not available. Source: Centers for Medicare & Medicaid Services, Office of Information Services, unpublished data. 
2-26 

SHORT-TERM GENERAL HOSPITALS 

Operating prospective payment system 

 Medicare Part A pays for the operating costs associated with acute inpatient 

care in short-term hospitals using the inpatient prospective payment system (IPPS), 

established by Congress in the Social Security Amendments of 1983 (Public Law 

98-21). Before the enactment of IPPS, Medicare paid hospitals retrospectively for 

incurred costs, subject to certain limits, definitions of allowable costs, and tests of 

reasonableness. Despite these limits, medical costs continued to grow faster than 

the rate of inflation in the early 1980s. IPPS was enacted to constrain the growth of 

Medicare's inpatient hospital payments by providing incentives for these acute 

hospitals to provide care more efficiently. Under IPPS, Medicare payments are 

made at predetermined, specific rates which represent the average cost, nationwide, 

of treating a Medicare patient according to his or her medical condition. Hospitals 

that are able to provide services for less than the fixed IPPS payment may keep the 

difference. Hospitals with costs that exceed the fixed IPPS payment lose money on 

the case. In general, the components of IPPS have served as a model for 

prospective payment systems subsequently developed for other types of hospitals. 

The foundation for Medicare=s prospective rates for both inpatient operating 

and inpatient capital payments is a patient classification system which now 

encompasses 518 diagnosis related groups (DRGs). A hospital=s payment will vary 

depending upon the DRG assigned to a Medicare discharge. DRG assignment is 

primarily based on a patient=s discharge diagnoses and type of treatment received 

(either medical or surgical with certain classifications dependent upon the hospital 

procedures provided during the stay). Depending upon the DRG, a patient=s age, 

sex, and discharge destination may be considered as well. Each DRG has a relative 

value (or case-mix weight) that reflects the cost of treating Medicare patients in that 

particular group in comparison to the treatment cost of the average Medicare case. 

DRGs that are expected to use more resources than the average Medicare case have 

a relative value above one; those DRGs that are expected to be less costly have a 

value of less than one. The Centers for Medicare & Medicaid Services (CMS) 

annually reviews the DRG classification system to insure that clinically similar 

cases with relatively comparable costs are grouped together which may result in the 

reassignment of procedure codes to other DRGs as well as the creation or 

discontinuation of specific DRGs. For example, from FY2003 to FY2004, 5 DRGs 

were discontinued and 13 DRGs were created. CMS also recalibrates the relative 

values associated with each DRG annually using hospitals= average standardized 

billed charges for each DRG; such recalibration is subject to a budget neutrality 

adjustment to ensure that Medicare=s aggregate payments do not increase because 

of the recalibrated DRG weights. The relative weight of any DRG may change 

from year to year. The weights for 223 DRGs for FY2004 declined from those for 

FY2003 (all but 38 DRGs by less than 5 percent) while the weights for 280 DRGs 

for FY2004 increased from those for FY2003 (all but 46 DRGs by less than 5 

percent). Data for DRG relative weights may be found at http:www.cms.gov.
TABLE 2-11--MEDICARE SHORT-STAY HOSPITAL DIAGNOSIS-RELATED GROUPS 

RANKED BY DISCHARGE, FISCAL YEAR 2001 

[In Thousands of Dollars]

Rank DRG Number Description Discharges 1 Percent Total Total Payments2 Total Medicare Payments Total Beneficiar

Payments

1 127 Heart Failure and Shock 686,830 5.6 $3,603,783 $3,258,989 $344,794 2 089 Simple Pneumonia and Pleurisy4 506,410 4.2 2,698,700 2,403,574 295,126 

3 088 Chronic Obstructive Pulmonary Disease 399,849 3.3 1,829,334 1,604,216 225,118 

4 209 Major Joint and Limb Reattachment Procedures 373,905 3.1 3,797,007 3,538,489 258,518 

5 116 Other Permanent Cardiac Pacemaker Implant or 

Acid Lead or Generator Procedure 368,837 3.0 4,534,966 4,317,271 217,695 

6 014 Specific Cerebrovascular Disorders Except 

Transient Ischemic Attack 324,461 2.7 1,988,094 1,786,815 201,279 

7 430 Psychoses 323,840 2.7 2,063,592 1,863,347 200,245 

8 462 Rehabilitation 280,502 2.3 2,670,173 2,611,264 58,909 

9 182 Esophagitis, Gastroeneritis and Miscellaneous 

Digestive Disorders 4 263,115 2.2 1,052,786 908,098 144,688 

10 296 Nutritional and Miscellaneous Metabolic Disorders 4 253,599 2.1 1,144,615 1,017,637 126,978 

11 143 Chest Pain 252,329 2.1 690,693 532,888 157,805 12 174 Gastrointestinal Hemorrhage 5 248,967 2.0 1,277,125 1,137,843 139,282 

13 138 Cardiac Arrhythmia and Conduction Disorders 5 204,852 1.7 867,051 752,577 114,474 

14 320 Kidney and Urinary Tract Infections 4 195,006 1.6 875,799 766,417 109,382 

15 416 Septicemia, Age over 17 182,551 1.5 1,521,464 1,419,259 102,205 

16 121 Circulatory Disorders with Acute Myocardial 

Infarction, with Cardiovascular Complications, Discharged Alive 

168,331 1.4 1,328,266 1,238,997 89,269 
TABLE 2-11--MEDICARE SHORT STAY HOSPITAL DIAGNOSIS-RELATED GROUPS 

RANKED BY DISCHARGE, FISCAL YEAR 2001- continued 

[In Thousands of Dollars]

Rank DRG Number Description Discharges 1 Percent Total Total Payments2 Total Medicare Payments Tota

Benefic

Payme

17 079 Respiratory Infections and Inflammations 4 167,416 1.4 1,437,822 1,349,403 88,418 132 Atherosclerosis with Complicating Conditions (CC) 153,664 1.3 504,555 424,515 80,019 015 Transient Ischemic Attack and Precerebral Occlusions 153,329 1.3 4,853,999 4,755,945 98,020 124 Circulatory Disorders excluding Acute Myocardial 

Infarction, with Diagnosis with Cardiovascular Catheter with Complex Diagnosis 138,328 1.1 995,290 917,917 77,3

21 148 Major Small and Large Bowel Procedures with CC 130,662 1.1 2,511,942 2,426,954 84,9

22 210 Hip and Femur Procedures except Major Joint4 122,481 1.0 1,110,702 1,032,861 77,8

23 316 Renal Failure 117,726 1.0 875,244 817,671 57,5

24 478 Other Vascular Procedures 5 110,211 0.9 1,448,624 1,387,693 60,9

25 475 Respiratory System Diagnosis with Ventilator Support 104,740 0.9 2,188,472 2,121,352 67,1Total, All DRGs 12,192,174 100.0 $90,427,469 $86,949,363 $3,478

1 Based on the stay records for 100 percent of Medicare aged and disabled beneficiaries as recorded in the MEDPAR file. 2 Total payments represent total hospital revenue for Medicare enrollee utilization, including Medicare payments and beneficiary obligations. Bills f

pay, at-risk managed care utilization and no-pay Medicare secondary payer bills are excluded. 

3 Beneficiary payments are the responsibility of the beneficiary or other third party payers. 4 Age greater than 17, with complications. 5 With complications. 

Source: Centers for Medicare & Medicaid Services, Office of Information Systems. 
TABLE 2-12--TRENDS IN FACTORS AFFECTING MEDICARE HOSPITAL SPENDING AND AVERAGE 

PAYMENTS PER CASE, SELECTED FISCAL YEARS 1983-2002 

[Percentage change from previous years] 

Factor 1983 1985 1990 1995 1996 1997 1998 1999 2000 2001 200

Market Basket index 1 5.50 4.00 5.50 3.60 2 3.50 3 2.50 2.70 2.40 2.90 3.40 3.3Annual update factor 4 NA NA 5.71 1.89 1.64 2.00 0.00 0.51 1.05 3.16 2.5

Case mix index 5 -- 3.10 0.85 1.50 1.40 0.20 -0.60 -0.50 -0.80 -0.70 0.5

Average payment per admission 6 9.69 14.21 5.62 3.27 3.34 1.56 -0.25 3.25 -0.56 3.76 5.0

Average payment per beneficiary 7 10.90 5.60 7.70 3.40 3.90 2.90 -2.00 -0.10 0.60 7.10 8.4

1 Estimates based on data available when final PPS rule was issued for each fiscal year (except for 1985, which was before the start of the PPS; best 

available estimate for 1983 is shown). Estimates after the final rule can, and often do, differ from those shown. 

2 3.7 for hospitals excluded from the prospective payment system. 3 3.4 for hospitals excluded from the prospective payment system. 4 Estimate of the payment-weighted average update factor, as based on latest estimates, subject to change in future estimates. The estimates shown c

and often do, differ from those shown in the Federal Register notices announcing the inpatient hospital deductible each year. For 2001, one reason fthe difference is that a change in the update factor was enacted to occur halfway through the fiscal year, which could not be known at the time of the deductible notice. The factor shown for 2001 is a payment-weighed average of all the update factors for the year. 5 Estimated case mix index, as based on latest estimates. Subject to change in future estimates. 

6 Increases in fee-for-service incurred inpatient hospital expenditures on a per-charge basis, as estimated under the intermediate assumptions of the 2

Trustees Report. Subject to change in future estimates. 

7 Increases in fee-for-service incurred inpatient hospital expenditures on a per-beneficiary basis, as estimated under the intermediate assumptions of 

2003 Trustees Report. Subject to change in future estimates. NA – Not available. Source: Centers for Medicare & Medicaid Services, Office of the Actuary. 
2-30 

 A hospital's DRG payment is the product of two components: (1) a 

standardized amount (or base rate) which is adjusted by the hospital's area average 

wage level; and (2) the DRG's relative weight. The base rate is intended to 

represent the cost of a typical (average) Medicare inpatient discharge. Presently, 

two separate standardized amounts are calculated: one amount is used to pay for 

Medicare discharges from hospitals in large urban areas (either metropolitan 

statistical areas that have a population of more than a million or New England 

County metropolitan areas that have a population of more than 970,000) and the 

other amount is used to pay for discharges from hospitals in other areas. The large 

urban area standardized amount is 1.6 percent larger than the other area amount. 

However, the Consolidated Appropriations Resolution, 2003 (CAR) (P.L.108-7) 

provided for a temporary payment increase for rural and small urban hospitals; all 

Medicare discharges from April 1, 2003 to September 30, 2003 were paid on the 

basis of the large urban area amount. The temporary authorization legislation that 

extended transitional Medicaid (P.L. 108-89) also extended Medicare's payment 

equalization between large urban hospitals and other hospitals until March 31, 

2004. That law signed October 1, 2003 requires the Secretary to equalize the base 

amounts by November 1, 2003 and compensate hospitals for missed payments. 

Two amounts are still calculated for hospitals in Puerto Rico based on a 50/50 

blend of a Federal amount and a Puerto Rico-specific amount. 

 The hospital wage index is used to adjust the standardized amount to 

account for the local wage variation or cost of labor in the hospital's area. This 

adjustment is accomplished by multiplying a portion of the national standardized 

payment amount by a wage index. Presently approximately 71 percent of the base 

rate is adjusted by the wage index. The wage index is intended to measure the 

average wage level for hospital workers in each urban area (metropolitan statistical 

area or MSA) or rural area (comprised of counties that have not been assigned to 

MSAs) relative to the national average wage level. Some states, such as New 

Jersey and Rhode Island, where every county is included in a MSA have no rural 

wage index. 

 The Secretary is required to update the wage index annually based on a 

survey of wages and wage-related costs of short-term acute care hospitals. An 

area=s aggregate hospital compensation is divided by aggregate paid hours of 

hospital employment in the area to produce the area=s average hourly wage. The 

area=s wage index is calculated by dividing the average hourly wage for each area 

by the national average hourly wage (determined by dividing national aggregate 

compensation by national aggregate paid hours of employment). A wage index 

used to calculate a hospital=s Medicare payment will be that index associated with 

the area where the hospital is located or that associated with the area where the 

hospital has been reclassified or redesignated. The index number, such as 0.7492 

for hospitals in rural Alabama or 1.5119 for hospitals in Oakland, CA, for each 

rural area (or non-MSA) or MSA in the United States is published by CMS in the 

Federal Register in August of each year. A separate wage index for hospitals in 

Puerto Rico is calculated using only data from those hospitals as well. Any 

updates or adjustments to the wage index are done in a budget neutral fashion, so 
2-31 

that aggregate payments to hospitals are not affected by the annual changes. 

 Since the national average wage level is represented by an index value of 

1.000, the wage index value for any area has a direct and simple interpretation. The 

value of 1.5119 for Oakland, CA means that the hourly wage rate for hospital 

workers is about 51 percent higher in that MSA than nationwide. In FY2004, the 

average annual wage in Oakland, CA was $36.87 and the national average hourly 

wage was $24.72. When computing the hospital payment rates applicable for 

hospitals in the Oakland, CA MSA, which has a population of more than 1 million, 

the labor-related share or 71 percent of the large urban area standardized amount is 

multiplied by 1.5119 in order to adjust for the higher level of hourly wage rates in 

this area. Similarly, the calculation of the per discharge payment for hospitals in 

rural Alabama would involve a reduction to the labor-related component of its 

standardized payment amount to reflect the fact that the average hourly wage in this 

area is $18.50 or about 25 percent lower than the national average (as indicated by 

the rural Alabama=s wage index value of 0.7492). To calculate Medicare=s base 

payment for hospitals in each of these areas, the nonlabor related share of the 

standardized amount is added to the wage-adjusted labor related share. 

 The calculation of the base payment amount for both areas is shown in 

Table 2-13. This amount would be multiplied by the applicable DRG weight to 

calculate Medicare=s payment for a specific discharge. 

TABLE 2-13--EXAMPLE OF WAGE-ADJUSTED PER DISCHARGE BASE 

IPPS PAYMENT CALCULATIONS FOR RURAL ALABAMA AND 

OAKLAND, CA FOR FISCAL YEAR 20041

Component Short-term general hospital in rural 

Alabama 

Short-term general hospital 

Oakland, CA MSA 

Labor-related share of 

national adjusted 

operating standardized 

amounts 

$3,086.73 

Other area amount 

$3,136.39 

Large urban area amount 

Wage index for area 0.7492 1.5119 

Wage-adjusted labor 

related share 2,312.58 

[$3,086.73*0.7492] 

$4,741.91 

[$3,136.39*1.5119] 

Nonlabor related share of 

national amounts $1,254.67 $1,274.85 

Wage-adjusted per 

discharge base payment 

$3,567.25 

[$2,312.58+1,254.67] 

$6,016.76 

[$4,741.91+$1,274.85] 1

 P.L. 108-89 provided for a temporary increase in the other area amount to the large urban amount 

for discharges from October 1, 2003 through March 31, 2004. 

Source: CRS calculation based on information in FY2004 IPPS regulation published in the Federal 

Register on August 1, 2003 and subsequent correction notice issued October 6, 2003. 

 

 In general, the differences in the amount of these per discharge payments 

would reflect both the 1.6 percent differential in the standardized amount between 

large urban and other areas as well as the differences in the relative area wages. 

However, the 1.6 percent payment differential between the standardized amounts 

has been eliminated for discharges from October 1, 2003 until March 31, 2004. All 

hospitals will be reimbursed using the large urban area amount. Also, the per 
2-32 

discharge payments for hospitals in Alaska and Hawaii would reflect a cost-ofliving adjustment to the nonlabor related portion of the standardized amount to 

recognize the higher cost of supplies and other nonlabor inputs. In FY2004, the 

nonlabor portion of the base rate (approximately 29 percent of the standardized 

amount) for hospitals in these states is increased by up to 25 percent. 

 Other Operating PPS Payment Adjustments--Factors other than a hospital=s 

location will affect the amount of Medicare payment received for a particular DRG. 

 In addition to the basic DRG payment for each case, teaching hospitals or those 

hospitals that serve a large number of Medicaid or poor Medicare beneficiaries may 

receive supplemental IPPS payments. Atypical or outlier cases may result in 

additional IPPS payments; under certain circumstances, cases that are transferred to 

other acute hospitals or certain post-acute settings may receive special treatment 

under IPPS. Finally, hospitals may receive additional payments to compensate for 

use of specifically identified new technologies. 

 Indirect Medical Education Adjustment--Medicare recognizes the costs of 

graduate medical education (GME) under two mechanisms: an indirect medical 

education (IME) adjustment within IPPS and, as discussed later, direct graduate 

medical education (DGME) payments made outside of IPPS. An IME adjustment 

provides additional IPPS payments to hospitals for the indirect costs attributable to 

approved medical education programs for physicians; Medicare does not recognize 

the indirect costs associated with the education of other health professions. A 

teaching hospital=s higher patient care costs relative to nonteaching hospitals may 

be due to a variety of factors, including patient severity of illness that is not fully 

captured by the DRG patient classification system, the extra demands placed on the 

hospital staff as a result of the teaching activity, or additional tests and procedures 

that may be ordered by residents. About 1,100 hospitals, constituting about one 

fourth of all IPPS hospitals, receive IME payments. According to CBO=s most 

recent estimate, Medicare=s spending on IME for both operating and capital IPPS 

systems will be $6.1 billion in FY2003. This includes payments to teaching 

hospitals for patients enrolled in Medicare +Choice plans. MedPAC has found that 

Medicare=s IME payments exceed the estimated cost relationship between teaching 

intensity and costs per case. Using 1999 cost data, MedPAC estimates that 

approximately half of the total IME payments in FY2003 are above the estimated 

impact of teaching on hospital costs. 

 A hospital=s IME payment is based on a percentage add-on to the IPPS rate 

that is established by a complicated curvilinear formula that currently provides a 

payment increase of approximately 5.5 percent for each 10 percent increase in the 

hospital's intern and resident-to-bed (IRB) ratio. Hospitals with a higher IRB ratio, 

a measure of teaching intensity, receive a larger add-on adjustment to their DRG 

payments. For example, a hospital with 5 residents for every 100 beds (an IRB of 

0.05) would have a 2.7 percent increase in its DRG payments; a hospital with 25 

residents for every 100 beds (an IRB of 0.25) would receive a 12.8 percent IME 

adjustment to its DRG payments. 

 With certain exceptions, BBA 1997 limits the number of allopathic and 

osteopathic residents that Medicare will count in the IME formula (the numerator of 
2-33 

the IRB ratio) at the level reported by the hospital in its most recent cost report 

ending on or before December 31, 1996. Effective for cost reporting periods on or 

after October 1, 1997, the IME resident counts are based on a 3-year rolling average 

of the resident counts, subject to the resident limits or full-time equivalent (FTE) 

cap. If a hospital is above its limit, the count for the purposes of the rolling average 

is the FTE cap. In addition to the resident limit, BBA 1997 also placed a limit on 

the IRB ratio itself. A hospital=s IRB ratio used to calculate its IME adjustment for 

the current payment year cannot exceed its IRB ratio from the immediately 

preceding cost reporting period. 

 Disproportionate Share Hospital Adjustment--Since 1986, an increasing 

number of hospitals have received additional payments because they serve a 

disproportionate share of low-income patients. The justification for DSH spending 

has changed over time. Originally, the DSH adjustment was intended to 

compensate hospitals that treat a large proportion of low-income patients for the 

higher costs associated with their treatment. Now, the adjustment is considered as a 

way to protect access to care for vulnerable populations. 

 Most DSH hospitals, approximately 2,800 hospitals, receive the additional 

payments based on a formula calculated using the proportion of the hospital=s 

Medicare inpatient days provided to poor Medicare beneficiaries (those who 

receive Supplemental Security Income or SSI) added to the proportion of total 

hospital days provided to Medicaid recipients. A few urban hospitals receive DSH 

payments under an alternative formula that considers the proportion of a hospital=s 

patient care revenues that are received from State and local indigent care funds.1

 

CBO estimates that DSH spending (in both operating and capital PPS) will be $6.3 

billion in FY2003 

 The DSH threshold is the minimum percentage of measured DSH care 

(measured under either the disproportionate day or Pickle formula) that must be 

provided by a hospital in order to qualify for additional payments. A hospital will 

not receive operating DSH payments unless its low- income patient share exceeds 

15 percent or, as discussed earlier, it qualifies as a Pickle hospital. After that 

minimum threshold of 15 percent is met, a hospital=s DSH adjustment, the 

percentage add-on to the hospital=s IPPS payment, will vary by the hospital=s bed 

size or urban or rural location. Under the current operating DSH thresholds and 

formulas, the DSH adjustment that a small urban or rural hospital can receive is 

capped at 5.25 percent while large (100 beds and more) urban hospitals and large 

rural hospitals (500 beds and more) can still receive an uncapped adjustment that 

can be significantly greater. However, certain rural hospitals, those that are sole 

community hospitals (SCHs) or rural referral centers (RRCs), may receive a higher 

DSH adjustment than other rural hospitals. Table 2-14 shows the minimum 

DSH thresholds required to qualify for the additional DSH payments and the 

formulas for computing the adjustment for different hospitals effective for 

discharges after April 1, 2001 authorized by the Medicare, Medicaid, and SCHIP 

 

1

 If a hospital receives at least 30 percent of its patient care revenue from these indigent care funds, it 

qualifies as a APickle@ hospital and will get a 35 percent increase in its Medicare payments. Presently, 

9 hospitals receive a DSH Medicare adjustment under the Pickle amendment. 
2-34 

Benefits Improvement and Protection Act of 2000 (BIPA). 

TABLE 2-14--CURRENT OPERATING DISPROPORTIONATE SHARE 

THRESHOLDS AND FORMULAS, BY HOSPITAL TYPE AND SIZE, 

AS ESTABLISHED IN BIPA 

Type and size of 

hospital 

Threshold or 

qualifying DSH 

patient share 

Adjustment 

formula 

DSH patient share 

greater than or equal 

to 15 percent but less 

than 19.3 percent. 

Percent increase in IPPS payments 

based on [(P-15)*0.65] + 2.5. 

Less than 

100 beds 

DSH patient share 

equal to or greater 

than 19.3 percent. 

5.25 percent increase to a hospital=s 

IPPS payments. 

DSH patient share 

greater than or equal 

to 15 percent but less 

than 20.2 percent. 

Percent increase in IPPS payments 

based on 

[(P-15)*0.65] + 2.5. 

100 or more 

beds 

DSH patient share 

equal to or greater 

than 20.2 percent. 

Percent increase in IPPS payments 

based on 

[(P-20.2)*0.825]+ 5.88. 

Urban 

100 or more 

beds 

30 percent of inpatient 

revenue from 

State/local indigent 

care funds. 

35 percent increase to a hospital=s IPPS 

payments. 

DSH patient share 

equal to 15 percent 

but less than 19.3 

percent. 

Percent increase in IPPS payments 

based on 

[(P-15)*0.65] + 2.5. 

Under 500 

beds (no 

distinction 

between 

under and 

over 100 bed 

rural 

hospitals) 

DSH patient share 

equal to or greater 

than 19.3 percent. 

5.25 percent increase to a hospital=s 

IPPS payments. 

Rural 

500 or more 

beds 

Not specified in law, 

regulations set at 15 

percent. 

Same as urban, 100 or more beds. 

DSH patient share 

greater than 15 

percent and less than 

19.3 percent. 

Percent increase in IPPS payments 

based on 

[(P-15)*0.65] + 2.5. 

Sole 

Community 

Hospital 

(SCH) 

DSH patient share 

equal to 19.3 percent 

but less than 30 

percent. 

5.25 percent increase to a hospital=s 

IPPS payments. 
2-35 

TABLE 2-14--CURRENT OPERATING DISPROPORTIONATE SHARE 

THRESHOLDS AND FORMULAS, BY HOSPITAL TYPE AND SIZE, 

AS ESTABLISHED IN BIPA -continued 

Type and size of 

hospital 

Threshold or 

qualifying DSH 

patient share 

Adjustment 

formula 

DSH patient share 

equal to or greater 

than 30 percent. 

10 percent increase to a hospital=s IPPS 

payments. 

DSH patient share 

greater than 15 

percent but less than 

19.3 percent. 

Percent increase in IPPS payments 

based on 

[(P-15)*0.65] + 2.5. 

Rural 

Referral 

Center 

(RRC), not 

SCH 

DSH patient share 

greater than 19.3 

percent but less than 

30 percent. 

5.25 percent increase to a hospital=s 

IPPS payments. 

DSH patient share 

equal to or greater 

than 30 percent. 

Percent increase in IPPS payments 

based on [(P-30)*0.6] +5.25. 

Both RRC 

and SCH 

DSH patient share 

equal to or greater 

than 15 percent. 

Greater of a 10 percent increase or that 

resulting from 

[(P-30)*(0.6)] +5.25 Hospitals with 

DHS patient day proportion greater 

than 37.91 percent would be paid using 

the higher RRC adjustment. 

Note-The disproportionate patient day proportion (P) is equal to the sum of (a) inpatient days provided 

to Supplemental Security Income beneficiaries divided by total Medicare inpatient days and (b) inpatient 

days provided to Medicaid recipients (who are not eligible for Part A) divided by total inpatient days.

Source: Congressional Research Service. 

 Outliers--Additional amounts are paid to hospitals for atypical cases known 

as “outliers.” These are cases that have extraordinarily high costs compared to 

most discharges classified in the same DRG. Prior to FY1998 certain cases with 

extraordinarily long lengths of stay would have qualified for outlier payments as 

well. Outlier payments are financed by an offset or reduction in the base payment 

amount per discharge. The statute requires that total outlier payments to all 

hospitals covered by the system represent no less than 5 percent and no more than 6 

percent of the total estimated PPS payments for the fiscal year. Generally, CMS 

has established 5.1 percent as the target for outlier spending. 

 To qualify as a cost outlier, a hospital's charges for a case, adjusted to its 

costs, must exceed a hospital=s IPPS payment rate (including payments for IME, 

DSH, and for new technology) for the DRG by a certain threshold. Generally, the 

cost for a case is calculated by multiplying the charges for the inpatient stay by the 

hospital=s ratio of cost to charges as reported in its most recent settled, or the most 

recent tentatively settled, cost report, whichever is from the later cost reporting 

period. The additional payment amount is equal to 80 percent of the difference 
2-36 

(90 percent for certain DRGs for burn victims) between the hospital's entire cost for 

the stay and the threshold amount. The threshold, which is adjusted by the 

hospital=s wage index, is published every year in the Federal Register. For 

FY2004, the threshold is $31,000.2

 Outlier payments have never equaled their targeted offset. In earlier years, 

Medicare underspent its target; most recently, outlier payments have exceeded the 

budgeted target, in part because of abrupt increases in certain hospitals= charges. 

CMS analyses indicates that years in which outlier payments have been more than 

expected have been offset by outlier spending in years when it has been less than 

expected. Since FY1997, however, actual outlier payments have exceeded the 5.1 

percent offset by an aggregate of 11.2 percentage points; outlier spending has been 

$8.5 billion more than anticipated; an estimated $1.5 billion of that overspending 

occurred in FY2002. Total outlier spending in FY2002 is estimated to be 

approximately $5.4 billion. Certain changes, such as elimination of the use of 

statewide average cost to charge ratios and use of more recent hospital specific cost 

to charge ratios (from tentatively settled cost reports), in Medicare=s outlier 

payment policies were instituted late in FY2003 or in FY2004 to address outlier 

overspending. 

 Transfers--Prior to BBA 1997, cases that were designated and reimbursed as 

transfer cases were for those patients that were discharged from one short-term 

general hospital and readmitted to another on the same day. Under the current 

payment policy for these cases, the sending acute hospital (the hospital that 

transfers the patient to another acute hospital) is paid twice the DRG per diem for 

the first day and the per diem for all remaining days up to the full payment amount. 

 The final discharging acute hospital (the hospital that receives the patient) receives 

the full DRG payment amount.3

 Both hospitals remain eligible for cost outliers, 

DSH payments and GME payments for these transfer cases. The per diem payment 

is calculated as the hospital-specific DRG payment divided by the national 

geometric mean length of stay for all discharges in that DRG. 

Patients discharged from an acute care hospital to postacute care settings 

were not initially included under this transfer policy. BBA 1997 directed that the 

Secretary select 10 DRGs with a high volume of discharges to postacute care or a 

disproportionate use of postacute services and pay these cases as transfers 

beginning in FY 1999. Postacute care includes those providers excluded from IPPS 

(including long-term care hospitals, inpatient rehabilitation facilities or distinct part 

units, psychiatric hospitals or units), skilled nursing facilities, and clinically related 

home health care provided within 3 days after the date of discharge. Acute patients 

in these DRGs that are transferred to swing beds for skilled nursing care are not 

considered to be postacute transfers. After FY 2000, the Secretary was authorized 

to expand this policy to additional DRGs. In FY2004, the transfer policy was 

modified to cover 29 DRGs; 2 of the original DRGs were eliminated and 21 other 

DRGs were added to the transfer policy. Generally, to be included under the 

 

2

 This single threshold applies to both capital and operating IPPS outlier payments. 

3

 A sending hospital (as well as the final discharging hospital) will always receive full payment for a 

patient in one DRG who is transferred, DRG 385, Neonates that Died or Were Transferred. 
2-37 

policy, a DRG must have at least 14,000 postacute care transfer cases; at least 

10 percent of its postacure care transfers occurring before the geometric mean 

length of stay; and a geometric mean length of stay of at least 3 days for both of the 

2 most recent years for which data are available. For a new DRG to be included 

under this policy, its geometric mean length of stay must decline by at least 

7 percent during the most recent 5-year period. To minimize coding distortions, 

CMS includes both DRGs from a paired DRG combination (where a patient=s 

assignment in one or the other of the DRGs depends on the presence of a 

complication or comorbid condition) automatically under the policy even if only 

one of the DRGs meet these criteria. 

Under the postacute transfer policy, the sending hospital will receive twice 

the per diem rate for the first day and the per diem rate for each following day of 

the stay up to the full DRG payment amount. However, 3 of the 29 selected DRGs 

have a disproportionate share of the costs early in the hospital stay. For these 

DRGs, a sending hospital receives 50 percent of the full DRG payment plus the per 

diem amount for the first day of the stay and 50 percent of the per diem amount for 

each of the remaining days of the stay, up to the full DRG payment. Medicare 

payment to any postacute providers involved in the stay are not affected by this 

policy. 

 Additional Payments for New Technology--BIPA established a process of 

identifying and paying more for new medical services and technologies provided to 

Medicare beneficiaries by short-term general hospitals. As defined by CMS, new 

technologies are those that represent an advance in medical technology that 

substantially improves diagnosis and treatment of Medicare beneficiaries when 

compared to previously available technologies. It takes 2 to 3 years from the point 

when a new technology is brought to market to the point where that data is 

incorporated in the Medicare charge data used to calculate DRG weights. To 

qualify for an additional IPPS payment, these technologies must be inadequately 

paid by the existing DRG system with costs that are not captured by the 

recalibration of DRG weights. As implemented by CMS, a new technology will 

qualify for special payments if the applicant can show that average charge for a 

case using the new technology is one standard deviation above the geometric mean 

of the standardized charges for all cases in the relevant DRG (or when a case may 

be assigned to multiple DRGs, the weighted average of all DRGs to which the case 

may be assigned). Medicare pays 50 percent of the costs of the new technology 

that are above the DRG payment, up to a maximum of 50 percent of the estimated 

cost of the new technology. The add-on payments are budget-neutral with a target 

limit of 1 percent of total operating prospective payments. If the target limit is 

exceeded, the marginal payment rate for new technologies would be reduced. 

 For FY2003, CMS received 5 applications for new technologies to be 

considered for the inpatient add-on payment; one biotechnology treatment for 

sepsis was approved for the add-on payment. However, in FY 2003, CMS 

recognized the likely introduction of a new technology in a different, unprecedented 

fashion. In that year, CMS created 2 new DRGs for patients receiving an 

angioplasty that uses drug-eluting stents, a higher cost technology that was 
2-38 

expected to be widely adopted once approved by the Food and Drug Administration 

(FDA). Subject to a positive decision by FDA, the DRGs became active for 

appropriate discharges occurring on or after April, 2003. CMS constructed the 

weights for the new DRGs using non-Medicare price data and utilization 

assumptions as explained in the August 1, 2003 Federal Register. For FY2004, 

CMS received 2 applications for new technologies to be considered for inpatient 

add-on payments and granted one for a spinal fusion technology. For FY2005 and 

in subsequent years, CMS has reduced the qualifying threshold to 75 percent of one 

standard deviation beyond the geometric mean standardized charges for all cases in 

the DRG to which the new medical service or technology is assigned. 

Capital prospective payment system 

 Unlike the prospective payment systems that have been recently 

implemented for specialty hospitals, Medicare sets separate per discharge payment 

rates to cover the costs for depreciation, interest, rent and other property-related 

expenses in short-term general hospitals. Until FY1992, Medicare paid its share of 

acute hospitals= reasonable capital-related costs, based on the percentage of hospital 

services used by Medicare beneficiaries. Starting in FY1992, subject to a 10-year 

transition period extending through FY2001, inpatient capital costs were paid on 

the basis of an increasing proportion of an annual Federal rate and a decreasing 

proportion of a hospital=s historic costs for capital. For all cost reporting periods 

beginning in FY 2002, all hospitals, except new hospitals, are paid based on 100 

percent of the Federal rate. 

 As in the case with operating IPPS, standardized capital payment amounts 

are reduced to finance outlier payments and adjusted to account for the effect of 

DRG reclassifications and hospital reassignments, special exceptions payments as 

well as other mandated budget neutrality factors. In FY2004 the Federal rate for 

capital was set at about $427 for Medicare discharges from hospitals in large urban 

areas and about $415 for Medicare discharges from hospitals in other areas. 

Capital IPPS payments typically constitute about 10 percent of total Medicare IPPS 

inpatient payments to short-term hospitals for inpatient care, a percentage that has 

fluctuated over time and can vary by type and location of hospital. 

 Medicare=s capital IPPS for acute hospitals includes similar adjustment 

factors as its operating IPPS; however, the adjustments in capital IPPS can be 

structured differently than those in the IPPS. Generally, under capital IPPS, the 

Federal rate is based on average base year capital costs per case in FY1989, 

updated by inflation and other cost changes. Hospitals in large urban areas receive 

an additional 3 percent increase to their Federal rate. Hospitals in Alaska and 

Hawaii receive an additional cost of living adjustment in capital IPPS. 

 Capital IPPS payments are adjusted using a hospital=s geographic adjustment 

factor (GAF, which is calculated from the hospital=s wage index) and Medicare 

patients’ case-mix intensity which uses the same DRG patient classification system 

used in operating IPPS. Medicare=s capital IPPS also incorporates special payments 

for outliers as well as payments for DSH and IME. With respect to outlier 

reimbursement, a single set of thresholds is used to identify outlier cases for both 
2-39 

inpatient operating and capital-related IPPS. Although the outlier reduction factor 

for operating IPPS is statutorily set between 5 percent and 6 percent, the outlier 

reduction factor for capital PPS is not. In FY2004, the capital outlier reduction 

factor was 4.79 percent. 

 With respect to the capital DSH adjustment, only urban hospitals with more 

than 100 beds may receive a DSH adjustment; there is no qualifying threshold 

specified. Rather, any hospital with a positive DSH percentage will receive 

approximately a 2.1 percent increase in its capital payments for each 0.01 increase 

in its DSH percentage. The APickle@ hospitals (that qualify for a 35 percent 

operating DSH adjustment because at least 30 percent of their inpatient revenues 

are from State or local indigent care funds) are given a capital DSH adjustment of 

14.16 percent. 

 With respect to the capital IME adjustment, teaching hospitals receive 

additional IPPS payments based on the ratio of residents to average daily inpatient 

census, rather than the ratio of residents to beds as in operating IPPS. The 

adjustment factor will increase capital payments approximately 2.8 percentage 

points for each 10 percent increase in this IME measure. 

 Finally, capital IPPS incorporates special exception payments for different 

categories of hospitals. CMS has established a special exceptions process which 

provides for additional payments to eligible hospitals for up to 10 years from the 

year that it completes a replacement or renovation project that meets certain 

criteria. The project must have been completed no later than the end of the 

hospital=s last cost reporting period before October 1, 2001. Eligible hospitals 

include sole community hospitals; urban hospitals with at least 100 beds with a 

minimum DSH adjustment of 20.2 percent; hospitals that receive DSH as a Pickle 

hospital; and hospitals that have a combined Medicaid and Medicare utilization of 

at least 70 percent. These hospitals must meet specified project need and project 

size requirements. CMS estimates that 27 hospitals will qualify for special 

exception payments in cost reporting periods beginning in FY 2000. 

 Capital exception payments are also made to hospitals that incur 

unanticipated capital expenses due to circumstances beyond the hospital=s control. 

Specifically, these would include unanticipated capital expenditures in excess of 

$5 million (net of insurance proceeds or other Federal or State monies) attributed to 

extraordinary circumstances including floods, fires, or earthquakes. Hospitals will 

receive a minimum of 85 percent of Medicare=s share of the allowable capitalrelated costs attributed to these circumstances. SCHs will receive at least 

100 percent of these allowable costs. 

Annual Updates 

 The IPPS standardized amounts are increased each year using an update 

factor which may be determined, in part, by the projected increase in the hospital 

market basket (MB) index. CMS rebases the operating MB index every 5 years to 

reflect the changing composition of hospital inputs being purchased. Most recently, 

the MB was rebased and revised for FY2003 payments to reflect FY1997 cost data 

and to incorporate a separate category for blood and blood products. 
2-40 

 The hospital input price index reflects the average change in the price of a 

set of mutually exclusive spending categories. The relative importance of the 

spending categories (cost or expenditure weights) are calculated using Medicare 

cost reports and other data from a base year. These are the numerical shares that 

each category contributes to the total MB; the cost weights over all categories add 

up to 100 percent. The more that an input good is used in the production of 

inpatient hospital care, the higher the associated expenditure weight will be and the 

greater the influence the projected inflation in that category will have on the change 

in the MB. Price proxies (or measures of price inflation) are selected for each 

spending category. The proxies are derived from publicly available statistical series 

published on a routine basis, preferably no less often than each quarter. For 

example, the proxy selected for the wages and salary expense category is the 

employment cost index for civilian hospital workers. To calculate the MB, the 

weight for each category is multiplied by the level of the price proxy. The sum of 

these products for all cost categories equals the composite index level of the MB in 

a given year. Dividing this sum by the index level from an earlier year produces an 

estimate of the growth rate in the MB over that time period. As shown in 

Table 2-15, the projected inflation of 3.8 percent for wages and salaries comprise 

50.69 percent of the estimate of total hospital operating MB used to set the FY2004 

IPPS rates. 

 Generally, Congress sets the update for operating payments for several years 

in advance in statute. According to CMS, the IPPS update is the single most 

important payment variable for the hospital sector as it affects nearly $100 billion 

per year in Medicare hospital payments. Typically, over the life of IPPS, the 

operating update has been set at a level below a full MB update. For example, in 

FY2003, the update for operating costs was set at MB - 0.55 percentage points; the 

best estimate of the MB available when the final regulation was issued was 

3.5 percent. The FY2003 update equaled a 2.95 percent increase. However, for 

FY2004 and in subsequent years, absent further legislation, the operating update 

will equal the change in the MB. The MB update reflected in the IPPS operating 

update each year is the most recently available forecast when the final regulation is 

published. Unlike the capital IPPS update, the operating update does not include a 

correction for forecast error. As indicated by Table 2-16, for most of IPPS, the 

forecasted value of the MB incorporated in the IPPS update has been larger than 

the final estimate of the MB change. 
2-41 

TABLE 2-15--INPATIENT HOSPITAL PROSPECTIVE PAYMENT 

SYSTEM INPUT PRICE INDEX (“THE MARKET BASKET”) EXPENSE 

CATEGORIES AND RATES OF CHANGE, FOR EACH PRICE PROXY, 

FISCAL YEAR 2004

Federal Fiscal Year Percentage Rates of Price Change Expense Category Base Year 1997 weights 1 2004 2

Wages and Salaries 3 50.69 3.8 

Employee Benefits 3 10.97 4.9 

Professional fees: Non-Medical 3

 5.40 3.5 

Utilities 1.35 -1.0 

 Electricity 0.83 -1.6 

 Fuel, Oil, Coal, Etc 0.28 -2.0 

 Water and Sewage 0.24 2.6 

Liability Insurance 0.84 6.3 

All Other 30.75 2.2 

 All other Products 19.54 2.0 

 Pharmaceuticals 5.42 3.9 

 Food: Direct Purchase 1.37 1.5 

 Food: Contract Service 1.27 2.6 

 Chemicals 2.60 -1.9 

 Blood and Blood Products 0.88 1.0 

 Medical Instruments 2.19 1.8 

 Photographic Supplies 0.20 1.3 

 Rubber and Plastics 1.67 1.5 

 Paper Products 1.36 3.1 

 Apparel 0.58 0.1 

 Machinery and Equipment 1.04 0.1 

 Miscellaneous 0.96 1.4 

 All other Services 11.21 2.7 

 Telephone 0.40 0.3 

 Postage 0.86 1.8 

 All Other: Labor Intensive 3

 5.44 3.3 

 All Other: Non-Labor Intensive 4.52 2.2 

Total 100 3.4 1

 Weights may not sum due to rounding. 

2

 Projected data, subject to change in future forecasts, used to establish FY 2004 IPPS rates. 

3

Considered labor related. 

Source: Center for Medicare & Medicaid Services, Office of the Actuary. 

 

 Although Congress sets the operating update, CMS sets the capital update 

using an update framework that consists of a capital input price index (CIPI) and 

several adjustment factors. In FY2003, CMS rebased and revised the CIPI to 

incorporate a FY1997 base year and to reflect a more recent structure of capital 

costs. The capital price index is structured differently from the operating MB, 

because capital is acquired and paid for over time instead of being consumed in the 

same time period in which it is purchased. The CIPI incorporates 2 sets of weights: 

 one set identifies the relative importance of each of the cost categories to the 

average capital costs in a hospital and the other set of weights (called vintage 

weights) identifies the proportion of capital spending within each cost category that 

is attributable to each year of the useful life of the capital asset. The capital cost 
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categories include depreciation (physical capital including both building and fixed 

equipment as well as moveable equipment), interest (financial capital) and other 

related capital expenses (such as insurance). With respect to the relative 

importance of each of the capital cost categories, depreciation of building and fixed 

equipment comprises 34.22 percent of the CIPI; depreciation of movable equipment 

comprises 37.13 percent of the CIPI and interest costs comprises 23.46 percent of 

the CIPI. Lease expenses are not a separate cost category in the CIPI, but are 

distributed among the other capital cost categories with 10 percent of lease costs 

assumed to be overhead. 

TABLE 2-16--FORECASTED INCREASE IN THE IPPS MARKET BASKET, 

ACTUAL INCREASE IN THE IPPS MARKET BASKET, AND THE IPPS 

UPDATE, FISCAL YEARS 1984-2002 

Fiscal 

Year 

Forecasted Increase in 

the IPPS Market 

Basket1

Actual Increase in the 

IPPS Market Basket2

Actual IPPS Operating 

Update 

1984 4.9 5.1 4.7 

1985 4.0 4.0 4.5 

1986 4.3 3.0 0.5 

1987 3.7 3.3 1.2 

19883 4.7 4.8 1.5 

1989 5.4 5.5 3.3 

1990 5.5 4.6 4.74

1991 5.2 4.4 3.4 

1992 4.4 3.2 3.0 

1993 4.1 3.1 2.7 

1994 4.3 2.6 2.0 

1995 3.6 3.1 2.0 

1996 3.5 2.4 1.5 

1997 2.5 2.0 2.0 

1998 2.7 2.9 0.0 

1999 2.4 2.5 0.5 

2000 2.9 3.6 1.1 

2001 3.4 4.1 3.4 

2002 3.3 2.9 2.75 

2003 3.5 N/A 2.95 

2004 3.4 N/A 3.4 1 Projected forecast of MB based on available data when final rule was published that was used to 

set update for that year. 

2

 Final measure of MB increase for a given year.

3 IPPS was implemented in 1984, but was not fully-phased in until 1988. Also, throughout IPPS 

the hospital categories that determined the standardized rate paid to a hospital changed: from an 

urban/rural configuration to large urban/ urban/ rural and now to large urban/other area. Actual 

updates received by any hospital would be affected these changes. 

4 Actual updates for FY1990 adjusted to reflect 1.22 percent across the board reduction in DRG 

weights.

Source: Centers for Medicare & Medicaid Services, various publications. 

 CMS sets the capital update using their update framework which includes 

the CIPI rate of increase adjusted for patient care intensity (or efficiency) changes, 

case-mix adjustments, DRG reclassifications and recalibrations and a correction for 

the forecast error from 2 years earlier. CMS includes an intensity adjustment to 
2-43 

reflect policy considerations with respect to assessed improvements in efficiency, 

within-DRG severity increases and the adoption of quality enhancing technology. 

Other adjustments within the update framework are based on CMS=s attribution of 

the source of observed changes in the case-mix index for Medicare discharges. The 

change in the case-mix index can result from changes in the average resource use of 

Medicare patients (a Areal@ case-mix change), changes in hospital coding practices 

that would result in higher weight DRG assignments (coding effects), and changes 

in DRG reclassification and recalibration. To the extent that the real case-mix 

increase is captured by the observed change in the case mix index measure, no 

additional adjustment will be incorporated in the capital update framework. Also, 

the DRG reclassification effect is included with a 2-year lag. For example, the 

FY2003 capital update framework included a -0.3 percent reduction attributed to an 

overstatement of the change originally attributed to DRG recalibration and 

reclassification that occurred in FY2001. Finally, CMS will make an adjustment 

for forecast error if their estimate of the CIPI for any year is off by 0.25 percentage 

points or more; again there is a 2-year lag between the forecast and the 

measurement of forecast error. For example, the -0.3 percent forecast correction 

factor in FY2003 indicates that the current data establishes that the forecasted value 

of the CIPI used in the FY2001 update framework was overstated. The impact of 

the policy adjustments vary from year to year. For example, in FY2003, the CIPI 

was 0.7, but the capital update was 1.1 percent due to the influence of other factors. 

 However in FY2004, the capital update was 0.7 percent, an increase that was 

entirely driven by the rate of change in the CIPI; other adjustments were deemed to 

either have a negligible impact or cancelled each other out. Table 2-17 shows the 

capital update framework and associated adjustments from FY1999 to FY2004. 

 

TABLE 2-17 -- CAPITAL IPPS UPDATE FRAMEWORK, 

FISCAL YEARS 1999-2004

Capital Update Components 1999 2000 2001 2002 2003 2004 

Capital Input Price Index 0.7 0.6 0.9 0.7 0.7 0.7 

Intensity 0.0 0.0 0.0 0.3 1.0 0.0 

Projected Case-mix Change -1.0 -0.5 -0.5 0.0 -1.0 -1.0 

Real DRG Change 0.8 0.5 0.5 0.0 1.0 1.0 

Subtotal 0.5 0.6 0.9 1.0 1.7 0.7 

Effect of Reclassification 

and Recalibration 

(with 2 year lag) 

0.0 0.1 0.0 0.0 -0.3 0.0 

Forecast Error Correction 

(with 2 year lag) -0.4 -0.4 0.0 0.3 -0.3 0.0 

Total Capital Update 0.1 0.3 0.9 1.3 1.1 0.7 

Source: CRS compilation of data from various Federal Registers. 

 For both operating and capital IPPS, the annual increase to the base rates 

will depend not only on the update amounts, but will also be affected by the annual 

budget neutrality offsets attributed to DRG recalibrations, wage index changes, 

hospital reclassifications, and outliers. 
2-44 

Payments made outside capital and operating IPPS 

 Specific categories of hospital expenses, including direct medical education 

costs, are not included in the hospital prospective payment system. 

 Direct medical education costs--The direct costs of approved medical 

education programs (such as the salaries of residents and teachers and other 

education costs for residents, for nurses, and for allied health professionals trained 

in provider-operated programs) are paid separately from IPPS. The direct medical 

education costs for the training of nurses and allied health professionals in provideroperated programs are paid for on a reasonable cost basis. The direct costs of 

residency training programs for physicians are paid according to a formula that uses 

each hospital's per resident costs, updated from a base year and subject to certain 

limits as explained below. CMS estimates Medicare spending on direct graduate 

medical education (DGME) payments for allied health professionals at $250 

million for fee-for-service beneficiaries and an additional payment of up to $60 

million made to hospital-based nursing and allied health programs to account for 

utilization by beneficiaries who are enrolled in Medicare+Choice programs; CMS 

estimates Medicare spending on DGME payments for residency training programs 

for physicians at $2.3 billion in FY2002. 

 Medicare's payment to each hospital for the direct costs of physician=s 

residency training programs equals the hospital's cost per full-time equivalent 

(FTE) resident, times the weighted average number of FTE residents, times the 

percentage of inpatient days attributable to Medicare Part A beneficiaries, including 

days provided to Medicare +Choice enrollees. Generally, each hospital's per 

resident amount (PRA) is calculated using data from the hospital's cost reporting 

period that began in fiscal year 1984, increased by 1 percent for hospital cost 

reporting periods beginning July 1, 1985, and updated in subsequent cost reporting 

periods by the change in the Consumer Price Index (CPI). Hospitals with both 

primary care and obstetrics and gynecology residents and nonprimary care residents 

in FY1994 or FY1995 may have two separate PRAs: one for primary care and 

obstetrics and gynecology and one for nonprimary care. Primary care residents are 

defined to include family medicine, general internal medicine, general pediatrics, 

preventive medicine, geriatric medicine, and osteopathic general practice. 

 Although teaching hospitals' per resident costs vary greatly between 

hospitals, recently some of the variation in Medicare reimbursement for these 

amounts has been reduced. Starting in FY2001, hospitals with PRAs below 70 

percent of the national average were increased to 70 percent of the geographically 

adjusted value or the floor amount. Starting during FY2002, this floor was 

increased to 85 percent of the locality adjusted, updated, and weighted national 

PRA. Also hospitals with PRAs above 140 percent of the geographically adjusted 

national average or the ceiling amount did not receive an inflation update for 2 

years (FY2001 and FY2002) and will receive a lower update than other hospitals 

(CPI minus 2 percent) for 3 years (FY2003- FY2005). 

 Only residents in their initial residency period are counted as a full FTE. 

Residents who are not in their initial residency period are counted as one-half of an 

FTE. There is no limit on the number of years that an individual resident can be 
2-45 

counted as 0.5 FTE as long as the resident continues to train in an approved 

program. Generally, the initial residency period is the minimum number of years 

required for a resident to become board eligible in the specialty in which the 

resident first began training, not to exceed 5 years. The number of years considered 

as an initial residency period varies by physician specialty. The initial residency 

program in combined residency programs is defined as the time required for 

certification in the longer of the programs. In certain combined programs, an 

additional year in the initial period is permitted. Residents who are foreign or 

international medical graduates are not counted as FTE residents unless they have 

passed certain examinations. 

 In general, Medicare=s DGME payment to any hospital is limited by a cap 

that is based on the number of allopathic and osteopathic residents that the hospital 

counted for the purposes of DGME payments on its cost report ending on or before 

December 31, 1996. Generally, a hospital=s unweighted FTE count may not 

exceed this limit, but certain adjustments may be made for newly established 

medical residency training programs, terminations of teaching programs, rural 

training programs, and affiliated groups of teaching hospitals. A hospital=s DGME 

payments are based on a 3-year rolling average of resident counts (using data from 

the payment year cost reporting period and the preceding two cost reporting 

periods), subject to the resident limits. This rolling average calculation will include 

dental and podiatry residents. 

 Payments for Other Excluded Cost Categories--Certain hospitals receive 

additional payments for different categories of services that have been excluded 

from IPPS and are paid separately. Medicare pays for a percentage of the bad debts 

attributable to unpaid deductible and copayment amounts related to covered 

services received by Medicare beneficiaries. In FY1998, approximately 3,900 

hospitals received $409 million in bad debt payments. The estimated net expenses 

associated with Medicare organ acquisition in certified transplantation centers are 

excluded from IPPS and paid on a reasonable cost basis. In FY1998, 208 hospitals 

received about $340.3 million for net organ acquisition costs. Qualifying rural 

hospitals are paid on a reasonable cost basis for anesthesia services furnished by 

hospital employed nonphysician anesthetists (certified registered nurse anesthetists 

and anesthesiologist's assistants) or obtained under arrangement. In FY1999, 639 

hospitals received approximately $33.9 million in Medicare payments for these 

services. Finally, teaching hospitals can elect to receive reasonable cost payments 

in lieu of fee schedule payments that might otherwise be made for direct medical 

and surgical services of physicians who are employees or who otherwise agree not 

to bill separately for such services. The services include the services and the 

supervision of interns and residents providing care to Medicare beneficiaries. In 

FY1998, 14 teaching hospitals were paid about $25.6 million for these services. 

 Special Treatment for Certain Acute Care Facilities--Certain facilities 

receive special treatment under IPPS, particularly those facilities identified as 

isolated or essential hospitals primarily located in rural areas, including rural 

referral centers, sole community hospitals, and Medicare dependent hospitals. 

Small rural facilities have been able to offer long-term care services without 
2-46 

establishing a distinct unit by offering such care in hospital swing beds (beds that 

swing between offering acute care and long-term care services.) Starting in 1998, 

small, limited service facilities have been able to opt out of Medicare IPPS under 

the critical access hospital program and receive reasonable cost reimbursement for 

their services. 

 Sole Community Hospitals (SCHs)--SCHs are hospitals that, because of 

factors such as isolated location, weather conditions, travel conditions, or absence 

of other hospitals, are the sole source of inpatient services reasonably available in a 

geographic area. Any hospital seeking SCH status can qualify if it is located more 

than 35 miles from a like hospital. Depending upon its circumstances, including its 

bed size, a hospital can qualify as a SCH under various distance, market share or 

travel time standards. Specifically, a hospital that is located more than 35 miles 

from other like hospitals or one with at least 45 minutes of travel time between it 

and its nearest like hospital because of distance, posted speed limits, and 

predictable weather conditions will qualify as a SCH. A rural hospital that is 

located between 25 and 35 miles from another like hospital can qualify as a SCH if 

it: (1) passes a market share test where no more than 25 percent of the Medicare 

beneficiaries or population within its service area can be admitted to other like 

hospitals located within a 35-mile radius or in its service area, whichever is larger; 

(2) has fewer than 50 beds, does not offer specialty services that are needed by 

some of the Medicare beneficiaries or other residents in its service area, and has its 

Medicare fiscal intermediary certify that it would have otherwise met the market 

share test if it did offer the needed services; or (3) had its like hospitals inaccessible 

for at least 30 days in each 2 out of the 3 preceding years. For these purposes, a 

hospital=s service area is defined, generally speaking, as the smallest number of zip 

codes from which it draws 75 percent of its admissions during the most recent 

12-month cost reporting period ending before its SCH application. A rural hospital 

that is located between 15 and 25 miles from other like hospitals can qualify as a 

SCH if its other like hospitals are inaccessible for at least 30 days in each 2 out of 

the 3 preceding years. 

 The rural SCH qualification criteria may be applicable to urban hospitals. 

BBRA provided that an urban hospital may be redesignated as being located in a 

rural area if it meets one of several criteria. Specifically an urban hospital can 

apply to the Secretary and be reclassified to a rural area if (1) it is in a rural census 

tract of a metropolitan area; (2) it is designated by the State as in a rural area or as a 

rural hospital; or (3) it meets all the requirements for rural SCHs except that it is 

located in an urban area. An urban hospital that qualifies as a rural SCH and 

reclassifies to a rural area through this process is not permitted to be reclassified 

subsequently through the Medicare Geographic Classification Review Board 

(MGCRB). 

 CMS does not consider all providers offering inpatient services to be Alike 

hospitals@ when determining whether an applicant can qualify as an SCH. 

Specifically, critical access hospitals (CAHs) are not considered like hospitals by 

CMS, because these facilities are not full-service inpatient providers. Moreover, 

CMS will not consider a nearby hospital to be a like hospital unless the inpatient 
2-47 

services provided by the nearby hospital Aoverlap@ with those offered by the SCH or 

SCH applicant. As established in regulation, effective for cost reporting periods 

on or after October 1, 2002, a nearby hospital will not be considered a like hospital 

unless the percentage of its total inpatient days equals 8 percent or more of the total 

patient days provided by the SCH or SCH applicant. The comparison includes all 

days provided in units that provide the level of care payable under IPPS; days 

provided in PPS-exempt, distinct part units would not be included in the 

comparison. This regulatory provision was adopted because of the development of 

freestanding specialty hospitals that focus on specific cardiovascular, orthopedic, 

or other surgical procedures. 

 The primary advantage of the SCH classification is the option to use a 

hospital=s updated historical operating costs when calculating Medicare inpatient 

payments when this results in higher payments to the hospital. Specifically, an 

SCH may use the higher of the following payment rates as the basis of its Medicare 

reimbursement: the current IPPS base payment rate in comparison to its hospitalspecific per discharge costs from either FY1982, FY1987, or FY1996 updated to 

the current year. The FY1996 base year option became effective for discharges on 

or after FY2001 on a phased-in basis and is fully implemented for SCH discharges 

beginning in FY2004. An SCH will only receive outlier payments, 

disproportionate share hospital payments, or indirect medical education payments 

(adjustments within the IPPS system) when it is paid using the current IPPS base 

rate (and not the rates based on its updated hospital specific per discharge costs). 

An SCH=s Medicare payments will be calculated using the rate that results in the 

highest payment as established by its fiscal intermediary in the settlement of the 

hospital=s cost report. 

 Another significant advantage for an SCH is the ability to request additional 

payments for any year if the hospital experiences a decrease of more than 5 percent 

in its total inpatient cases due to circumstances beyond its control. The request 

must include an analysis of the reasons for the decrease in discharges, explain the 

resulting effect on the per discharge costs, and show that the decrease is due to 

circumstances beyond the hospital=s control. There are other special inpatient 

payment considerations an SCH may receive. Specifically, those rural SCHs that 

are paid on the basis of the current IPPS base rate (and not on the basis of their 

hospital-specific costs) that qualify for disproportionate share hospital (DSH) 

payments will receive a 10 percent payment increase rather than the maximum 5.25 

percent DSH adjustment received by other rural hospitals. Moreover, SCHs are not 

required to meet one of the tests, the proximity requirement, in order to reclassify 

to a different geographic area and receive a higher wage index, base payment rate 

(if applicable) or both. In terms of payments for outpatient services, the outpatient 

laboratory fee schedule can be increased by 2 percentage points for these services 

provided by an SCH. 

 Certain SCHs not meeting the criteria have been allowed to continue to 

qualify for payments as an SCH. Under most circumstances, hospitals designated 

as SCHs prior to December 19, 1989 are permitted to retain their SCH status. 

Generally, an approved SCH classification will remain in effect without the need 
2-48 

for approval unless there is a noticeable change in the circumstances under which 

the classification was approved. However, a hospital (even a “grandfathered” 

SCH) can lose its special status as an SCH if successfully reclassified by the 

MGCRB for the purposes of using a higher base payment. 

 Medicare Dependent Hospitals--Small rural hospitals that treat a relatively 

high proportion of Medicare patients can be classified as Medicare dependent 

hospitals (MDHs). Generally speaking, a MDH is located in a rural area, has 100 

beds or less, is not classified as an SCH, and has at least 60 percent of acute 

inpatient days or discharges attributable to Medicare in the hospital cost reporting 

period that began during fiscal year 1987 or in two of the three most recently 

audited cost reporting periods for which there is a settled cost report. Originally 

intended to be a temporary classification status, Congress has extended the MDH 

designation several times. BBRA extended the sunset date for MDH classification 

to September 30, 2006. 

 The financial advantages of an MDH designation are less than those 

afforded to an SCH designation. An MDH can receive higher Medicare payments 

than other acute care hospitals in the same circumstances. Specifically, an MDH 

hospital will be paid based on its adjusted FY1982 or FY1987 hospital specific 

costs rather than the national base rate if that will result in higher payments. 

However, an MDH will receive only 50 percent of the difference between the base 

rate and its adjusted FY1982 or FY1987 hospital-specific costs. The other benefit 

is that an MDH, like an SCH, continues to be protected from a decrease of more 

than 5 percent in its total inpatient cases due to circumstances beyond its control. 

 Rural Referral Centers (RRCs)--RRCs are relatively large rural hospitals 

that generally provide a broad array of services and treat patients from a wide 

geographic area. These rural hospitals are thought to have operating costs more 

similar to urban hospitals than to the average smaller community hospitals, because 

of bed size, a large number of complicated cases, a high number of discharges, or a 

large number of referrals from other hospitals or from physicians outside the 

hospital=s service area. Originally, only rural hospitals with 500 or more beds 

received special treatment as a referral center. Presently, RRCs must have at least 

275 beds or meet specific criteria which indicate that the facility receives a high 

referral volume from other hospitals. 

 A rural hospital can qualify as a RRC if it meets the bed size criteria of 

275 or more beds and meets the following referral standards and service area 

standards: at least 50 percent of its Medicare patients are referred from other 

hospitals or from physicians not on the hospital's staff and at least 60 percent of its 

Medicare patients reside more than 25 miles from the hospital. Alternatively, a 

rural hospital must meet certain case-mix and discharge standards. Specifically, the 

hospital must have (1) a case-mix index equal to or greater than the national or 

regional median case mix index for all urban hospitals, excluding hospitals with 

approved teaching programs; and (2) at least 5,000 discharges per year (3,000 

discharge for osteopathic hospitals) or at least the median number of discharges for 

urban hospitals in the same region. Under this alternative standard, a hospital must 

meet one of the following referral or service area standards: more than 50 percent 
2-49 

of the hospital's medical staff are specialists, at least 60 percent of its discharges are 

for inpatients who reside more than 25 miles from the hospital, or at least 

40 percent of inpatients treated at the hospital have been referred either from 

physicians not on the hospital's staff or from other hospitals. 

 Under the original structure of IPPS, RRCs received the urban rather than 

the rural base payment rate. When the other urban and rural payment rates were 

equalized in FY1995, RRCs lost some of the benefit of their classification status. 

However, qualifying RRCs receive a higher DSH adjustment than do other rural 

hospitals. Also, as discussed subsequently, RRCs continue to be entitled to 

preferential consideration before the Medicare Geographic Classification Review 

Board. An RRC does not need to demonstrate proximity to an area or establish 

that its wages exceed 106 percent of the average wage in the area where it seeks to 

be redesignated. 

 Hospital Swing Beds--Small rural hospitals have had difficulty in 

establishing separately identifiable units for Medicare and Medicaid long-term care 

because of limitations in their physical plant and accounting capabilities. These 

hospitals had an excess of hospital beds and their communities had a scarcity of 

long-term care beds in Medicare and Medicaid participating facilities. Under the 

swing bed program started under OBRA 1980 (P.L. 96-499), certain rural hospitals 

with fewer than 50 beds were permitted to use their inpatient facilities, as 

necessary, to furnish long-term care services. OBRA 1987 extended the Medicare 

swing-bed program to rural hospitals with less than 100 beds with certain payment 

limitations. Prior to the skilled nursing facility (SNF) PPS described subsequently, 

hospitals with swing beds were paid the average Medicare rate per patient day for 

routine services provided in freestanding SNFs in their census region; ancillary 

services were reimbursed on a reasonable cost basis. Most swing bed providers 

have been paid using the SNF PPS, starting for cost reporting periods on or after 

July 1, 2002. Critical access hospitals (discussed subsequently) with swing beds 

are exempt from the SNF PPS. In 2002, there were 1,067 swing-bed hospitals 

certified to provide acute care or SNF services. 

 Critical Access Hospitals--BBA 1997 provided for the Rural Hospital 

Flexibility Program which created a new Medicare category of rural entities, critical 

access hospitals (CAHs), and authorized a companion grant program of $25 million 

annually for 5 years to establish networks for improving access to health care 

services in rural communities. Based on earlier demonstration programs of rural 

primary care hospitals and medical assistance facilities, CAHs provide emergency, 

outpatient and limited inpatient services in rural areas. Before a hospital can be 

designated as a CAH, the State must submit and have approved a rural health plan 

implementing the Medicare Rural Hospital Flexibility Program. 

 The original CAH provisions were subsequently modified. Currently, to 

qualify as a CAH, the rural, for-profit, nonprofit, or public hospital must be located 

more than 35 miles from another hospital or 15 miles in areas with mountainous 

terrain or those where only secondary roads are available. These milage standards 

may be waived if the hospital has been designated by the State as a necessary 

provider of health care. Under certain circumstances, hospitals that have closed 
2-50 

within the past 10 years may be designated as CAHs. All CAHs must provide 24-

hour emergency services; and operate a limited number of inpatient beds in which 

hospital stays can average no more than 96 hours. Although CAHs are limited to 

15 acute-care beds, these facilities may have an additional 10 swing beds that are 

set up for skilled nursing facility level care. While all 25 beds can be used as swing 

beds, only 15 of the 25 can be used for acute care at any time. Any bed of a unit of 

the facility that is licensed as a distinct-part SNF is not included in these bed 

counts. Generally, a rural hospital designated as a CAH receives reasonable, cost 

based reimbursement for care rendered to Medicare beneficiaries. CAHs may elect 

either a cost-based hospital outpatient service payment or an all-inclusive rate 

which is equal to a reasonable cost payment for facility services plus 115 percent of 

the fee schedule payment for professional services. The reasonable cost of 

outpatient CAH services may include the reasonable compensation and related 

costs for an emergency room physician who is on call but not present on the 

premise of the CAH, if the physician is not otherwise furnishing physicians=

services and is not on call at any other provider or facility. Ambulance services 

that are owned and operated by CAHs are reimbursed on a reasonable cost basis if 

these ambulance services are 35 miles from another ambulance system. 

 As of April 2003, 763 hospitals have been certified by CMS as CAHs; 

442 of these CAHS have been governor-designated as necessary providers as 

opposed to meeting the Federally mandated mileage and location standards. More 

than half (51 percent) of all CAHs are located in 10 States; 3 States, Delaware, 

New Jersey, and Rhode Island, do not participate in the program. Sixty-nine 

additional hospitals have CAH designations that are pending. 

 Geographic Reclassification of Hospitals--Unlike other providers, acute 

hospitals may apply to the Medicare Geographic Classification Review Board 

(MGCRB) for a change in classification from a rural area to an urban area, or 

reassignment from one urban area to another urban area. The MGCRB was 

created to determine whether a hospital should be redesignated to an area with 

which it has close proximity for purposes of using the other area's standardized 

amount, wage index, or both. If reclassification is granted, the new wage index will 

be used to calculate Medicare=s payment for inpatient and outpatient services. 

Other services offered by the hospital such as rehabilitation services in a distinct 

part unit will be paid using the wage index from the hospital=s original area. 

Hospital reclassifications are established on a budget neutral basis so aggregate 

IPPS payments will not increase as a result. A hospital may apply for 

reclassification individually, as a member of a group of hospitals, and as a member 

of a statewide wage index area; depending upon the type of application, different 

criteria apply. 

 Generally, for an individual hospital to qualify for reclassification, it must 

demonstrate a close proximity to the areas where they seek to be reclassified. This 

proximity can be established if one of two conditions is met: (1) an urban hospital 

must be no more than 15 miles and a rural hospital must be no more than 35 miles 

from the area where it wants to be reclassified; or (2) at least 50 percent of the 

hospital=s employees reside in the area. A RRC or a SCH (or a hospital that is both 
2-51 

a RRC and a SCH) does not have to meet the proximity test. If qualified, it can be 

redesignated to the urban area that is closest to the hospital. If a rural area is closer, 

then the SCH or the RRC may seek reclassification to either the closest rural area or 

the closest urban area. 

 After establishing appropriate proximity, a hospital may qualify for the 

payment rate of another area if it proves that its incurred costs are comparable to 

those of hospitals in that area. To use an area=s base payment, a hospital must 

demonstrate that its average case-mix adjusted cost per discharge is equal to or 

more than its current rate plus 75 percent of the difference between that rate and the 

rate it would receive if reclassified. To use an area's wage index, a hospital must 

demonstrate that its average hourly wage is equal to at least 82 percent (a rural 

hospital) or 84 percent (an urban hospital) of the average hourly wage of hospitals 

in the area to which it seeks redesignation. Also an urban hospital cannot be 

reclassified unless its average hourly wage is at least 108 percent of the average 

hourly wage of the area in which it is located; this standard is 106 percent for rural 

hospitals seeking reclassification to an area. An exception to these standards has 

been established for a dominating hospital that comprises at least 40 percent of the 

area=s total wages. 

 For redesignations starting in FY2003, the average hourly wage 

comparisons used to determine whether a hospital can use another area=s wage 

index are based on 3 years worth of lagged data submitted by hospitals as part of 

their cost report. For instance, FY2004 wage index reclassifications were based on 

weighted 3-year averages of average hourly wages using data from FY1998, 

FY1999, and FY2000 cost reports. Starting in FY2003, redesignations are for 

3 years unless a hospital withdraws or terminates the redesignation. 

 There are some limitations on reassignment. Effective for FY2002 and 

subsequently, a hospital may not be reclassified for purposes of using another area's 

standardized amount if the area to which the hospital seeks reclassification does not 

have a higher standardized amount than that currently received by the hospital. A 

hospital that seeks reclassification for the purpose of using another area's wage 

index may apply for reclassification only to an area that has a higher prereclassified average hourly wage than that of the hospital's original geographic area. 

 In addition, a hospital seeking reclassification for both wage index and base 

payments purposes may not be redesignated to more than one area. Under certain 

circumstances, all the hospitals in a rural county can be redesignated into an urban 

area; all the hospitals in an urban county can be redesignated into another urban 

area; and all the hospitals in the State can be redesignated and paid using a 

statewide wage index. 

 Certain rules have been established in statute and by regulation that specify 

the changes to an area=s wage index value that occur when hospitals are reclassified 

by the MGCRB. For example, an MSA=s wage index value is never lower than its 

State=s rural wage index value. If a hospital reclassification causes the wage index 

in the new area to fall by 1 percent or less, the area=s original wage index applies to 

these newly assigned hospitals (as well as to the original hospitals in the area). 

However, if reclassification causes the wage index value to fall by more than 
2-52 

1 percent, the area=s wage index is recalculated (with the wage data from the 

redesignated hospitals) and the combined wage index value applies to redesignated 

hospitals; the wage index values for hospitals located in the area are not affected. 

In MSAs where the wage index value increases because of reclassification, all 

hospitals in the area (those that are physically located there and those that have 

been reassigned) use the higher wage index. Hospitals in areas whose wage index 

values would be reduced by excluding the wage data for hospitals that have be 

reclassified continue to have their wage indexes calculated as if no reclassification 

occurred. Hospitals in rural areas whose wage index values increase because of 

reclassification are allowed to benefit through recalculation. 

 Aside from reclassifications through the MGCRB, hospitals have also been 

reclassified by law. Specifically certain rural hospitals can reclassify as urban if the 

county in which the hospital is located is adjacent to two or more MSAs and meets 

criteria regarding commuting patterns of its residents to the central counties of the 

adjacent MSAs. BBRA 1999 provided for an update of the standards used for the 

geographic reclassification of these Arural deemed urban@ hospitals. BBRA 1999 

also provided that certain urban hospitals could be reclassified as rural hospitals if 

the hospital is located in a rural census tract of an MSA (as determined under the 

most recent Goldsmith Modification); is located in an area designated by State law 

or regulation as a rural area; or the hospital would qualify as a referral center or as 

an SCH if the hospital were located in a rural area; or the hospital meets other 

criteria as specified by the Secretary. Finally, BBRA 1999 established that certain 

counties should be considered as part of specified urban areas for the purposes of 

Medicare inpatient reimbursement. 

SPECIALITY HOSPITALS AND DISTINCT PART UNITS 

 Certain facilities were excluded from IPPS when it was implemented in 

1984 because the DRGs were thought not to adequately represent their patients=

resource needs or the volume of Medicare patients was deemed to be insufficient 

so that payments based on averages and made on a per discharge basis would be 

inadequate. The excluded providers include rehabilitation, long-term care, 

psychiatric, children's, and cancer hospitals, rehabilitation and psychiatric hospital 

distinct part units, religious nonmedical heath care institutions, and hospitals 

located outside the 50 States and Puerto Rico. Hospitals in certain States have been 

excluded from IPPS and operate under a State hospital reimbursement control 

system approved by the Secretary under Section 1886(c) of the Social Security Act 

(as added by Tax Equity and Fiscal Responsibility Act of 1982 or TEFRA and 

subsequently modified). At this point, only hospitals in Maryland are paid 

according to a State reimbursement control system. 

 This section will primarily discuss the payment systems for those specialty 

hospitals and units that have been excluded from IPPS and paid on the basis of 

reasonable costs subject to the TEFRA limits: cancer hospitals; children=s 

hospitals; psychiatric hospitals and units; rehabilitation hospitals and units; and 

long-term care hospitals. Certain of these facilities are currently paid under 
2-53 

different, recently implemented provider-specific prospective payment systems. 

Inpatient rehabilitation facilities (IRFs) began to be reimbursed under a PPS in 

January 2002; long-term care hospitals (LTCHs) began to be reimbursed under a 

PPS in October, 2002. The section will begin with brief background information 

on the TEFRA payment system still used to pay cancer, children=s, and psychiatric 

hospitals and units, followed by descriptions of the IRF-PPS and LTCH-PPS. 

Cancer Hospitals, Children’s Hospitals, and Psychiatric Hospitals and Units 

 In order to qualify for exemption from IPPS, a psychiatric hospital or 

distinct part unit must be primarily engaged in providing, by or under the 

supervision of a psychiatrist, psychiatric services for the diagnosis and treatment of 

persons with mental illness as well as meet the conditions of participation for 

hospitals and the special conditions of participation for psychiatric hospitals. A 

distinct part psychiatric unit must meet the requirements established for distinct part 

units in hospitals including separately identifiable admission and discharge records, 

physically separate beds and must also meet additional requirements established in 

regulation. Eleven cancer hospitals are currently exempt from IPPS. These 

hospitals generally are recognized by the National Cancer Institute as either a 

comprehensive or clinical cancer research center; are primarily organized for the 

treatment of and research on cancer (not as a subunit of an acute general hospital or 

university-based medical center); and have at least 50 percent of its discharges with 

a diagnosis of neoplastic disease. Eighty-one children=s hospitals are currently 

exempt from IPPS. These hospitals are those engaged in furnishing services to 

inpatients who are predominantly individuals under the age of 18. 

 Essentially, under TEFRA rate of increase limits, a specialty hospital is paid 

on a reasonable cost basis subject to the rate of increase ceiling. A TEFRA hospital 

is paid the lower of its actual operating costs or a facility-specific target amount and 

will receive additional payments depending upon the relationship of its cost per 

discharge to its target amount. Generally, a provider with costs under its target will 

be rewarded with a bonus payment; a provider with costs per discharge above its 

target will receive a relief payment. A provider=s target amount is based on its 

Medicare allowable costs per discharge in a base year, updated to the current year 

by an annual update factor. In FY2004, the update is the increase in the MB for 

excluded hospital which is 3.4 percent. Medicare pays the capital costs in these 

providers on a reasonable cost basis. 

 Generally, new providers have had significantly higher costs (and 

subsequently higher target amounts) than older, established providers. In an effort 

to reduce disparities, BBA 1997 modified the way in which bonus and relief 

payments are calculated. Also, facilities and exempt units that were excluded from 

IPPS before FY1991 were permitted to update (or rebase) their target amount for 

FY1998 and beyond. New providers that are exempt from IPPS (those that receive 

payments for the first time on or after October 1, 1997) will receive the lesser of 

their operating costs or 110 percent of the national median of the updated, locality 

adjusted target amount for similarly situated hospitals for each of its first two cost 

reporting periods for which it has a settled cost report. This payment option for 
2-54 

new providers now applies only to new psychiatric hospitals and units. 

Inpatient Rehabilitation Facilities and Distinct Part Units 

 An inpatient rehabilitation facility (IRF), both freestanding IRFs and 

distinct part rehabilitation units of acute hospitals, must meet certain requirements 

to be excluded from IPPS and paid as an IRF. At least 75 percent of a facility=s 

inpatient population must require intensive rehabilitation services for one of 10 

conditions including treatment of stoke, spinal cord injury, major multiple trauma, 

brain injury, polyarthritis, and other specific conditions. Also a rehabilitation unit 

must have beds that are physically separate from the hospital=s other beds, 

separately identified admission and discharge records from those of the hospital, 

and policies that specify that necessary clinical information is sent to the unit upon 

transfer of a hospital=s patient to the unit. 

 Simply stated, under PPS, Medicare pays an IRF a predetermined, fixed 

amount per discharge, depending upon a patient=s impairment level, functional 

status, comorbid conditions and age. Certain adjustments are made for facility level 

characteristics to account for area wage variations, rural location and the percentage 

of low-income patients (LIPs) served. IRF-PPS also includes case level 

adjustments. Specifically, reduced or additional amounts are paid for early 

transfers, short-stay outliers, patients who die before transfer and patients who are 

extraordinarily costly (outliers). These payments encompass inpatient operating 

and capital costs of furnishing covered rehabilitation services, but not the costs of 

approved educational activities, Medicare bad debts and other services that are paid 

outside of the IRF-PPS. Medicare=s PPS payment to an IRF for any patient will 

depend upon a clinician=s comprehensive assessment of that patient upon admission 

and again at discharge. These documented assessments must be based on the direct 

observation of and communication with the patient; information may be 

supplemented with information from other sources, including family members or 

other clinicians. The prescribed patient assessment instrument (PAI) form, the 

Uniform Data Set for Medical Rehabilitation (UDSmr), encompasses about 

55 questions used to ascertain a patient=s functional independence including motor 

skills and cognitive capacities and to establish a patient=s comorbidities. A patient=s 

assessments (from both admission and discharge) are transmitted to CMS 

electronically once and at the same time. Failure to meet the IRF PAI transmission 

deadlines results in a 25 percent reduction in Medicare=s payment in all but 

extraordinary circumstances. 

 Using data from the patient=s initial assessment, each Medicare patient is 

classified into one of 100 mutually exclusive case-mix groups (CMGs). First, a 

patient is placed into one of 21 rehabilitation impairment categories (RICs) that 

encompass clinically similar conditions, such as stroke or traumatic brain injury, as 

the primary cause of admission. Next, a patient is placed into a CMG within the 

RIC; the CMG assignment depends upon the patient=s functional status and, in 

some instances, age. Within a CMG, a patient is assigned to one of 4 categories or 

comorbidity tiers using clinical information from the patient=s discharge 

assessment. The presence of comorbidities was found to substantially increase the 
2-55 

average cost of a specific CMG. Patients with the most serious conditions are 

assigned to tier 1; patients with the least serious conditions are assigned to tier 3; 

those without any relevant comorbidities are assigned to the “none” tier. 95 CMGs 

encompass the 21 RICs; 5 other CMGs have been established for patients with 

special circumstances; one of the 5 CMGs is for patients with very short stays and 

the 4 remaining are for patients who die before treatment is completed. Each of 

these 5 special CMGs have only one payment rate and no comorbidity tiers. 

 CMS established relative or cost weights using cost report data from 

FY1996, FY1997, and FY1998 and charge data from calendar year (CY) 1999. 

The relative weights account for a patient=s resource needs for each of the CMGs 

and payment tiers; 385 relative weights are used to determine Medicare payment 

rates. Unlike those used in IPPS, these relative weights are not updated annually. 

Within any given CMG, the cost weight for a patient with a high comorbidity is 

greater than the cost weights for those patients with low or no comorbidities. This 

cost weight is multiplied by a standardized payment conversion factor (also referred 

to as the budget neutral conversion factor) to calculate the payment for a given 

patient.4

 The standard payment amount was originally constructed using the 

facility-specific information from 508 facilities, including cost reports from 

FY1995, FY1996, and FY1997; applicable target amounts, as well as Medicare 

claims (including corresponding UDSmr data) from CY1996 and CY1997. CMS 

estimated payments that would have been made under the prior payment system; 

calculated the average weighted payment per discharge under the IRF-PPS, and 

determined a budget neutral conversion factor. This payment amount was then 

subject to a behavioral offset of 1.16 percent to account for coding improvements 

and patient discharges that would occur earlier in the IRF stay. In FY2004, the 

standard payment amount is $12,525. 

 For FY2004 IRF-PPS payments, CMS uses FY1999 acute care hospital 

wage data (used in the FY2003 IPPS but with no accounting for geographic 

assignments) to compute the IRF wage index values. The labor-related portion 

(72.395 percent) of the Federal payment rate is multiplied by the IPPS wage index 

value for the IRF=s area (either MSA or rural area). This wage-adjusted amount is 

added to the non-labor related portion of the rate to determine the wage-adjusted 

Federal payment rate. IRFs in rural areas receive an additional 19.14 percent 

increase to the Federal payment rate. An additional payment is made to IRFs that 

serve low-income patients (LIPs). The same measure, the percentage of poor 

Medicare and Medicaid days in a given facility, that is used to establish DSH 

payments for most IPPS hospitals is used as the measure for LIPs served in an IRF. 

 In the IRF-PPS, the additional payments are calculated using a logarithmic formula 

where the LIP measure is raised to the power of .4839. An IRF will receive 

additional payments if it serves at least one low-income patient. 

 

4

 BBA 1997 specified that budget neutral payments were to be established under IRF-PPS during 

FY2001 and FY2002 that would result in the amount of total payments equal to 98 percent of the 

operating and capital payments that would have been made had IRF-PPS not been enacted. BIPA 

increased the amount of the IRF-PPS budget neutral payments to 100 percent in FY2002. Unlike the 

PPS for long-term care hospitals discussed subsequently, the IRF-PPS budget neutrality provision is no 

longer mandated. 
2-56 

 Table 2-18 shows the IRF-PPS adjusted payment calculation for CMG 0112 

(without comorbidities) in 2 different facilities. CMG 0112 is used to establish 

Medicare payments for stroke patients from 82 to 88 years old who have motor 

scores that range from 12 and 26 (without comorbidities). It has a relative weight 

of 2.0015; Medicare=s Federal prospective payment rate for this CMG is $25,068.79 

($12,525*2.0015=$25,068.79). This represents the Federal rate before the relevant 

facility-level adjustments are applied. IRF-PPS payments will be adjusted to 

account for a facility=s relative area wage, rural location, and low-income 

percentage. In FY2004 a facility in rural Alabama has a wage index value of 

0.7660 and one in the Oakland, CA MSA has a wage index value of 1.5072. Both 

facilities have a 26 percent DSH percentage which qualifies them for a LIP 

adjustment of 11.82 percent. 

TABLE 2-18—EXAMPLE OF IRF-PPS PAYMENT CALCULATION 

FOR CMG 0112 (FOR CERTAIN STROKE PATIENTS WITHOUT 

COMORBIDITIES) INCLUDING FACILITY LEVEL ADJUSTMENTS, 

FISCAL YEAR 2004 

Component IRF in rural Alabama IRF in Oakland, CA MSA 

Federal prospective payment rate 

for CMG 0112 $25,068.79 $25,068.79 

Labor portion of Federal payment 

($25,068.79 *0.72526) $18,181.39 $18,181.39 

Wage index for IRF 0.7660 1.5072 

Wage-adjusted amount $13,926.94 $27,402.99 

Nonlabor related amount 

$25,068.79*0.27474) $6,887.40 $6,887.40 

Wage-adjusted Federal payment $20,814.34 $34,290.39 

Rural adjustment 1.1914 1.0 

Subtotal $24,798.21 $34,290.39 

LIP adjustment 1.1182 1.1182 

Total FY2004 adjusted Federal 

prospective payment for CMG 

0112 

$27,729.36 $38,343.51 

Source: CRS calculation based on information in FY2004 IRF-PPS published in the Federal 

Register on August 1, 2003. 

 In addition to facility level adjustments, an IRF may receive additional or 

reduced Medicare payment for any given case, depending upon the Medicare 

patient=s circumstances. Additional payments are made for cases that are high cost 

outliers. A patient will be considered to be an outlier if the estimated cost of the 

case exceeds an adjusted threshold amount. This cost is calculated by multiplying 

the charge by the facility=s overall cost-to-charge ratio obtained from the latest 

settled or tentatively settled cost report.5

 An IRF will receive 80 percent of the 

difference between the estimated cost of the case and the outlier threshold. In this 

instance, the threshold amount is the sum of the facility level CMG payment and 

the threshold amount multiplied by those facility level adjustments. For FY2004, 

 

5

 If a facility=s cost to charge ratio is 3 standard deviations above the applicable national average cost to 

charge ratio, then a ceiling on this ratio is imposed. Separate calculations and ceilings apply to rural and 

urban IRFs. 
2-57 

the unadjusted threshold amount is $11,211, which CMS estimates will result in 

total estimated outlier payments of approximately 3 percent of total IRF-PPS 

payments. 

 Medicare pays a reduced amount for a patient who is an early transfer. The 

patient has a length of stay that is greater than 3 days but less than the average for 

the assigned CMG and is transferred to another rehabilitation facility (which has 

been defined as a rehabilitation facility, a long-term care hospital, a short-term 

hospital, or a nursing home.) No payment reduction applies for patients who are 

discharged to a home health agency or other outpatient therapy setting. Also, the 

IRF will receive the full amount if the transfer occurs after the patient has been 

treated for the average length of stay associated with the CMG. The payment rate 

for early transfers is based on the per diem payment for the applicable CMG (to 

which the patient has been assigned). The IRF will receive an additional one halfday payment to recognize the higher costs generally associated with the patient=s 

first day of care. The early transfer payment would include any facility level 

payment adjustments. 

 Medicare pays for short-stay outliers using one of the 5 special CMGs. 

These are patients who are not transfers, but are discharged from the facility after 

being hospitalized no more than 3 days. These short-stay outliers may occur 

because the patient could not tolerate a full course of intensive inpatient 

rehabilitation treatment, left against medical advice, or died within 3 days of 

admission. Also, patients who are discharged from and return to the same IRF by 

midnight of the 3rd consecutive calendar day are considered interrupted stays. 

Medicare makes only one IRF-PPS payment for these cases. In addition to PPS 

payments, Medicare will pay IRFs for certain items such as Medicare beneficiaries=

bad debts, the costs of approved educational programs and for blood clotting factors 

provided to Medicare inpatients who have hemophilia outside of the PPS. 

 Each year the IRF-PPS standardized payment amount in increased based on 

the modified MB for excluded hospitals (those not paid under IPPS). This MB is 

based on cost report data from Medicare participating inpatient rehabilitation and 

psychiatric facilities as well as long-term, children’s and cancer hospitals which 

were subject to TEFRA payment limitations. The TEFRA MB only includes 

operating costs, so the IRF-PPS update is based on a modified TEFRA MB that 

reflects capital costs. CMS revised and rebased the MB with capital for excluded 

hospitals to incorporate 1997 cost report data starting in FY2004. The new MB 

includes an explicit cost category for blood and blood products. Also, the 

calculation of this modified MB with capital is based on a ratio of operating to 

capital costs where operating costs account for 91.032 percent of the total costs and 

capital costs account for the remaining 8.968 percent of the total costs. 

Long-Term Care Hospitals 

 Long-term care hospitals (LTCHs) are designed to provide extended 

medical and rehabilitative care for patients who are clinically complex and have 

multiple acute or chronic conditions. Most patients in LTCHs have several 

diagnosis codes on their Medicare claims. Approximately one-half of the patients 
2-58 

have five or more diagnoses on their claims. LTCHs consist of a relatively 

heterogeneous group of providers that typically provide a range of services, 

including comprehensive rehabilitation, head trauma treatment, and pain 

management. Although some LTCHs treat a wide range of conditions, others 

specialize in one or two types of conditions. The country=s oldest LTCHs evolved 

from tuberculosis and chronic disease hospitals and may now still focus on patients 

with chronic conditions. The newer facilities are designed primarily to care for 

ventilator dependent patients. Finally LTCHs are distributed unevenly across the 

United States; one third of the facilities are located in Massachusetts, Texas, and 

Louisiana. Old LTCHs (those participating in Medicare when IPPS was 

implemented) are generally located in the northeastern region of the United States, 

while new LTCHs are typically located in the southern region. Old LTCHs are 

either government controlled or nonprofit. In contrast, one half of the LTCHs that 

began participation in Medicare between 1983 and 1993 and two-thirds of those 

that began participation in Medicare in FY1994 or later are proprietary facilities.6

 

In recent years, the LTCH group has evolved to include hospitals-within-hospitals 

(or co-located hospitals) and satellite facilities in addition to traditional freestanding 

facilities. The best available information indicates that as of 1997, roughly 

21 percent of the LTCHs were co-located hospitals and 68 percent were 

freestanding; the affiliation status of the remaining 11 percent could not be 

identified.7

 The number of LTCHs participating in Medicare has significantly 

increased. In 1991, there were 91 LTCHs, a number that increased to 155 in 1994, 

225 in 1999, 252 in 2000, and 297 in April 2003. 

 LTCHs are certified under Medicare as short-term acute care hospitals 

which have been excluded from IPPS. An LTCH has a Medicare inpatient average 

length of stay (ALOS) greater than 25 days or an ALOS for all patients of greater 

than 20 days if the hospital meets certain requirements. Both covered and 

noncovered medically necessary days for Medicare patients are included in the 

25-day ALOS calculation. Although, by statute, there are no LTCH distinct part 

units, there are satellite and hospital-within-a-hospital LTCHs that are co-located or 

share the same campus with acute care hospitals and other Medicare providers. To 

be exempt from IPPS, a hospital-within-a-hospital must have a separate governing 

body, chief executive officer, chief medical officer, and medical staff and meet one 

of the following criteria: (1) perform basic functions independently from the host 

hospital; (2) incur no more than 15 percent of its total inpatient operating costs for 

items and services supplied by the hospital in which it is located; or (3) have at least 

75 percent of its patients admitted from sources other than the host hospital. A 

satellite provider is a hospital-within-a-hospital facility that is owned by a separate, 

existing LTCH and is subject to distinct criteria established by regulation. 

Different payment rules can apply to these co-located Medicare providers, 

depending on the number and percentage of Medicare discharges and readmissions 

between the entities. 

 

6 Federal Register, vol. 67, no. 56, March 22, 2002, p. 13424. 7

 ALong-Term Care Hospitals Under Medicare: Facility Level Characteristics, Korbin Liu et al, Health 

Care Financing Review, Winter 2001. vol. 23, no 2., p. 6
2-59 

 Effective for the first cost reporting period beginning on or after 

October 1, 2002, LTCHs are paid under a PPS, subject to a 5-year transition period. 

During the transition period, a facility=s percentage payment based on the Federal 

rate increases by increments of 20 percentage points over the 5 year period. For 

instance, in the first year of its transition period, a LTCH was paid on a blended rate 

based on 20 percent of the Federal rate and 80 percent of its TEFRA target amount; 

the transition blend is based on 40 percent of the Federal rate and 60 percent of its 

TEFRA target amount in the second year. By cost reporting periods beginning or 

after October 1, 2006, the transition period will be complete. Alternatively, a LTCH 

may elect the one time option to be paid based on 100 percent of the Federal 

prospective rate. Also, any new LTCH must be paid on 100 percent of the Federal 

rate. 

 Under this PPS, Medicare pays a LTCH a predetermined amount per 

discharge, depending upon the patient=s assignment into one of 510 LTC-DRGs. 

The patient classification system, LTC-DRGs, is based on IPPS DRGs that are 

reweighted to reflect the resource use of longer stay patients. Only one LTC-DRG 

is assigned to a hospitalization at the patient=s discharge. The LTCH-PPS includes 

several facility level adjustments such as the area wage index and a cost of living 

adjustment (COLA) of up to 25 percent for LTCHs in Alaska and Hawaii, but it 

does not include adjustments for rural location, low income patients served, or 

IME. With respect to case level adjustments, the LTCH-PPS will pay reduced 

amounts for short-stay outliers (but not cases that are deemed to be interrupted 

stays) and additional amounts for high cost outliers. Unlike the IRF-PPS, there are 

no special payment policies for transfer cases or deaths. The LTCH-PPS payment 

encompasses payments for both operating and capital-related costs of inpatient 

care, but certain costs, including those associated with approved educational 

programs, Medicare=s bad debt expenses, or blood clotting factors, are paid for 

separately. Starting July 1, 2003, CMS changed the LTCH-PPS from the Federal 

fiscal year (from October 1 through September 30) to a rate year that begins July 1 

through June 30, of each year. This date change affects the timing of the annual 

issuance of the LTCH update, Federal rate, and applicable facility and case level 

payment adjustments such as revisions to the wage index values and the fixed loss 

amount or high cost outlier threshold. Changes to the LTC-DRGs classifications 

and their relative weights will remain on a Federal fiscal year schedule as will the 

effective dates for the LTCH-PPS transition blend period. 

 CMS has adapted the IPPS patient classification system to better reflect the 

resource use and patient load in LTCHs. Because LTCHs often specialize in 

certain types of cases, such as ventilator dependent patients, CMS uses a hospitalspecific relative value method to calculate the relative weights for LTC-DRGs that 

differs from the method used to calculate the IPPS DRG relative weights. 

Generally, the charges associated with a given LTC-DRG at each facility are 

adjusted to remove the effect of its pricing strategy (the facility=s average markup in 

charges) and patient intensity (the facility=s case mix index). In calculating these 

relative weights, statistical outliers and cases with a length of stay of 7 days or less 

are removed. Weights also are adjusted for cases where the LTCH stay is less than 
2-60 

five-sixths of the geometric average length of stay. Unlike IPPS, low volume 

LTC-DRGs, (those with less than 25 cases) are used to construct LTC-DRG 

weights. The 161 low volume LTC-DRGs are grouped into 5 quintiles based on 

average charge per discharge. CMS calculates a relative weight and average length 

of stay for these quintiles using the same formula as the regular LTC-DRGs; those 

values are then assigned to each of the low volume LTC-DRGs that are included in 

the quintile. CMS identified 159 of the 510 LTC-DRGs with no LTCH cases in the 

FY2001 claims data used to establish the cost weights. These no volume LTCDRGs are crosswalked to other clinically similar LTC-DRGs and then grouped into 

the most appropriate of the 5 quintiles established for low volume LTC-DRGs. 

CMS made other adjustments to certain paired LTC-DRGs to correct for 

incompletely coded claims.8 Finally, LTC-DRGs representing organ transplants 

were given a 0.00 cost weight, since none of the currently participating LTCHs are 

Medicare-approved transplant centers (or apparently, have ever expressed any 

interest in becoming such providers.) 

 The cost weight for a LTC-DRG multiplied by a standard Federal rate 

represents the framework for Medicare=s payment for a given patient which, as 

mentioned earlier, is then subject to facility level and case level payment 

adjustments. CMS used cost report data from FY1996 through FY1999 and 

FY2001 claims data, updated to FY2003, to calculate the LTCH standard Federal 

payment rate. Data from certain providers that did not maintain charge data 

(providers that billed using an all inclusive rate) or that operated under 

demonstration projects were excluded. CMS adjusts the standard Federal rate by a 

reduction factor of 8 percent as an offset for the estimated LTCH outlier payments. 

By statute, total payments under LTCH-PPS must be equal to the amount that 

would have been paid if the PPS had not been implemented. Accordingly, CMS 

included a 0.34 percent reduction in the Federal rate to account for behavioral 

changes that would occur as LTCH respond to incentives inherent in the new 

payment system. CMS includes a budget neutrality offset to account for the 

increased spending that results from LTCHs electing full Federal payment during 

the transition period. The amount of the offset is re-estimated each year. In 

FY2003, CMS imposed a 6.6 percent budget neutrality offset (using a factor of 

0.934 which is 1.0 minus .066) to account for $50 million in projected additional 

costs that would occur that year because of the number of LTCH that CMS 

anticipated would elect payment based on the Federal rate. In the 2004 rate year, 

the budget neutrality offset was established at 6 percent to account for the $120 

million in additional payments attributed to the LTCH-PPS transition period. The 

budget offset applies to all LTCH payments, not just those computed using the full 

Federal payment during the transition period; a LTCH that is being paid on a 

transition blend with some proportion of its payments based on its TEFRA rate 

would have its TEFRA based payments reduced as well. Finally, CMS will review 

LTCH payments and may make a one-time prospective adjustment to the LTCH 

 

8

 Under TEFRA reimbursement, Medicare payments to a LTCH were not affected by the diagnosis and 

procedure codes included on a patient=s claim. CMS anticipates that this data from LTCHs will improve 

substantially, given the payment incentives under LTCH PPS. 
2-61 

PPS by October 1, 2006, to correct for any errors in the original budget neutrality 

calculations. 

 Like the IRF-PPS, the LTCH-PPS uses the IPPS wage index data for its 

adjustment. However, because CMS did not find a significant relationship between 

LTCHs= costs and their geographic location, the LTCH wage index adjustment is 

being phased in using 20 percentage point increments each year over a 5-year 

period, starting with cost reporting periods beginning on or after October 1, 2002. 

The timing of the implementation of the wage index adjustment is linked to the 

provider=s actual cost reporting period. Annual updates to the wage index, 

however, are linked to the LTCH rate year. Consequently, the wage adjustment for 

a particular LTCH may change during its cost reporting period. For instance, a 

LTCH with a cost reporting period from January 1, 2003 through 

December 31, 2003 is paid using 1/5th of the applicable wage index value for that 

entire cost reporting period. From January 1, 2003 to June 30, 2003, its payments 

will be based on 1/5th of the FY2002 IPPS wage index value for its area; from 

July 1, 2003 to December 1, 2003, its payments will be based on 1/5th of the 

FY2003 IPPS wage index value for its area. Starting January 1, 2004, it will 

receive 2/5ths of the FY2003 IPPS wage index value. 

 To illustrate this wage adjustment, assume the LTCH with a cost reporting 

period beginning on January 1 is located in the Chicago, MSA. This MSA has an 

FY2002 IPPS wage index value of 1.1008, so the LTCH would receive a wage 

index adjustment of 1.0202 starting CY2003, the first year of its phase-in period. It 

would receive this wage index adjustment until June 30, 2003. Starting for 

discharges on July 1, 2003, all LTCHs will be paid using the FY2003 IPPS wage 

index values (with no accounting for geographic reclassifications); the applicable 

FY2003 wage index value for the Chicago MSA is 1.15. The LTCH would receive 

a wage index adjustment of 1.0209 for discharges from July 1, 2003 to December 

31, 2003 (1/5th of 1.1044) when it is still in its first year of the wage index phase-in 

period. Starting in CY2004, the LTCH will be paid using 2/5ths of the applicable 

wage index value. The LTCH would receive a wage index adjustment of 1.0418 

(2/5ths of 1.15) starting on January 1, 2004 for the next 6 months; this adjustment 

would change on July 1, 2004 when the LTCH wage index would be updated. 

 CMS has established the Federal rate of $35,726 for the 2004 LTCH-PPS 

rate year. The labor-related portion (72.885 percent) of the Federal payment rate is 

multiplied by the applicable area=s wage index value of the physical location of the 

LTCH. This wage-adjusted amount is added to the non-labor related portion of the 

rate which will be adjusted for COLA if applicable to determine the adjusted 

Federal payment rate. Table 2-19 illustrates the LTCH-PPS adjusted payment 

calculation for the LTCH in Chicago discussed earlier and a case in LTCH-DRG 

09, Spinal Disorders and Injuries, which has a relative weight of 1.4118. This 

particular LTCH has opted for payment based on 100 percent of the Federal rate. 

As mentioned earlier, the budget offset would apply equally to LTCH that is being 

paid on a transition blend; its TEFRA based payments would be reduced as well. 

 
2-62 

TABLE 2-19—EXAMPLE OF LTCH-PPS PAYMENT CALCULATION, 

WITH FACILITY LEVEL ADJUSTMENTS, FOR DISCHARGE 

STARTING JULY 1, 2003 

Component LTCH in the Chicago MSA 

Federal prospective payment rate $35,726 

Labor portion of Federal payment ($35,726 

*0.72885) $26,038.90 

1/5th the wage index for Chicago MSA 1.0209 

Wage-adjusted amount $26,583.11 

Nonlabor related amount ($35,726*0.27474) $9,687.10 

Cost of living (COLA) adjustment 1.0 

LTCH=s wage-adjusted Federal rate for 

FY2004 ($26,583.11+$9,687.10) $36,270.21 

Relative weight for LTC-DRG 09, Spinal 

Disorders and Injuries 1.4118 

Total adjusted Federal payment $51,206.28 

Budget neutrality offset 0.940 

LTCH=s FY2004 adjusted Federal prospective 

payment for LTC-DRG 09 $48,133.91 

Source: CRS calculation based on FY2004 LTCH PPS information in published in the Federal Register

on June 6, 2003. 

 

 Aside from facility level adjustments, the LTCH-PPS includes certain case 

level adjustments as well. Generally, a short-stay outlier will be paid the lesser of 

120 percent of the cost of the case, 120 percent of the LTC-DRG specific per diem 

payment, or the full LTC-DRG payment. In this PPS, a short-stay outlier is a case 

that has a length of stay less than or equal to 5/6s of the ALOS for the LTC-DRG to 

which the case is assigned. For example, if the ALOS for a particular LTC-DRG is 

30 days, then the short-stay outlier policy would apply to any stays that are 25 days 

or less in length (5/6s of 30 days is 25 days). 

 An interrupted stay is a case where a LTCH patient is discharged and then 

admitted directly to an inpatient acute care hospital, an IRF, a skilled nursing 

facility, or a swing-bed and then returns to the same LTCH within a fixed period of 

time which varies by provider type. The limit is 9 days or less in an acute hospital; 

27 days or less in an IRF; 45 days or less in an SNF or in a swing-bed. If the 

patient returns to the LTCH within these fixed limits, Medicare treats the case as an 

interrupted stay and only one payment to the LTCH is made. 

 Finally, Medicare pays additional amounts for cases that are high cost 

outliers where the estimated cost of the case exceeds the outlier threshold. This 

threshold is the LTC-DRG payment plus a fixed-loss amount. CMS establishes the 

fixed loss amount annually so that projected outlier payments equal 8 percent of 

estimated total LTCH-PPS payments. The fixed-loss amount for the 2004 rate year 

is $19,590. CMS will pay 80 percent of cost above the outlier threshold for high 

cost outlier cases. 

 Like the IRF-PPS, the LTCH-PPS Federal payment rate is increased 

annually based on most recent estimate of the modified TEFRA MB for excluded 

hospitals (those not paid under IPPS) adjusted for capital costs. CMS revised and 

rebased the excluded hospital with capital MB to a 1997 base year and included an 

explicit cost category for blood and blood products. As mentioned earlier, the 
2-63 

calculation of this modified MB with capital reflects a ratio of operating-to-capital 

costs where operating costs comprise 91.032 percent of the total costs and capital 

costs account for the remaining 8.968 percent of total costs. Starting July 1, 2003, 

CMS changed the annual update to the LTCH Federal payment rate from the 

Federal fiscal year (from October 1 through September 30) to a rate year that begins 

July 1 through June 30, of each year. The 2004 update calculation included an 

adjustment for the change in the update cycle. The full 12-month MB with capital 

increase was estimated to be 3.3 percent which was reduced by -0.8 percent; the 

2004 LTCH PPS rate year increase was 2.5 percent. 

SKILLED NURSING FACILITY SERVICES 

Coverage

 Medicare covers extended care services provided in nursing homes for 

beneficiaries who require additional skilled nursing care and rehabilitation services 

following a hospitalization. These extended care services, commonly known as 

skilled nursing facility (SNF) benefits, are covered under Part A for up to 100 days 

per spell of illness and must be provided in an SNF certified to participate in 

Medicare. A spell of illness is that period which begins when a beneficiary is 

furnished inpatient hospital or SNF care and ends when the beneficiary has been 

neither an inpatient of a hospital nor an SNF for 60 consecutive days. A beneficiary 

may have more than one spell of illness per year. 

 In order to be eligible for SNF care, the beneficiary must have been an 

inpatient of a hospital for at least 3 consecutive days and must be transferred to an 

SNF, usually within 30 days of discharge from the hospital. Furthermore, a 

physician must certify that the beneficiary is in need of skilled nursing care or other 

skilled rehabilitation services on a daily basis, which, as a practical matter, can only 

be provided on an inpatient basis and which are related to the condition for which 

the beneficiary was hospitalized. 

Payment

 Prior to a congressionally mandated prospective payment system, Medicare 

paid for SNF care on a retrospective cost-based basis. This meant that SNFs were 

paid for the reasonable costs (as defined by the program) they incurred for the care 

they provided as determined at the end of the SNF’s fiscal year. SNFs had few 

incentives to maximize efficiency and minimize their costs, and little inducement to 

control the amount or number of services they provided. 

 Prospective payment system--In BBA 1997, Congress required that a 

prospective payment system (PPS) for SNF care be phased in over 3 years, 

beginning with the SNF's first cost reporting period after July 1, 1998. SNF 

prospective payment involves grouping patients according to the type and intensity 

of services they require and setting a daily payment rate for each payment group. 

Like other PPSs that pay health care providers for care to Medicare beneficiaries on 

the basis of predetermined, fixed amounts, Medicare payments to SNFs are 

intended to pay the provider for its Medicare beneficiary costs on average. That is, 
2-64 

although the payment is a predetermined daily rate, a facility's actual costs may be 

above or below that amount for an individual patient. The incentive facilities have 

is to manage costs so that, on average, costs do not exceed the PPS average 

amounts. SNFs that provide the services at lower costs than the Medicare payment 

are able to keep the difference. 

 Unit of Payment--Under SNF PPS, a SNF receives a daily payment that 

covers all the services provided to the beneficiary that day including room and 

board, nursing, therapy, food, and medicine with very limited exceptions. Some 

care costs are paid separately under the statute such as physician visits and dialysis 

services. The daily base payment, called the AFederal per-diem rate,@ is based on 

actual 1995 SNF costs that have been trended forward for inflation and varies by 

the urban or rural location of the SNF. The Federal per-diem rate is broken down 

into four components, two of which are adjusted for case mix: nursing 

componentBadjusted for case-mix; therapy componentBadjusted for case mix; 

therapy componentBnot adjusted for case mix; and the non-case mix adjusted 

component. 

 Case-Mix System--The statute requires the Secretary to develop an 

appropriate adjustment to the Federal rate to account for case mix. The case mix 

system developed adjusts the Federal per-diem rate for treatment and care needs of 

the beneficiary and is called Resource Utilization Groups, version III (RUG-III). 

RUG-III is composed of 7 major categories that are further differentiated into 44 

specific patient groupings. The 7 major categories are Ahierarchical,@ that is, 

patients are automatically grouped into the highest paying groups given their 

condition. The 7 categories, in hierarchical order, are: Rehabilitation, Extensive 

Services, Special Care, Clinically Complex, Impaired Cognition, Behavior 

Problems, and Reduced Physical Function (see Table 2-20.) Patients in need of 

rehabilitative therapy services are automatically assigned one of the 

14 rehabilitation groups, depending upon the minutes of rehabilitative services 

they receive in a week, the combinations of disciplines providing the services, and 

the patient’s activities of daily living (ADL) scores (ADL scores measure patients’ 

abilities in toileting, grooming, dressing and so forth). The next category, 

Extensive Services, is composed of 3 groups which use services requiring more 

technical knowledge and skill as the variables for patient assignment, rather than 

ADL scores. The third category, Special Care, is made up of 3 groups composed of 

patients with one or more of the conditions in this category. ADL scores determine 

group assignment within this category. The fourth category, Clinically Complex, is 

composed of 6 groups comprising patients with a variety of conditions including 

burns, septicemia and pneumonia or who require more complex care. ADL scores 

and patient depression determine group assignment within this category. The fifth 

category is Impaired Cognition, which is comprised of 4 groups of patients with 

poor cognitive performance. Patients receiving care that falls within this category 

are unlikely to qualify for Medicare coverage of their stay because of the skilled 

care requirements. The sixth category is Behavior Only, which has 4 groups. 

Patients receiving care that falls in this category have exhibited behaviors that 

include resisting care, being combative or who have hallucinations or delusions. 
2-65 

These patients are unlikely to qualify for Medicare coverage of their stay because 

they may not require skilled care. The final RUG category is Physical Function 

Reduced which contains 10 groups. Patients in this category are those who do not 

have any of the conditions or characteristics for the other groups. As with the 

earlier two RUGs, patients in this group are unlikely to require the skilled care 

needed to qualify for Medicare payment. 

 

TABLE 2-20--RESOURCE UTILIZATION GROUPS (RUGS) 

CATEGORIES AND PAYMENT ADD-ONS 

Service 

Category 

Clinical condition/ 

service need 

RUG-III 

Groups 

Payment 

Add-on (in 

percent) 

Patients with an 

ADL score of 16-

18 

RUC 

Patients with an 

ADL score of 9-15 

RUB 

REHABILITATION B

Patients requiring any 

combination of therapy 

services, based on the 

number of minutes of 

therapy received each week. 

Ultra high: 720 or 

more minutes of 

therapy services per 

week, at least 2 

therapy disciplines 

and 1 at least 5 

days a week. 

Patients with an 

ADL score of 4-8 

RUA 

6.7 

Patients with an 

ADL score of 16-

18 

RVC 

Patients with an 

ADL score of 9-15 

RVB 

Very high: 500 to 

719 minutes of 

therapy services per 

week, 1 discipline 

at least 5 days a 

week. Patients with an 

ADL score of 4-8 

RVA 

6.7 

Patients with an 

ADL score of 16-

18 

RHC 

Patients with an 

ADL score of 9-15 

RHB 

High: 325 to 499 

minutes of therapy 

services per week, 

1 discipline at least 

5 days a week. 

Patients with an 

ADL score of 4-8 

RHA 

6.7 

Patients with an 

ADL score of 16-

18 

RMC 

Patients with an 

ADL score of 9-15 

RMB 

 Medium: 150 to 

324 minutes of 

therapy services per 

week, 5 days across 

3 disciplines. 

Patients with an 

ADL score of 4-8 

RMA 

6.7 
2-66 

TABLE 2-20--RESOURCE UTILIZATION GROUPS (RUGS) 

CATEGORIES AND PAYMENT ADD-ONS-continued 

Service 

Category 

Clinical condition/ 

service need 

RUG-III 

Groups 

Payment 

Add-on 

(in percent) 

Patients with an 

ADL score of 14-

18 

 Low: 45 to 149 RLB 

minutes of therapy 

services per week 

over at least 3 days. 

 Nursing 

rehabilitation 6 

days per week, 2 

activities. 

Patients with an 

ADL score of 4-13 

RLA 

6.7 

Patient has required intravenous (IV) 

feeding in the last 7 days. 

SE3 20 

Patient has required IV feeding in the last 

14 days, IV medications, or suctioning. 

SE2 20 

EXTENSIVE SERVICES B

Patients with an ADL score 

of at least 7 and who require 

other specified extensive 

services Patient has required tracheotomy care or 

are on a ventilator/respirator. 

SE1 20 

Patients with an ADL score of 17-18. SSC 20 

Patients with an ADL score of 15-16. SSB 20 

SPECIAL CARE B Patients 

with multiple sclerosis, 

quadriplegia, or cerebral 

palsy; who are tube fed and 

with aphasia, or who require 

radiation treatment, or who 

require treatment for surgical 

wounds, lesions, or ulcers (2 

sites any stage or 1 site stage 

2 or 3); or who have fever 

and dehydration, pneumonia, 

vomiting, or weight loss; or 

who require tube feeding 

Patients with and ADL score of 

7-14. 

SSA 20 

Patients have an ADL score of 17-18 with 

depression 

CC2 20 

Patients have an ADL score of 17-18 

without depression 

CC1 20 

Patients have an ADL score of 12-16 with 

depression 

CB2 20 

Patients have an ADL score of 12-16 

without depression 

CB1 20 

Patients have an ADL score of 4-11 with 

depression 

CA2 20 

CLINICALLY COMPLEX 

B Patients with burns, coma, 

septicemia, pneumonia, foot 

wounds, internal bleeding, 

dehydration, chemotherapy, 

wounds, kidney failure, 

urinary tract infections 

oxygen or transfusions. 

Patients have an ADL score of 4-11 

without depression 

CA1 20 

ADL score of 6-10 and receiving nursing 

rehabilitation 

IB2 B

ADL score of 6-10, not receiving nursing 

rehabilitation 

IB1 B

IMPAIRED COGNITION B

Patients with poor cognitive 

performance 

(Score on MDS 2.0 

cognitive performance scale 

of >= 3) 

ADL score of 4-5 and receiving nursing 

rehabilitation 

IA2 B
2-67 

TABLE 2-20--RESOURCE UTILIZATION GROUPS (RUGS) 

CATEGORIES AND PAYMENT ADD-ONS-continued

Service 

Category 

Clinical condition/ 

service need 

RUG-III 

Groups 

Payment 

Add-on 

(in percent) 

 ADL score of 4-5 and not receiving 

nursing rehabilitation 

IA1 B

ADL score of 6-10, and receiving nursing 

rehabilitation services. 

BB2 B

ADL score of 6-10 and not receiving 

nursing rehabilitation services. 

BB1 B

ADL score of 4-5, and receiving nursing 

rehabilitation services. 

BA2 B

BEHAVIOR ONLY B

Patients with behavior 

symptoms such as 

wandering, hallucinations, or 

physical or verbal abuse of 

others (unless other category 

would place patient in other 

category). 

ADL score of 4-5, and not receiving 

nursing rehabilitation services. 

BA1 B

Patient has an ADL score of 16 - 18 and is 

 receiving nursing rehabilitation. 

PE2 B

Patient has an ADL score of 16 - 18 and is 

not receiving nursing rehabilitation. 

PE1 B

PHYSICAL FUNCTION 

REDUCED B No special 

clinical conditions; RUG 

groups are based solely on 

the patient=s ability to 

perform activities of daily 

living. 

Patient has an ADL score of 11 - 15 and is 

 receiving nursing rehabilitation. 

PD2 B

Patient has an ADL score of 11 - 15 and is 

not receiving nursing rehabilitation. 

PD1 B

Patient has an ADL score of 9-10 and is 

receiving nursing rehabilitation. 

PC2 B

 Patient has an ADL score of 9-10 and is 

not receiving nursing rehabilitation. 

PC1 B

Patient has an ADL score of 6-8 and is 

receiving nursing rehabilitation. 

PB2 B

Patient has an ADL score of 6-8 and is not

receiving nursing rehabilitation. 

PB1 B

Patient has an ADL score of 4-5 and is 

receiving nursing rehabilitation. 

PA2 B

Patient has an ADL score of 4-5 and is not

receiving nursing rehabilitation. 

PA1 B

Source: Federal Register, May 12, 1998, vol. 63, no. 91, p. 26262 and Federal Register, 

October 5, 1998, vol. 63, no. 192, pp. 53303-6. 

 BBRA 99 increased payments for 15 RUGS by 20 percent beginning 

April 1, 2000 and ending when the Secretary implements refinements to the RUGs. 

The RUGs that were increased were for rehabilitation services, extensive services, 

special care services, and clinically complex services. BIPA 2000 modified the 

add-on to correct for a payment anomaly created by BBRA 99 where several of the 

mid-intensity rehabilitation RUGs were paid at a higher rate than the high intensity 

rehabilitation RUGS. These temporary increases result in additional payments to 

SNFs of approximately $1 billion a year. 

 Since the inception of SNF PPS, CMS has been conducting research on 

refinements to the RUGs. In April, 2000 the Secretary proposed refining the 

RUGs by adding payment categories to better compensate SNFs for providing care 

to medically complex patients as well as to better account for the “non-therapy 
2-68 

ancillary service” costs (such as prescription drugs and respiratory therapy). 

However, the proposal was withdrawn when, upon further analysis, CMS 

determined that the existing RUGs did a better job than the proposed ones in 

describing differences in patient resource use. Since then, the Secretary has not 

proposed any refinements. In the SNF PPS proposed rule published May 16, 2003, 

CMS announced that the RUGs would not be refined for FY 2004, thus keeping in 

place the temporary add-on payments. A press release on the proposed rule stated, 

“After careful review of the available data, CMS determined that the research is not 

sufficiently advanced at the present time to implement the refinements this year.” 

CMS is continuing its research on refinements to the RUGs system. BIPA 2000 

requires the Secretary to study different systems for categorizing SNF patients and 

to report to Congress by January 1, 2005 with the results and any recommendations 

for changing the SNF PPS statute. 

 Wage Adjustment--The final adjustment under SNF PPS is to adjust for 

differences in wages between geographic areas. The labor-related portion of the 

payment rate is approximately 76 percent. The statute gives the Secretary 

discretion to use the wage index he finds appropriate. The Secretary uses the most 

recent hospital wage index to adjust SNF PPS payments. In 2001, the Secretary 

explored using SNF wages to construct a SNF PPS wage index. The proposal was 

not adopted for several reasons: reliability of the existing data (there were 

significant variations in the SNF-specific wage data and a large number of SNFs 

were unable to provide adequate wage and hourly data); SNF record keeping 

burden (SNFs would have to keep detailed data, submitting it to fiscal 

intermediaries annually, and facing audit of those data); and significant resource 

commitment by CMS (the editing, reviewing, and auditing of the data for 

approximately 14,000 SNFs would require significant new resources). 

 Payment Calculation--As discussed above, SNF PPS payments are daily 

payments. The urban or rural unadjusted Federal per diem rate is broken down into 

four categories, two of which are adjusted for case mix using the patient=s RUG. 

Each of the RUGs is then broken into a labor-related and non labor-related share 

and the labor portion is multiplied by the wage index for the area in which the SNF 

is located. The non-labor portion of the base payment amount is added back in to 

arrive at the total daily payment. The payment formula is: Daily payment = 

(Labor-related case-mix adjusted rate x area wage index) + (non-labor-related 

case-mix adjusted rate). An example of the calculations is shown in Table 2-21. 

The case-mix adjusted rate = (Nursing component of Federal Rate x Nursing 

weight for RUG)+(Therapy component of Federal Rate x Therapy weight for 

RUG)+ (Therapy non-case mix component)+(Non-case mix component). 

 Outliers--The statute does not permit payments for outliers under SNF PPS. 

 In the other PPSs that have outlier payments, the statute contains explicit authority 

for the Secretary to make outlier payments. 

 Updates--The SNF Federal rates are updated annually using the SNF market 

basket index. The SNF market basket index is a measure of change in the price of 

goods and services used in providing care for Medicare beneficiaries in a SNF. For 

FY 2004, SNFs received a full market basket update of 3.0 percent. In addition, for 
2-69 

FY 2004, the Secretary issued a regulation that corrected cumulative forecast error 

in the market basket since SNF PPS began on July 1, 1998. As a result the 

FY 2004 rates will be increased by an additional 3.26 percent. 

TABLE 2-21--EXAMPLE OF SNF PPS DAILY PAYMENT CALCULATION 

FOR A SNF LOCATED IN CHICAGO, ILLINOIS FOR SELECTED RUGS 

RUG 

Group 

Labor 

Related 

Wage 

Index 

Wage 

Adjusted 

Amount 

Nonlabor 

related 

Adjusted 

Federal 

Rate 

BBRA/ 

BIPA 

Adjustment 

Daily 

Payment 

RVC $268.21 1.0848 $290.95 $82.98 $373.93 6.7 percent $398.99 

RHA 207.28 1.0848 224.86 64.13 288.99 6.7 percent 308.35 

SSC 172.65 1.0848 187.29 53.41 240.70 20 percent 288.84 

IA2 117.07 1.0848 127.00 36.22 163.22 -- 163.22 

 Source: Federal Register, August 4, 2003, vol 68, no. 149, pp 46040 B 46057. 

 Payments Outside the PPS--BBRA expanded the list of services that are 

excluded by statute from the SNF PPS: certain chemotherapy items and 

administration services, certain radioisotope services, certain prosthetic devices, 

and ambulance services furnished in conjunction with renal dialysis treatments. 

BBRA required that any increase in total payments that result from these exclusions 

be budget neutral, that is, that the Federal per-diem amounts be reduced 

proportionate to the payments. 

SNF payments and utilization

 For a number of years, SNF care was one of Medicare's fastest growing 

benefits. Table 2-22 shows that SNF utilization and spending first began to increase 

substantially in 1988 and 1989. These increases can be traced to changes that 

occurred in the benefit at that time. First, HCFA issued new coverage guidelines 

that became effective early in 1988. Prior to this time, studies had pointed to a lack 

of adequate written guidance on coverage criteria that led to inconsistencies in 

coverage decisions for a benefit that was intended to be uniform across the country. 

As a result, many SNFs were reluctant to accept Medicare beneficiaries because of 

the possibility that a submitted claim would be retroactively denied. The 1988 

guidelines clarified coverage criteria by providing numerous examples of covered 

and noncovered care. Furthermore, the guidelines explained that even when a 

patient's full or partial recovery is not possible, care could be covered if it were 

needed to prevent deterioration or to maintain current capabilities. Previously, some 

care had been denied coverage because patients' health status was not expected to 

improve. 

 The second major, though temporary, change in Medicare's SNF benefit 

came in 1988 with the enactment of the Medicare Catastrophic Coverage Act 

(MCCA). Effective beginning in 1989, this legislation eliminated the SNF benefit's 

prior hospitalization requirement; revised the coinsurance requirement to be equal 

to 20 percent of the national average estimated per-diem cost of SNF services for 

the first 8 days of care; and authorized coverage of up to 150 days of care per 
2-70 

calendar year (rather than 100 days per spell of illness). These changes were 

repealed in 1989, and the SNF benefit's structure assumed its prior form. Studies 

have suggested that the coverage guidelines and MCCA changes together might 

have caused a long-run shift in the nursing home industry toward Medicare patients 

that did not end with repeal of MCCA. 

 Table 2-22 shows that SNF spending in calendar year 1990 stood at $2.3 

billion; by 1997 it had increased to $12.9 billion, for an average annual growth rate 

of 28 percent. With implementation of the PPS payment system in mid-1998, 

however, the rate of increase dropped precipitously: between 1997 and 1998 

payments decreased 0.9 percent, and payments decreased by 18.3 percent in 1999. 

Between 1992 and 1997 the number of Medicare beneficiaries receiving SNF care 

doubled from 778,000 to 1.5 million. The number of covered days grew from 27 

million to 50 million, or by 85 percent. After the implementation of SNF PPS in 

July 1998, spending dropped below that of earlier years. Not until 2001 did SNF 

spending exceed 1998 levels. This drop in spending has been attributed to both 

increased activities in preventing fraud and abuse and to the implementation of the 

new PPS. Payment increases contained in BBRA 99 and BIPA 2000 helped 

account for the increase in payments seen after 1999. 

TABLE 2-22--SKILLED NURSING FACILITY PAYMENTS, PEOPLE 

SERVED, AND DAYS COVERED BY MEDICARE, 

CALENDAR YEARS 1988-2002 

Year 

Payments 

(In 

millions) 

Percent 

Change 

People 

served (In 

thousands) 

Percent 

Change 

Covered 

days (In 

thousands) 

Percent 

Change 

 1988 $925 -- 384 -- 10,669 -- 

 1989 3,482 276.4 636 65.4 29,839 179.7 

 1990 2,329 -33.1 638 4.7 23,781 -20.3 

 1991 2,737 17.5 671 4.9 22,255 -6.4 

 1992 3,990 45.8 778 16.3 27,013 21.4 

 1993 5,368 34.5 903 16.1 31,446 16.4 

 1994 7,681 43.1 1,063 17.7 37,945 20.7 

 1995 9,183 19.6 1,233 16.0 43,116 13.6 

 1996 11,248 22.5 1,373 11.4 47,515 10.2 

 1997 12,944 15.1 1,503 9.5 49,905 5.0 

 1998 12,828 -0.9 1,510 0.5 48,535 -2.8 

 1999 10,486 -18.3 1,447 -4.2 45,290 -6.7 

 2000 11,263 7.4 1,468 1.5 46,708 3.1 

2001 13,849 23.0 NA NA 50,578 8.3 

 2002 14,427 4.2 NA NA 52,725 4.2 

Average annual percent change: 

1988-1997 (pre-BBA) 

 -- 34.1% -- 16.4% -- 18.7% 

1997-2002 (post-BBA) 

 -- 2.2% -- NA -- 1.1% 

Note: Payments are incurred Part A expenditures and do not include beneficiary cost sharing. 

NA- Not applicable. 

Source: CRS analysis of data from CMS Office of the Actuary and Office of Research, Development 

and Information. 
2-71 

HOME HEALTH SERVICES 

Coverage and Benefits

 The Medicare home health benefit has specific statutory eligibility criteria: a 

beneficiary must be confined to his or her home (that is, be Ahomebound@), be under 

the care of a physician, and need skilled nursing care on an intermittent basis or 

other skilled therapy care. A homebound individual is defined as one who cannot 

leave home without a considerable and taxing effort, or who requires the aid of a 

supportive device (such as crutches, a cane, a wheelchair, or a walker), or if the 

individual has a condition such that leaving the home is medically contraindicated. 

Absences from home may occur infrequently for short periods of time for purposes 

such as to receive medical treatment, attend certain adult day care programs, or 

attend church. Skilled care includes skilled nursing or therapy (physical, 

speech/language, occupational) services that are delivered under the care of a 

physician and in accordance with a plan of care that is periodically reviewed by a 

physician. Skilled nursing care and home health aide services must be provided on 

a part-time or intermittent basis, which is defined as Aless than 8 hours each day and 

28 or fewer hours each week (or, subject to review on a case-by-case basis as the 

need for care, less than 8 hours each day or 35 or fewer hours per week).@ 

 For beneficiaries meeting the qualifying criteria, Medicare's home health 

benefit covers the following services: 

1. Part-time or intermittent nursing care provided by or under the 

supervision of a registered nurse; 

2. Physical or occupational therapy or speech-language pathology services; 

3. Medical social services; 

4. Part-time or intermittent services of a home health aide who has 

successfully completed a training program approved by the Secretary; 

5. Medical supplies (excluding drugs and biologicals) and durable medical 

equipment (DME); 

6. Medical services provided by an intern or resident in training under an 

approved training program with which the agency may be affiliated; and 

7. Certain other outpatient services which involve the use of equipment that 

cannot readily be made available in the beneficiary's home. 

 Home health care is covered by Medicare as long as the care is medically 

reasonable and necessary for the treatment of illness or injury. Although the 

number of home health visits a beneficiary may receive is unlimited, services must 

be provided pursuant to a plan of care that is prescribed and periodically reviewed 

by a physician. In general, Medicare's home health benefit is intended to serve 

beneficiaries needing acute medical care requiring the services of skilled health 

care personnel. It was never envisioned as providing coverage for the nonmedical 

supportive care and personal care assistance needed by chronically impaired 

persons. It is not a long-term care program for the disabled or the frail elderly. 

Beneficiaries do not have any copayments for home health services. 

 Home health aide visits include Ahands-on personal care to the beneficiary or 
2-72 

services that are needed to maintain the beneficiary=s health or to facilitate 

treatment of the beneficiary=s illness or injury.@ Covered home health aide services 

include personal care of a patient, simple dressing changes that do not require the 

skills of a licensed nurse and assistance with medications that ordinarily are selfadministered and do not require the skills of a licensed nurse. 

 Home health services are provided by private or public home health 

agencies (HHAs) that specialize in provision of such services and that are certified 

to participate in Medicare by CMS. HHAs may be public or government-sponsored 

entities, private nonprofit agencies, or proprietary for-profit agencies. Hospitals 

may own or sponsor an HHA. Home health care givers may be employees of the 

HHA or may work for an agency under contract. Often, Medicare beneficiaries 

constitute the great majority of an HHA's caseload, although other users include 

individuals covered by Medicaid and those with private insurance or who pay out 

of pocket. 

Financing for Home Health Benefits

 The financing for the home health care benefit is split between the Hospital 

Insurance Trust Fund (Part A) and the Supplementary Medical Insurance Trust 

Fund (Part B). At the inception of the home health benefit, Part A paid for up to 

100 home health visits for beneficiaries enrolled in Part A and who had had a 3-day 

prior hospitalization. Home health care was also covered under Part B, up to 100 

visits, for beneficiaries who had no prior hospitalization, or who had exhausted 

their 100 Part A visits, or who had Part B coverage only. The Omnibus Budget 

Reconciliation Act of 1980 liberalized the rules governing Medicare=s coverage of 

home health services, including eliminating the requirement for a prior 

hospitalization and removing the limitation on the number of visits. This had the 

effect of shifting the financing for home health services almost entirely over to the 

Part A Trust Fund. The only beneficiaries for whom Part B payments were made 

were those who had no Part A coverage. 

 BBA 97 reimposed joint financing of the home health benefit between Parts 

A and B by gradually transferring those home health services unassociated with a 

hospital stay from Part A to Part B. Medicare Part A covers the first 100 visits 

following a 3-day hospital stay or a SNF stay. The transfer was phased in over a 6-

year period. Transferring certain certain home health service costs to the Part B 

Trust fund results in increased outlays and thus increased Part B premium costs to 

beneficiaries. This increased cost in premiums was phased in over 7 years. 

Beneficiaries without Part B coverage receive unlimited Part A coverage for home 

health services. 

Payment

 Prior to implementation of a congressionally mandated prospective payment 

system, Medicare paid for home health care on a retrospective cost-based basis. 

This meant that HHAs were paid for the reasonable costs (as defined by the 

program) they incurred in providing care to Medicare beneficiaries. These 

reasonable costs were determined at the end of the HHAs fiscal year, and were 
2-73 

subject to certain limitations. Prior to BBA 97, HHAs had one cost limit: a limit on 

the costs of providing each visit. This Aper-visit cost limit@ was applied in the 

aggregate B that is, the limit was calculated by multiplying the cost limit by all the 

Medicare visits the agency made in the year -- not to individual visits. The per-visit 

cost limit gave agencies an incentive to control the costliness of the visits provided. 

 However, agencies could easily circumvent the limit by providing two short visits 

rather than one long visit. In the period preceding BBA 97, the number of visits 

provided to Medicare beneficiaries increased dramatically as did Medicare 

expenditures for home health services (see Table 2-25). In an attempt to control the 

costs of the care provided to Medicare beneficiaries, Congress, in BBA 97, reduced 

the per-visit cost limits and imposed an additional cost limit, the aggregate per 

beneficiary limit, until prospective payment could be implemented. The reduced 

and new cost limits were called the interim payment system. The aggregate per 

beneficiary limit was calculated by multiplying the limit by the number of Medicare 

beneficiaries served by the agency. It was based on the average costs incurred by 

agencies during agencies= fiscal year ending before October 1, 1994. After BBA 

97, HHAs were reimbursed the lesser of: (1) their actual reasonable costs; (2) their 

reasonable costs subject to the per visit limit; or (3) their reasonable costs subject to 

the aggregate per beneficiary limit. 

 Prospective payment system--In BBA 97, Congress required that a 

prospective payment system (PPS) for home health care be implemented for cost 

reporting periods beginning on or after October 1, 1999. The effective date of 

home health PPS was amended to October 1, 2000, for all agencies, because of the 

inability of CMS to make systems changes for the new payment system while the 

agency was fixing its computer systems for the year 2000 computer problems. 

 Home health prospective payment involves grouping patients according to 

the type and intensity of services they require and setting a payment rate for each 

payment group. Payment is based on the unit of payment adjusted for the area 

wages in which a beneficiary resides and is adjusted for the care needs of the 

beneficiary. Like other PPSs that pay health care providers for care to Medicare 

beneficiaries on the basis of predetermined, fixed amounts, Medicare payments to 

HHAs are intended to pay the agency for its Medicare beneficiary costs on average. 

That is, although the payment is a predetermined rate, an agency=s actual costs may 

be above or below that amount for an individual patient. The incentive agencies 

have is to manage costs so that, on average, costs do not exceed the PPS average 

amounts. HHAs that provide the services at lower costs than the Medicare payment 

are able to keep the difference. 

 Unit of Payment--Under home health (HH) PPS, an HHA receives a 

payment for a 60-day episode of care for beneficiaries. The 60-day episode 

includes skilled nursing, therapy, aide visits, medical supplies, and medical social 

workers. Physician services, durable medical equipment and osteoporosis drugs are 

not included in the HH PPS. The 60-day episode base payment, called the Anational 

standardized 60-day episode rate@ is based on actual, audited FY 1997 home health 

costs that have been trended forward for inflation. The base payment amount for 

FY2003 is $2,159.39 for a 60-day episode of care. There is not a distinction 
2-74 

between urban and rural base payment amounts. 

 Wage Adjustment--The unit of payment is adjusted to account for 

differences in the area wages. The statute gives the Secretary discretion to use the 

wage index he finds appropriate and explicitly authorizes the Secretary to use the 

hospital wage index for home health PPS. The Secretary uses the previous year=s 

hospital wage index (that does not contain the reclassifications or floors in the 

hospital wage index used to adjust hospital PPS payments) to adjust for differences 

in area wages. In FY 2004, the FY 2003 pre-floor and pre-reclassified hospital 

wage index is used to adjust payments. The wage index for the area in which the 

beneficiary is actually served is used to adjust the payments. CMS has explored 

using a wage index specific to HHAs in the past, but has not adopted one because 

the earlier efforts had data and methodological issues. 

 Case Mix System--The statute requires the Secretary to develop 

“...appropriate case mix adjustment factors for home health services in a manner 

that explains a significant amount of the variation in cost among different units of 

services.” The case mix system developed adjusts the base payment rate for the 

treatment and care needs of beneficiaries and is called Home Health Resource 

Groups (HHRGs). The HHRGs estimate the resource use for specific combinations 

of clinical, functional and service levels. There are 4 clinical severity levels, 5 

functional severity levels, and 4 services utilization levels. The combinations result 

in 80 HHRGs. Each combination defines one of the 80 groups in the case-mix 

system. Each patient is assigned to one of the groups as determined following an 

assessment of the patient=s condition and care needs using the Outcome and 

Assessment Information Set (OASIS). A patient with high clinical severity, 

moderate functional severity, and low services utilization severity is placed in the 

same group (C3F2S1) with all other patients whose summed scores place them in 

the same set of severity levels for the three dimensions. Table 2-23 shows the 

HHRGs and their relative case mix weights. 

 Payment Calculation--The standardized 60-day episode rate is adjusted for 

the area wage index where the beneficiary served resides and for case mix using the 

applicable HHRG. To calculate payment, the episode rate (in column a of 

Table 2-24) is multiplied by the labor portion (0.77668) and then by the appropriate 

area wage index (column c). The result is added to the non-labor portion of the 

episode rate (column d). That sum (in column e) is multiplied by the appropriate 

HHRG weight (column g) to arrive at a 60-day episode payment. 
2-75 

TABLE 2-23--HOME HEALTH RESOURCE GROUPS AND RELATIVE 

CASE-MIX WEIGHTS, FISCAL YEAR 2000 

HHRG Description HHRG Group Clinical Functional Service 

Case Mix 

Weight 

C0F0S0 Min Min Min 0.5265 

C0F0S1 Min Min Low 0.6074 

C0F0S2 Min Min Mod 1.4847 

C0F0S3 Min Min High 1.7364 

C0F1S0 Min Low Min 0.6213 

C0F1S1 Min Low Low 0.7022 

C0F1S2 Min Low Mod 1.5796 

C0F1S3 Min Low High 1.8313 

C0F2S0 Min Mod Min 0.7249 

C0F2S1 Min Mod Low 0.8058 

C0F2S2 Min Mod Mod 1.6831 

C0F2S3 Min Mod High 1.9348 

C0F3S0 Min High Min 0.7629 

C0F3S1 Min High Low 0.8438 

C0F3S2 Min High Mod 1.7212 

C0F3S3 Min High High 1.9728 

C0F4S0 Min Max Min 0.9305 

C0F4S1 Min Max Low 1.0114 

C0F4S2 Min Max Mod 1.8887 

C0F4S3 Min Max High 2.1404 

C1F0S0 Low Min Min 0.6221 

C1F0S1 Low Min Low 0.703 

C1F0S2 Low Min Mod 1.5803 

C1F0S3 Low Min High 1.832 

C1F1S0 Low Low Min 0.7169 

C1F1S1 Low Low Low 0.7978 

C1F1S2 Low Low Mod 1.6752 

C1F1S3 Low Low High 1.9269 

C1F2S0 Low Mod Min 0.8205 

C1F2S1 Low Mod Low 0.9014 

C1F2S2 Low Mod Mod 1.7787 

C1F2S3 Low Mod High 2.0304 

C1F3S0 Low High Min 0.8585 

C1F3S1 Low High Low 0.9394 

C1F3S2 Low High Mod 1.8168 

C1F3S3 Low High High 2.0684 

C1F4S0 Low Max Min 1.0261 

C1F4S1 Low Max Low 1.107 
2-76 

TABLE 2-23--HOME HEALTH RESOURCE GROUPS AND RELATIVE 

CASE-MIX WEIGHTS, FISCAL YEAR 2000-continued 

HHRG Description HHRG Group Clinical Functional Service 

Case Mix 

Weight 

C1F4S2 Low Max Mod 1.9843 

C1F4S3 Low Max High 2.236 

C2F0S0 Mod Min Min 0.7965 

C2F0S1 Mod Min Low 0.8774 

C2F0S2 Mod Min Mod 1.7548 

C2F0S3 Mod Min High 2.0065 

C2F1S0 Mod Low Min 0.8914 

C2F1S1 Mod Low Low 0.9723 

C2F1S2 Mod Low Mod 1.8496 

C2F1S3 Mod Low High 2.1013 

C2F2S0 Mod Mod Min 0.9949 

C2F2S1 Mod Mod Low 1.0758 

C2F2S2 Mod Mod Mod 1.9532 

C2F2S3 Mod Mod High 2.2048 

C2F3S0 Mod High Min 1.0329 

C2F3S1 Mod High Low 1.1139 

C2F3S2 Mod High Mod 1.9912 

C2F3S3 Mod High High 2.2429 

C2F4S0 Mod Max Min 1.2005 

C2F4S1 Mod Max Low 1.2814 

C2F4S2 Mod Max Mod 2.1588 

C2F4S3 Mod Max High 2.4105 

C3F0S0 High Min Min 1.1973 

C3F0S1 High Min Low 1.2782 

C3F0S2 High Min Mod 2.1556 

C3F0S3 High Min High 2.4073 

C3F1S0 High Low Min 1.2922 

C3F1S1 High Low Low 1.3731 

C3F1S2 High Low Mod 2.2504 

C3F1S3 High Low High 2.5021 

C3F2S0 High Mod Min 1.3957 

C3F2S1 High Mod Low 1.4766 

C3F2S2 High Mod Mod 2.354 

C3F2S3 High Mod High 2.6056 

C3F3S0 High High Min 1.4337 

C3F3S1 High High Low 1.5147 

C3F3S2 High High Mod 2.392 

C3F3S3 High High High 2.6437 

C3F4S0 High Max Min 1.6013 

C3F4S1 High Max Low 1.6822 

C3F4S2 High Max Mod 2.5596 

C3F4S3 High Max High 2.8113 

Source: Federal Register, July 3, 2000, Vol. 65, No. 128, p. 41202-3.
2-77 

TABLE 2-24—EXAMPLE OF HOME HEALTH PPS 60-DAY EPISODE 

PAYMENT CALCULATION FOR AN HHA LOCATED IN CHICAGO, IL 

FOR SELECTED HHRGS 

(a) 

FY 2004 

Episode 

Rate 

(b) 

Labor 

Portion 

[(a)x0.77668] 

(c) 

Chicago 

Wage 

Index 

(d) 

NonLabor 

Portion 

(e) 

Wageadjusted rate 

[[(b)x(c)]+

(d)] 

(f) 

HHRG 

(g) 

HHRG 

Weight 

(h) 

60-Day 

Episode 

Payment1

[(e)x(g)] 

$2,230.65 $1,732.50 1.1044 $498.15 $2411.52 C1F4S3 2.2360 $4,392.16 

$2,230.65 $1,732.50 1.1044 $498.15 $2411.52 C0F3S1 0.8438 $2,034.84 1 Episode payment before additional payment adjustments such as outliers or partial episode payments. 

Source: Federal Register, July 3, 2000 vol. 65, no. 129, Federal Register, July 2, 2003, vol. 68, no. 127.

 HHAs are paid 60 percent of the wage- and case mix- adjusted payment 

after submitting a request for anticipated payment (RAP). The RAP may be 

submitted at the beginning of a beneficiary=s care once the HHA has received 

verbal orders from the beneficiary=s physician and the assessment is completed. 

The remaining payment is made when the beneficiary=s care is completed or the 

60-day episode ends. Depending upon the circumstances additional adjustments 

such as an outlier payment or a significant change in condition adjustment may be 

made to the adjusted episode payment. These additional adjustments are described 

below. 

 Updates--The home health 60-day episode rate is updated annually using the 

home health market basket index. The home health market basket index is a 

measure of change in the price of goods and services used in providing care for 

Medicare beneficiaries receiving home care. For FY 2004, agencies received a full 

market basket update of 3.3 percent. 

 Outliers--The outlier adjustment provides additional payment to an HHA 

when the cost of an episode of care is unusually large. Outlier payments are made 

for episodes whose estimated costs exceed a threshold amount for each HHRG. 

Five percent of total home health payments are set aside for outlier payments. 

 Significant Change in a Beneficiary=s Condition (SCIC)--An HHA=s 

payments can be modified within a patient=s 60-day episode when a significant 

change in a beneficiary=s condition occurs. To obtain this adjustment, an HHA 

must obtain the necessary change order from the physician; note the required 

changes in treatment in the beneficiary=s plan of care; and complete a new OASIS 

evaluation, which will produce a new case-mix adjustment factor. Payment will be 

an amount that is proportional between the HHRG prior to the change and the 

HHRG after the significant change in condition. 

 Partial Episode Payment--The partial episode payment adjustment is made 

if a beneficiary transfers from one HHA to another HHA during a 60-day episode. 

The first HHA to provide care will have its payment reduced by a portion equal to 

the amount of time during the 60-day episode in which care was provided. The 

second HHA will conduct an assessment, and a new, 60-day episode of care will 

begin. 
2-78 

 Low Utilization Payment Adjustment (LUPA)--The PPS payment for an 

agency is adjusted if a beneficiary=s care is delivered in 4 or fewer visits. The 

payment is a standardized, service-specific per-visit amount multiplied by the 

number of visits actually provided during the episode. 

 

Background and Trends in Medicare HHA Utilization and Spending 

 During the first 10 years of the Medicare Program, home health care 

accounted for less than 2 percent of total Medicare spending. Although home 

health spending was increasing rapidly (at an average annual rate of about 23 

percent between 1970 and 1980), Medicare spending overall was also increasing 

significantly (the average annual rate of growth was about 17 percent between 1970 

and 1980). Between 1980 and about 1990 home health grew to 2 to 3 percent of 

total program spending reflecting the faster growth in home health spending than 

Medicare as a whole. This small increase reflected the 1980 liberalizations in the 

home health benefit as well as the effect the inpatient hospital prospective payment 

system had on overall Medicare spending. Some analysts had predicted that the 

inpatient PPS (which began in 1984) would lead to even larger growth in home 

health care utilization by Medicare beneficiaries than had occurred in the prior 

decade. However, home health care spending increases that might have occurred as 

a result of the inpatient PPS were offset by changes in the law and in certain 

administrative procedures. For instance, the 1984 Deficit Reduction Act required 

HCFA to reduce the number of Afiscal intermediaries@ with which HCFA contracts 

to process Medicare home health care claims. These entities approve or deny 

beneficiary eligibility for home health care as well as HHA claims for payment. As 

HCFA reduced the number of fiscal intermediaries, eligibility and claims decisions 

became more standardized. HCFA also intensified educational programs for claims 

processors, required HHAs to submit increased documentation with each claim, and 

increased the number of claims subjected to in-depth medical reviews. The home 

health care claims denial rate rose from 3.4 percent in 1985 to 7.9 percent in 1987. 

These actions served to moderate the rate of growth of the home health benefit. 

 A significant event in the history of the Medicare home health benefit was 

settlement of a class action lawsuit filed in 1988 (Duggan v. Bowen) which 

challenged HCFA's interpretation of the Apart-time or intermittent@ provision in 

section 1861(m) of the Social Security Act. As a result of the decision, HCFA 

revised the agency=s policy regarding the interpretation of the statutory language, 

changing the policy interpretation from part-time and intermittent to part-time or

intermittent. This change allowed the number of visits to be increased because they 

no longer had to be Aintermittent@ but could be made on a daily basis.HCFA's 

revised guidelines also loosened the claims procedures that had been tightened 

between 1985 and 1987. The revised guidelines may have opened the door to 

eligibility for persons who have ongoing medical problems that require personal 

care assistance associated more with long-term care rather than acute care. From 

1987 to 1997 the number of beneficiaries receiving home health services more than 

doubled and the average number of visits per home care patient increased more 

than threefold, from 23 visits in 1987 to 73 in 1997 (Table 2-25). During this time 
2-79 

period, the number of HHAs participating in Medicare also increased sharply, 

growing from 5,686 agencies in 1989 to 10,492 in 1997. This dramatic growth in 

the number of beneficiaries served and the number of visits provided also resulted 

in similarly dramatic increase in Medicare spending for home health. Home health 

spending rose from $1.9 billion in 1987 to about $17.5 billion in 1997, an average 

annual increase of almost 25 percent (Table 2-25). This growth led to changes in 

payment in the BBA, as well as other provisions that affected HHAs, and also led 

to scrutiny by the HHS Office of the Inspector General and the General Accounting 

Office regarding fraudulent practices by some home health agency operators. CMS 

changed a number of practices regarding home health agencies and initiated a 

moratorium on allowing new HHAs to enter the Medicare program from September 

1997 through January 1998. 

 After the BBA, Medicare payments to HHAs decreased sharply, falling 

more than 35 percent in the first full year the aggregate per beneficiary cost limits 

were in place and an additional 24 percent in the second year. The number of 

beneficiaries served decreased more than 10 percent a year for the three years after 

BBA passed. This decrease was due to the stepped up program integrity activities 

directed at HHAs and to a change in a qualifying service by BBA.9

 The average 

number of visits per beneficiary served also decreased dramatically, falling almost 

30 percent in the first full year after BBA due to the application of the interim 

payment system. 

 After implementation of the HH PPS October 1, 2000, payments increased 

by 8.5 percent in 2001 and by 13 percent in 2002. The number of visits and, to a 

lesser degree, the number of beneficiaries served, continued to decline after the 

implementation of PPS. In 2001, the average number of visits per person dropped 

to 28 and the number of beneficiaries served per thousand dropped to 71. 

HOSPICE SERVICES 

Coverage and benefits 

 Medicare covers hospice care for terminally ill beneficiaries, in lieu of most 

other Medicare services related to the curative treatment of their illness. 

Beneficiaries who elect hospice may still receive curative treatments for illnesses or 

injuries unrelated to their terminal illness and they may disenroll from hospice at 

any time. Congress established the hospice benefit in the Tax Equity and Fiscal 

Responsibility Act of 1982 (TEFRA) for a period of 3 years. Congress made the 

benefit permanent in the Consolidated Omnibus Budget Reconciliation Act of 1985 

(COBRA). 

 

9

 BBA 97 removed venipuncture services from the list of skilled services that was used in determining 

beneficiary eligibility for the home health benefit. Anecdotally, venipuncture, the drawing of blood, had 

been seen as a way for some HHAs to deliver frequent aide services to beneficiaries that needed no other 

skilled care. Furthermore, venipuncture was a covered Part B service and many believed that 

beneficiaries would continue to receive needed care. 
2-80 

TABLE 2-25 -- MEDICARE HOME HEALTH AGENCY PAYMENTS, 

PEOPLE SERVED, AND VISITS, CALENDAR YEARS 1987-2002 

People served Visits 

Year 

Payments 

(in 

millions) 

Percent 

change Number Per 1000 

enrolled

Percent 

change 

Number 

(in 

thousands)

Per 

person 

served 

Percent 

change 

1987 $1.9 -- 1,564.5 48 -- 35,589 23 

1988 2.1 8.5 1,601.7 49 2.1 37,129 23 1.9 

1989 2.6 24.3 1,724.9 51 4.1 46,296 27 15.8 

1990 3.9 51.7 1,967.1 57 11.8 69,386 35 32.4 

1991 5.6 43.5 2,242.9 64 12.3 98,643 44 25 

1992 7.9 39.4 2,506.2 70 9.4 132,499 53 20.2 

1993 10.3 31.6 2,874.1 79 12.9 167,802 58 10.4 

1994 13.8 33.1 3,179.2 93 17.7 218,790 69 17.9 

1995 16.3 18.2 3,469.4 102 9.7 264,178 76 10.7 

1996 17.7 8.6 3,599.7 107 4.9 281,887 78 2.8 

1997 17.5 -1.2 3,557.5 108 0.9 260,162 73 -6.6 

1998 11.0 -36.8 3,061.6 95 -12.0 159,247 52 -28.9 

1999 8.4 -24.3 2,719.7 85 -10.5 112,866 42 -20.2 

2000 8.5 1.4 2,461.2 75 -11.8 94,751 39 -7.3 

2001 9.2 8.5 2,402.5 71 -5.3 67,985 28 -26.5 

2002 10.4 13.0 NA NA NA 72,602 NA NA 

Average annual percent change: 

1987-1997 -- 24.7 -- -- 8.4 -- -- 12.4 

1997-2002 -- -9.9 -- -- NA -- -- NA 

Note- Payments are on an incurred basis. 

NA- Not available. 

Source: Centers for Medicare & Medicaid Services, Office of the Actuary and Office of Information 

Services. 

 Hospice care emphasizes palliative medical care, that is, relief from pain, 

and supportive social and counseling services for terminally ill beneficiaries and 

their families. Services are provided primarily in the patient=s home. Hospice is 

designed to provide a broad range of services including prescription drugs for pain 

control and symptom management, skilled nursing care, physician services, home 

health aide services, homemaker services, patient counseling, and family 

bereavement counseling. 

 For a person to be considered terminally ill and eligible for Medicare=s 

hospice benefit, the beneficiary=s attending physician and the medical director of 

the hospice (or physician member of the hospice team) must certify that the 

individual has a life expectancy of 6 months or less. Beneficiaries electing hospice 

are covered for two 90-day periods, followed by an unlimited number of 60-day 

periods. The medical director or physician member of the hospice team must 

recertify at the beginning of each period that the beneficiary is terminally ill. 

Services must be provided under a written plan of care established and periodically 

reviewed by the individual=s attending physician and by the medical director of the 

hospice. 

 Covered hospice services include the following: (1) nursing care provided 

by or under the supervision of a registered nurse; (2) physical or occupational 
2-81 

therapy or speech-language pathology services; (3) medical social services; (4) 

services of a home health aide who has successfully completed a training program 

approved by the Secretary of the U.S. Department of Health and Human Services 

(DHHS); (5) homemaker services; (6) medical supplies (including drugs and 

biologicals) and the use of medical appliances; (7) physician services; (8) shortterm inpatient care (including both respite care and procedures necessary for pain 

control and acute and chronic symptom management); (9) counseling, including 

dietary counseling, for care of the terminally ill beneficiary and for family 

adjustment to the patient=s death (bereavement counseling is not a reimbursable 

service); and (10) any other item or service which is specified in a patient=s plan of 

care and which Medicare can pay for. 

 Medicare=s hospice benefit is intended to be principally an in-home benefit. 

For this reason, Medicare law prescribes that respite care, or relief for the primary 

care giver of the terminally ill patient, may be provided only on an intermittent, 

nonroutine, and occasional basis and may not be provided consecutively over 

longer than 5 days. In addition, the aggregate number of inpatient care days 

provided in any 12-month period to Medicare beneficiaries electing hospice care 

can not exceed 20 percent of the total number of days of hospice coverage provided 

to these persons. 

 Only two covered hospice servicesBoutpatient drugs or biologicals and 

respite careBare subject to coinsurance. Outpatient drugs and biologicals are subject 

to a coinsurance amount that approximates 5 percent of the cost of the drug to the 

hospice program, except that the amount may not exceed $5 per prescription. For 

respite care, coinsurance equals 5 percent of program payments for respite, but may 

not exceed Medicare=s inpatient hospital deductible during a hospice coinsurance 

period (defined as the period when hospice election is not broken by more than 14 

days). 

 Covered services must be provided by a Medicare-certified hospice. 

Certified hospices must be either public agencies or private organizations primarily 

engaged in providing covered hospice services and must make services available on 

a 24-hour basis, in individuals= homes, on an outpatient basis, and on a short-term 

inpatient basis. Hospices must routinely and directly provide substantially all of the 

following “core” services: nursing care, medical social services, and counseling 

services. The remaining hospice services may be provided either directly by the 

hospice or under arrangements with others. If services are provided through 

arrangements with other providers, the hospice must maintain professional 

management responsibility for all such services, regardless of the facility in which 

the services are furnished. 

 The hospice program must also have an interdisciplinary group of personnel 

which includes at least one registered professional nurse and one social worker 

employed by the hospice; one physician employed by or under contract with the 

hospice; plus at least one pastoral or other counselor. 
2-82 

Prospective Payment System 

 In implementing Medicare=s hospice benefit, HCFA established a 

prospective payment methodology in 1983. This early prospective payment system 

pays hospices according to the general type of care provided to a beneficiary on a 

daily basis. Unlike other PPSs there is no additional adjustment for case mix. Like 

other PPSs that pay health care providers for care to Medicare beneficiaries on the 

basis of predetermined, fixed amounts, Medicare payments to hospices are intended 

to pay for the costs of care for a hospice beneficiary, on average. That is, although 

the payment is a predetermined daily rate, a hospice=s actual costs may be above or 

below that amount for an individual patient. The incentive facilities have is to 

manage costs so that, on average, costs do not exceed the PPS average amounts. 

Hospices that provide the services at lower costs than the Medicare payment are 

able to keep the difference. 

 Unit of Payment-- Under the hospice prospective payment, hospices are paid 

one of four prospectively determined rates, which correspond to four different 

levels of care, for each day a Medicare beneficiary is under the care of the hospice. 

Payment will thus vary by the length of the patient=s period in the hospice program 

as well as by the characteristics of the services (intensity and site) furnished to the 

beneficiary. Each rate is adjusted for the geographic location in which the service 

is delivered to account for variations in area wages as described below. 

 The four rate categories are: 

1. Routine home careBRoutine home care payment is made for a day on 

which an individual is at home and is not receiving continuous home care. 

The routine home care rate is paid for every day a patient is at home and 

under the care of the hospice regardless of whether the hospice actually 

visits the home and regardless of the volume or intensity of the services 

provided on any given day as long as fewer than 8 hours of care is 

provided. The FY 2004 base routine home care rate is $118.08 per day. 

 2. Continuous home careBContinuous home care payment is made for a day 

on which an individual receives hospice care consisting predominantly of 

nursing care on a continuous basis at home. Home health aide or 

homemaker services or both may also be provided on a continuous basis. 

Continuous home care is furnished only during brief periods of crisis and 

only as necessary to maintain the terminally ill patient at home. Home 

care must be provided for a period of at least 8 hours before it would be 

considered to fall within the category of continuous home care. Payment 

for continuous home care will vary depending on the number of hours of 

continuous services provided. For FY 2004, the base continuous home 

care rate is $689.18 for 24 hours or $28.72 per hour. 

3. Inpatient respite careB Inpatient respite care payment is made for a day on 

which the individual who has elected hospice care receives care in an 

approved facility on a short- term (not more than 5 days at a time) basis 

for the respite of his or her caretakers. For FY 2004, the base inpatient 

respite care rate is $122.15 per day. 

4. General inpatient careB General inpatient care payment is made for a day 
2-83 

on which an individual receives general inpatient care in an inpatient 

facility for pain control or acute or chronic symptom management which 

cannot be managed in other settings. Care may be provided in a hospital, 

skilled nursing facility (SNF), or inpatient unit of a freestanding hospice. 

For FY 2004, the base general inpatient care rate is $525.28 per day. 

 Wage Adjustment--Each of the four payment rates is adjusted for differences 

in wages between geographic areas. The labor-related portion of the payment rate 

is approximately 69 percent. The hospital wage index is used to adjust the laborrelated portion of the hospice payment rates. The use of the hospital wage index to 

adjust hospice payments was determined using negotiated rulemaking. As a result, 

CMS uses the most recent hospital wage index available at the time the Federal 

Register notice announcing the wage index is published. In addition, also as a 

product of the negotiated rulemaking, wage index values greater than 0.8 are 

multiplied by a budget neutrality adjustment. Wage index values below 0.8 are 

adjusted to be the greater of: (1) a 15 percent increase, subject to a maximum wage 

index value of 0.8, or (2) the product of multiplying the hospital wage index value 

for a given area by the budget neutrality adjustment. The budget neutrality 

adjustment for FY 2004 is 1.061238. For FY 2004, the FY 2003 hospital wage 

index, adjusted as described above, will be used. 

 Payment Calculation--The applicable hospice rate category is adjusted for 

the area wage index where the beneficiary served resides. To calculate payment, 

the applicable rate category labor portion (in column b of Table 2-26) is multiplied 

by the appropriate area wage index (column c). The result is added to the non-labor 

portion of the episode rate (column d). That sum (in column e) is the daily hospice 

payment amount. 

TABLE 2-26—EXAMPLE OF DAILY HOSPICE PAYMENT 

CALCULATION FOR A HOSPICE LOCATED IN CHICAGO, IL 

FOR THE FOUR RATE CATEGORIES 

(a) 

Rate 

Category 

(b) 

Labor 

Portion 

(c) 

Chicago 

Wage 

index 

(d) 

Non-Labor 

Portion 

(e) 

Wage-adjusted 

payment 

[[(b)x(c)]+(d)] 

Routine Home Care $81.13 1.1720 $36.95 $132.03 

Continuous Home Care $473.54 1.1720 $215.64 $800.63 

Inpatient Respite Care $66.12 1.1720 $56.03 $133.52 

General Inpatient Care $336.23 1.1720 $189.05 $583.11 

Source: Federal Register, September 30, 2003, vol. 68, no. 189; Program Memorandum A-03-057, 

July 3, 2003. 

 Cap Amount-- Medicare law requires that payments to a hospice for care 

furnished over the period of a year be limited to a “cap amount.” The cap amount is 

a per beneficiary amount applied on an aggregate rather than a case-by-case basis. 

Therefore, each individual hospice=s cap amount is calculated by multiplying the 

yearly per beneficiary cap amount by the number of Medicare beneficiaries who 

received hospice care from the hospice during the cap period. Medicare defines a 

cap year as the period from November 1 through October 31 of the following year. 
2-84 

The hospice cap for the period November 1, 2002, through October 31, 2003, is 

$18,661.29 per beneficiary per year, and is not adjusted for variations in area 

wages. 

 Updates--Hospice daily payment rates for routine home care, continuous 

home care, inpatient respite care, and general inpatient care are updated annually by 

the increase in the hospital market basket. For FY 2004 the update is the full 

hospital market basket increase of 3.4 percent. 

 The hospice cap amount is adjusted annually by the percentage change in 

the medical care component of the Consumer Price Index for All Urban Consumers 

(CPI-U). 

Hospice program data 

 Table 2-27 shows that the number of hospices participating in Medicare 

grew from 553 in July, 1988 to 2,325 in December, 2002. Freestanding hospices 

grew at the fastest average annual rate (13 percent) followed by hospital-based 

hospices (10 percent) and home health agency-based hospices (9 percent). 

Medicare payments for hospice care in FY 1991 were $446 million and grew to 

$3.6 billion in FY 2001, an average annual increase of 23 percent (Table 2-28). 

This growth in spending was fueled by the increased number of beneficiaries using 

the hospice benefit rather than an increase in the intensity of services provided to 

beneficiaries. From FY 1991 through FY 2001, the number of beneficiaries using 

Medicare=s hospice benefit increased at an average annual rate of 18 percent. 

However the average dollar amount spent per beneficiary grew at a more modest 

4 percent average annual rate between FY 1991 and FY 2001. The number of days 

that a beneficiary elects hospice care increased steadily from FY 1991 through 

1995, then decreased between 1996 and 1999, before increasing in FY 2000 and FY 

2001. The large declines in the number of days in the FY 1996 through FY 1999 

period has been attributed to increased enforcement of the “life expectancy” 

requirement. The increase in days in FY 2000 and 2001 is attributable to 

educational efforts by CMS regarding the life expectancy requirement B that is, 

CMS wrote to hospices that hospices will not be penalized if a beneficiary lives 

longer than 6 months and that the hospice benefit is not limited to 6 months. Of 

the types of care provided by hospices, continuous home care grew at the fastest 

rate over the FY 1991 through FY 2001 time period, increasing at an average 

annual rate of 31 percent. Routine home care had the next highest growth rate, an 

average annual rate of 24 percent, followed by physician services (21 percent) and 

general inpatient care (19 percent). 
2-85 

TABLE 2-27--NUMBER OF HOSPICES PARTICIPATING IN 

MEDICARE BY TYPE OF HOSPICE, 1988-2002 

Number of Hospices 

Date 

Freestanding HospitalBased SNF HHA Total 

7/88 191 138 11 213 553 

7/89 220 182 13 286 701 

5/90 260 221 12 313 806 

9/91 394 282 10 325 1,011 

1/92 404 291 10 334 1,039 

5/93 499 341 10 438 1,288 

8/94 608 401 12 583 1,604 

6/95 656 447 18 674 1,795 

10/96 762 507 21 800 2,090 

12/97 875 559 23 829 2,286 

12/98 895 567 22 809 2,293 

12/99 934 564 22 774 2,294 

12/00 970 557 20 734 2,281 

12/01 1,004 554 20 704 2,282 

12/02 1,074 558 17 676 2,325 

Average Annual Percent Change 

 13.1 10.5 3.2 8.6 10.8 

 Source: Centers for Medicare & Medicaid Services. 

PART B SERVICES - COVERAGE AND PAYMENTS 

PHYSICIANS= SERVICES 

Coverage 

 Medicare provides coverage for physicians= services. This category includes 

surgery, consultation, and home, office and institutional visits. Certain limitations 

apply for services rendered by dentists, podiatrists, and chiropractors and for the 

treatment of mental illness. These are referred to as limited licensed practitioners. 

Reimbursement - In General

 Medicare pays for physicians= services on the basis of a fee schedule which 

went into effect in 1992. The fee schedule assigns relative values to services. Each 

of the approximately 7,500 physician service codes is assigned its own relative 

value. Relative values reflect three factors: physician work, practice expenses, and 

malpractice costs. These relative values are adjusted for geographic variations in 

the costs of practicing medicine. Geographically-adjusted relative values are then 

converted into a dollar payment amount by multiplying by a dollar figure known as 

the conversion factor. The annual percentage update to the conversion factor equals 

the Medicare economic index (which measures inflation) subject to an adjustment 

to match spending for physicians= services under the sustainable growth rate 

system. 
TABLE 2-28 -- MEASURES OF MEDICARE HOSPICE CARE, SELECTED FISCAL YEARS 1991-200

Category 1991 1993 1995 1996 1997 1998 19991 2

Cash outlays by provider type (in millions):  Freestanding $219 $620 $997 $1,042 $1,123 $1,206 $1,445 $

 Hospital Based $92 $205 $319 $331 $345 $373 $400  SNF Based $9 $23 $26 $25 $13 $17 $17  HHA Based $126 $304 $508 $546 $543 $575 $573 

Total $446 $1,152 $1,831 $1,944 $2,024 $2,171 $2,435 $

Cash outlays by care type (in millions): Routine Home Care $377 $1,005 $1,612 $1,702 $1,770 $1,889 $2,111 $

Continuous Home Care $4 $12 $26 $29 $29 $32 $35 

Inpatient Respite Care $1 $3 $4 $5 $5 $5 $6 General Inpatient Care $60 $126 $179 $198 $210 $232 $267 Physician Services $4 $7 $10 $11 $12 $13 $16 

Total $445 $1,152 $1,831 $1,944 $22,024 $2,171 $2,435 $

Average dollar amount per beneficiary:  Freestanding $4,121 $6,065 $6,451 $6,157 $5,796 $5,689 $5,690 $ Hospital Based $4,234 $5,361 $5,740 $5,333 $5,028 $5,129 $5,214 $ SNF Based $4,198 $5,344 $6,079 $5,953 $5,079 $5,122 $5,537 $ HHA Based $3,993 $5,239 $5,569 $5,313 $4,949 $5,084 $5,145 $

Total $4,108 $5,681 $6,049 $5,747 $5,402 $5,412 $5,471 $

Number of beneficiaries by provider type:  Freestanding 53,184 102,283 151,466 169,285 193,765 211,952 253,981 29 Hospital Based 21,717 38,295 55,631 62,081 68,688 72,804 76,705 8 SNF Based 2,040 4,221 4,272 4,124 2,547 3,288 3,097 3

 HHA Based 31,472 57,969 91,239 102,783 109,723 113,096 111,363 12

Total 108,413 202,768 302,608 338,273 374,723 401,140 445,146 51

Average number of days a beneficiary elects hospice care:  Freestanding 46.2 62.0 62.9 58.5 53.4 50.8 47.1  Hospital Based 44.2 53.8 56.7 51.6 47.9 44.1 41.4 
 SNF Based 37.6 42.7 49.3 47.7 19.9 41.0 38.0 

 HHA Based 42.5 52.2 53.8 50.0 45.9 44.0 40.7 

Total2 44.5 57.2 58.8 54.5 50.1 48.6 44.5 

Number of units by care type: Routine Home Care-days 4,667,703 11,324,524 17,257,734 17,862,843 18,189,764 18,454,749 20,236,689 23,

Continuous Home Care-hours 199,309 565,903 1,129,697 1,193,623 1,190,982 1,303,204 1,398,793 1,8

Inpatient Respite Care-days 14,867 27,887 45,932 47,218 47,790 47,905 49,530 5General Inpatient Care-days 161,211 303,245 418,093 451,396 470,593 502,199 565,875 6Physician Services-procedures 53,491 115,560 165,066 185,970 200,376 204,624 243,270 21FY 1999 and FY 2000 figures were calculated based on claims from hospices open during FY 2002.2Weighted by the number of beneficiaries in each hospice type.Note- Totals may not add due to rounding.Source: Centers for Medicare & Medicaid Services. Standard Analytical Files, 100 percent Final Action Claims. 
2-88 

Calculation of Fee Schedule

 The fee schedule has three components: the relative value for the service; a 

geographic adjustment, and a national dollar conversion factor. 

 Relative Value--The relative value for a service compares the relative 

physician work involved in performing one service with the work involved in 

providing other physicians= services. It also reflects average practice expenses and 

malpractice expenses associated with the particular service. The relative value for 

each service is the sum of three components: 

 Physician work component, which measures physician time, skill, and 

intensity in providing a service; 

 Practice expense component, which measures average practice expenses 

such as office rents and employee wages (which, for certain services 

can vary depending on whether the service is performed in a facility, 

such as an ambulatory surgical facility, or in a non-facility setting); and 

 Malpractice expense component, which reflects average professional 

liability insurance costs. 

 Geographic Adjustment--The geographic adjustment is designed to account 

for variations in the costs of practicing medicine. A separate geographic 

adjustment is made for each of the three components of the relative value unit, 

namely a work adjustment, a practice expense adjustment, and a malpractice 

adjustment. These are added together to produce an indexed relative value unit for 

the service for the locality. There are 92 service localities nationwide. (Table 2-29 

shows the geographic indices used for the 2002-2003 period.) 

 The geographic adjustments are indexes that reflect cost differences among 

areas compared to the national average in a Amarket basket@ of goods. The work 

adjustment is based on a sample of median hourly earnings of workers in six 

professional specialty occupation categories. The practice expense adjustment is 

based on employee wages, office rents, medical equipment and supplies, and other 

miscellaneous expenses. The malpractice adjustment reflects malpractice insurance 

costs. The law specifies that the practice expense and malpractice indices reflect 

the full relative differences. However, the work index must reflect only one-quarter 

of the difference. Using only one-quarter of the difference generally means that 

rural and small urban areas would receive higher payments and large urban areas 

lower payments than if the full difference were used. 

 Conversion Factor--The conversion factor is a dollar figure. The payment 

for a service equals the geographically adjusted relative value for the service 

multiplied by the conversion factor. The conversion factor is the same for all 

services. The conversion factor is updated each year. (See below.) The 2003 

conversion factor, which became effective March 1, 2003, is $36.7856. 

Anesthesiologists are paid under a separate fee schedule which uses base and time 

units; a separate conversion factor ($17.05 in 2003) applies. 

Table 2-30 shows the conversion factors that have applied since 

implementation of the fee schedule in 1992. For several years during this period, 

more than one conversion factor applied. However, beginning in 1998, one 

conversion factor applied for all services. 
2-89 

Annual Update to the Conversion Factor

 The conversion factor is updated each year according to a formula specified 

in law. The intent of the formula is to place a restraint on overall spending for 

physicians= services. Several factors enter into the calculation of the formula. 

These include: 1) the Medicare economic index (MEI) which measures inflation in 

the inputs needed to produce physicians services; 2) the sustainable growth rate 

(SGR) which is essentially a target for Medicare spending growth; and 3) the 

update adjustment factor which modifies the update, which would otherwise be 

allowed by the MEI, to bring spending in line with the SGR target. 

 The SGR system was established because of the concern that the fee 

schedule itself would not adequately constrain increases in spending for physicians=

services. While the fee schedule specifies a limit on payments per service, it does 

not place a limit on the volume or mix of services. The use of SGR targets is 

intended to serve as a restraint on aggregate spending. The SGR targets are not 

limits on expenditures. Rather the fee schedule update reflects the success or 

failure in meeting the target. If total physician expenditures exceed the target, the 

update for a future year is reduced. If expenditures are less than the target, the 

update is increased. 

TABLE 2-29--GEOGRAPHIC PRACTICE COST INDICES BY 

MEDICARE CARRIER AND LOCALITY, 2002-2003 

Locality Name Work Practice Expense Malpractice 

Alabama 0.978 0.870 0.807 

Alaska 1.064 1.172 1.223 

Arizona 0.994 0.978 1.111 

Arkansas 0.953 0.847 0.340 

Anaheim/Santa Ana, CA 1.037 1.184 0.955 

Los Angeles, CA 1.056 1.139 0.955 

Marin/Napa/Solano, CA 1.015 1.248 0.687 

Oakland/Berkeley, CA 1.041 1.235 0.687 

San Francisco, CA 1.068 1.458 0.687 

San Mateo, CA 1.048 1.432 0.687 

Santa Clara, CA 1.063 1.380 0.639 

Ventura, CA 1.028 1.125 0.783 

Rest of CA1 1.007 1.034 0.748 

Rest of CA1 1.007 1.034 0.748 

Colorado 0.985 0.992 0.840 

Connecticut 1.050 1.156 0.966 

Delaware 1.019 1.035 0.712 

DC+MD/VA Suburbs 1.050 1.166 0.909 

Fort Lauderdale, FL 0.996 1.018 1.877 

Miami, FL 1.015 1.052 2.528 

Rest of FL 0.975 0.946 1.265 

Atlanta, GA 1.006 1.059 0.935 

Rest of GA 0.970 0.892 0.935 

Hawaii/Guam 0.997 1.124 0.834 

Idaho 0.960 0.881 0.497 

Chicago, IL 1.028 1.092 1.797 

East St. Louis, IL 0.988 0.924 1.691 
2-90 

TABLE 2-29--GEOGRAPHIC PRACTICE COST INDICES BY 

MEDICARE CARRIER AND LOCALITY, 2002-2003-continued

Locality Name Work Practice Expense Malpractice 

Suburban Chicago, IL 1.006 1.071 1.645 

Rest of IL 0.964 0.889 1.157 

Indiana 0.981 0.922 0.481 

Iowa 0.959 0.876 0.596 

Kansas1 0.963 0.895 0.756 

Kansas1 0.963 0.895 0.756 

Kentucky 0.970 0.866 0.877 

New Orleans, LA 0.998 0.945 1.283 

Rest of Louisiana 0.968 0.870 1.073 

Southern Maine 0.979 0.999 0.666 

Rest of Maine 0.961 0.910 0.666 

Baltimore/Surr. Cntys, MD 1.021 1.038 0.916 

Rest of Maryland 0.984 0.972 0.774 

Metropolitan Boston 1.041 1.239 0.784 

Rest of Massachusetts 1.010 1.129 0.784 

Detroit, MI 1.043 1.038 2.738 

Rest of Michigan 0.997 0.938 1.571 

Minnesota 0.990 0.974 0.452 

Mississippi 0.957 0.837 0.779 

Metropolitan Kansas City, MO 0.988 0.967 0.846 

Metropolitan St. Louis, MO 0.994 0.938 0.846 

Rest of Missouri1 0.946 0.825 0.793 

Rest of Missouri1 0.946 0.825 0.793 

Montana 0.950 0.876 0.727 

Nebraska 0.948 0.877 0.430 

Nevada 1.005 1.039 1.209 

New Hampshire 0.986 1.030 0.825 

Northern NJ 1.058 1.193 0.860 

Rest of New Jersey 1.029 1.110 0.860 

New Mexico 0.973 0.900 0.902 

Manhattan, NY 1.094 1.351 1.668 

NYC Suburbs/Long I., NY 1.068 1.251 1.952 

Poughkpsie/N NYC suburbs, NY 1.011 1.075 1.275 

Queens, NY 1.058 1.228 1.871 

Rest of New York 0.998 0.944 0.764 

North Carolina 0.970 0.931 0.595 

North Dakota 0.950 0.880 0.657 

Ohio 0.988 0.944 0.957 

Oklahoma 0.968 0.876 0.444 

Portland, OR 0.996 1.049 0.436 

Rest of Oregon 0.961 0.933 0.436 

Metropolitan Philadelphia, PA 1.023 1.092 1.413 

Rest of Pennsylvania 0.989 0.929 0.774 

Puerto Rico 0.881 0.712 0.275 

Rhode Island 1.017 1.065 0.883 

South Carolina 0.974 0.904 0.279 

South Dakota 0.935 0.878 0.406 

Tennessee 0.975 0.900 0.592 
2-91 

TABLE 2-29--GEOGRAPHIC PRACTICE COST INDICES BY 

MEDICARE CARRIER AND LOCALITY, 2002-2003-continued

Locality Name Work Practice Expense Malpractice 

Austin, TX 0.986 0.996 0.859 

Beaumont, TX 0.992 0.890 1.338 

Brazoria, TX 0.992 0.978 1.338 

Dallas, TX 1.010 1.065 0.931 

Fort Worth, TX 0.987 0.981 0.931 

Galveston, TX 0.988 0.969 1.338 

Houston, TX 1.020 1.007 1.336 

Rest of Texas 0.966 0.880 0.956 

Utah 0.976 0.941 0.644 

Vermont 1.020 0.986 0.539 

Virgin Islands 0.965 1.023 1.002 

Virginia 0.984 0.938 0.500 

Seattle (King County), WA 1.005 1.100 0.788 

Rest of Washington 0.981 0.972 0.788 

West Virginia 0.963 0.850 1.378 

Wisconsin 0.981 0.929 0.939 

Wyoming 0.967 0.895 1.005 1

Payment locality is serviced by two carriers. 

Note-Work GCPI is the 1/4 work GPCI required by Section 1848 (1)(A)(iii) of the Social Security 

Act. GPCIs rescaled by the following factors for budget neutrality: Work=0.99699; Practice 

Expense=0.99235; Malpractice Expense=1.00215. 

Source: DHHS, CMS, Medicare Program, Revisions to Payment Policies under the Physician Fee 

Schedule for Calendar Year 2003, Federal Register, December 31, 2003, v67, no251, p.80170. 

TABLE 2-30--CONVERSION FACTORS: CALENDAR YEARS 1992-20003 

Calendar Year Services Conversion Factor 

1992 All Services $31.00 

1993 Surgical 31.96 

 Nonsurgical 31.25 

1994 Surgical 35.16 

 Primary Care 33.72 

 Other nonsurgical 32.90 

1995 Surgical 39.45 

 Primary Care 36.38 

 Other nonsurgical 34.62 

1996 Surgical 40.80 

 Primary Care 35.42 

 Other nonsurgical 34.63 

1997 Surgical 40.96 

 Primary Care 35.77 

 Other nonsurgical 33.85 

1998 All Services 36.69 

1999 All Services 34.73 

2000 All Services 36.61 

2001 All Services 38.26 

2002 All Services 36.20 

2003 All Services 36.79 

Source: CMS, Medicare Program; Physician Fee Schedule Update for Calendar year 2003. Final 

Rule Federal Register, vol 68. No.40, February 28, 2003. 
2-92 

 General Requirements--The annual percentage update to the conversion 

factor, equals the MEI, subject to an adjustment (known as the update adjustment 

factor) to match target spending for physicians= services under the SGR system. The 

conversion factor is further adjusted to meet certain budget neutrality requirements. 

 Update Adjustment Factor--The update adjustment sets the conversion 

factor at a level so that projected spending for the year will meet allowed spending 

by the end of the year. Allowed spending for the year is calculated using the SGR. 

However, in no case can the update adjustment factor be less than minus 7 percent 

or more than plus 3 percent. 

 Beginning in 2001, the update adjustment factor is the sum of: 1) the prior 

year adjustment component, and 2) the cumulative adjustment component. The 

prior year adjustment component is determined by: 1) computing the difference 

between allowed expenditures for physicians= services for the prior year and the 

amount of actual expenditures for that year; 2) dividing this amount by the actual 

expenditures for that year; and 3) multiplying that amount by 0.75. The cumulative 

adjustment component is determined by: 1) computing the difference between 

allowed expenditures for physicians= services from April 1, 1996 through the end of 

the prior year and the amount of actual expenditures during such period; 2) dividing 

that difference by actual expenditures for the prior year as increased by the SGR for 

the year for which the update adjustment factor is to be determined; and 3) 

multiplying that amount by 0.33. Use of both the prior year adjustment component 

and the cumulative adjustment component allows any deviation between 

cumulative actual expenditures and cumulative allowed expenditures to be 

corrected over several years rather than a single year. 

 Sustainable Growth Rate--The law specifies a formula for calculating the 

SGR. It is based on changes in four factors: 1) estimated changes in fees; 2) 

estimated change in the average number of Part B enrollees (excluding 

Medicare+Choice beneficiaries); 3) estimated projected growth in real gross 

domestic product (GDP) growth per capita; and 4) estimated change in 

expenditures due to changes in law or regulations. 

 By November 1 of each year, (using the best data available as of 

September 1), CMS is required to publish in the Federal Register, the SGRs for 

three time periods. These periods are the upcoming year, the current year, and the 

preceding year. Thus the SGR is estimated and revised twice, based on later data. 

 By November 1, 2002, CMS was to publish an estimate of the SGR for 

CY2003, a revision of the CY2002 SGR estimated in 2001 and a revision of the 

CY2001 SGR first estimated 2 years earlier and revised 1 year earlier. Publication 

of these amounts was first delayed until December 31, 2002. These amounts were 

subsequently revised as a result of the enactment of the Consolidated 

Appropriations Resolution, 2003 (CAR) (P.L.108-7) which allowed CMS to go 

back and use actual data to determine the SGRs for FY 1998 and FY1999 for the 

purposes of determining future fee schedule updates. Two factors in the SGR 

calculation accounted for the major differences between estimated and actual data. 

These were fee-for-service enrollment in Medicare (because fewer people than 
2-93 

expected enrolled in managed care) and changes in the real per capita growth in the 

GDP. Changing the FY 1998 and FY 1999 numbers to reflect actual data had the 

effect of increasing the SGR used for the calculation of the 2003 update. 

Calculation of the Conversion Factor for 2002 and 2003

 As noted above, the annual update to the conversion factor reflects the MEI 

plus an adjustment to reflect the success or failure in meeting the SGR target. In 

2002, the update derived from these calculations resulted in an update of: 

-4.8 percent. In addition, certain required budget neutrality adjustments were made 

through adjustments to the conversion factor. The final update to the conversion 

factor was: -5.4 percent. Thus, the conversion factor for 2002 ($36.1992) was 

5.4 percent less than the conversion factor for 2001 ($38.2581). Despite the 

negative update in 2002, CBO estimates that payments under the physician fee 

schedule increased from $40.4 billion in 2001 to $44.2 billion in 2002. This is 

largely attributable to the increase in the volume of services provided to 

beneficiaries. 

 As noted, the law requires the fee schedule for the following year to be 

issued by November 1. However, due to technical complications, publication of the 

2003 fee schedule was first delayed until December 31, 2002. It would have 

provided for an additional 4.4 percent cut. It was revised on February 28, 2003 in 

response to the enactment of the Consolidated Appropriations Resolution, 2003 

(CAR) (P.L.108-7). As a result of the CAR provision, the update for 2003 is 

1.6 percent. As a result of the delays, the 2003 fee schedule became effective 

March 1, 2003. 

Table 2-31 shows how the 2003 conversion factor was calculated. The MEI 

for 2003 is 3.0 percent. The update adjustment factor (after applying the formula 

described above) is 0.989. An additional statutory reduction (-0.2 percent) applies 

in 2003. An additional budget neutrality adjustment (-0.4) is made to account for 

the increase in work relative values for anesthesia services resulting from the 5-year 

review. This results in a 2003 conversion factor of $36.7856. 

TABLE 2-31--CALCULATION OF THE 2003 CONVERSION FACTOR 

2002 Conversion Factor $36.1992 

Multiply by Update (product of: MEI plus 1 (1.030), update adjustment factor 

(0.989), and additional statutory reduction (.998, i.e., a 0.2 percent reduction)) x 1.0166 

Multiply by budget neutrality adjustment (- 0.4 percent) to account for increase 

in anesthesia work relative values x 0.9996 

2003 Conversion Factor $36.7856 

Source: Congressional Research Service. 

Bonus Payments 

 The law specifies that physicians who provide covered services in any rural 

or urban health professional shortage area (HPSA) are entitled to an incentive 

payment. This is a 10 percent bonus over the amount which would otherwise be 

paid under the fee schedule. The bonus is only paid if the services are actually 

provided in the HPSA, as designated under the Public Health Service Act. 
2-94 

Limits on Beneficiary Liability

 In General--Medicare payments are made for physicians' services after the 

annual deductible requirement of $100 has been satisfied. Payment is set at 80 

percent of the fee schedule with beneficiaries responsible for the remaining 20 

percent, which is referred to as coinsurance. Medicare payment is made either on 

an “assigned” or “unassigned” basis. By accepting assignment, physicians agree to 

take the Medicare fee schedule amount as payment in full. Thus, if assignment is 

accepted, beneficiaries are not liable for any additional out-of-pocket payments. In 

contrast, if assignment is not accepted, beneficiaries may be liable for charges in 

excess of the Medicare approved charge, subject to limits. This process is known as 

balance billing. 

 When a physician agrees to accept assignment on all Medicare claims in a 

given year, the physician is referred to as a participating physician. Physicians who 

do not agree to accept assignment on all Medicare claims in a given year are 

referred to as nonparticipating physicians. It should be noted that the term 

“nonparticipating physician” does not mean that the physician doesn=t deal with 

Medicare. Nonparticipating physicians still treat Medicare patients and receive 

Medicare payments for providing covered services.. There are a number of 

incentives for physicians to become participating physicians, the chief of which is 

that the fee schedule payment amount for nonparticipating physicians is only 95 

percent of the recognized amount paid to participating physicians. Additional 

incentives include more rapid claims payment and widespread distribution of 

participating physician directories. Nonparticipating physicians may not charge 

more than 115 percent of Medicare's allowed amount for any service. Medicare's 

allowed amount for nonparticipating physicians is set at 95 percent of that for 

participating physicians. Thus, nonparticipating physicians are only able to bill 

9.25 percent (115 percent times 95 percent) over the approved amount for 

participating physicians. 

 Mental Health Services Payment Limitation--Certain mental health services 

are subject to a payment limitation under which 50 percent cost-sharing, rather than 

20 percent cost-sharing applies. Services subject to the higher cost-sharing are 

services provided in connection with the treatment of mental, psychoneurotic, and 

personality disorders of a patient who is not an inpatient of a hospital. The term 

“mental, psychoneurotic, and personality disorders” is defined as the specific 

psychiatric conditions described in the American Psychiatric Association’s (APA) 

Diagnostic and Statistical Manual of Mental Disorders. The payment limitation 

applies only to treatment services. It does not apply to diagnostic services. Testing 

services performed to evaluate a patient's progress during treatment are considered 

part of treatment and are subject to the higher cost-sharing. The limitation does not 

apply to partial hospitalization services that are not directly provided by a 

physician. 

Assignment and Participation Data

 The total number of assigned claims as a percentage of total claims received 
2-95 

by Medicare carriers is known as the assignment rate. Table 2-32 shows the 

assignment rate for services provided by physicians, limited licensed practitioners 

(podiatrists, chiropractors, and optometrists) and non-physician practitioners (such 

as nurse practitioners and clinical social workers). The assignment rate declined 

until the mid-1970s when the rate leveled off at about 50 percent. Since 1985, the 

rate has increased significantly, rising to 98.3 percent of claims and 99.3 percent of 

covered charges in 2002. Table 2-33 shows the state-by-state assignment rates for 

services provided by physicians and limited licensed practitioners. Virtually all of 

these claims (when measured as a percentage of covered charges) are paid on 

assignment. In 2002, the lowest such rate was in South Dakota and Idaho 

(94.9 percent) while the highest rate (100 percent) was in Massachusetts. 

 Physician participation rates have risen significantly since the inception of 

the participation program in 1984. For the calendar year 2002 participation period, 

the physician participation rate (including limited licensed practitioners) had risen 

to 89.7 percent, accounting for 96.7 percent of covered charges (Table 2-34). 

Specialists in cardiovascular disease had the highest assignment rates. Table 2-35 

shows the participation rates by specialty. Table 2-36 shows the percentage of 

participating physicians and limited licensed practitioners as a percentage of total 

physicians and limited licensed practitioners for each State. 

TABLE 2-32--NET ASSIGNMENT RATES, IN PERCENT, SELECTED 

FISCAL YEARS 1969-2002 

Fiscal Year Claims Covered Charges 

1969 61.0 NA 

1970 61.2 NA 

1975 51.9 47.7 

1980 51.4 51.3 

1985 67.7 67.4 

1990 80.9 84.8 

1991 82.5 87.6 

1992 85.5 90.8 

1993 89.2 94.0 

1994 92.1 96.0 

1995 94.2 97.1 

1996 95.6 97.9 

1997 96.5 98.3 

1998 97.2 98.6 

1999 97.5 98.8 

2000 97.8 99.0 

2001 98.1 99.1 

2002 98.3 99.3 

1

 Both measures of assignment exclude claims from hospital-based physicians and grouppractice prepayment plans that are considered assigned by definition. 

NA-Not available. 

Source: Centers for Medicare & Medicaid Services. 
2-96 

TABLE 2-33--PHYSICIAN ASSIGNMENT RATES AS PERCENT OF 

COVERED CHARGES BY STATE, SELECTED YEARS 1985-2002 

[In Percent]

Census division/State 1985 1990 1995 2000 2001 2002 

National 65.5 83.0 96.8 99.1 99.2 99.4 

New England 

 Maine 81.5 92.4 99.1 99.8 99.8 99.8 

 New Hampshire 56.5 69.9 96.9 99.3 99.4 99.5 

 Vermont 64.3 94.7 99.1 99.6 99.6 99.7 

 Massachusetts 1

 93.7 99.5 99.8 99.9 99.9 99.9 

 Rhode Island 94.0 98.7 99.9 99.9 100.0 100.0 

 Connecticut 57.6 84.7 97.6 99.9 99.1 99.2 

Middle Atlantic 

 New York 70.3 81.9 95.6 98.6 98.8 98.9 

 New Jersey 62.3 73.0 92.6 98.0 98.3 98.6 

 Pennsylvania 88.1 95.7 99.6 99.8 99.8 99.9 

East North Central 

 Ohio 50.8 82.6 99.7 99.9 99.9 99.9 

 Indiana 49.6 77.2 96.5 99.4 99.4 99.5 

 Illinois 51.7 75.9 98.6 98.8 99.1 99.2 

 Michigan 88.2 94.5 99.0 99.7 99.7 99.7 

 Wisconsin 51.7 68.2 94.2 99.4 99.5 99.6 

West North Central 

 Minnesota 30.6 47.6 86.2 95.7 96.3 96.7 

 Iowa 46.9 69.8 99.2 99.2 99.3 99.4 

 Missouri 2

 50.1 74.9 96.7 99.3 99.4 99.4 

 North Dakota 30.5 55.0 92.9 99.4 99.4 99.5 

 South Dakota 18.7 39.2 67.0 92.8 93.8 94.9 

 Nebraska 47.3 64.9 89.6 96.8 97.5 97.9 

 Kansas 3

 72.7 88.8 97.1 99.6 99.6 99.6 

South Atlantic 

 Delaware 81.8 90.5 97.8 99.3 99.4 99.5 

 Maryland 4

 81.6 91.4 98.1 99.2 99.3 99.4 

 District of Colombia 5

 78.1 87.5 96.6 98.7 98.8 98.9 

 Virginia 6

 66.4 87.3 98.4 99.6 99.7 99.7 

 West Virginia 66.7 93.2 99.1 99.6 99.8 99.8 

 North Carolina 60.3 80.8 96.7 99.0 99.2 99.3 

 South Carolina 64.9 87.1 97.0 99.4 99.5 99.6 

 Georgia 63.9 83.5 97.4 99.3 99.4 99.5 

 Florida 62.2 84.1 98.4 99.5 99.6 99.6 

East South Central 

 Kentucky 50.3 84.8 97.9 99.5 99.5 99.6 

 Tennessee 55.6 84.0 98.3 99.6 99.6 99.7 

 Alabama 74.6 92.3 98.9 99.7 99.8 99.8 

 Mississippi 63.5 88.1 97.8 99.4 99.6 99.7 

West South Central 

 Arkansas 72.6 92.0 98.7 99.6 99.7 99.8 

 Louisiana 51.0 88.0 98.1 99.5 99.6 99.7 

 Oklahoma 39.0 68.2 94.2 99.1 99.3 99.3 

 Texas 63.0 79.9 96.6 99.2 99.3 99.4 

Mountain 
2-97 

TABLE 2-33--PHYSICIAN ASSIGNMENT RATES AS PERCENT OF 

COVERED CHARGES BY STATE, SELECTED YEARS 1985-2002-

continued 

[In Percent] 

Census division/State 1985 1990 1995 2000 2001 2002 

 Montana 42.6 53.0 86.3 98.6 98.8 99.0 

 Idaho 25.2 36.1 71.7 90.2 93.4 94.9 

 Wyoming 33.8 43.9 81.8 93.6 94.5 95.6 

 Colorado 56.0 70.4 93.5 98.1 98.4 98.7 

 New Mexico 58.3 76.1 95.2 98.8 99.0 99.1 

 Arizona 52.8 76.2 92.8 95.0 95.6 96.1 

 Utah 63.1 80.4 96.6 99.5 99.6 99.7 

 Nevada 81.6 96.0 99.4 99.8 99.8 99.9 

Pacific 

 Washington 45.5 54.8 93.4 98.8 99.1 99.3 

 Oregon 38.7 59.9 92.3 98.2 98.5 98.8 

 California 71.3 84.4 97.3 99.1 99.3 99.4 

 Alaska 54.4 79.6 96.2 98.9 99.1 99.2 

 Hawaii 61.2 82.9 98.7 99.5 99.5 99.5 1

 Massachusetts enacted a Medicare mandatory assignment provision, effective April 1986. The fact that the 

assignment rates shown here are not 100 percent may be explained by the inclusion in the data base of billings by 

practitioners other than allopathic and osteopathic physicians, which are included in the Medicare statutory definition 

of "physician". 

2

 Starting with the fiscal year 1993 includes data for all counties in Missouri plus two counties on the State border. 

3

 Starting with the fiscal year 1993 includes data for all counties in Kansas excluding two counties on the State border. 

4

 Starting with the fiscal year 1993 includes data for all counties in Maryland excluding two counties on the State 

border. 

5

 Starting with the fiscal year 1993 includes data for the District of Columbia plus two counties in Maryland and 

located on the State border plus a few counties and cities located in Virginia, near the State border. 

6

 Starting with the fiscal year 1993 includes data for all counties in Virginia excluding a few counties and cities near the 

State border. 

Source: Centers for Medicare & Medicaid Services. 

TABLE 2-34--MEDICARE PHYSICIAN PARTICIPATION RATES: PERCENT 

OF PHYSICIANS AND LIMITED LICENSED PRACTITIONERS WITH 

AGREEMENTS AND THEIR SHARE OF ALLOWED CHARGES, 1984-2002 

Participation Period Percent of Physicians 

Signing Agreements 

Participating Physicians Covered Charges 

as a Percent of Total 1

October 1984-September 1985 30.4 36.0 

October 1985-April 1986 28.4 36.3 

April 1986-December 1986 28.3 38.7 

January 1987-March 1988 30.6 48.1 

April 1988-December 1988 37.3 57.9 

January1989-March 1990 40.2 62.0 

April 1990-December 1990 45.5 67.2 

January 1991-December 1991 47.6 72.3 

January 1992-December 1992 52.2 78.8 

January 1993-December 1993 59.8 85.5 

January 1994-December 1994 64.8 89.4 

January 1995-December 1995 72.3 92.6 

January 1996-December 1996 77.5 94.3 

January 1997-December 1997 80.2 95.1 

January 1998-December 1998 82.8 95.7 

January 1999-December 1999 84.6 95.9 
2-98 

TABLE 2-34--MEDICARE PHYSICIAN PARTICIPATION RATES: PERCENT 

OF PHYSICIANS AND LIMITED LICENSED PRACTITIONERS WITH 

AGREEMENTS AND THEIR SHARE OF ALLOWED CHARGES, 1984-2002-

continued

Participation Period Percent of Physicians 

Signing Agreements 

Participating Physicians Covered Charges 

as a Percent of Total 1

January 2000-December 2000 88.3 96.2 

January 2001-December 2001 88.7 96.4 

January 2002-December 2002 89.7 96.7 

1

 Rates reflect covered charges for physician services processed during period. 

2

 The actual participation period was May through December of 1986, and participation agreements were in effect at 

that time. However, charge data are generally collected by quarter; thus, the data for the last three quarters of 1986 

are used as a proxy for the participation period. 

Source: Centers for Medicare & Medicaid Services. 

TABLE 2-35--PARTICIPATION RATES AS PERCENTAGE OF 

PHYSICIANS, BY SPECIALTY FOR SELECTED PARTICIPATION 

PERIODS, 1990-20021

 

1990 1995 2000 2001 2002 

Physicians (M.D.s and D.O.s): 

 General practice 39.7 59.9 80.2 79.0 81.4 

 General surgery 55.8 80.2 93.3 92.5 93.0 

 Otology, laryngology, rhinology 45.2 77.1 91.8 91.3 92.1 

 Anesthesiology 30.8 73.9 93.7 92.3 92.8 

 Cardiovascular Disease 60.6 84.9 95.8 94.4 94.8 

 Dermatology 53.4 79.3 90.8 90.1 90.5 

 Family Practice 47.2 74.5 90.8 90.3 91.2 

 Internal Medicine 48.8 73.8 90.7 88.7 89.3 

 Neurology 53.1 78.9 92.1 89.9 90.5 

 Obstetrics-gynecology 48.8 72.5 86.8 86.3 86.9 

 Ophthalmology 55.6 81.2 93.3 92.8 93.6 

 Orthopedic surgery 53.7 82.6 93.8 93.1 93.6 

 Pathology 53.4 78.9 93.6 92.2 92.5 

 Psychiatry 41.6 58.7 79.1 79.6 80.8 

 Radiology 55.6 82.8 95.3 91.9 92.5 

 Urology 49.6 83.0 94.6 93.8 93.6 

 Nephrology 66.5 87.0 95.1 93.6 94.0 

 Clinic/other grp practice-not GPPP 68.7 79.4 91.6 92.7 93.5 

Limited license practitioners (LLP): 

 Chiropractor 26.2 42.6 59.4 63.0 64.5 

 Podiatry-surgical chiropody 54.0 79.2 90.7 91.6 92.3 

 Optometrist 54.0 66.9 78.4 80.0 80.9 1

 1990 is for April-December; all other years January-December. 

Note-Effective with the October 1, 1985 election period, carriers were instructed to count 

individuals only once, even if practicing in multiple settings. 

Source: CMS/OFM. 
2-99 

TABLE 2-36--PHYSICIAN AND LIMITED LICENSED PRACTITIONER 

PARTICIPATION RATES AS PERCENTAGE OF PHYSICIANS AND 

LIMITED LICENSED PRACTITIONERS, BY STATE, FOR SELECTED 

PARTICIPATION PERIODS 1985-2002 

State October 1985-

April 1986 1991 1995 2000 2001 2002 

Alabama 58.2 82.7 90.5 95.5 96.0 96.1 

Alaska 10.4 53.8 77.1 82.9 83.7 86.1 

Arizona 15.4 61.3 87.1 90.3 88.5 90.6 

Arkansas 45.2 59.9 74.8 94.6 95.1 95.5 

California 30.0 60.8 74.5 85.5 78.5 78.6 

Colorado 28.1 35.3 65.2 87.4 88.4 89.5 

Connecticut 22.2 29.3 57.8 89.3 89.9 90.5 

Delaware 23.9 43.9 68.0 85.2 86.9 92.0 

District of Columbia 30.5 39.8 63.0 84.1 85.2 90.8 

Florida 25.7 36.5 68.0 90.1 92.1 92.9 

Georgia 33.1 53.6 86.3 89.4 89.5 90.8 

Hawaii 20.6 57.3 82.8 90.3 91.0 94.3 

Idaho 11.0 19.5 54.7 77.6 79.4 80.8 

Illinois 23.1 46.9 73.3 90.9 92.4 92.6 

Indiana 18.2 45.1 72.8 83.2 85.1 85.5 

Iowa 29.7 51.9 81.1 93.2 94.0 94.2 

Kansas 45.4 62.6 84.4 94.2 94.4 94.6 

Kentucky 24.3 59.5 83.4 93.8 93.3 93.7 

Louisiana 18.8 42.9 57.4 91.7 92.1 92.3 

Maine 35.4 50.3 68.9 94.3 93.6 93.7 

Maryland 30.4 45.3 88.1 93.4 94.2 94.1 

Massachusetts 48.1 50.8 64.7 94.9 91.7 92.1 

Michigan 44.0 53.7 75.3 95.3 96.6 96.9 

Minnesota 18.5 29.3 58.6 79.3 79.9 80.4 

Mississippi 19.1 42.7 59.4 83.5 84.6 85.6 

Missouri 35.2 49.0 87.6 87.9 90.0 95.6 

Montana 24.3 24.8 70.1 86.6 88.6 89.9 

Nebraska 20.0 56.5 82.5 92.7 93.2 93.8 

Nevada 21.7 72.9 91.2 94.1 91.2 96.2 

New Hampshire 26.9 32.7 60.4 93.1 90.8 91.1 

New Jersey 18.0 29.6 54.9 82.8 84.5 87.4 

New Mexico 17.7 49.7 78.1 89.9 91.1 92.6 

New York 20.8 34.6 59.2 80.3 81.0 81.2 

North Carolina 39.1 58.1 77.6 89.6 90.0 91.1 

North Dakota 10.9 43.9 81.8 95.5 96.3 97.2 

Ohio 21.7 52.5 90.5 93.9 94.2 95.5 

Oklahoma 13.8 39.0 72.3 91.7 92.5 93.9 

Oregon 18.5 46.7 79.7 90.7 91.2 92.8 

Pennsylvania 50.8 45.9 67.3 85.5 94.3 95.8 

Rhode Island 46.7 67.8 80.9 72.5 74.1 75.6 

South Carolina 17.9 57.9 76.1 91.4 91.5 92.1 

South Dakota 8.0 20.6 51.7 86.7 87.7 89.3 

Tennessee 21.1 63.7 80.6 91.2 91.3 92.2 

Texas 19.7 38.9 76.9 85.4 86.5 88.0 
2-100 

TABLE 2-36--PHYSICIAN AND LIMITED LICENSED PRACTITIONER 

PARTICIPATION RATES AS PERCENTAGE OF PHYSICIANS AND 

LIMITED LICENSED PRACTITIONERS, BY STATE, FOR SELECTED 

PARTICIPATION PERIODS 1985-2002-continued

State October 1985-

April 1986 1991 1995 2000 2001 2002 

Utah 29.3 65.6 85.9 94.6 95.1 96.2 

Vermont 41.5 45.4 68.8 92.9 94.8 94.9 

Virginia 29.6 48.1 55.6 87.3 87.6 88.6 

Washington 23.6 46.1 76.2 92.9 93.8 96.2 

West Virginia 22.9 66.3 87.2 93.5 94.2 94.8 

Wisconsin 31.0 46.8 81.2 90.9 92.7 94.5 

Wyoming 18.3 39.1 66.4 87.1 87.3 87.7 

National 28.4 47.6 72.3 88.3 88.7 89.7 

Note-Other practitioners includes limited license practitioners and non-physician practitioners. 

Source: CMS/OFM. 

NONPHYSICIAN PRACTITIONER SERVICES 

 Medicare covers certain services provided by nonphysician practitioners 

such as nurse practitioners and physician assistants. These practitioners are paid 

under the physician fee schedule and are required to accept assignment on all 

claims. Nonphysician practitioners are different from limited licensed practitioners 

(such as podiatrists and chiropractors) who have the option of whether or not to 

accept assignment. 

Physician Assistants and Nurse Practitioners 

 Separate payments are made for physician assistant services, when provided 

under the supervision of a physician. Separate payments are also made for nurse 

practitioner services, provided in collaboration with a physician. Payment for these 

services can only be made if no facility or other provider charges are paid in 

connection with the service. Payment equals 80 percent of the lesser of either the 

actual charge or 85 percent of the fee schedule amount for the same service if 

provided by a physician. For assistant-at-surgery services, payment equals 80 

percent of the lesser of either the actual charge or 85 percent of the amount that 

would have been recognized for a physician serving as an assistant- at-surgery. The 

physician assistant may be in an independent contractor relationship with the 

physician. 

Certified Nurse Midwife Services 

 Certified nurse midwife services are paid at 65 percent of the physician fee 

schedule amount. 

Certified Registered Nurse Anesthetists 

 Certified registered nurse anesthetists are paid under the same fee schedule 

used for anesthesiologists (see above). Payments for services furnished by an 

anesthesia care team composed of an anesthesiologist and a certified registered 
2-101 

nurse anesthetist are capped at 100 percent of the amount that would be paid if the 

anesthesiologist were practicing alone. The payments are evenly split between each 

practitioner. 

Clinical Psychologists and Clinical Social Workers 

 Diagnostic and therapeutic services provided by clinical psychologists are 

paid under the physician fee schedule. Payments for services provided by clinical 

social workers are equal to 75 percent of the amount allowed for clinical 

psychologists. Some services are subject to the psychiatric services limitation 

which limits Medicare payments for some services to 50 percent of incurred 

expenses. 

Physical or Occupational Therapists 

 Payments for physical therapy and occupational therapy services are made 

under the physician fee schedule. In 1999, an annual $1,500 per-beneficiary limit 

applied to all outpatient physical therapy services (including speech-language 

pathology services), except for those furnished by a hospital outpatient department 

(OPD). A separate $1,500 limit applied to all outpatient occupational therapy 

services except for those furnished by hospital OPDs. Therapy services furnished 

as incident to physicians= professional services were included in these limits. The 

$1,500 limits were to apply each year, with updates for inflation beginning in 2002. 

However, BBRA 1999 suspended application of these limits in 2000 and 2001 and 

BIPA suspended application in 2002. Thus, no limits applied in these 3 years. 

CMS implemented the limit $1,590 (reflecting inflation updates) 

September 1, 2003. 

CLINICAL LABORATORY SERVICES 

Coverage

 Medicare provides coverage for diagnostic clinical laboratory services. 

These services may be provided by an independent laboratory, a physician's office 

laboratory, or a hospital laboratory to outpatients. Laboratories must meet the 

requirements of the Clinical Laboratory Improvement Act Amendments of 1988. 

This legislation, which focused on the quality and reliability of medical tests, 

expanded Federal oversight to virtually all laboratories in the country, including 

physician office laboratories. 

 BBA 1997 required the Secretary to adopt uniform coverage policies for 

laboratory tests using a negotiated rulemaking process. The policies would be 

designed to eliminate variation among carriers and to simplify administrative 

requirements. A final rule detailing national coverage and administrative policies 

for labs paid under Part B was published on November 23, 2001. It was effective 

November 25, 2002, except that labs could request up to an additional 12 months to 

make the necessary changes to their computer systems. 

 The rule establishes 23 national coverage determinations (NCDs) for the 

most commonly ordered lab tests. For each of the 23 clinical diagnosis lab service 
2-102 

NCDs listed in the final rule, there is a list of current procedural technology (CPT) 

codes identifying the test, panel of tests, or group of tests covered under the NCD. 

In addition, for each NCD there are 3 lists of diagnosis codes, known as ICD-9-CM 

codes (International Classification of Diseases, Ninth Revision, Clinical 

Modification). The first list, “ICD-9-CM codes covered by Medicare” includes 

codes where there is a presumption of medical necessity, though the claim may be 

subject to review. The second list, “ICD-9-CM codes denied,” includes lists of 

codes that are never covered. The third list, “ICD-9-CM codes that do not support 

medical necessity” include diagnoses that generally are not covered for the test, but 

for which there are limited exceptions. Additional documentation could support a 

determination of medical necessity in certain cases. For each of the 23 NCDs, each 

ICD-9-CM code falls into one of the 3 ICD-9-CM lists. 

Payment

 Since 1984, Medicare has paid for clinical laboratory services on the basis 

of a fee schedule. Fee schedules have been established on a carrier service area 

basis. The law set the initial payment amount for services performed in physicians' 

offices or independent laboratories at the 60th percentile of the prevailing charge 

established for the 12-month period beginning July 1, 1984. Similarly, the initial 

fee schedule payment amount for services provided by hospital-based laboratories 

serving hospital outpatients was set at the 62d percentile of the prevailing charge 

level. Subsequent amendments to the payment rules limited application of the 

hospital fee schedule to “qualified hospitals.” A qualified hospital is a sole 

community hospital (as that term is used for payment purposes under Medicare's 

hospital inpatient prospective payment system (IPPS)) which provides some 

clinical diagnostic tests 24 hours a day in order to serve a hospital emergency room 

which is available to provide services 24 hours a day, 7 days a week. 

 Payments under the fee schedule equal the lesser of the actual charge billed 

for the test, the local fee or the national limitation amount (NLA). For tests for 

which NLAs were set before 2001, the NLA is 74 percent of the median of local 

fees. For tests for which NLAs are first established after such date, the NLA is 100 

percent of the median of the local fees. A national minimum payment amount is 

established for Pap smears; in 2003, this minimum payment is $14.76. 

 The fee schedule payment amounts have been increased periodically since 

1984 to account for inflation. The updates have generally occurred on January 1 of 

each year. BBA 97 eliminated the updates for 1998-2002. The update for 2003 is 

1.1 percent. 

 Payment for clinical laboratory services (except for those provided by a 

rural health clinic) may only be made on the basis of assignment. Payment for 

clinical laboratory services equals 100 percent of the fee schedule amount; no 

beneficiary cost sharing is imposed. 
2-103 

DURABLE MEDICAL EQUIPMENT AND PROSTHETICS AND 

ORTHOTICS 

 Medicare Part B covers a wide variety of medical supplies if they are 

medically necessary and are prescribed by a physician. Under the program, durable 

medical equipment (DME) includes such items as hospital beds, blood glucose 

monitors, and wheelchairs. The benefit also includes related supplies, such as drugs 

and biologicals that are necessary for the effective use of the product. Guidelines 

define DME as equipment that: (1) can withstand repeated use; (2) is used to serve 

a medical purpose; (3) generally is not useful in the absence of an illness or injury; 

and (4) is appropriate for use in the home. All of these requirements must be met 

before an item can be covered. 

 Medicare also covers prosthetic devices. These are defined as items that 

replace all or part of an internal body organ, such as colostomy bags, pacemakers, 

and breast prostheses for postmastectomy patients. Prosthetics and orthotics include 

such items as leg, arm, back and neck braces, and artificial legs, arms, and eyes. 

Reimbursement for durable medical equipment

 Medicare pays for DME on the basis of a fee schedule originally established 

by the Omnibus Budget Reconciliation Act of 1987 (OBRA 1987). Under the DME 

fee schedule, Medicare pays 80 percent of the lower of either the item=s actual 

charge or the fee schedule amount. The beneficiary is responsible for the remaining 

20 percent. Under the fee schedule, covered DME items are classified into five 

groups: (1) inexpensive or routinely purchased DME; (2) items requiring frequent 

and substantial servicing; (3) customized items (equipment constructed or modified 

substantially to meet the needs of an individual patient); (4) other items of DME 

(frequently referred to as the >>capped rental== category); and (5) oxygen and oxygen 

equipment. Some items that do not meet the definition of DME, such as disposable 

surgical dressings, are also covered under the fee schedule. 

 In general, the fee schedule payment rates for DME are determined locally 

(on a statewide basis). However, these local payments are subject to floor and 

ceiling limits determined nationally. Medicare will not pay less than 85 percent of 

the weighted average of all local payment amounts (floor), and will not pay more 

than 100 percent of this average (ceiling). 

 Prosthetics and orthotics are also paid according to a fee schedule similar to 

the DME fee schedule. The payment rates are determined regionally (there are 10 

regions) and are subject to national limits which also have ceilings and floors. The 

floor is 90 percent of the weighted average of all regional payment amounts, and 

the ceiling is 120 percent of this weighted average. 

 The fee schedules are generally updated annually by the CPIBU. However, 

BBA 1997 eliminated updates for DME for fiscal years 1998B2002. In 2003, the 

update returned to the CPI-U. The update for prosthetics and orthotics was limited 

to 1.0 percent through fiscal year 2002. Subsequent legislation temporarily restored 

payment updates. For oxygen and oxygen equipment, BBA 1997 set the national 
2-104 

payment limits beginning in fiscal year 1999 to 70 percent of 1997 levels. 

 Medicare pays for a few items of medical equipment on a reasonable cost 

basis, rather than under the fee schedule. These include medical supplies; home 

dialysis equipment; therapeutic shoes; parenteral and enteral nutrients (PEN), 

equipment, and supplies; transfusion medicine; and blood products. BBA 1997 

authorized the Secretary to establish fee schedules for these items. The final 

regulation, issued August 2001, however, established a fee schedule only for PEN. 

 Its amounts are based on the reasonable charges that would have been used in 

2002. It will be updated by the CPI-U. 

Table 2-37 shows total Medicare spending in calendar year 2001 for DME, 

prosthetics and orthotics, and certain other items. 

TABLE 2-37--MEDICARE SPENDING FOR DURABLE MEDICAL 

EQUIPMENT, PROSTHETICS, ORTHOTICS, AND CERTAIN 

OTHER ITEMS, CALENDAR YEAR 2001 

Category Medicare Spending 

Surgical Dressings $37,740,571 

Supplies/Accessories $327,272,640 

Capped Rental $1,537,862,990 

Customized Items $49,339 

Oxygen $1,959,620,305 

Prosthetics/Orthotics $933,570,890 

Inexpensive/Routine $1,066,078,939 

Items w/Frequent Maint. $133,180,137 

Other $163,926,394 

Parental/Enteral $719,725,080 

DME to Admin Drugs $847,894,411 

 Total $7,726,921,696 

Source: Centers for Medicare & Medicaid Services. 

 Inherent reasonableness authority--If the Secretary determines that using 

standard procedures to calculate payment for an item under the fee schedule results 

in an amount which is >>grossly excessive or grossly deficient and not inherently 

reasonable,== the Secretary is authorized to increase or decrease the payment amount 

accordingly. The authority to make these adjustments is generally referred to as the 

inherent reasonableness authority. It involves a complex procedure of investigation, 

commentary, and notification. 

 BBA 1997 sought to simplify the procedure and widen the application of 

this authority, requiring that new criteria be established for determining if a fee 

schedule charge was inherently unreasonable, and the factors to be used in 

determining charges that are realistic and equitable. Using these criteria, the 

Secretary would be permitted to adjust payment levels. An interim final rule was 

issued in December 2002. Significantly, the rule states that the inherent 

reasonableness authority will not be used in situations where there is less than a 15 

percent difference between the current payment rate and a proposed payment rate. 
2-105 

Administering the DME benefit

 CMS enters into contracts with insurance companies known as carriers 

under Part B of Medicare, to administer the program, i.e., to process claims and 

make payments. In the case of DME, administration is centralized in four regional 

carriers (known as DME regional carriers, or DMERCs) who are responsible for 

processing claims for all beneficiaries living within their areas. As a result of the 

consolidation, which occurred in 1992, variation in coverage policy and utilization 

patterns has been reduced. Suppliers provide Medicare beneficiaries with medical 

equipment and bill the regional carrier in their area. Before being issued a Medicare 

supplier number, suppliers must comply with various standards, including 

maintaining a physical location, being responsible for deliveries to beneficiaries 

and honoring all product warranties, and providing proof of appropriate liability 

insurance. 

Competitive bidding

 Investigations have shown that Medicare pays higher prices for certain 

medical supplies than those paid by other health care insurers and other government 

agencies, including the Department of Veterans Affairs. BBA 1997 provided 

authority for Medicare to establish five 3-year demonstration projects under which 

suppliers competitively bid for contracts to deliver specific items of DME to 

beneficiaries. The first project was established in 1999 in Polk County, Florida. 

Suppliers submitted bids, competing for the right to provide certain medical 

equipment to the 92,000 Medicare beneficiaries in the area. Bids were evaluated on 

the basis of quality and price. Numerous suppliers were chosen for each item to 

maintain beneficiary access. The demonstration project ended September 2002. A 

second demonstration project began operations in San Antonio, Texas, in February 

2001, where approximately 112,000 Medicare beneficiaries were involved. That 

project terminated in December 2002. CMS estimated that competitive bidding in 

the two projects resulted in overall savings of approximately 19.9 percent over fee 

schedule prices. 

HOSPITAL OUTPATIENT DEPARTMENT SERVICES 

 

Table 2-38 summarizes the history of Medicare payments for hospital 

outpatient services from 1974 through 2001. Medicare payments increased almost 

55-fold, from $323 million in 1974 to $17.7 billion in 2001, with annual rates of 

increase averaging as high as 26.5 percent from 1974 to 1984, falling to 13.3 

percent from 1984 to1994. Most recently, from 1995 to 2001, the annual rate of 

change has been 5.4 percent per year. The substantial rates of increase in OPD 

payments per Part B enrollee (from $14 in 1974 to $563 in 2001) reflect the 

increase in the volume of services provided in OPDs as well as growth in payments 

for those services under the retrospective cost-based payment system. Since 1974, 

hospital charges for outpatient services provided to Medicare beneficiaries 

increased by almost 20 percent per year, on average. Medicare's payments for OPD 

services increased by 16 percent per year during that time period. Medicare's 
2-106 

payments for covered OPD services as a proportion of hospital charges has declined 

from nearly 70 percent in 1983 to 25 percent in 2001. This declining ratio reflects 

primarily the high rates of increase in hospital charges and, to a lesser extent, limits 

on the rate of increase in Medicare's payments for outpatient services due to fee 

schedules and blended payment formulas. 

 

TABLE 2-38--MEDICARE HOSPITAL OUTPATIENT CHARGES 

AND REIMBURSEMENTS BY TYPE OF ENROLLMENT AND 

YEAR OF SERVICE, SELECTED YEARS 1974-2001 

Program Payments 

Year of 

Service 

Number of 

SMI 1 Enrollees 

(In Thousands)

Charges for 

Covered 

Services 

(In Thousands)

Amount 

(In Thousands) Per Enrollee 

Percent of 

Covered 

Charges 

All Enrollees 

1974 23,166,570 $535,296 $323,383 $14 60.4 

1980 27,399,658 2,076,396 1,441,986 52 69.4 

1984 29,415,397 5,129,210 3,387,146 115 66.0 

1985 29,988,763 6,480,777 4,082,303 136 63.0 

1990 32,635,800 18,346,471 8,171,088 250 44.5 

1991 33,239,840 22,016,673 8,612,320 259 39.1 

1992 33,956,460 26,799,501 9,941,391 293 37.1 

1993 34,642,500 32,026,576 10,938,545 316 34.2 

1994 35,178,600 36,323,649 11,813,522 336 32.6 

1995 2

 31,806,740 40,476,180 12,933,358 407 31.9 

1996 31,775,280 44,564,665 13,896,048 437 31.2 

1997 31,022,040 47,888,129 14,382,561 464 30.0 

1998 30,304,340 50,607,564 14,212,983 469 28.1 

1999 30,083,220 54,744,210 14,617,464 486 26.7 

2000 30,477,540 60,728,234 14,969,335 491 24.6 

2001 31,513,140 71,066,998 17,739,919 563 25.0 

Average Annual Rate of Growth

1974-2001 1.1 19.8 16.0 14.7 -- 

1974-1984 2.4 25.4 26.5 23.4 -- 

1984-1994 1.8 21.6 13.3 11.3 -- 

1995-2001 -0.2 9.8 5.4 5.6 -- 

Aged

1974 21,421,545 394,680 220,742 10 55.9 

1980 24,680,432 1,517,183 1,030,896 42 69.9 

1984 26,764,150 4,122,859 2,679,571 100 65.0 

1985 27,310,894 5,210,762 3,211,744 118 61.6 

1990 29,691,180 15,384,510 6,563,454 221 42.7 

1991 30,183,480 18,460,835 6,842,329 227 37.1 

1992 30,722,080 22,253,657 7,741,774 252 34.8 

1993 31,162,480 26,556,415 8,522,089 273 32.1 

1994 31,443,800 29,768,892 9,116,610 290 30.6 

1995 2

 28,020,760 33,110,441 9,900,199 353 29.9 

1996 27,849,640 36,099,678 10,542,937 379 29.2 

1997 27,046,120 38,728,484 10,861,323 402 28.0 

1998 26,243,140 41,945,972 10,681,369 407 26.0 

1999 25,918,800 44,272,508 10,903,014 421 24.6 
2-107 

TABLE 2-38--MEDICARE HOSPITAL OUTPATIENT CHARGES 

AND REIMBURSEMENTS BY TYPE OF ENROLLMENT AND 

YEAR OF SERVICE, SELECTED YEARS 1974-2001-continued

Program Payments 

Year of 

Service 

Number of 

SMI 1 Enrollees 

(In Thousands)

Charges for 

Covered 

Services 

(In Thousands)

Amount 

(In Thousands) Per Enrollee 

Percent of 

Covered 

Charges 

2000 26,173,700 48,940,902 11,029,355 421 22.5 

2001 26,974,140 57,262,254 13,142,167 487 23.0 

Average Annual Rate of Growth

1974-2001 0.9 20.2 16.3 15.5 -- 

1974-1984 2.3 26.4 28.4 25.9 -- 

1984-1994 1.6 21.9 13.0 11.2 

1995-2001 -0.6 9.6 4.8 5.5 -- 

Disabled

1974 1,745,019 140,617 102,641 59 73.0 

1980 2,719,226 559,213 411,090 152 73.5 

1984 2,651,247 1,006,351 707,575 267 70.3 

1985 2,677,869 1,270,015 870,560 325 68.5 

1990 2,944,620 2,961,961 1,607,634 546 54.3 

1991 3,056,360 3,555,838 1,769,991 579 49.8 

1992 3,234,380 4,545,843 2,199,617 680 48.4 

1993 3,480,020 5,470,161 2,416,456 694 44.2 

1994 3,734,800 6,463,757 2,696,912 722 41.7 

1995 2

 3,785,980 7,465,739 3,033,158 801 40.6 

1996 3,925,640 8,464,987 3,353,211 854 39.6 

1997 3,975,920 9,159,645 3,521,238 886 38.4 

1998 4,061,200 9,561,592 3,531,614 870 36.9 

1999 4,164,420 10,471,702 3,714,450 892 35.5 

2000 4,303,840 11,787,331 3,939,980 915 33.4 

2001 4,303,840 13,804,744 4,597,752 1,013 33.3 

Average Annual Rate of Growth

1974-2000 3.6 18.5 15.1 11.1 -- 

1974-1984 4.3 21.8 21.3 16.3 -- 

1984-1994 3.5 20.4 14.3 10.5 

1995-2001 3.1 10.8 7.2 4.0 -- 

1

 1974 is the first full year of coverage for disabled beneficiaries under Medicare. 2

 Beginning in 1995, the utilization rates per 1,000 enrollees do not reflect managed care 

enrollment; that is, Medicare enrollees in managed care plans are not included in the 

denominator used to calculate the utilization rates. 

Note: Numbers may not add to totals because of rounding. Hospital outpatient services 

include clinics or hospital-based renal dialysis facility services, and surgical facility or 

hospital-based ambulatory surgical center services provided to hospital outpatient 

Source: Centers for Medicare & Medicaid Services, Office of Research, Development and 

Information 

 As Table 2-39 shows, although the number of hospitals has fallen over past 

decade (from 5,191 in 1991 to 4,347 in 2001), the proportion of these hospitals that 

offer outpatient surgery and emergency services has increased. Almost all 

hospitals provide outpatient services and a significant percentage provide outpatient 

surgery. 
2-108 

 

TABLE 2-39--PROVIDERS OF HOSPITAL OUTPATIENT SERVICES, 

SELECTED YEARS 1991-2001 

Percentage offering 

Year 

Number of 

hospitals Outpatient 

Services 

Outpatient 

Surgery 

Emergency 

Services 

1991 5,191 92 79 91 

1997 4,976 93 81 92 

2001 4,347 94 84 93 

Note: Excludes long-term and alcohol and drug abuse hospitals. 

Source: MedPAC analysis of Medicare provider of service file. 

 Medicare beneficiaries receive a wide range of services in hospital 

outpatient departments (HOPD), from injections to surgical procedures under 

general anesthesia. Services provided in HOPDs which are paid under Medicare 

Part B include: (1) emergency room and clinic services; (2) operating and recovery 

room services; (3) laboratory and pharmacy services; (4) physical therapy and 

rehabilitation services; (5) DME; and (6) chemotherapy and radiation therapy. 

HOPDs also provide diagnostic and preventive procedures such as radiology, 

computer axial tomography (CAT) scans, magnetic resonance imaging, 

endoscopies, and colonoscopies. Table 2-40 shows the percent distribution of 

HOPD charges by type of service provided to Medicare beneficiaries in 2001. 

Radiology and laboratory services comprise about a third of the total hospital 

outpatient charges. 

TABLE 2-40--PERCENT DISTRIBUTION OF HOSPITAL OUTPATIENT 

DEPARTMENT CHARGES UNDER MEDICARE, 

BY TYPE OF SERVICE, 2001 

Service Percent of Charges 

Radiology 21.6 

Laboratory 12.5 

Operating Room 11.5 

End-Stage Renal Disease 5.8 

Pharmacy 4.2 

Emergency Room 4.0 

Clinic 1.5 

Rehabilitation 2.3 

Medical/Surgical Supplies 8.1 

All Other1

 28.5 1

 Includes computerized axial tomography, durable medical equipment, blood, and so forth. 

Source: Centers for Medicare & Medicaid Services, Office of Research, Development and 

Information. 

 In 2001, about 62 percent of the Medicare beneficiaries that received feefor-service Medicare used hospital outpatient services; about 150 million outpatient 

services were paid for under the outpatient prospective payment system (OPPS) 

implemented in short-term general hospitals. In 2001, the first full year of the new 

outpatient payment system, OPPS spending was $18.4 billion, including 
2-109 

$10.4 billion by the program and $8.0 billion in beneficiary cost sharing. In 2001, 

beneficiary cost sharing (which has historically been higher for hospital outpatient 

services than the typical 20 percent cost sharing for other Part B services) was 

about 42 percent of total payments. 

Background

 In the early years of the Medicare program, Medicare paid for both inpatient 

and outpatient hospital care based on a hospital's reasonable costs attributable to 

providing covered services for Medicare beneficiaries. Using these retrospective 

payment systems, Medicare paid the allowable costs incurred in providing care, the 

amount of which was determined and made after the service was rendered. 

Medicare=s payment systems for hospital inpatient care and outpatient services were 

separated in 1983 when a new prospective system was implemented for inpatient 

care. Under that arrangement, a hospital receives a fixed payment, known in 

advance of providing care, covering all care and services required by a patient 

during a hospital stay (exclusive of physician fees) and determined by the 

diagnosis-related group (DRG) into which the patient is classified at admission. 

However, outpatient services remained under the costs-or-charges retrospective 

payment arrangement. Throughout the 1980s, Medicare payments for hospital 

outpatient services grew as the volume of services provided in that setting 

increased. Although growth in the Medicare population contributed to increased 

utilization of outpatient care, a substantial share of the growth in the volume of 

outpatient services is attributable to advances in medicine and technology that 

permit procedures formerly restricted to the inpatient hospital setting to be provided 

safely on an outpatient basis. Aggressive management of inpatient utilization 

attributed to the incentives inherent in the IPPS payment system may also have 

influenced the shift in care from hospital inpatient to hospital outpatient 

departments. Outpatient services have become an important revenue source for 

hospitals; outpatient revenue is relatively more important to rural than to urban 

hospitals. 

 Since the early 1980s, Medicare's payments for HOPD services have grown 

for reasons other than increased volume, and that growth is often attributed to the 

lack of incentives for efficiency or cost control inherent in the retrospective costbased payment system. Congress sought to contain the rate of increase in Medicare 

payments for certain outpatient services by requiring implementation of fee 

schedules to pay for those services. For example, Congress required the Health 

Care Financing Administration (HCFA, now called the Centers for Medicare & 

Medicaid Services, or CMS) to establish fee schedules for many outpatient 

diagnostic laboratory procedures and tests; for orthotics, prosthetics, and DME; 

dialysis for persons with end-stage renal disease (ESRD); and surgeries that might 

also take place in another outpatient setting such as ambulatory surgical centers 

(ASCs). In the Omnibus Budget Reconciliation Acts of 1986 and 1990, Congress 

directed the Secretary of Health and Human Services (the Secretary) to develop a 

PPS for all HOPD care. In addition, to achieve more immediate savings, legislation 

required across-the-board reductions in Medicare payments for hospital operating 
2-110 

costs and capital costs (including those associated with outpatient care) starting in 

1990. 

 Over time, a fairly complex set of Medicare payment rules for outpatient 

hospital services evolved. Although Medicare implemented fee schedules for some 

HOPD services, payment for other services remained under the retrospective 

payment system. For instance, payments for clinic and emergency room visits 

were paid based on the lesser of a hospital=s reasonable costs or customary charges. 

 Certain surgeries carried out in the HOPDs, but which are also approved by 

Medicare to be provided in ASCs were paid the lower of costs, charges, or a 

blended payment that incorporated the ASC fee schedule amount (again, excluding 

physicians service which are paid separately). Payment for certain radiology 

services and diagnostic procedures were based on a blended payment that included, 

in part, the Medicare fee schedule for physician services. Moreover, these blended 

payment calculations varied among different types of hospitals. 

 The calculation of a beneficiary=s coinsurance amount was similarly 

complex. A beneficiary=s coinsurance payment was calculated based on 20 percent 

of the hospital=s charges for those services where Medicare=s payment was based on 

80 percent of the lower of reasonable costs or customary charges. For most 

services, Medicare=s payment was offset by the beneficiary=s payment, so that 

hospitals were not paid more than 100 percent of the Medicare approved amount. 

Over time, as charges for hospital outpatient services increased faster than hospital 

costs (and Medicare=s payments), beneficiaries= coinsurance payments began to 

represent a larger and larger share of total payments to hospitals for outpatient 

services. Also, for certain services, such as ASC approved surgical procedures, 

Medicare=s program payment was not fully reduced by the beneficiary=s 

coinsurance payment; hospitals received payments that were greater than the 

Medicare approved amount. These formula driven overpayments (FDOs) were 

estimated to be approximately $850 million by industry representatives at the time 

of implementation of OPPS. 

 Despite implementation of fee schedules, blended payment amounts, and 

across-the-board reductions in payments, Medicare HOPD payments rose at an 

annual rate of over 12 percent from 1983 to 1997 and increased from 7 percent to 

20 percent as a share of all Medicare payments to hospitals. Many saw the 

patchwork payment arrangements for outpatient services as fraught with 

disincentives for hospitals to provide care efficiently. Accordingly, BBA 1997 

extended the across-the-board reductions of 5.8 percent for operating costs and 10 

percent for capital costs through 1999 and directed the Secretary to implement 

OPPS in 1999. BBA 1997 also eliminated the formula-driven overpayment, 

effective at the start of FY1998, a move that resulted in an almost immediate 

reduction in payments to hospitals. The legislation established a buy-down 

procedure to reduce beneficiary cost sharing for OPD services gradually to 20 

percent of Medicare approved amounts. Beneficiary coinsurance would be 

established at 20 percent of the median of all hospital outpatient charges per 

procedure in 1996, updated to the time of implementation of OPPS and Afrozen@ at 

those dollar amounts. Over time, as Medicare's program payments under the new 
2-111 

OPPS increase with beneficiary payments frozen, the beneficiary payment amounts 

would come to equal 20 percent of Medicare's PPS payments. However, the buy 

down for those services where the difference between the median charge and the 

PPS approved amount is large could take decades. Under BBA 1997, hospitals 

were permitted to limit beneficiary copayments to 20 percent voluntarily as well as 

disseminate information regarding their reduced beneficiary charges. 

 The proposed OPPS regulations were published on September 8, 1998, for 

public comment with implementation of the new payment system scheduled for 

implementation in 1999. Implementation of the changes were delayed until after 

the start of the year 2000 in order to accommodate resolution of Y2K data 

processing problems. In the meantime significant legislative changes to OPPS 

were enacted. The Balanced Budget Refinement Act (BBRA) required the 

implementation of: (1) budget neutral outlier payments, within specified limits, for 

certain high cost patients; (2) budget neutral pass-through payments for certain new 

and innovative high cost devices, drugs, and biologicals for 2-3 years; (3) a 

“2 times” rule which limits the cost range of items or services that are included in 

any one APC (or ambulatory payment classification which is the classification 

system for outpatient services described subsequently) so that the highest cost item 

or service in the group cannot be more than two times higher than the lowest cost 

item or service within the group; (4) an annual review and update of the APCs and 

relative weights; (5) transitional corridors through 2003 which phase-in reductions 

in aggregate Medicare payments that individual hospitals experience due to OPPS 

implementation; (6) special ``hold harmless'' payments, for small, rural hospitals 

until January 1, 2004, to ensure that they receive no less under OPPS than they 

would have received in aggregate under the prior payment system; (7) permanent 

hold harmless payments for cancer hospitals; (8) a limit on beneficiary copayments 

for HOPD care set at the annual beneficiary deductible for inpatient care; (9) a 

budget neutrality benchmark for Medicare spending that includes beneficiary 

coinsurance amounts paid under the prior system; (10) coverage of the cost of 

implantable items; (11) use of either the mean or the median of hospital costs when 

establishing relative APC weights; (12) across-the-board reductions in payments 

for hospital operating costs and capital costs until implementation of OPPS; and 

(13) use of the IPPS wage index that accounts for hospitals= reclassification to 

different geographic areas. Medicare=s hospital outpatient payment system was 

subsequently modified by BIPA to include: (1) scheduled reductions to 

beneficiary=s coinsurance payments from 2002 through 2006 until the maximum 

rate is 40 percent in 2006; (2) an increase in the 2001 update to the full increase in 

the market basket as well as other increases to the 2001 OPPS rates; (3) appropriate 

adjustments to the conversion factor in later years to eliminate the effect of coding 

or classification changes; (4) modifications to the procedures and standards by 

which certain medical devices are categorized and determined eligible for passthrough payments under the OPPS; and (5) a permanent hold harmless provision for 

children=s hospitals. Implementation of OPPS began August 1, 2000. 
2-112 

Medicare=s hospital outpatient payment system

 The OPPS payment is intended to cover hospitals= operating and capital 

costs for the facility services that are furnished. Under OPPS, the unit of payment 

is the individual service or procedure as assigned to one of about 570 ambulatory 

payment classification groups (APCs). Services are classified into APCs based on 

their Healthcare Common Procedure Coding System (HCPCS), a standardized 

coding system used to identify products, supplies, and services for claims 

processing and payment purposes. Some new services are assigned to certain Anew 

technology@ APCs based only on similarity of resource use. Individual outpatient 

services that are similar clinically and comparable in terms of resource utilization 

are arranged into groups according to an APC system. To the extent possible, 

integral services and items are bundled within each APC; for example, an APC for 

a surgical procedure will include operating and recovery room services, anesthesia, 

and surgical supplies. Each APC has a status indicator to identify which particular 

OPPS payment policy is applicable. For instance, payments for those APCs with a 

status indicator of AT@ are reduced if multiple procedures are performed on the same 

visit; payments for those APCs with a status indicator of AS@ are not reduced if 

multiple procedures are performed. 

 Medicare=s payment for these services is calculated by multiplying the 

relative weight associated with an APC by a conversion factor. A relative value is 

established for each group and is the same for each service assigned to the group. 

Except for the new technology APCs, each APC has a relative weight that is based 

on the median cost of services in that APC. The CY2003 APC relative weight 

calculation used selected claims from April 1, 2001 through March 31, 2002. 

CMS converted billed charges to costs using cost-to-charge ratios by cost centers 

specific to each hospital. Data from claims with single or multiple procedure codes 

were aggregated differently to establish the median cost for each APC. The 

median costs of each APC was scaled to the median cost associated with APC 

0601, the mid-level clinic visit. The relative weights for those APCs that 

significantly decreased from 2002 to 2003 were subject to a dampening calculation; 

 the decrease was limited to 15 percent plus half the difference of the remaining 

change from 2002 to 2003. 

 New Technology APCs--In contrast to other APC groups, services are 

assigned to the new technology APCs based on their expected costs; the groups do 

not account for clinical aspects of its packaged services. There are 17 new 

technology APCs that range from $0-$50 to $5,000 to $6,000, with an additional 

category at $19,500-$20,500. The relative weights for these APCs are set at the 

midpoint of the range. Services are included in the new technology APCs for at 

least 2 years, but no more than 3 years. To be considered for assignment into one 

of these APCs, the technology must be a complete service or procedure that cannot 

be adequately described by an existing payment category. The covered service 

must be new and ineligible for an additional transitional pass-through payment that 

is described subsequently. Spending in these new technology APCs are not subject 

to a budget neutrality limit. 
2-113 

 Like other Part B fee schedules, the conversion factor translates the relative 

weights into dollar payment amounts. The conversion factor for 2003 is $52.151. 

For most APCs, the conversion factor is adjusted to account for geographic 

variations in cost. The labor related portion (60 percent) of the conversion factor is 

adjusted by the IPPS wage index accounting for hospital=s geographic 

reclassifications. The conversion factor is updated on a calendar year schedule and 

the annual updates are based on the hospital market basket (MB) offset by 

mandated budget neutrality factors associated with wage-index changes, changes to 

APC groups, and the APC relative weights. Currently, the 2003 HOPD update was 

the projected change in the hospital inpatient MB of 3.5 percent adjusted by a 

budget neutrality factor of 0.98715. 

 Medicare=s outpatient PPS includes budget neutral case level adjustments 

including pass-through payments for new technology and outlier payments for 

high-cost services. Transitional corridor payments that limit hospitals= losses 

under OPPS have been established through 2003 as well. Small rural hospitals with 

100 or fewer beds have such protections through 2003. Also, permanent hold 

harmless payments for cancer, and children=s hospitals have been established. 

 Transitional pass-through payments for new technology--Transitional passthrough payments are supplemental payments to cover the incremental cost 

associated with certain medical devices, drugs and biologicals that are inputs to an 

existing service. The additional payment for a given item is established for a 

limited period of time from 2 to 3 years and then the costs are incorporated into the 

APC relative weights. By law, total pass-through payments are limited to a given 

percentage of total OPPS payments. In 2003, spending on pass-through items 

cannot exceed 2.5 percent of total outpatient PPS payments; in CY2004 and 

subsequently, the percentage is 2.0 percent. If CMS expects that pass-through 

payments will exceed this limit during a year, the agency is required to impose a 

uniform reduction in pass-through payments to meet that limit. CMS did not 

maintain the required budget neutrality from August 2000 to April 2002. 

 Current drugs and biologicals that have been in transitional pass-through 

status on or prior to January 1, 2000 were removed from that payment status 

effective January 1, 2003. CMS established separate APC payments for certain of 

these drugs, including selected orphan drugs, blood and blood products, and 

selected higher cost drugs in CY2003. CMS established a threshold of $150 per 

claim line for a drug to qualify for a separate APC payment as a higher-cost drug, 

other drugs that had qualified for a transitional pass-through payment were 

packaged into procedural APCs. For example, in some instances, brachytherapy 

seeds (radioactive isotopes used in cancer treatments) were packaged into payments 

for brachytherapy procedures. The payment rates for these APCs are based on a 

relative weight calculated in the same way as procedural APCs are calculated. 

 Generally, medical devices as well as drugs and biologicals are eligible for 

transitional pass-through payments when the cost of the device is not insignificant 

in relation to the OPPS payment amount; no existing or previously existing 

payment category is appropriate; and payment was not being made for the device as 

a HOPD services as of December 31, 1996. Under certain circumstances, the latter 
2-114 

requirement may not apply. The cost of a given drug, biological or device is 

considered not insignificant in relation to the amount payable for the applicable 

APC according to certain thresholds established by CMS. Medicare payment for 

devices is based on the amount that a hospital=s charges, adjusted to costs, exceeds 

the portion of the OPPS payment associated with the device. Medicare payments 

for drugs and biologicals is based on the difference between 95 percent of their 

average wholesale price and the portion of the otherwise applicable APC payment 

rate attributable to the existing drug, subject to a budget neutrality provision. The 

pass-through amount for new drugs with a substitute drug recognized in a separate 

drug APC payment is the difference between 95 percent of new drug=s AWP and 

the payment rate for the comparable dose of the associated drug=s APC. Although 

transitional pass-through payments are subject to a budget neutrality requirement, 

the applicable budget neutrality requirement (2.5 percent through CY2003) was not 

effective until April, 2002. In 2002, after imposing the uniform reduction, CMS 

paid hospitals about 72 percent of AWP for transitional pass-through payments for 

these drugs and biologicals. 

 Outliers--Outlier payments are made for certain cases with high costs 

relative to the payment rate for the applicable APC group. In 2003, outliers are 

defined as services with estimated costs that exceed a threshold of 2.75 times its 

APC payment rate. Hospitals will be paid for 45 percent of the difference between 

the threshold and the estimated cost of the service. Aggregate outlier payments are 

limited to 2 percent of total OPPS payments and are financed by reducing the 

conversion factor by 2 percent. 

 Transitional corridor payments--A hospital may receive transitional corridor 

payments through 2003, the amount of which will depend upon the difference 

between a hospital=s OPPS payments and what it would have received under the 

previous payment policy. Corridor payments will compensate a significant portion 

of a hospital=s small loss and a smaller portion of a hospital=s larger loss. These 

payments have diminished over the transition period. In 2003, corridor payments 

will compensate a hospital up to 60 percent of the difference that is less than 10 

percent of what the hospital would have received under the previous policy, but 

only 6 percent of any difference that is greater than 10 percent. 

AMBULATORY SURGICAL CENTER SERVICES 

 Services provided in an ambulatory surgical center (ASC) are paid under 

Medicare Part B. An ASC is a facility where surgeries that do not require an 

inpatient hospital admission are performed. ASCs treat only patients who have 

already seen a health care provider and for whom surgery has been selected as an 

appropriate treatment. All ASCs must have at least one dedicated operating room 

and the equipment needed to perform surgery safely and to provide for recovery 

from anesthesia. Patients electing to have surgery in an ASC arrive for a scheduled 

appointment on the day of the procedure, have the surgery in an operating room, 

and recover under the care of the nursing staff before leaving for home. According 

to MedPAC, the number of Medicare-certified ASCs more that doubled from 
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1,460 in 1991 to 3,371 in 2001. From 1997 through 2001, an average of over 

270 new facilities began participating in Medicare a year, an increase that was 

partially offset by the average of 52 ASCs that closed or merged each year. 

 Medicare began covering ASC services in 1982 as a way to reduce costs for 

surgeries generally carried out on a hospital inpatient basis but that could be 

performed safely in a less costly outpatient setting. ASCs must meet certain 

conditions specified by Medicare in order to participate in the program. Some 

ASCs limit services to one type of surgery, such as ophthalmology, and others 

provide a variety of procedures, including gastroenterological, orthopedic, pain 

block, urology, podiatry, and ear, nose, and throat procedures. About half of all 

Medicare payments to ASCs in 2001 were related to cataract removal or lens 

insertion. 

Payment for ambulatory surgical centers 

 From the start of Medicare coverage of ASC services, Medicare based its 

payments on a prospective payment fee schedule. This system was one of the first 

applications of a fee schedule for outpatient or ambulatory care. The two primary 

cost components of a surgical procedure are the physician's (or practitioner's) 

professional fees for performing the procedure and the costs associated with 

services furnished by the facility where the surgery is performed. Medicare pays 

ASCs for facility and nonphysician personnel costs incurred in connection with 

performing specific surgical procedures. As with other Medicare services, 

physician and certain practitioner fees are paid under the physician fee schedule. 

 Currently, over 2,400 procedures are included on the Medicare-approved list 

of ASC procedures. CMS determines which procedures will constitute the ASC list 

on the basis of certain criteria related to the safety, appropriateness, and 

effectiveness of performing the procedure in an ASC setting. CMS is required by 

law to update the list of procedures performed in ASCs that are eligible for 

Medicare pavement. The list of approved procedures was most recently updated in 

2003. These Medicare-approved ASC procedures are consolidated into 9 payment 

groupings, each of which has one payment amount. The national payment rate for 

each of the groups equals the estimated median cost of procedures in the group. 

CMS adjusts the labor-related portion of the rate (currently 34.45 percent) using the 

hospital wage index for the ASC=s location. Payments are also adjusted when 

multiple surgical procedures are performed at the same time. Generally, the ASC 

will receive full payment for the most expensive procedure and will receive 50 

percent payment for the other procedures. 

 Medicare is required to update ASC rates every 5 years based on a survey 

of the actual audited costs incurred by a representative sample of ASCs for a 

representative sample of procedures. Between revisions, the rates are to be 

increased by the Consumer Price Index for All Urban Consumers (CPI-U). 

However, for fiscal years 1998-2002, BBA 1997 reduced the annual update to the 

CPI-U increase minus 2 percentage points. ASC=s received an increase of 

approximately 2 percent for FY2003. The current projection of the CPI-U for 

FY2004 is 1.0145 percent. 
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 For services on or after October 1, 2003, Medicare=s base rates (prior to 

geographic adjustments) for ASC services are: 

Group 1 ........... $340 Group 6........ $690 + $150 for an intracular lens 

Group 2 ........... $455 Group 7........ 1,015 

Group 3 ........... $520 Group 8........ 839 + $150 for an intracular lens 

Group 4 ........... $643 Group 9........ 1,366 

Group 5 ........... $731 

Proposed changes to ASC Medicare payments 

 On June 12, 1998, HCFA issued proposed rules which would make major 

changes in Medicare payments to ASCs. The major changes include replacing the 

payment groupings with an APC system comprised of 105 payment groups; 

updating underlying cost data using 1994 survey data updated to the present; and 

making additions to and deletions from the list of Medicare covered ASC 

procedures. Payments would range from $53 to $2,107 and would be updated by 

the CPI-U annually on a calendar year basis. BBRA 1999 did not address ASC 

payment rates, the proposed APC system, or update procedures. However, it 

requires that, if the Secretary implements new rates based on the 1994 data (or any 

rates based on pre-99 Medicare cost survey data), those new rates must be phased 

in by basing payments one-third on the new rates in the first year, two-thirds in the 

second year, and fully in the third year. BIPA prohibited implementation of a 

revised payment system for ASC facility services before January 1, 2002, extended 

the phase in of the APC system for ASCs to 4 years and required that by January 1, 

2003, ASC rates be rebased using data from a 1999 or later Medicare survey. In its 

March 28, 2003 regulation, CMS stated that it has developed an ASC survey 

instrument, but believes that developing useful cost data will take at least 2 years. 

Moreover, CMS is studying its rate setting approach to ensure that its ASC payment 

system does not inadvertently worsen payment differentials across the various 

ambulatory sites of service that provide the same care. 

AMBULANCE SERVICES 

Covered Services

 Medicare covers ambulance services only if they are furnished to a 

beneficiary whose condition is such that other means of transportation are 

contraindicated. The beneficiary=s condition must require both the transportation 

itself and the level of service provided in order for the billed service to be 

considered medically necessary. 

 Nonemergency transportation is considered appropriate if: 1) the patient is 

bed confined and it is documented that the beneficiary=s condition is such that other 

methods of transportation are contraindicated; or 2) if the medical condition is such 

that ambulance transportation is required. Special rules apply for nonemergency 

services. In the case of scheduled repetitive services, the ambulance provider or 

supplier must obtain an order from the beneficiary=s attending physician; the order 
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must certify that the medical necessity requirements have been met. The following 

requirements apply for services that are unscheduled, or scheduled on a 

nonrepetitive basis: 

 The ambulance provider or supplier must obtain, within 48 hours after 

transport, a written order from the beneficiary=s attending physician if the 

beneficiary is a resident of a facility. No order is required for a beneficiary 

residing at home or not under the care of a physician. 

 If the ambulance provider or supplier is unable to obtain the statement 

from the attending physician, then a statement must be obtained from a 

physician assistant, nurse practitioner, clinical nurse specialist, registered 

nurse or discharge planner. Such individual must have personal 

knowledge of the beneficiary=s condition at the time the transport is 

ordered or the service is furnished. The individual must be employed by 

either the patient=s attending physician, or the hospital or facility where 

the beneficiary is being treated and from which the beneficiary is 

transported. 

 If the required certification is not obtained within 21 days, the supplier 

must document attempts to obtain such certification. 

 Medicare covers transportation from the point of origin to the nearest 

hospital, critical access hospital or skilled nursing facility that is capable of 

furnishing the required level and type of care for the beneficiary=s illness or injury. 

The facility must have available the type of physician or physician specialist needed 

to treat the beneficiary=s condition. The program also covers trips from such 

facilities to the beneficiary=s home. In addition, the program covers trips from a 

SNF to the nearest supplier of medically necessary services not available at the 

SNF where the beneficiary is a resident. Beneficiaries receiving renal dialysis 

treatments for ESRD can be transported to the nearest facility furnishing such 

services. 

Payments for Services

 Medicare pays for ambulance services on the basis of a fee schedule. The 

fee schedule, which went into effect April 1, 2002, is being phased-in over a fiveyear period. This fee schedule replaces the reasonable cost payment system that 

had applied for hospital providers of ambulance services and the reasonable charge 

payment system that had applied to other suppliers of ambulance services. (Critical 

access hospitals are exempt from the fee schedule and continue to be paid for 

ambulance services on the basis of reasonable costs.) 

 During a transition period (2002- 2006), payment under the program is 

based on a blend with a gradually increasing portion of the payment based on the 

fee schedule and a decreasing portion on the former payment methodology. In 

2002, the payment equaled 20 percent of the fee schedule plus 80 percent of the 

previous reasonable cost or charge rates. In 2003, the blend is 40 percent of the fee 

schedule rates and 20 percent of cost or charge rates. In 2004, the blend will be 60 

percent of the fee schedule, 40 percent of the cost or charge rates; in 2005 the blend 

will be 80 percent of the fee schedule and 20 percent of the cost or charge rates. In 
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2006, the payment will be based entirely on the fee schedule. 

 The fee schedule establishes seven categories of ground ambulance services 

and two categories of air ambulance services. The ground ambulance categories 

are: basic life support (BLS), both emergency and nonemergency; advanced life 

support Level 1 (ALS1), both emergency and nonemergency; advanced life support 

level 2 (ALS2); speciality care transport (SCT); and paramedic ALS intercept (PI). 

The air ambulance categories are: fixed wing air ambulance (FW) and rotary wing 

air ambulance (RW). 

 The fee schedule payment for an ambulance service equals a base rate for 

the level of service plus payment for mileage. Geographic adjustments are made to 

a portion of the base rate to reflect the relative costs of providing services in various 

areas of the country. Additionally, the base rate is increased for air ambulance trips 

originating in rural areas and mileage payments are increased for all trips 

originating in rural areas. 

 The calculation for ground ambulance services is made as follows: 

 The relative value assigned to the category of service is multiplied by the 

national dollar conversion factor. This is the unadjusted base rate. 

 Seventy percent of the unadjusted base rate is multiplied by the 

geographic practice expense adjustment used for the physician fee 

schedule. This is added to thirty percent of the unadjusted base rate. The 

sum is the adjusted base rate. 

 A mileage calculation is made. For urban areas, the regular mileage rate 

is multiplied by the number of miles. For rural areas, the regular mileage 

rate is increased by fifty percent for miles 1 - 17 and by 25 percent for 

miles 18 - 50; the regular mileage rate applies for all miles over 50. (No 

mileage rate applies for paramedic ALS intercept services). 

 The adjusted base rate payment amount is added to the mileage payment. 

The sum is the fee schedule payment amount. 

 There are no relative values or conversion factor for air ambulance services. 

 The fee schedule amount for these services is calculated as follows: 

 Fifty percent of the published unadjusted base rate (for fixed or rotary 

wing, as appropriate) is multiplied by the geographic practice expense 

adjustment used for the physician fee schedule. This is added to fifty 

percent of the unadjusted base rate. The sum is the adjusted base rate 

payment. 

 A mileage calculation is made by multiplying the mileage rate by the 

number of miles. 

 The adjusted base rate payment amount is added to the mileage payment. 

The sum is the fee schedule payment amount. 

 For both ground and air ambulance services in 2003, 40 percent of the fee 

schedule payment amount is added to 60 percent of the payment calculated using 

the reasonable charge or cost method (whichever is appropriate) to give the actual 

payment amount. 

 The fee schedule amount is updated each year by the CPI-U. The update for 

2003 is 1.1 percent. 
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HOME HEALTH SERVICES 

 Home health services are covered under both Medicare Part A and Medicare 

Part B. For a discussion of the benefit, see Part A discussion above. 

PRESCRIPTION DRUGS 

Coverage

 Medicare beneficiaries who are inpatients of hospitals or skilled nursing 

facilities may receive drugs as part of their treatment. Medicare payments made to 

the facilities cover these costs. Medicare also makes payments to physicians for 

drugs or biologicals which cannot be self-administered. This means that coverage 

is generally limited to drugs or biologicals administered by injection. However, if 

the injection is generally self-administered (e.g., insulin), it is not covered. 

 In general, Medicare does not cover outpatient prescription drugs. However, 

despite the general limitation, the law specifically authorizes coverage for the 

following: 

 Immunosuppressive Drugs-Drugs used in immunosuppressive therapy 

(such as cyclosporin) for individuals who have received a Medicare

covered organ transplant. 

 Erythropoietin (EPO). EPO for the treatment of anemia for persons with 

chronic renal failure who are on dialysis. 

 Oral Anti-Cancer Drugs. Drugs taken orally during cancer chemotherapy 

providing they have the same active ingredients and are used for the same 

indications as chemotherapy drugs which would be covered if they were 

not self-administered and were administered as incident to a physician=s 

professional service. Also included are oral anti-nausea drugs used as part 

of an anti-cancer chemotherapeutic regimen. 

 Hemophilia clotting factors. Hemophilia clotting factors for hemophilia 

patients competent to use such factors to control bleeding without medical 

supervision, and items related to the administration of such factors. 

 Drugs that are necessary for the effective use of covered durable medical 

equipment, including those which must be put directly into the equipment 

(e.g., tumor chemotherapy agents used with an infusion pump). 

 Injectable osteoporosis drug approved for treatment of post-menopausal 

osteoporosis provided by a home health agency to a homebound 

individual whose attending physician has certified suffers from a bone 

fracture related to post-menopausal osteoporosis and the individual is 

unable to self-administer the drug. 

 The program also covers the following immunizations: 

 Pneumococcal pneumonia vaccine. The vaccine and its administration to 

a beneficiary if ordered by a physician. 

 Hepatitis B vaccine. The vaccine and its administration to a beneficiary 

who is at high or intermediate risk of contracting hepatitis B. 
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 Influenza virus vaccine. The vaccine and its administration when 

furnished in compliance with any applicable State law. The beneficiary 

may receive the vaccine upon request without a physician=s order and 

without physician supervision. 

Payments

 Payments for these drugs and immunizations are made under Medicare 

Part B. The payment for a drug equals 95 percent of the average wholesale price 

(AWP). On December 3, 2002, CMS sent a notice to contractors announcing the 

establishment of a single national price for each Medicare covered drug whose 

payment allowance is based on 95 percent of the AWP. Effective January 1, 2003, 

individual fiscal intermediaries and carriers no longer make the AWP 

determinations. Rather, they rely on the single drug pricer (SDP) files sent to them 

by CMS and process claims on the basis of the price shown on the applicable file. 

The new policy does not apply to drugs billed to DMERCs (durable medical 

equipment regional carriers) because DMERC-paid drug allowances are already 

consistent nationally. The policy also does not apply to hospital outpatient drugs 

(except blood clotting factors) because the payment allowance for such drugs is 

determined by a different procedure. 

 Medicare pays 80 percent of the recognized payment amount after the 

beneficiary has met the $100 Part B deductible. The beneficiary is liable for the 

remaining 20 percent coinsurance charges. These Part B cost-sharing charges do 

not apply for pneumococcal pneumonia or influenza vaccines. 

OTHER PART B SERVICES 

Preventive services 

 Screening mammograms--Medicare covers an annual screening 

mammography for all women over age 40. Payment for the mammogram is made 

under the physicians= fee schedule. 

 Screening Pap smears; pelvic exams--Medicare authorizes coverage for a 

screening Pap smear and a screening pelvic exam once every 2 years; annual 

coverage is authorized for women at high risk. Payment is based on the clinical 

diagnostic laboratory fee schedule (see above). A national minimum payment for 

Pap smears is established. In 2003, this is $14.76. 

 Prostate cancer screening tests--Medicare covers an annual prostate cancer 

screening test for men over age 50. The test can consist of any (or all) of the 

following procedures: (1) a digital rectal exam; (2) a prostate-specific antigen blood 

test; and (3) such other procedures as the Secretary finds appropriate for the 

purpose of early detection of prostate cancer. 

 Colorectal cancer screening--The law authorizes coverage of and 

establishes frequency limits for colorectal cancer screening tests. A covered test is 

any of the following procedures furnished for the purpose of early detection of 

colorectal cancer: (1) screening fecal-occult blood test (for persons over 50, no 

more than annually); (2) screening flexible sigmoidoscopy (for persons over 50, no 
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more than one every 4 years after a previous sigmoidoscopy or more than one every 

10 years following a screening colonoscopy); (3) screening colonoscopy (no more 

than one every 2 years for high-risk individuals and no more than one every 10 

years (or no more than 4 years after a screening flexible sigmoidoscopy) for other 

persons; and (4) such other procedures as the Secretary finds appropriate for the 

purpose of early detection of colorectal cancer. Barium enema tests, as an 

alternative to either a screening flexible sigmoidoscopy or a screening colonoscopy, 

are covered in accordance with the same screening parameters specified for those 

tests. Services are paid under the physician fee schedule (except that fecal occult 

blood tests are paid under the laboratory fee schedule). A facility payment may 

also apply if services are performed in an ambulatory surgical center or hospital 

outpatient department. 

 Diabetes Outpatient Self-Management Training--Medicare's covered 

benefits include diabetes outpatient self-management training services. These 

services are defined as including educational and training services furnished to an 

individual with diabetes by a certified provider in an outpatient setting. They are 

covered only if the physician or qualified non-physician practitioner who is 

managing the individual's diabetic condition certifies that the services are needed. 

Services must be provided under a comprehensive plan of care to ensure therapy 

compliance or to provide the individual with necessary skills and knowledge 

(including skills related to the self-administration of injectable drugs) to participate 

in the management of their own condition. Certified providers for these purposes 

are defined as physicians or other individuals or entities that, in addition to 

providing diabetes outpatient self-management training services, provide other 

items or services reimbursed by Medicare. Providers must meet quality standards 

established by the Secretary. CMS currently accepts recognition of the American 

Diabetes Association (ADA) as meeting the National Standards for diabetes selfmanagement training programs. 

Medical Nutrition Therapy Services--Medicare authorizes coverage of 

medical nutrition therapy services (MNT) for certain beneficiaries who have 

diabetes or a renal disease. Services include nutritional, diagnostic, therapy and 

counseling services furnished by a registered dietician or nutrition professional, 

pursuant to a referral by a physician. Effective October 1, 2002, basic coverage of 

MNT for the first year a beneficiary receives MNT with either a diagnosis of renal 

disease or diabetes is 3 hours. Basic coverage in subsequent years for renal disease 

or diabetes is 2 hours. The dietitian/nutritionist may choose how many units are 

performed per day as long as all of the other requirements are met. If the treating 

physician determines that receipt of both MNT and diabetes self-management 

training is medically necessary in the same episode of care, Medicare will cover 

both in the initial and subsequent years without decreasing either benefit as long as 

they are not provided on the same date of service. The dietitian/nutritionist may 

choose how many units are performed per day. In all cases, additional hours are 

considered to be medically necessary and covered if the treating physician 

determines that there is a change in medical condition, diagnosis, or treatment 

regimen that requires a change in MNT and orders additional hours during that 
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episode of care. Payment equals 85 percent of the amount established under the 

physician fee schedule for the service if it had been furnished by a physician. 

 Bone mass measurements--Bone mass measurement is covered for the 

following high risk persons: an estrogen-deficient woman at clinical risk for 

osteoporosis; an individual with vertebral abnormalities; an individual receiving 

long-term glucocorticoid steroid therapy; an individual with primary 

hyperparathyroidism; or an individual being monitored to assess osteoporosis drug 

therapy. Payments are made under the physician fee schedule. In general, the 

services are covered if they are provided no more frequently than once every 2 

years. 

 Glaucoma Screening--The program provides for annual coverage for 

glaucoma screening for beneficiaries in the following high risk categories: (1) 

individuals with diabetes mellitus, (2) individuals with a family history of 

glaucoma, or (3) African-Americans age 50 and over. Medicare will pay for 

glaucoma screening examinations when they are furnished by or under the direct 

supervision in the office setting of an ophthalmologist or optometrist, who is legally 

authorized to perform the services under State law. Payments are made under the 

physician fee schedule. 

Telehealth

 Medicare pays for services which are furnished via a telecommunications 

system by a physician or practitioner, notwithstanding the fact that the individual 

providing the service is not at the same location as the beneficiary. Payment to the 

physician or practitioner furnishing the service is equal to the amount that would be 

paid if the service had been furnished without the use of a telecommunications 

system. A facility fee is paid to the originating site (i.e. the site where the 

beneficiary is when the service is provided.) The fee equals the amount established 

for the preceding year, increased by the percentage increase in the Medicare 

economic index (MEI). The 2003 amount is $20.60. 

Rural Health Clinics and Federally-Qualified Health Centers

 Medicare covers services furnished by a qualified rural health clinic (RHC) 

located in an area which has a shortage of health personnel. The covered services 

RHCs may offer are divided into two basic groups-- rural health clinic services and 

other medical and other health services covered under Part B. Items and services 

which meet the definition of rural health clinic services are physicians= services; 

services and supplies incident to a physician's services; nurse practitioner and 

physician assistant services (including the services of specialized nurse 

practitioners and nurse midwives) that would be covered if furnished by a 

physician, provided the nurse practitioner or physician assistant is legally permitted 

to perform the services by the State in which they are performed; services and 

supplies incident to the services of nurse practitioners and physician assistants that 

would be covered if furnished incident to a physician's services; and visiting nurse 

services to the homebound. The program also covers services in Federallyqualified health centers (FQHCs). Covered services include those covered in RHCs 
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as well as preventive primary services. 

 Payments for RHC and FQHC services are based on an all inclusive rate for 

each beneficiary visit for covered services. An interim payment is made to the 

entity based on estimates of allowable costs and number of visits; a reconciliation is 

made at the end of the year based on actual costs and visits. Per visit payment limits 

are established for all RHCs (other than those in hospitals with fewer than 50 beds) 

and FHQCs. Payment limits are updated on January 1 of each year by the Medicare 

economic index (MEI) which measures inflation for certain medical services. 

Because of the delay in implementing the MEI, there was one update on January 1, 

2003 and a second one on March 1, 2003. For services provided January 1, 2003 - 

February 28, 2003, the RHC upper payment limit was $66.46, the urban FQHC 

limit was $103.18 and the rural FQHC limit was $88.71. For services provided 

March 1, 2003- December 31, 2003, the RHC upper payment limit is $66.72, the 

urban FQHC limit is $103.58, and the rural FHQC limit is $89.06. Assignment is 

mandatory; no deductible applies for FQHC services. 

Comprehensive Outpatient Rehabilitation Facilities (CORFs)

 A comprehensive outpatient rehabilitation facility (CORF) is a public or 

private institution that is engaged primarily in providing (by or under the 

supervision of physicians) diagnostic, therapeutic, and restorative services on an 

outpatient basis for the rehabilitation of injured, disabled or sick persons. The 

facility must provide at least the services of physicians (who are available to the 

facility on a full or part-time basis), physical therapy, and social or psychological 

services. Covered services also include occupational therapy, speech language 

pathology services, respiratory therapy, prosthetic and orthotic devices, nursing 

care, drugs which cannot be self-administered, supplies, and durable medical 

equipment. Payments for services are made under the physician fee schedule. 

Therapy services are subject to the therapy payment limitations (described above, 

for physical and occupational therapy providers). Mental health services are subject 

to the payment limitation for mental health services (described above). 

Partial Hospitalization Services

 Medicare covers partial hospitalization in connection with the treatment of 

mental illness. The services are covered only if the individual would otherwise 

require inpatient psychiatric care. The course of treatment must be prescribed, 

supervised, and reviewed by a physician. Services must be provided under a 

program which is hospital-based or hospital affiliated and must be a distinct and 

organized intensive ambulatory treatment service offering less than 24-hour daily 

care. The program may also be covered when provided by a community mental 

health center. 

 Payment for professional services is made under the physician fee schedule. 

 Other services are paid under the hospital outpatient prospective payment system. 
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END-STAGE RENAL DISEASE SERVICES 

COVERAGE 

 Medicare's End-Stage Renal Disease (ESRD) Program was established in 

the Social Security Amendments of 1972, and covers beneficiaries regardless of 

age. Eligible individuals have severe impairment of kidney function as a result of 

diabetes, hypertension, or other diseases that lead to ESRD. Prior to passage of the 

1972 Amendments, treatment for ESRD was limited to a few individuals because of 

its high cost and the limited number of dialysis machines. ESRD is invariably fatal 

without treatment. Treatment takes two forms: transplantation and dialysis. 

 Beneficiaries must be: (1) fully insured for Old-Age and Survivors 

Insurance benefits; (2) entitled to monthly Social Security benefits; or (3) spouses 

or dependents of individuals described in (1) or (2). Such individuals must be 

medically determined to be suffering from ESRD and must file an application for 

benefits. 

 Benefits include all Part A and Part B medical items and services. ESRD 

beneficiaries are automatically enrolled in the Part B portion of Medicare and are 

required to pay the monthly Part B premium. Medicare coverage begins on the 

first day of the third month after the beneficiary begins a course of renal dialysis. 

In the case of a transplant candidate, coverage can begin as early as the month in 

which the patient is hospitalized for transplantation. No new waiting period is 

required when a beneficiary=s entitlement has ended and the beneficiary needs to 

begin another course of dialysis or receive another kidney transplant. 

Medicare+Choice (M+C) plans may provide ESRD benefits to the Medicare 

beneficiary who is already enrolled in a M+C organization and subsequently 

develops ESRD. However, beneficiaries who have been recently diagnosed with 

ESRD cannot join a M+C plan. 

Table 2-41 shows expenditures, number of beneficiaries, and the average 

expenditure per person for all persons with ESRD (including the aged and disabled) 

from 1974 through 2005. Total projected program expenditures for the Medicare 

ESRD Program for fiscal year 2003 are $15.0 billion; for fiscal year 2005, they are 

estimated to increase to $17.4 billion. In fiscal year 2003, there are an estimated 

397,270 beneficiaries, including successful transplant patients and persons entitled 

to Medicare on the basis of age or disability who also have ESRD. 

 When the ESRD Program was created, it was assumed that program 

enrollment would level out at about 90,000 enrollees by 1995. That mark was 

passed several years ago, and no indication exists that enrollment will stabilize 

soon. Table 2-42 shows that new enrollment for all Medicare beneficiaries 

receiving ESRD services grew at an average annual rate of 6.8 percent from 1991 

to 2000. Most of the growth in program participation is attributable to growth in the 

numbers of elderly people receiving services and growth in the numbers of more 

seriously ill people entering treatment. Table 2-42 shows the greatest rate of growth 

in program participation is in people over age 75, at 10.1 percent, followed by 
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people of ages 65-74 with a growth rate of 4.4 percent. The largest rate of growth in 

primary causes of people entering ESRD treatment was diabetes. People with 

diabetes frequently have multiple health problems, making treatment for renal 

failure more difficult. 

TABLE 2-41--END-STAGE RENAL DISEASE MEDICARE 

BENEFICIARIES AND PROGRAM EXPENDITURES, SELECTED FISCAL 

YEARS 1974-2005 

[Expenditures in millions of dollars] 

Fiscal Year Expenditures (HI & SMI) HI Beneficiaries Per Person Cost 

1974 $229 15,993 $14,319 

1975 361 22,674 15,921 

1980 1,245 54,725 22,750 

1985 2,835 96,965 29,237 

1990 5,251 154,575 33,971 

1991 5,634 170,718 33,002 

1992 6,198 182,826 33,899 

1993 6,947 201,168 34,532 

1994 7,671 220,972 34,717 

1995 8,567 239,057 35,838 

1996 9,452 255,578 36,983 

1997 10,467 282,062 37,109 

1998 10,757 303,655 35,424 

1999 10,549 323,238 32,635 

2000 10,822 342,211 31,623 

2001 12,622 358,753 35,184 

2002 13,839 379,540 36,463 

2003 15,033 397,270 37,841 

2004 16,174 413,345 39,131 

2005 17,373 428,383 40,556 

Note-Estimates for 1982-2005 are subject to revision by the Office of the Actuary, Office of 

Medicare and Medicaid Cost Estimates; Estimates for 1998-2005 are under the Trustees 2003 

assumptions. 

Source: Centers for Medicare & Medicaid Services, Office of the Actuary. 

 The rates of growth in older and sicker patients entering treatment for ESRD 

indicate a shift in physician practice patterns. In the past, most of these people 

would not have entered dialysis treatment because their age and severity of illness 

made successful treatment for renal failure less likely. Although the reasons that 

physicians have begun treating older and sicker patients are not precisely known, it 

is clear that these practice patterns have resulted, and will continue to result, in 

steady growth in the number of older patients receiving Medicare's ESRD services. 

Outpatient Immunosuppressive Drug Coverage

 Although the capability to perform transplants had existed since the 1950s, 

problems with rejection of transplanted organs limited its treatment for renal 

failure. The 1983 introduction of a powerful and effective immunosuppressive 

drug, cyclosporin, resulted in a dramatic increase in the number of transplants being 

performed and the success rate of transplantation. Medicare currently pays 
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80 percent of the cost for immunosuppressive drugs required after a covered 

Medicare transplantation. 

TABLE 2-42--INCIDENT COUNTS OF REPORTED ESRD: ALL 

PATIENTS, BY DEMOGRAPHIC CHARACTERISTICS AND PRIMARY 

DIAGNOSIS, SELECTED YEARS 1991-2000 

Characteristic or 

Primary 

Diagnosis 

1991 1993 1995 1996 1997 1998 1999 2000 

0-4 131 120 124 128 108 98 93 129 

5-9 108 97 102 94 79 84 93 80 

10--14 211 194 211 208 186 181 175 174 

15-19 402 425 453 424 347 372 385 351 

20-24 818 827 824 810 720 744 668 664 

25-29 1,430 1,443 1,331 1,295 1,248 1,254 1,202 1,211 

30-34 1,994 2,050 2,035 1,897 1,763 1,817 1,767 1,714 

35-39 2,425 2,545 2,709 2,629 2,489 2,458 2,559 2,375 

40-44 3,002 3,083 3,419 3,420 3,265 3,466 3,368 3,380 

45-49 3,146 3,657 4,189 4,276 4,161 4,524 4,613 4,599 

50-54 3,486 4,086 4,771 4,751 5,100 5,455 5,840 5,905 

55-59 4,475 4,912 5,580 5,642 5,999 6,486 6,783 6,836 

60-64 5,962 6,364 7,120 7,121 7,314 7,735 7,813 7,991 

65-69 7,895 8,765 9,351 9,902 10,353 10,658 10,660 10,683 

70-74 7,215 8,432 9,464 10,332 10,871 11,342 11,547 11,623 

75-79 5,337 6,228 7,255 8,182 9,077 9,862 10,761 10,983 

80-84 2,734 3,386 4,184 4,813 5,591 5,979 6,566 7,036 

85+ 1,100 1,465 2,182 2,182 2,524 3,059 3,461 3,700 

Unknown - - - - - - - 10 

 0-19 852 836 890 854 720 735 746 734 

20-44 9,669 9,948 10,318 10,051 9,485 9,739 9,564 9,344 

45-64 17,069 19,019 21,660 21,790 22,574 24,200 25,049 25,331 

65-74 15,110 17,197 18,815 20,234 21,224 22,000 22,207 22,306 

75+ 9,171 11,079 13,233 15,177 17,192 18,900 20,788 21,719 

Unknown - - - - - - - 10 

Male 27,852 31,130 34,515 36,721 38,135 40,469 42,274 42,826 

Female 24,024 26,951 30,401 31,379 33,060 35,107 36,081 36,615 

White 34,073 37,217 41,165 42,952 46,454 48,794 51,549 52,622 

Black 15,706 18,201 19,559 20,503 20,661 22,164 22,260 22,040 

Native American 700 787 1,043 1,150 821 1,231 920 953 

Asian 1,290 1,683 2,090 2,260 2,121 2,459 2,611 2,510 

Other/unknown 107 193 1,062 1,242 1,140 934 1,019 1,319 

Hispanic 1,610 2,548 6,101 7,499 7,435 8,239 8,350 8,482 

Non- Hispanic 50,266 55,533 58,818 60,608 63,762 67,343 70,009 70,962 

Diabetes 18,746 20,594 26,324 29,219 31,273 33,615 34,852 35,310 

Hypertension 15,498 16,465 16,862 17,948 19,264 20,503 21,260 21,038 

Glomerulone-phritis 6,103 6,185 6,765 7,113 6,883 6,951 6,770 6,187 

Cystic kidney 1,491 1,519 1,691 1,590 1,620 1,701 1,738 1,604 

Other urologic 1,101 999 1,185 1,385 1,296 1,336 1,412 1,339 

Other cause 4,859 5,048 6,731 7,061 7,319 7,686 7,902 7,972 

Unknown cause 2,242 2,167 2,257 2,553 2,694 2,947 2,935 3,081 

Missing disease 1,836 5,104 3,104 1,238 848 843 1,490 2,913 
2-127 

TABLE 2-42--INCIDENT COUNTS OF REPORTED ESRD: ALL 

PATIENTS, BY DEMOGRAPHIC CHARACTERISTICS AND PRIMARY 

DIAGNOSIS, SELECTED YEARS 1991-2000 

Characteristic or 

Primary 

Diagnosis 

1991 1993 1995 1996 1997 1998 1999 2000 

U.S. 51,162 57,294 64,014 67,140 70,212 74,516 77,250 78,363 

U.S. territories 56 59 80 95 107 121 113 123 

Puerto Rico 609 667 791 855 861 915 969 931 

Foreign 13 10 11 13 12 21 13 19 

Unknown 36 51 13 - - - 14 - 

All 51,876 58,081 64,919 68,107 71,197 75,582 78,359 79,444 

Note-The incident cohorts and associated modalities are determined at the time of ERSD 

initiation without applying the 60-day stable modality rule. The age of the incident patient is 

determined as of the date of ERSD initiation. CMS has only started collecting Hispanic 

ethnicity data as of April 1995, so Hispanic data in years prior to 1995 has been left blank. 1

Values for cells with fewer than 10 patients are suppressed. 

Source: www.usrds.org/2002/Medicare_only/A_Medicare_only.pfd. 

 Immunosuppressive drug coverage under Medicare began with The 

Omnibus Budget Reconciliation Act of 1986 (OBRA >86), which provided 

coverage up to 1 year from the date of discharge from a Medicare-covered 

transplant. Subsequent legislation extended the coverage. The Beneficiary 

Improvement and Protection Act (BIPA) (P.L. 106-554), provided lifetime 

coverage for immunosuppressive drugs to Medicare aged and disabled beneficiaries 

following a transplant covered by Medicare, effective December 21, 2000. 

However, persons who are under age 65 and entitled to Medicare based solely on 

their diagnosis of ESRD will lose their ESRD Medicare entitlement 3 years after 

transplantation, and, effectively, lose coverage for the necessary 

immunosuppressive drugs. They will be eligible again when they reach age 65. 

TREATMENT 

Table 2-43 indicates that a total of 14,628 kidney transplants were 

performed in Medicare-certified U.S. hospitals in 2001. Kidneys are the most 

frequently transplanted organ and Medicare covers nearly 90 percent of all kidney 

transplant beneficiaries in the U.S. Medicare appears to be the primary payer in 

approximately 50 percent of all kidney transplants in the U.S. and is at least the 

secondary payer in nearly 60 percent of all kidney transplants. Despite the 

significant increases in the number and success of kidney transplants, 

transplantation is not the treatment of choice for all ESRD patients. A chronic, 

severe shortage of kidneys available for transplantation limits the number of 

patients who can receive transplants. Even absent a shortage of organs, some 

patients are not suitable candidates for transplants because of their age, severity of 

illness, or other complicating conditions. Finally, some ESRD patients do not want 

an organ transplant. 
2-128 

 For all of these reasons, dialysis is likely to remain the primary treatment for 

ESRD. Medicare pays for 75-80 percent of all dialysis care. Dialysis is an 

artificial method of performing the kidney's function of filtering blood to remove 

waste products and toxins. There are two types of dialysis: hemodialysis and 

peritoneal dialysis. The method chosen by the majority of Medicare beneficiaries 

is hemodialysis, which requires blood to be removed from the body, filtered and 

cleansed through a dialyzerBsometimes called an artificial kidney machine--before 

being returned to the body. Hemodialysis is usually performed three times a week 

in a clinic or hospital, and takes three to four hours, depending on the patient. 

TABLE 2-43--TOTAL KIDNEY TRANSPLANTS PERFORMED IN 

MEDICARE-CERTIFIED U.S. HOSPITALS, 1999-2001 

Calendar Living Donor Cadaveric Donor 

Year 

Total 

Transplants Number Percent Number Percent 

1999 13,483 4,644 34 8,839 66 

2000 14,311 5,427 38 8,884 62 

2001 14,628 5,804 40 8,824 60 

Source: Centers for Medicare & Medicaid Services, Office of Clinical Standards and Quality. 

 Peritoneal dialysis filtering takes place inside the body by inserting 

dialysate fluid through a permanent surgical opening in the peritoneum (abdominal 

cavity). Toxins filter into the dialysate fluid and are then drained from the body 

through the surgical opening. There are three types of peritoneal dialysis: 

intermittent peritoneal dialysis (IPD), continuous cycling peritoneal dialysis 

(CCPD)-- both of which require the use of a machine and the assistance of a 

partner--and continuous ambulatory peritoneal dialysis (CAPD)-- which does not 

require a machine. 

 IPD can be done at home but is usually done in a hospital--treatments are 

performed several times a week, for a total of 36 to 42 hours per week. The CAPD 

and CCPD require daily exchanges of dialysate fluid and both can be performed at 

home. CAPD can be done at any time and is the most popular form of peritoneal 

dialysis. The process involves draining the dialysate and replacing fresh solution 

which takes 30 to 40 minutes and the solution is usually changed four times a day. 

CCPD is usually done at night while the individual is asleep, requiring 10 to 12 

hours per night. 

REIMBURSEMENT 

 Medicare reimbursement for dialysis services provided by hospital-based 

and independent facilities are paid at prospectively determined ratesBthe necessary 

dialysis-related services, equipment, and supplies are furnished for a predetermined 

fixed fee per dialysis treatment. The rate, referred to as a composite rate, is derived 

from a base rate and adjusted by local area wage differences and audited cost data 

adjusted for the national proportion of patients dialyzing at home versus in a 

facility. Adjustments are made to the composite rate for hospital-based dialysis 
2-129 

facilities to reflect higher overhead costs. Some examples of services included 

under the composite rate are: cardiac monitoring, catheter changes, dressing 

changes, suture removal, all oxygen and its administration, and declotting of shunt. 

If a facility fails to furnish any part of the items and services covered under the rate, 

then the facility cannot be paid any amount for the part of the items and services 

that it did furnish. 

 Beneficiaries electing home dialysis may choose either to receive dialysis 

equipment, supplies, and support services directly from the facility with which the 

beneficiary is associated (method I) or to make independent arrangements for 

equipment, supplies, and support services (method II). Under method I, the 

equipment, supplies, and support services are included in the facility's composite 

rate. Under method II, payments are made on the basis of reasonable charges and 

limited to 100 percent of the median hospital composite rate, except for patients on 

CCPD, in which case the limit is 130 percent of the median hospital composite rate. 

Neither the composite rate nor the reasonable charge payment for method II is 

routinely updated. 

 The composite rate for renal dialysis was updated in the BBRA. The act 

increased the composite rate for 2000 by 1.2 percent above the revised composite 

rate that was in effect in 1999. An additional 1.2 percent was authorized for 2001 . 

BIPA modified the BBRA provision to provide for a 2.4 percent increase to the 

composite rate beginning in 2001. The maximum composite rate cap (maximum 

allowed payment per treatment) as of January 2002 is $144.59 per treatment for 

urban centers and $144.05 for rural areas. 

 Kidney transplantation services are inpatient hospital services and they are 

subject to the Medicare prospective payment system (PPS). The costs of care for 

actual and potential kidney donors are fully covered by Medicare and include all 

reasonable preparatory, operation, and post-operation recovery expenses associated 

with donation, without regard to deductibles, coinsurance, and premium payments. 

Post-operation recovery expenses are limited to the actual period of recovery, 

however. There is also no specific update policy for reasonable costs of kidney 

acquisition, and 100 percent of reasonable costs is reimbursed. 

MEDICARE+CHOICE 

 Medicare has a long-standing history of offering its beneficiaries an 

alternative to the traditional fee-for-service program. Health Maintenance 

Organizations and other types of managed care plans have been allowed to 

participate in the Medicare program, beginning with private health plan’s contracts 

in the 1970s and the Medicare risk contract program in the 1980s. Then, in 1997, 

Congress passed the Balanced Budget Act of 1997 (BBA, P.L. 105-33), replacing 

the risk contract program with the Medicare+Choice (M+C) program. The M+C 

program established new rules for beneficiary and plan participation, along with a 

new payment methodology. In addition to controlling costs, the M+C program was 

also designed to expand private health plans to markets where access to managed 

care plans was limited or nonexistent and to offer new types of private health plans. 
2-130 

The 106th Congress enacted legislation to address some issues arising from the 

BBA changes. The Balanced Budget Refinement Act of 1999 (BBRA, P.L. 106-

113) changed the M+C program in an effort make it easier for Medicare 

beneficiaries and plans to participate in the program. Further refinements to the 

M+C program were included in the Medicare, Medicaid, and SCHIP Benefits 

Improvement and Protection Act of 2000 (BIPA, P.L. 106-554). The 107th

Congress passed The Public Health Security and Bioterrorism Preparedness and 

Response Act (P.L. 107-188) which included a few temporary changes to deadlines 

in the Medicare+Choice program. 

 In 2003, Medicare+Choice plans were available to about 59 percent of the 

over 40 million Medicare beneficiaries, and in March 2003 about 12 percent of 

them chose to enroll in one of the 146 (including two private-fee-for service plans) 

available Medicare+Choice plans. The rapid growth rate of Medicare managed 

care enrollment in the 1990s leveled off with the implementation of the M+C 

program, and in fact, there has been a continuous decline in enrollment since 1999 

when 17 percent of beneficiaries were enrolled in M+C plans. 

 In order to increase enrollment in Medicare managed care and to allow 

beneficiaries to better meet their health care needs, the M+C program offers a 

diverse assortment of managed care plans. However, achieving the goals of the 

M+C program has been difficult, in part because the goal to control Medicare 

spending which led to a slowdown in the rate of increase in payments to plans, may 

have dampened interest by managed care entities in developing new markets, 

adding plan options, and maintaining their current markets (see Appendix E for 

further information about the M+C program). 

SELECTED ISSUES

SECONDARY PAYER 

 Generally, Medicare is the ``primary payer,'' that is, it pays health claims 

first, with an individual's private or other public health insurance filling in some or 

all of Medicare's coverage gaps. However, in certain cases, the individual's other 

coverage pays first, while Medicare is the secondary payer. This phenomenon is 

referred to as the Medicare Secondary Payer Program. 

 An employer (with 20 or more employees) is required to offer workers age 

65 and older (and workers' spouses age 65 and older) the same group health 

insurance coverage as is made available to other employees. Workers have the 

option of accepting or rejecting the employer's coverage. If the worker accepts the 

coverage, the employer's plan is primary for the worker and/or spouse who is over 

age 65; Medicare becomes the secondary payer. Employers may not offer a plan 

that circumvents this provision. 

 Similarly, a group health plan, offered by a large employer with 100 or more 

employees, is the primary payer for employees or their dependents who are on the 

Medicare disability program. The provision applies only to persons covered under 

the group health plan because the employee (generally the spouse of the disabled 
2-131 

person) is in “current employment status” (i.e., is an employee or is treated as an 

employee by the employer). Secondary payer provisions also apply to ESRD 

individuals with employer group health plans (regardless of employer size). The 

group health plan is the primary payer for 30 months for persons who become 

eligible for Medicare ESRD benefits. 

 Medicare is also the secondary payer when payment has been made, or can 

reasonably be expected to be made, under workers' compensation, automobile 

medical liability, all forms of no-fault insurance, and all forms of liability 

insurance. 

 The law authorizes a data match program which is intended to identify 

potential secondary payer situations. Medicare beneficiaries are matched against 

data contained in Social Security Administration and Internal Revenue Service files 

to identify cases in which a working beneficiary (or working spouse) may have 

employer-based health insurance coverage. Cases of previous incorrect Medicare 

payments are identified and recoveries are attempted. Recoveries can be initiated up 

to 3 years after the date the service was furnished. Further, recoveries may be made 

from third-party administrators except where such administrators cannot recover 

amounts from the employer or group health plan. 

Table 2-44 shows savings attributable to these Medicare secondary payer 

provisions. In fiscal year 2002, combined Medicare Part A and B savings are 

estimated at $4.3 billion. 

TABLE 2-44--MEDICARE SAVINGS ATTRIBUTABLE TO SECONDARY 

PAYER PROVISIONS, FISCAL YEARS 1996-2002 

[In Millions of Dollars]

Year and 

Medicare 

Part 

Workers' 

Compensation 

Working 

Aged 

End-Stage 

Renal Disease Automobile Disability Total 

1996: 

 Part A 93.6 1,062.5 133.4 335.0 728.5 2,353.0 

 Part B 11.1 295.1 34.3 50.1 196.4 586.9 

 Total 104.7 1,357.6 167.6 385.0 924.9 2,939.9 

1997: 

 Part A 99.7 1,046.5 114.3 366.8 697.5 2,324.9 

 Part B 11.8 276.4 32.4 63.7 178.9 563.2 

 Total 111.5 1,322.9 146.7 430.5 876.3 2,888.1 

1998: 

 Part A 96.7 1,303.0 108.1 219.2 810.8 2,683.9 

 Part B 11.6 364.3 35.0 28.0 238.4 707.7 

 Total 108.3 1,667.3 143.1 247.2 1,049.2 3,391.6 

1999: 

 Part A 85.3 1,300.0 120.3 211.4 873.9 2,763.6 

 Part B 11.9 400.0 42.6 29.6 282.6 791.0 

 Total 97.2 1,700.0 162.9 241.0 1,156.5 3,554.6 

2000: 

 Part A 89.9 1,026.0 122.6 209.1 772.6 2,419.4 

 Part B 13.3 327.3 44.1 32.2 254.0 701.0 

 Total 103.2 1,353.3 166.7 241.3 1,026.6 3,120.4 
2-132 

TABLE 2-44--MEDICARE SAVINGS ATTRIBUTABLE TO SECONDARY 

PAYER PROVISIONS, FISCAL YEARS 1996-2002-continued 

[In Millions of Dollars] 

Year and 

Medicare 

Part 

Workers' 

Compensation 

Working 

Aged 

End-Stage 

Renal Disease Automobile Disability Total 

2001: 

 Part A 81.4 1,212.0 129.0 202.7 947.8 2,761.8 

 Part B 14.6 414.2 43.1 48.9 330.4 882.6 

 Total 96.0 1,626.2 172.1 251.6 1,278.2 3,644.4 

2002: 

 Part A 89.7 1,482.9 151.4 263.5 1,139.5 3,318.0 

 Part B 16.5 459.8 48.1 33.0 369.0 960.5 

 Total 106.2 1,942.7 199.5 296.5 1,508.5 4,278.5 

Note-Liability savings are included in the total. 

Source: Centers for Medicare & Medicaid Services, Office of Financial Management. 

SUPPLEMENTING MEDICARE COVERAGE 

 Most beneficiaries depend on some form of private or public coverage to 

supplement their Medicare coverage. In 2000, only about 13 percent of 

beneficiaries relied solely on the traditional fee-for-service Medicare program for 

protection against the costs of care; an additional 13 percent were enrolled in 

managed care organizations. See Appendix B for a discussion of supplementary 

coverage and Appendix E for a discussion of Medicare+Choice. 

LEGISLATIVE HISTORY, 1997-2003 

 This section summarizes major Medicare legislation enacted into law, 

beginning in 1997. Previous editions of the Green Book review legislation enacted 

prior to that date. The summary highlights major provisions; it is not a 

comprehensive list of all Medicare amendments. Included are provisions which had 

a significant budget impact, changed program benefits, modified beneficiary cost 

sharing, or involved major program reforms. Provisions involving policy changes 

are mentioned the first time they are incorporated in legislation, but not necessarily 

every time a modification is made. The descriptions include either the initial 

effective date of the provision or, in the case of budget savings provisions, the fiscal 

years for which cuts were specified. 

BALANCED BUDGET ACT (BBA) OF 1997 (P.L. 105-33) 

Hospitals 

 Froze PPS hospital and PPS-exempt hospitals and units and limited updates 

for fiscal years 1999-2002. Established a PPS for inpatient rehabilitation hospitals, 

effective beginning in fiscal year 2001. Rebased capital payment rates and provided 

for additional reductions over the fiscal year 1997-2002 period. Reduced the 

indirect medical education payment from 7.7 percent to 5.5 percent by fiscal year 
2-133 

2001 and reformed direct graduate medical education payments (generally effective 

on enactment or October 1, 1997). 

Skilled nursing facilities 

 Provided for a phase in of a PPS that will pay a Federal per-diem rate for 

covered SNF services (generally effective July 1, 1998). 

Home health 

 Provided for the establishment of a PPS for home health services. Provided 

for a reduction in per-visit cost limits prior to the implementation of the PPS, 

clarified the definitions of part-time and intermittent care, and provided for a study 

of the definition of homebound. Provided for the transfer of some home health costs 

from Part A to Part B (prospective payment effective October 1, 1999, reduction in 

cost limits effective on enactment, definition clarification effective October 1, 

1997, and transfer of costs effective January 1, 1998). 

Hospice 

 Reduced the hospice payment update for each of fiscal years 1998-2002, and 

clarified the definition of hospice care (generally effective on enactment). 

Physicians

 Provided for use of a single conversion factor; replaced the volume 

performance standard with the sustainable growth rate; provided for phased-in 

implementation of resource-based practice expenses; and permitted use of private 

contracts under specified conditions (generally effective January 1, 1998). 

Hospital outpatient departments 

 Extended reductions in payments for outpatient hospital services paid on the 

basis of costs through December 1999 and established a PPS for hospital outpatient 

departments (OPDs) for covered services beginning in 1999 (generally effective on 

enactment). 

Other providers 

 Froze payments for laboratory services for fiscal years 1998-2002; provided 

for establishment of a fee schedule in 2000 for payment for ambulance services 

(generally effective on enactment). 

Beneficiary payments 

 Permanently set the Part B premium at 25 percent of program costs and 

expanded the premium assistance beginning in 1998 available under the Specified 

Low-Income Medicare Beneficiary (SLMB) Program (effective on enactment). 

Prevention initiatives 

 Authorized coverage for annual mammograms for all women over 40. 

Added coverage for screening pelvic exams, prostate cancer screening tests, 
2-134 

colorectal cancer screening tests, diabetes self-management training services, and 

bone mass measurements for certain high-risk persons (generally effective in 1998, 

except prostate cancer screening effective 2000). 

Supplementary coverage 

 Provided for guaranteed issuance of specified Medigap policies without a 

preexisting condition exclusion for certain continuously enrolled aged individuals 

(effective July 1, 1998). 

Competitive bidding 

 Provided for competitive bidding demonstrations for furnishing Part B 

services (not including physicians services) (effective on enactment). 

Commissions 

 Established a 17-member National Advisory Commission on the Future of 

Medicare (with appointments to be made by December 1, 1997). Established the 

Medicare Payment Advisory Commission replacing the Prospective Payment 

Assessment Commission and the Physician Payment Review Commission (with 

appointments to be made by September 30, 1997). 

Medicare+Choice 

 Established a new part C of Medicare called Medicare+Choice (M+C). Built 

on the existing Medicare Risk Contract Program which enabled beneficiaries to 

enroll, where available, in health maintenance organizations (HMOs) that 

contracted with the Medicare Program. Expanded, beginning in 1999, the private 

plan options that could contract with Medicare to other types of managed care 

organizations (for example, preferred provider organizations and providersponsored organizations), private fee-for-service plans, and, on a limited 

demonstration basis, high deductible plans (called medical savings account plans) 

offered in conjunction with medical savings accounts (effective on enactment). 

BALANCED BUDGET REFINEMENT ACT (BBRA) OF 1999 

(INCORPORATED IN CONSOLIDATED APPROPRIATIONS ACT OF 1999, 

P.L.106-113) 

Prospective payment system hospitals 

 Froze the indirect medical education adjustment at 6.5 percent through fiscal 

year 2000, reduced the adjustment to 6.25 percent in fiscal year 2001 and to 5.5 

percent in fiscal year 2002 and subsequent years. Froze the reduction in the DSH 

adjustment to 3 percent in fiscal year 2001; changed the reduction to 4 percent in 

fiscal year 2002. Changed the methodology for Medicare's direct graduate medical 

education payments to teaching hospitals to incorporate a national average amount 

calculated using fiscal year 1997 hospital- specific per-resident amounts. Increased 

the number of years that would count as an initial period for child neurology 

residency training programs. Provided for the reclassification of certain counties 
2-135 

and areas for the purposes of Medicare reimbursement. 

PPS-exempt hospitals 

 Adjusted the labor-related portion of the 75-percent cap to reflect the wage 

differences in the hospitals' area relative to the national average. Increased the 

amount of continuous bonus payments to eligible long-term care and psychiatric 

providers from 1 percent to 1.5 percent for cost reporting periods beginning on or 

after October 1, 2000 and before September 30, 2001 and to 2 percent for cost 

reporting periods beginning on or after October 1, 2001 and before 

September 30, 2002. Required the Secretary to report on a discharge-based PPS for 

long-term care hospitals which would be implemented in a budget neutral fashion 

for cost reporting periods beginning on or after October 1, 2002. Required the 

Secretary to report on a per-diem-based PPS for psychiatric hospitals which would 

be implemented in a budget neutral fashion for cost reporting periods beginning on 

or after October 1, 2002. Required the Secretary to base the PPS for inpatient 

rehabilitation hospitals on discharges and incorporate functional related groups as 

the basis for payment adjustments. 

Rural providers 

 Permitted reclassification of certain urban hospitals as rural hospitals. 

Updated existing criteria used to designate outlying rural counties as part of 

metropolitan statistical areas for the purposes of Medicare’s hospital IPPS. 

Changed certain requirements pertaining to Medicare's Critical Access Hospital 

Program. Extended the Medicare dependent hospital classification through fiscal 

year 2006. Permitted certain sole community hospitals to receive Medicare 

payments based on their hospital specific fiscal year 1996 costs. Increased the 

target amount for SCHs by the full market basket amount for discharges occurring 

in fiscal year 2001. 

Skilled nursing facilities 

 Increased per-diem payments by 20 percent for 15 resource utilization 

groups (RUGs) under the PPS from April 1, 2000, until such time as the Secretary 

of HHS implements refinements to the RUGs. SNFs were permitted to elect to be 

paid under the full Federal PPS rate for SNFs (rather than go through the transitions 

period). Provided a temporary 4 percent increase in the Federal per-diem rate for 

SNF services for FY 2001 and FY 2002. The increase could not be considered in 

the base amount used to compute subsequent updates to the Federal per-diem rate. 

Expanded the list of services excluded from SNF PPS to include certain 

chemotherapy items and administration services, certain radioisotope services, 

certain prosthetic devices, and ambulance services furnished in conjunction with 

renal dialysis treatments, beginning in FY 2001. Any increase in total payments 

resulting from these exclusions are required to be budget neutral. Allowed SNFs 

with a 60 percent immunocompromised patient population to be paid temporarily a 

50/50 blend of their facility-specific and Federal rates beginning with the first cost 

reporting period beginning after enactment of BBRA and ending on September 30, 
2-136 

2001. Required reports on the resource use of AIDS patients (by the Secretary), on 

SNF costs in Alaska and Hawaii (by MedPAC), and on respiratory therapy State 

licensure, certification standards, and competency examinations (by the Secretary). 

Home health agencies 

 Delayed the 15-percent reduction in home health payments until 12 months 

after implementation of the PPS and, within 6 months of implementation, required 

the Secretary to assess the need for any reductions. Increased per-beneficiary limits 

by 2 percent for agencies whose per-beneficiary limit was below the national 

median; excluded DME from consolidated billing, and provided agencies an 

additional $10 per beneficiary to offset costs for collecting outcome and assessment 

information set (OASIS) data. 

Hospice 

 Increased payment rates otherwise in effect under the hospice PPS for fiscal 

year 2001 by 0.5 percent and for fiscal year 2002 by 0.75 percent, provided that 

these increases are not to be included in the base on which subsequent increases 

will be computed. 

Physicians 

 Made technical changes to limit oscillations in the annual update to the 

conversion factor beginning in 2001 and provided that the sustainable growth rate is 

calculated on a calendar year basis. Required the Secretary, in determining practice 

expense relative values, to establish by regulation a process under which the 

Secretary would accept for use and would use, to the maximum extent practicable 

and consistent with sound data practices, data collected by outside organizations 

and entities. 

Hospital outpatient departments 

 Made seven major changes to Medicare payments under the HOPD OPPS: 

(1) required the Secretary of the U.S. Department of Health and Human Services 

(DHHS) to provide payments (within specified limits, and on a budget neutral 

basis) over and above PPS payments for certain high cost (“outlier”) patients; (2) as 

a transition to the PPS, for 2-3 years, on a budget neutral basis, required the 

Secretary of DHHS to provide ``passthrough payments'' to hospital OPDs above 

and beyond PPS payments for costs of certain ``current innovative'' and ``new, high 

cost'' devices, drugs, and biologicals; (3) limited the cost range of items or services 

that are included in any one PPS category and required the Secretary to review the 

PPS groups and amounts annually and to update them as necessary; (4) as a 

transition to the PPS, through 2003, limited the reduction in Medicare payments 

individual hospitals experience due to the PPS; (5) provided special payments until 

2004 for small, rural hospitals to ensure that they receive no less under the 

outpatient PPS than they would have received under the prior system and provided 

the same protection permanently for cancer hospitals; (6) limited beneficiary 

copayments for outpatient care to no more than the amount of the beneficiary 
2-137 

deductible for inpatient care; and (7) required that the pre-PPS payment base used 

as the budget neutrality benchmark for the PPS include beneficiary coinsurance 

amounts as paid under the pre-PPS system (i.e., 20 percent of hospital charges). 

Therapy services 

 Suspended for 2 years (2001 and 2002) application of the caps on physical 

therapy and occupational therapy services. 

Pap smears 

 Set the minimum payment for the test component of a Pap smear at $14.60. 

Immunosuppressive drugs 

 Extended the 36-month limit on coverage of immunosuppressive drugs for 

persons exhausting their coverage in 2000-2004. Set the increase for persons 

exhausting benefits in 2000 at 8 months, and limited total expenditures to $150 

million over the 5 years. 

Studies 

 Required a number of studies including a Medicare Payment Advisory 

Commission comprehensive study of the regulatory burdens placed on all classes of 

providers under fee-for- service Medicare and the associated costs. Required GAO 

to conduct a study of Medigap policies. 

Medicare+Choice 

 Contained several provisions designed to facilitate the implementation of 

M+C. Changed the phase in of the new risk adjustment payment methodology 

based on health status to a blend of 10 percent new health status method/90 percent 

old demographic method in 2000 and 2001, and not more than 20 percent health 

status in 2002. Provided for payment of a new entry bonus of 5 percent of the 

monthly M+C payment rate in the first 12 months and 3 percent in the subsequent 

12 months to organizations that offer a plan in a payment area without an M+C plan 

since 1997, or in an area where all organizations announced withdrawal as of 

January 1, 2000. Reduced the exclusion period from 5 years to 2 years for 

organizations seeking to reenter the M+C Program after withdrawing. Allowed 

organizations to vary premiums, benefits, and cost sharing across individuals 

enrolled in the plan so long as these are uniform within segments comprising one or 

more M+C payment areas. Provided for submission of adjusted community rates by 

July 1 instead of May 1. Provided that the aggregate amount of user fees collected 

would be based on the number of M+C beneficiaries in plans compared to the total 

number of beneficiaries. Delayed implementation of the Medicare+Choice 

Competitive Bidding Demonstration Project. 
2-138 

MEDICARE, MEDICAID, AND SCHIP BENEFITS IMPROVEMENT 

AND PROTECTION ACT (BIPA) OF 2000 (INCORPORATED IN THE 

CONSOLIDATED APPROPRIATIONS ACT OF 2001 

PUBLIC LAW 106-554) 

IPPS hospitals

 Provided the full market basket update to all hospitals for FY2001. 

Established that all hospitals are eligible to receive DSH payments when their 

DSH percentage (threshold amount) exceeds 15 percent. Decreased the scheduled 

reduction in IPPS hospitals= DSH payments. Established that the cost of new 

medical technologies should be recognized with a budget neutral payment 

adjustment in IPPS by October 1, 2001. Established that starting for FY2001 

Medicare Geographic Classification Review Board (MGCRB) decisions, the 

reclassification of an IPPS hospital for use of a different area=s wage index is 

effective for 3 fiscal years. Modified teaching hospitals= indirect medical education 

(IME) percentage adjustment. Established that a teaching hospital=s approved per 

resident amount for cost reporting periods beginning during FY2002 is not less than 

85 percent of the locality adjusted national average per resident amount. Changed a 

hospital=s payment of the direct costs of approved nursing and allied health 

payments to incorporate Medicare managed care enrollees. Permitted certain 

independent laboratories to continue to bill Medicare directly for the technical 

component of pathology services provided to hospital inpatients and hospital 

outpatients under a grandfather arrangement for a 2-year period (2001-2002). 

IPPS exempt hospitals

 Established that total payments for inpatient rehabilitation facility (IRF) 

services in FY2002 would equal the amounts of payments that would have been 

made if the IRF prospective payment system (PPS) had not been enacted. Permitted 

an IRF to make a one-time election during the transition period to be paid based on 

a fully phased-in IRF-PPS rate. Increased the incentive payments for psychiatric 

hospitals and distinct part units to 3 percent for cost reporting periods beginning 

on or after October 1, 2000. Increased the national cap for long-term care hospitals 

by 2 percent and the target amount by 25 percent for cost reporting periods 

beginning during FY2001. Required the Secretary to examine the feasibility and 

impact of basing payment on the existing (or refined) acute hospital DRGs and 

using the most recently available hospital discharge data when developing the PPS 

for long-term care hospitals. 

Rural providers

 Modified the critical access hospital (CAH) program: (1) eliminated liability 

of Medicare beneficiaries for coinsurance, deductible, copayment, or other cost 

sharing amount with respect to clinical diagnostic laboratory services furnished as 

an outpatient CAH service; (2) permitted CAHs to elect outpatient payments based 

on reasonable costs plus an amount based on 115 percent of Medicare=s fee 

schedule for professional services; (3) exempted swing beds in CAHs from the 
2-139 

SNF prospective payment system; (4) provided for payment to CAHs for the 

compensation and related costs for on-call emergency room physicians who are not 

present on the premises, are not otherwise furnishing services, and are not on-call at 

any other provider or facility; and (5) specified that ambulance services provided by 

a CAH (or provided by an entity that is owned or operated by a CAH) are paid on a 

reasonable cost basis if the CAH or entity is the only provider or supplier of 

ambulance services that is located within a 35-mile drive of the CAH. 

 Modified the Medicare dependent hospital (MDH) classification so that an 

otherwise qualifying small rural hospital may be classified as an MDH if at least 

60 percent of its days or discharges were attributable to Medicare Part A 

beneficiaries in at least two of the three most recent audited cost reporting periods. 

Permitted sole community hospitals to elect payment based on hospital specific, 

updated FY1996 costs if this target amount resulted in higher Medicare payments. 

Increased payments to providers of ground ambulance services for trips originating 

in rural areas that are greater than 17 miles and up to 50 miles. Provided permanent 

authority to physician assistants who owned rural health clinics which lost their 

designation as such to bill Medicare directly. Revised Medicare reimbursement for 

telehealth services. Exempted rural health clinics operated by hospitals with less 

than 50 beds from the per-visit payment method. 

Skilled Nursing Facilities

 Provided higher payments to SNFs by increasing the update to the full 

market basket for FY 2001 and the market basket minus 0.5 percentage point for 

FY 2002 and FY 2003. The nursing component of the Federal rate was temporarily 

increased by 16.66 percent beginning April 1, 2000 through October 1, 2002. 

BIPA also corrected a payment anomaly created by BBRA by temporarily 

increasing all the rehabilitation RUGs by 6.7 percent (rather than the 20 percent for 

3 specific rehabilitation RUGs). This adjustment also remains in effect until the 

Secretary implements case mix refinements. BIPA also limited application of the 

consolidated billing requirement to Part A-covered stays and to therapy services 

furnished during Part A and Part B-covered stays. Permited the Secretary to 

establish a procedure for geographic reclassification for SNFs under PPS. The 

provision required the Secretary to collect the data necessary to establish a wage 

index for SNFs prior to establishing a geographic reclassification process. 

Required reports on different systems for categorizing patients in SNFs in a manner 

that accounts for the relative resource utilization of different patient types (by the 

Secretary); on the adequacy of Medicare payments to SNFs (by the GAO); and on 

nurse staffing ratios and the impact of the 16.66 percent increase in the nursing 

component payment rate (by the GAO). 

Home Health Agencies

 Delayed the effective date of the 15 percent reduction on payment limits for 

home health services an additional year after the implementation of PPS. Also 

provided the Secretary can adjust for case mix changes that are not the result of real 

case mix changes. Provided home health agencies with the full market basket 
2-140 

update for FY 2001. Provided a temporary 10 percent increase in payment for 

home health services furnished in a rural area from April 1, 2001 until 

March 31, 2003. Provided a two-month periodic interim payment after PPS began 

and subject to repayment with the settlement of the last cost report filed before PPS. 

 Clarified that home health agencies are not prevented from using telehealth 

services if the services do not substitute for in-person home health services ordered 

under a plan of care and are not considered a home health visit for eligibility or 

payment purposes. Prohibited the Secretary from using solely time or distance in 

determining branch office status and permitted the Secretary to include forms of 

technology in determining what constitutes supervision for purposes of determining 

branch office status. Clarified the definition of homebound to permit beneficiaries 

who require home health services to attend adult day care for therapeutic, 

psychosocial, or medical treatment and remain eligible for the home health benefit. 

 Also clarifies that any absence for the purpose of attending a religious services is 

considered infrequent or of short duration. 

Hospices

 Increased the hospice update by 5.0 percentage points in FY 2001 and 

required the Secretary to use 1.0043 as the Wichita, Kansas hospice wage index for 

FY 2000. Clarified that certification of an individual=s terminal illness must be 

based on the physician=s or the medical director=s clinical judgment regarding the 

normal course of the individual=s illness. Also required the Secretary to study and 

report on the appropriateness of the certification process regarding terminal illness 

and any recommendations for legislation by two years after enactment. 

Hospital outpatient departments

 Limited the amount of a beneficiary=s copayment for a procedure in a 

hospital outpatient department (HOPD) to the hospital inpatient deductible 

applicable in that year, effective April 1, 2001. Reduced the effective copayment 

rate for outpatient services to a maximum rate of 57 percent and then gradually 

reduced the effective coinsurance rate in 5 percentage point intervals from 2002 

through 2006 until the maximum rate is 40 percent in 2006, starting in April 2001. 

Increased the 2001 update to the full rate of increase in the market basket index. 

Increased the 2001 outpatient PPS rates. Authorized the Secretary to adjust the 

conversion factor in later years to eliminate the effect of coding or classification 

changes. Modified the procedures and standards by which certain medical devices 

are categorized and determined eligible for pass-through payments under the PPS. 

Permitted all qualifying hospitals to be eligible for transitional payments under 

OPPS. Established that existing provider-based status designations continue for 

2 years beginning October 1, 2000. Established that children=s hospitals would not 

receive lower Medicare payments under the outpatient PPS system than they would 

have received under the prior payment system. 

Ambulatory surgical centers

 Delayed implementation of proposed regulatory changes to the ambulatory 
2-141 

payment classification system, which are based on 1994 cost data, until 

January 1, 2002. Established that the these changes would be phased in over 4 

years. Required that the revised payment system, based on 1999 (or later) cost 

data, be implemented January 1, 2003. Established that the phase-in of the revised 

system and 1994 data ends when the system with 1999 or later data is implemented. 

Preventive Benefits

 Made the following changes to coverage of preventive services: 1) modified 

existing law to provide Medicare coverage for biennial screening Pap smears and 

pelvic exams; 2) added Medicare coverage for annual glaucoma screenings for 

persons determined to be at high risk for glaucoma, individuals with a family 

history of glaucoma, and individuals with diabetes; 3) authorized coverage for 

screening colonoscopies for all individuals, not just those at high risk; 4) specified 

that screening mammographies are paid under the physician fee schedule; and 5) 

authorized coverage for medical nutrition therapy services for beneficiaries who 

have diabetes or renal disease. 

Immunosuppressive Drugs

 Eliminated the time limitations of the coverage of immunosuppressive drugs 

for beneficiaries who have received a transplant paid for by Medicare. 

Persons with Amyotrophic Lateral Sclerosis

 Waived the 24-month waiting period for Medicare coverage (otherwise 

applicable for disabled persons) for persons with amyotrophic lateral sclerosis 

(ALS). 

Ambulances

 Provided for the full inflation update in 2001. Increased payments (from 

July 1, 2001 - December 31, 2003) for ground ambulance trips originating in rural 

areas that are greater than 17 miles and up to 50 miles. 

Therapy Services

 Extended the moratorium on physical therapy and occupational therapy caps 

for an additional year through 2002. 

Renal Dialysis

 Increased the composite rate payment for renal dialysis by 2.4 percent for 

2001. The Secretary was required to collect data and develop an end-stage renal 

disease (ESRD) market basket whereby the Secretary could estimate, before the 

beginning of each year, the percentage increase in costs for the mix of labor and 

non-labor goods and services included in the composite rate. The Secretary was 

required to report to Congress on the index together with recommendations on the 

appropriateness of an annual or periodic update. 
2-142 

Durable Medical Equipment and Prosthetics and Orthotics

 Provided full CPI-U update for DME and PO for 2001, but maintained for 

2002 the 0 percent update for DME and 1 percent update for PO. Provided 

coverage for certain prosthetics and custom-fabricated orthotics. Provided 

coverage for replacement of certain artificial limbs and replacement parts for such 

limbs. 

Revisions to Medicare Coverage Process

 Clarified when and under what circumstances Medicare coverage policy 

could be challenged. An aggrieved party could file a complaint concerning a 

national coverage decision which would be reviewed by the Department Appeals 

Board (DAB) of HHS. An aggrieved party could also file a complaint concerning a 

local coverage determination. In this case, the determination would first be 

reviewed by an administrative law judge. If unsatisfied, complainants could 

subsequently seek review of such local policy by the DAB. In both cases, a DAB 

decision would constitute final HHS action and be subject to judicial review. An 

affected party would be permitted to submit a request to the Secretary to issue a 

national coverage or noncoverage determination. 

Medicare+Choice

 Established multiple floor rates, based on population and location. Applied 

a 3 percent minimum update in 2001 and returned to the current law minimum 

update of 2 percent thereafter. Increased the M+C payment rates for enrollees with 

ESRD to reflect the demonstration rate of social health maintenance organizations' 

ESRD capitation demonstrations. Extended the current risk adjustment 

methodology until 2003 and beginning in 2004, begin to phase in a new risk 

adjustment methodology based on data from inpatient hospitals and ambulatory 

settings. Permitted M+C plans to offer reduced Medicare Part B premiums to their 

enrollees as part of providing any required additional benefits or reduced costsharing. Extended the application of the new entry bonus for M+C plans to include 

areas for which notification had been provided, as of October 3, 2000, that no plans 

are available January 1, 2001. Required payment adjustments to M+C plans if a 

legislative change resulted in significant increased costs. Precluded the Secretary 

from implementing, other than at the beginning of a calendar year, regulations that 

impose new, significant regulatory requirements on M+C organizations. Required 

the Secretary to make decisions, within 10 days, approving or modifying marketing 

material used by M+C organizations, provided that the organization used model 

language specified by the Secretary. Allowed an M+C organization offering a plan 

in an area with more than one local coverage policy to use the local coverage policy 

for the part of the area that was most beneficial to M+C enrollees (as identified by 

the Secretary) for all M+C enrollees enrolled in the plan. Expanded the M+C 

quality assurance programs for M+C plans to include a separate focus on racial and 

ethnic minorities. Allowed the Secretary to waive or modify requirements that 

hinder the design of, offering of, or enrollment in certain M+C plans, such as M+C 

plans under contract between M+C organizations and employers, labor 
2-143 

organizations, or trustees of a fund established by employers and/or labor 

organizations. Extended the period for Medigap enrollment for certain M+C 

enrollees affected by termination of coverage. Allowed individuals who enroll in an 

M+C plan after the 10th day of the month to receive coverage beginning on the first 

day of the next calendar month. Permitted ESRD beneficiaries to enroll in another 

M+C plan if they lost coverage when their plan terminated its contract or reduced 

its service area. Required an M+C plan to cover post-hospitalization skilled nursing 

care through an enrollee’s “home skilled nursing facility” in certain situations. 

Mandated review of ACR submissions by the HCFA Chief Actuary. 

PUBLIC HEALTH SECURITY AND BIOTERRORISM PREPAREDNESS 

AND RESPONSE ACT (P.L. 107-188) 

Medicare+Choice

 Moved CMS= annual announcement of M+C payment rates from no later 

than March 1 to no later than the 2nd Monday in May, effective only in 2003 and 

2004. Temporarily moved the deadline for plans to submit information about 

ACRs, M+C premiums, cost sharing, and additional benefits (if any) from no later 

than July 1 to no later than the 2nd Monday in September in 2002, 2003, and 2004. 

Changed the annual coordinated election period from the month of November to 

November 15th through December 31 in 2002, 2003, and 2004. Allowed Medicare 

beneficiaries to make and change elections to an M+C plan on an ongoing basis 

through 2004. Then beginning in 2005, individuals will only be able to make 

changes on the more limited basis, originally scheduled to be phased in beginning 

in 2002. 

CONSOLIDATED APPROPRIATIONS RESOLUTION, 2003 (CAR) 

(P.L.108-7) 

Hospitals

 Temporarily increased the base rate used to pay rural and small urban 

hospitals to that used to pay hospitals in large urban areas for discharges from 

April 1, 2003 to September 30, 2003.

Physicians

 Permitted CMS to make adjustments to sustainable growth rate figures for 

previous years, thereby permitting a fee schedule update of 1.6 percent for 2003. 

Part B Premium

 Extended through 2003 a program that pays the Medicare Part B premium 

for Medicare beneficiaries with incomes between 120 percent and 135 percent of 

poverty. 
2-144 

 TO EXTEND THE TEMPORARY ASSISTANCE FOR NEEDY FAMILIES 

BLOCK GRANT PROGRAM, AND CERTAIN TAX AND TRADE 

PROGRAMS, AND FOR OTHER PURPOSES (P.L. 108-89) 

Hospitals

 Extended Medicare=s payment equalization between large urban hospitals 

and other hospitals for discharges through March 31, 2004. The law which became 

effective October 1, 2003 requires the Secretary to equalize the base amounts by 

November 1, 2003 and compensate hospitals for missed payments. 

CBO SAVINGS AND REVENUE ESTIMATES FOR BUDGET 

RECONCILIATION AND RELATED ACTS, 1981-2003 

Table 2-45 shows estimates of savings and revenue increases for budget 

reconciliation legislation enacted from 1981 to 1997 and spending increases 

enacted in 1999, 2000 and 2003. These estimates were made at the time of 

enactment by the Congressional Budget Office (CBO). It should be noted that the 

estimates are compared with the CBO budget baseline in effect at the time. The 

savings from the various reconciliation bills cannot be added together. 

TABLE 2-45--MEDICARE SAVINGS ESTIMATES, 1981-2003 

[In Billions of Dollars]

Legislative Act Savings 

Omnibus Budget Reconciliation Act of 1981: 

 Spending reductions for fiscal years 1982-84 $4.3 

Tax Equity and Fiscal Responsibility Act of 1982: 

 Spending reductions for fiscal years 1983-87 23.1 

Social Security Amendments of 1983: 

 Spending reductions for fiscal years 1983-88 0.2 

 Revenue increases for fiscal years 1983-88 11.5 

Deficit Reduction Act of 1984: 

 Spending reductions for fiscal years 1984-87 6.1 

Consolidated Omnibus Budget Reconciliation Act of 1985: 

 Spending reductions for fiscal years 1986-81 12.6 

Omnibus Budget Reconciliation Act of 1986: 

 Spending reductions for fiscal years 1987-89 1.0 

Omnibus Budget Reconciliation Act of 1987: 

 Spending reductions for fiscal years 1988-90 9.8 

Omnibus Budget Reconciliation Act of 1989: 

 Spending reductions for fiscal years 1990-94 10.9 

Omnibus Budget Reconciliation Act of 1990: 

 Spending reductions for fiscal years 1991-95 43.1 

 Revenue increases for fiscal years 1991-95 26.9 

Omnibus Budget Reconciliation Act of 1993: 

 Spending reductions for fiscal years 1994-98 55.8 

 Revenue increases for fiscal years 1994-98 53.8 
2-145 

TABLE 2-45--MEDICARE SAVINGS ESTIMATES, 1981-2003-continued 

[In Billions of Dollars] 

Legislative Act Savings 

Health Insurance Portability and Accountability Act of 1996: 

 Spending reductions for fiscal years 1996-2002 3.0 

Balanced Budget Act of 1997: 

 Spending reductions for fiscal years 1998-2002 116.4 

 Spending reductions for fiscal years 1998-2007 393.8 

Balanced Budget Refinement Act of 1999: 

 Spending increases for fiscal years 2000-2004 -15.0 

 Spending increases for fiscal years 2004-9 -25.1 

Medicare, Medicaid, and SCHIP Benefits Improvement and 

Protection Act of 2000 

 Spending increase for fiscal years 2000-2005 -32.3 

 Spending increase for fiscal years 2001-2010 -81.5 

Consolidated Appropriations Resolution, 2003 

 Spending increase for 2003 -1.1 

 Spending increase for 2003-2013 -53.5 

Note-Savings relative to baseline at time of enactment. Figures cannot be summed. 

Sources: Committee on Ways and Means (1998); Congressional Budget Office. 

MEDICARE HISTORICAL DATA 

 Tables 2-46 through 2-52 present detailed historical data on the Medicare 

Program. Tables 2-46 and 2-47 present detailed enrollment data. Table 2-48 

describes the percentage of enrollees participating in a State buy-in agreement. 

Tables 2-49, 2-50 and 2-51 show the number of persons served and program 

payments. Table 2-52 shows the utilization of short stay hospital services. 
TABLE 2-46--GROWTH IN NUMBER OF AGED MEDICARE ENROLLEES BY SEX AND AGE, 

SELECTED YEARS 1968-2001 

Average Annual Growth Rate 

(Percent) 

Sex and Age 1968 1975 1980 1985 1990 1995 2000 2001 1968-

1975 

1975-

1984 

1985-

1995 

1995-

2001 

Total 

Aged 

Population 

20011

Enrollees 

as Percent 

of Total 

Aged 

Population 

2001 

All Persons 19,496 22,548 25,515 28,175 30,948 33,142 34,253 34,477 2.1 2.3 1.6 0.7 35,064 98.3 

65-69 6,551 7,642 8,459 8,956 9,695 9,517 9,167 9,201 2.2 1.6 0.6 -0.6 9,411 97.8 

70-74 5,458 5,950 6,756 7,442 7,951 8,756 8,609 8,564 1.2 2.3 1.6 -0.4 8,744 97.9 

75-79 3,935 4,313 4,809 5,453 6,058 6,563 7,285 7,285 1.3 2.4 1.9 1.8 7,401 98.4 80-84 2,249 2,793 3,081 3,463 3,957 4,470 4,870 5,022 3.1 2.2 2.6 2.0 5,070 99.1 

85 + 1,303 1,850 2,410 2,861 3,286 3,837 4,322 4,390 5.1 4.6 3.0 2.3 4,437 98.9 

Males 8,177 9,201 10,268 11,282 12,416 13,434 14,112 14,262 1.7 2.0 2.0 1.5 14,199 97.2 

65-69 2,944 3,420 3,788 4,019 4,352 4,348 4,268 4,298 2.2 1.6 1.6 0.2 4,393 96.3 

70-74 2,322 2,504 2,841 3,155 3,406 3,791 3,812 3,813 1.1 2.4 2.4 1.4 3,857 99.0 

75-79 1,596 1,669 1,854 2,112 2,382 2,642 2,991 3,003 0.6 2.4 2.4 2.4 2,997 96.0 

80-84 864 1,005 1,062 1,188 1,369 1,593 1,804 1,876 2.2 1.6 1.6 2.9 1,764 97.4 

85 + 450 604 722 809 906 1,060 1,237 1,272 4.3 3.1 3.1 2.9 1,188 97.6 

Females 11,319 13,347 15,247 16,894 18,532 19,708 20,140 20,199 2.4 2.4 2.4 1.2 20,203 99.0 

65-69 3,606 4,222 4,671 4,938 5,343 5,169 4,898 4,903 2.3 1.5 1.5 -9.9 5,201 95.1 

70-74 3,136 3,446 3,914 4,287 4,545 4,964 4,797 4,751 1.4 2.3 2.3 -10.0 4,945 99.2 75-79 2,338 2,644 2,954 3,341 3,676 3,921 4,294 4,281 1.8 2.4 2.4 -11.1 4,221 99.0 

75-84 1,386 1,788 2,019 2,276 2,588 2,877 3,066 3,145 3.7 2.4 2.4 -14.0 2,970 100.7 

85 + 853 1,246 1,689 2,053 2,380 2,777 3,085 3,119 5.6 5.3 5.3 -14.0 2,866 103.8 1 Total aged population data reflect United States residents. 

Note-Totals may not add due to rounding.Source: Centers for Medicare & Medicaid Services, Office of Research, Development and Information, U.S. Department of Commerce, Bureau of theCensus. 
TABLE 2-47--GROWTH IN NUMBER OF DISABLED MEDICARE ENROLLEES WITH HOSPITAL 

INSURANCE COVERAGE BY TYPE OF ENTITLEMENT AND AGE, SELECTED YEARS 1975-2001 

Year Average Annual Type of Entitlement Percent Growth 

and Age 1975 1980 1985 1990 1995 2000 2001 1975-1985 1985- 1995 1995- 2001 

All Disabled Persons 2,058,424 2,425,231 2,906,876 3,254,983 4,393,287 5,366,598 5,562,860 3.5 4.2 4.0 

Under 35 238,070 193,392 400,268 483,262 587,709 522,123 520,537 5.3 3.9 -2.0 35-44 251,142 258,374 442,809 654,953 973,328 1,129,170 1,137,135 5.8 8.2 2.6 45-54 508,345 572,823 593,058 741,193 1,187,993 1,627,107 1,727,260 1.6 7.2 6.4 55-64 1,060,967 1,400,642 1,470,741 1,375,575 1,644,257 2,088,198 2,177,928 3.3 1.1 4.8 

All Disabled Workers 1,638,662 2,396,897 2,325,525 2,579,097 3,602,559 NA NA 3.6 4.5 NA 

Under 35 100,439 184,619 201,678 257,760 357,794 NA NA 7.2 5.9 NA 35-44 164,439 253,186 308,068 482,071 769,071 NA NA 6.5 9.6 NA 45-54 426,451 565,846 492,809 612,692 1,023,616 NA NA 1.5 7.6 NA 

55-64 947,333 1,393,246 1,322,970 1,226,574 1,452,078 NA NA 3.4 0.9 NA 

Adults Disabled as Children 324,864 409,072 467,634 542,416 609,081 NA NA 3.7 2.7 NA 

Under 35 153,708 173,684 189,109 208,901 213,973 NA NA 2.1 1.2 NA 35-44 84,508 105,092 128,941 158,725 189,108 NA NA 4.3 3.9 NA 45-54 71,484 80,381 88,584 107,092 132,484 NA NA 2.2 4.1 NA 

55-64 45,164 49,910 61,000 67,698 73,516 NA NA 3.1 1.9 NA 

Widows and Widowers 83,771 110,785 82,841 68,793 111,121 NA NA -0.1 3.0 NA 

Under 55 7,446 7,577 4,585 5,615 12,420 NA NA -4.7 10.5 NA 55-64 76,325 103,208 78,255 63,178 98,701 NA NA 0.3 2.3 NA 

End-Stage Renal Disease Only 11,127 28,334 30,786 64,677 70,526 NA NA 10.7 8.6 NA 

Under 35 3,729 8,773 9,391 16,601 15,942 NA NA 9.7 5.4 NA 

35-44 2,187 5,188 5,799 14,157 15,149 NA NA 10.2 10.1 NA 45-54 2,966 6,977 7,080 15,794 19,473 NA NA 9.1 10.6 NA 55-64 2,245 7,396 8,516 18,125 19,962 NA NA 14.3 8.9 NA 

Note-Data are no longer available by the historical breakdowns. 

Source: Centers for Medicare & Medicaid Services, Office of Research, Development, and Information, unpublished data. 
2-148 

TABLE 2-48--NUMBER AND PERCENTAGE OF INDIVIDUALS 

ENROLLED IN SUPPLEMENTARY MEDICAL INSURANCE (SMI) 

UNDER STATE BUY-IN AGREEMENTS BY TYPE OF BENEFICIARY 

AND BY YEAR OR 2001 AREA OF RESIDENCE 

All Persons Aged Disabled 

Year or Area of 

Residence 1

Number 

 in 

Thousands 

Percent 

of SMI 

Enrolled

Number

in 

Thousands

Percent of 

SMI 

Enrolled

Total SMI 

in 

Thousands

Number

in 

Thousands

Percent of 

SMI 

Enrolled 

1968 1,648 8.8 1,648 8.8 -- NA NA 

1975 2,846 12.0 2,483 11.4 -- 363 18.7 

1980 2,954 10.9 2,449 10.0 -- 504 18.9 

1985 2,670 9.0 2,164 8.0 -- 505 19.2 

1990 3,604 11.0 2,714 9.1 2,943 890 30.0 

1991 3,766 10.4 2,817 8.7 NA 949 27.8 

1992 4,055 12.0 2,972 9.7 3,220 1,083 33.6 

1993 4,353 12.6 3,122 10.0 3,466 1,231 35.5 

1994 4,625 13.2 3,243 10.3 3,720 1,382 37.2 

1995 4,895 13.7 3,369 10.6 3,942 1,526 38.7 

1996 5,001 13.1 3,404 10.6 4,155 1,597 38.4 

1997 5,089 13.2 3,445 10.7 4,296 1,644 38.3 

1998 5,109 13.9 3,492 10.8 4,486 1,775 39.6 

1999 5,392 14.6 3,563 11.0 4,642 1,829 39.4 

2000 5,549 14.8 3,632 11.1 4,768 1,917 40.2 

2001 5,744 15.2 3,714 11.3 4,934 2,030 41.1 

Area of Residence1

All Areas 5,744 15.2 3,714 11.3 4,934 2,030 41.1 

United States 5,716 15.4 3,693 11.4 4,830 2,023 41.9 

Alabama 144 21.6 93 17.1 124 51 41.1 

Alaska 9 22.0 5 14.7 7 4 57.1 

Arizona 67 10.2 42 7.2 78 25 32.1 

Arkansas 81 19.5 53 15.5 74 28 37.8 

California 857 22.9 624 18.8 428 233 54.4 

Colorado 58 12.8 36 9.1 58 22 37.9 

Connecticut 58 11.8 35 8.0 53 23 43.4 

Delaware 13 11.7 8 8.2 13 5 38.5 

D.C. 14 21.2 10 17.5 9 4 44.4 

Florida 368 13.3 250 10.1 297 118 39.7 

Georgia 187 20.8 121 16.3 160 66 41.3 

Hawaii 22 13.8 16 11.0 13 6 46.2 

Idaho 19 11.7 10 6.9 19 9 47.4 

Illinois 167 10.8 99 7.2 176 68 38.6 

Indiana 97 11.9 56 7.9 106 41 38.7 

Iowa 54 11.8 32 7.8 47 22 46.8 

Kansas 42 11.4 25 7.6 39 17 43.6 

Kentucky 121 20.2 71 14.9 125 50 40.0 

Louisiana 118 20.6 77 16.2 100 41 41.0 

Maine 39 18.7 21 11.9 32 18 56.3 

Maryland 71 11.7 46 8.5 68 25 36.8 

Massachusetts 161 18.2 90 11.7 116 71 61.2 

Michigan 150 11.1 82 7.0 182 68 37.4 

Minnesota 70 11.1 41 7.3 64 29 45.3 
2-149 

TABLE 2-48--NUMBER AND PERCENTAGE OF INDIVIDUALS 

ENROLLED IN SUPPLEMENTARY MEDICAL INSURANCE (SMI) 

UNDER STATE BUY-IN AGREEMENTS BY TYPE OF BENEFICIARY 

AND BY YEAR OR 2001 AREA OF RESIDENCE- Continued 

All Persons Aged Disabled 

Year or Area of 

Residence 1

Number 

 in 

Thousands 

Percent 

of SMI 

Enrolled

Number

in 

Thousands

Percent 

of SMI 

Enrolled

Total SMI 

in 

Thousands

Number

in 

Thousands

Percent of 

SMI 

Enrolled 

Mississippi 119 29.2 77 24.1 88 42 47.7 

Missouri 94 11.4 54 7.6 116 40 34.5 

Montana 13 9.8 7 6.0 17 6 35.3 

Nebraska 22 9.0 11 5.0 25 11 44.0 

Nevada 23 9.6 14 6.6 29 9 31.0 

New Hampshire 10 6.3 5 3.5 19 5 26.3 

New Jersey 151 13.2 103 10.1 124 48 38.7 

New Mexico 40 17.9 27 14.1 32 13 40.6 

New York 395 15.6 272 12.3 329 123 37.4 

North Carolina 234 21.0 152 16.4 187 82 43.9 

North Dakota 7 7.1 4 4.5 9 3 33.3 

Ohio 182 11.1 114 7.9 201 68 33.8 

Oklahoma 70 14.3 46 10.9 66 24 36.4 

Oregon 65 13.6 39 9.2 56 26 46.4 

Pennsylvania 219 11.0 129 7.3 207 90 43.5 

Rhode Island 7 4.5 4 2.9 20 3 15.0 

South Carolina 120 21.4 75 16.3 101 45 44.6 

South Dakota 13 11.5 8 7.9 12 5 41.7 

Tennessee 184 22.8 109 16.4 142 75 52.8 

Texas 381 17.3 281 14.6 268 100 37.3 

Utah 18 9.1 9 5.1 21 9 42.9 

Vermont 14 16.3 8 10.8 12 6 50.0 

Virginia 119 13.8 75 10.1 123 44 35.8 

Washington 98 13.8 56 9.0 85 42 49.4 

West Virginia 49 14.9 27 10.3 65 22 33.8 

Wisconsin 75 10.1 40 6.0 80 35 43.8 

Wyoming 7 10.9 4 7.0 7 3 42.9 

Puerto Rico 7 1.7 4 1.3 97 3 3.1 

Other/Unknown2

 5 1.1 4 1.1 104 0 0.0 1

 State of residence is not necessarily State that bought coverage. 

2

 Includes Guam, Virgin Islands, and foreign countries; data for these areas combined to prevent 

disclosure of confidential information. 

NA-Not available 

Source: Centers for Medicare & Medicaid Services, unpublished data. 
2-150 

TABLE 2-49--DISTRIBUTION OF MEDICARE BENEFIT PAYMENTS BY 

TYPE OF COVERAGE, TYPE OF SERVICE, AND TYPE OF ENROLLEE, 

CALENDAR YEAR 2002 

[Amounts in millions of dollars]

All Enrollees Aged Disabled Type of Coverage 

 and Service Amount Percentage 

Distribution

Amount Percentage 

Distribution

Amount Percentage 

Distribution 

HI $148,523 100.0 $128,663 100.0 $19,860 100.0 

Inpatient 104,908 70.6 88,052 68.4 16,856 84.9 

SNF 14,646 9.9 13,831 10.7 815 4.1 

HHA 5,138 3.5 4,644 3.6 494 2.5 

Hospice 4,628 3.1 4,397 3.4 231 1.2 

Managed Care 19,203 12.9 17,739 13.8 1,464 7.4 

SMI 112,042 100.0 95,122 100.0 16,920 100.0 

Physicians Fee 

 Schedule 44,979 40.1 38,992 41.0 5,987 35.4 

Durable Medical 

 Equipment 6,530 5.8 5,188 5.5 1,342 7.9 

Carrier Laboratory 2,770 2.5 2,346 2.5 424 2.5 

Other Carrier 10,735 9.6 9,204 9.7 1,530 9.0 

Outpatient Hospital 13,139 11.7 10,846 11.4 2,292 13.5 

HHA 5,416 4.8 4,909 5.2 507 3.0 

Intermediary 

 Laboratory 2,288 2.0 1,859 2.0 429 2.5 

Other Intermediary 8,689 7.7 5,435 5.7 3,254 19.2 

Managed Care 17,497 15.6 16,342 17.2 1,155 6.8 

Total 260,565 100.0 223,785 100.0 36,780 100.0 

HI- Hospital Insurance. 

SMI- Supplementary Medical Insurance. 

SNF- Skilled Nursing Facility. 

HHA- Home Health Agency. 

Source: Centers for Medicare & Medicaid Services, Office of the Actuary. 

TABLE 2-50--PERSONS ENROLLED AND PERSONS SERVED UNDER 

MEDICARE, AND PROGRAM PAYMENTS, BY TYPE OF COVERAGE AND 

SERVICE, SELECTED CALENDAR YEARS 1967-2000 

Year Average Annual Rate of 

Change Type of 

Coverage 

and Service 1967 1980 1990 1995 2000 1967-

1980 

1980- 

1990 

1990- 

2000 

 Number of Enrollees (In Thousands) 

HI and/or SMI 19,521 28,478 34,213 37,566 39,632 2.9 1.9 1.5 

HI 19,494 28,067 33,731 37,152 39,211 2.8 1.9 1.5 

SMI 17,893 27,400 32,636 35,711 37,369 3.3 1.8 1.4 

 Number of Persons Served (In Thousands)

HI 3,960 6,752 7,036 7,886 7,325 4.2 0.4 0.4 

Inpatient 3,601 6,672 6,543 6,938 6,917 4.9 -0.2 0.6 

SNF 354 257 638 1,063 1,468 -2.4 9.5 8.7 

HHA 126 726 1,936 3,152 1,444 14.4 10.3 -2.9 

Hospice NA NA NA NA 541 NA NA NA 

SMI 6,523 17,822 26,951 29,912 29,313 8.0 4.2 0.8 
2-151 

TABLE 2-50--PERSONS ENROLLED AND PERSONS SERVED UNDER 

MEDICARE, AND PROGRAM PAYMENTS, BY TYPE OF COVERAGE 

AND SERVICE, SELECTED CALENDAR YEARS 1967-2000- continued 

Year Average Annual Rate of 

Type of Coverage Change 

and Service 1967 1980 1990 1995 2000 1967-

1980 

1980-

1990 

1990-

2000 

Physician and Other 

Medical Services 6,415 17,258 26,350 29,222 28,763 7.9 4.3 0.9 

Outpatient Services 1,511 7,538 15,511 18,945 21,029 13.2 7.5 3.1 

HHA 118 327 38 37 1,190 8.2 -19.4 41.1 

Total 7,154 18,031 30,087 30,423 29,583 7.4 5.3 -0.2 

Rate Per Thousand Enrollees 

HI 203 241 209 239 187 1.3 -1.4 -1.1 

Inpatient 185 238 194 207 185 2.0 -2.0 -0.5 

SNF 18 9 19 37 37 -5.2 7.8 7.0 

HHA 6 26 57 102 37 11.9 8.2 -4.3 

Hospice NA NA NA NA 14 NA NA NA 

SMI 365 650 826 939 784 4.5 2.4 -0.5 

Physician and Other 

Medical Services 359 630 807 917 770 4.4 2.5 -0.5 

Outpatient Services 84 275 475 612 563 9.6 5.6 1.7 

HHA 7 12 1 1 32 4.2 -22.0 41.4 

Total 366 633 792 893 746 4.3 2.3 -0.6 

Program Payments (In Millions of Dollars) 

HI 2,967 23,119 62,347 101,835 101,663 17.1 10.4 5.0 

Inpatient 2,667 22,297 56,716 78,944 85,197 17.7 9.8 4.2 

SNF 274 344 1,971 7,799 10,621 1.8 19.1 18.3 

HHA 26 478 3,660 15,092 2,918 25.1 22.6 -2.2 

Hospice NA NA NA NA 2,927 NA NA NA 

SMI 1,272 10,494 39,072 57,145 72,599 17.6 14.0 6.4 

Physician and Other 

Medical Services 1,217 8,358 30,222 41,617 51,474 16.0 13.7 5.5 

Outpatient Services 38 1,962 8,773 15,328 16,787 35.4 16.2 6.7 

HHA 17 175 78 200 4338 19.6 -7.8 49.5 

Total 4,239 33,613 101,419 158,980 174,261 17.3 11.7 5.6 

Program Payments Per Person Served 

HI 749 3,424 8,861 12,672 13,878 12.4 10.0 4.6 

Inpatient 741 3,342 8,688 11,336 12,318 12.3 10.0 3.6 

SNF 774 1,339 3,089 6,325 7,235 4.3 8.7 8.9 

HHA 206 658 1,690 4,404 2,021 9.3 9.9 1.8 

Hospice NA NA NA NA 5,409 NA NA NA 

SMI 195 589 1,450 1,889 2,477 8.9 9.4 5.5 

Physician and Other 

Medical Services 190 484 1,147 1,409 1,790 7.5 9.0 4.6 

Outpatient Services 25 260 566 778 798 19.7 8.1 3.5 

HHA 144 535 2,053 4,837 3,644 10.6 14.4 5.9 

Total 593 1,864 3,743 5,226 5,891 9.2 7.2 4.6 

HI- Hospital Insurance. 

SMI- Supplementary Medical Insurance. 

SNF- Skilled Nursing Facility. 
2-152 

TABLE 2-50--PERSONS ENROLLED AND PERSONS SERVED UNDER 

MEDICARE, AND PROGRAM PAYMENTS, BY TYPE OF COVERAGE 

AND SERVICE, SELECTED CALENDAR YEARS 1967-2000- continued

HHA- Home Health Agency. 

Source: Centers for Medicare & Medicaid Services, Office of Research, Development, and 

Information. 

TABLE 2-51--PERSONS SERVED AND PROGRAM PAYMENTS FOR 

MEDICARE BENEFICIARIES, BY DEMOGRAPHIC 

CHARACTERISTICS, CALENDAR YEAR 2000 

Persons Served Program Payments 

Demographic 

Characteristic Number in 

Thousands Percent Amount in 

Millions Percent 

Average 

Amount 

Per 

Person 

Served 

Per 

Enrollee 

Sex: 

Male 12,109 40.9 $76,230 43.7 $6,295 $5,370 

Female 17,473 59.1 98,031 56.3 5,610 5,286 

Age: 

Under 65 Years 4,096 13.8 25,773 14.8 6,292 5,252 

65-74 Years 12,128 41.0 57,494 33 4,741 4,040 

75-84 Years 9,620 32.5 62,685 36 6,516 6,320 

85 Years or Older 3,783 12.6 28,309 16.2 7,573 7,684 

Race: 

White 25,534 86.3 144,417 82.9 5,656 5,184 

Nonwhite 3,953 13.4 29,303 16.8 7,413 6,125 

Unknown 95 0.3 542 0.3 5,705 5,693 

Type of Entitlement: 

Aged 25,486 86.2 148,488 85.2 5,826 5,335 

Disabled 4,096 13.8 25,773 14.8 6,292 5,252 

MSA Type: 

Urban 21,009 71.0 131,348 75.4 6,252 5,579 

Rural 8,574 29 42,913 24.6 5,005 4,666 

Source: Centers for Medicare & Medicaid Services. 
TABLE 2-52--USE OF SHORT-STAY HOSPITAL SERVICES BY MEDICARE ENROLLEES BY CALENDAR 

YEAR OR 2001 DEMOGRAPHIC CHARACTERISTICS 

Discharges Total Days of Care Program Payments 

Calendar Year or 

Characteristic 

Hospital 

Insurance 

Enrollees in 

Thousands 

Number in 

Thousands

Per 1,000 

Enrollees

Number in 

Thousands 

Per 

Discharge

Per 1,000 

Enrollees 

Amount in 

Millions 

Per 

Discharge

Per 

Covered 

Day of

Care 

Per 

Enrollee

1975 24,640 8,001 325 89,275 11.2 3,623 $9,748 $1,218 $109 $396 1980 28,067 10,279 366 109,175 10.6 3,890 22,099 2,150 202 787 

1982 29,069 11,109 382 113,047 10.2 3,889 30,601 2,755 271 1,053 

1984 29,996 10,896 363 96,485 8.9 3,217 38,500 3,533 399 1,284 1985 30,589 10,027 328 86,339 8.6 2,823 40,200 4,009 466 1,314 

1986 31,216 10,044 322 86,910 8.7 2,784 41,781 4,160 481 1,338 

1987 31,853 10,110 317 89,651 8.9 2,815 44,068 4,359 492 1,383 

1988 32,483 10,256 316 90,873 8.9 2,798 46,879 4,571 516 1,443 

1989 33,040 10,148 307 89,902 8.9 2,721 49,091 4,838 546 1,486 

1990 33,719 10,522 312 92,735 8.8 2,750 53,708 5,281 579 1,593 1991 34,428 10,737 312 93,935 8.7 2,728 58,750 5,610 625 1,706 

1992 35,154 10,958 312 91,990 8.4 2,617 64,810 6,057 705 1,844 

1993 35,904 10,979 306 87,883 8.0 2,448 67,260 6,257 765 1,873 

1994 36,543 11,282 309 84,742 7.5 2,319 70,624 6,377 833 1,933 

1995 37,135 11,435 308 80,056 7.0 2,156 74,836 6,656 935 2,015 

19961 33,301 11,474 345 75,660 6.6 2,272 78,546 6,953 1,038 2,359 

19971 32,614 11,527 353 73,029 6.3 2,239 80,725 7,118 1,105 2,475 

 19981 31,955 11,355 355 70,055 6.2 2,192 78,364 7,021 1119 2,452 

19991 31,777 11,605 365 70,508 6.1 2,219 79,013 6,920 1,121 2,486 

20001 32,329 11,720 363 70,330 6.0 2,175 81,231 6,971 1,155 2,513 

 20011 33,446 12,231 366 72,607 5.9 2,171 88,323 7,262 1,216 2,641 

Annual Percentage Change in Period: 

1975-1984 2.2 3.5 1.3 0.9 -2.5 -1.3 16.5 12.6 15.5 14.0 1985-1995 2.0 -1.3 -3.1 -1.3 -1.6 -3.2 6.3 6.1 7.6 4.2 
TABLE 2-52--USE OF SHORT-STAY HOSPITAL SERVICES BY MEDICARE ENROLLEES BY 

CALENDAR YEAR OR 2001 DEMOGRAPHIC CHARACTERISTICS-continued

Discharges Total Days of Care Program Payments 

Calendar Year or 

Characteristic 

Hospital 

Insurance 

Enrollees in 

Thousands 

Number in 

Thousands

Per 1,000 

Enrollees

Number in 

Thousands 

Per 

Discharge

Per 1,000 

Enrollees 

Amount in 

Millions 

Per 

Discharge

Per 

Covered 

Day of

Care 

Per 

Enrollee

1996-2001 0.1 1.3 1.2 -0.8 -2.1 -0.9 2.4 0.9 3.2 2.3 

Age: 

Less Than 65 5,172 1,899 364 11,874 6.5 2,296 13,264 7,098 1,117 2,565 

65-69 7,695 1,698 230 9,519 5.9 1,237 13,199 7,825 1,387 1,715 70-74 6,994 2,026 303 11,485 6.0 1,642 15,699 7,784 1,367 2,245 75-79 6,021 2,265 393 13,330 6.3 2,214 17,177 7,609 1,289 2,853 

80-84 4,190 2,029 487 12,285 6.5 2,932 14,421 7,125 1,174 3,442 

85 or Older 3,787 2,314 610 14,114 6.5 3,727 14,564 6,308 1,032 3,846 

Sex: 

Male 14,616 5,208 371 31,346 6.0 2,145 40,971 7,816 1,307 2,803 Female 19,113 6,712 361 41,261 6.1 2,159 47,352 6,842 1,148 2,477 

Race: 2

White 28,571 10,078 361 59,089 5.9 2,068 72,375 7,123 1,225 2,533 All Other 4,875 1,766 388 13,186 7.5 2,705 15,549 7,990 1,179 3,190 

Area of Residence: 

Northeast 6,650 2,388 359 16,296 6.8 2,503 20,856 8,791 1,280 3,204 North Central 8,412 3,154 375 17,478 5.5 2,088 21,295 6,790 1,218 2,544 

South 12,708 4,969 391 29,071 5.9 2,301 32,676 6,608 1124 2,587 West 5,225 1,568 300 8,720 5.6 1,725 13,002 8,346 1,491 2,572 1 Prior to 1996, data were obtained from the Annual Person Summary Record. Beginning in 1996, utilization rates are based 

on persons receiving fee-for-service care and total persons not enrolled in prepaid health plans. 

2 Excludes unknown race. 

Source: Centers for Medicare & Medicaid Services, Office of Research, Development, and Information. 
2-155 

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Federal Hospital Insurance and Federal Supplementary Insurance Trust 

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Committee on Ways and Means. (2000) 2000 Green Book: Background Material 

and Data on Programs Within the Jurisdiction of the Committee on Ways 

and Means (WCMP 106-14). Washington D.C.: U.S. Government Printing 

Office. 

Federal Register (2003) Medicare Program; Physician Fee Schedule Update for 

Calendar Year 2003; Final Rule 68 (40);9567-9580. 

Federal Register (2002) Medicare Program; Revisions to Payment Policies Under 

the Physician Fee Schedule for Calendar Year 2003. Final Rule, 67 

(251),79966-80184. 

National Institutes of Health, National Institute of Diabetes and Digestive and 

Kidney Diseases, U.S. Renal Data System. The Latest Dialysis Findings of 

the United States Renal Data System. United States Renal Data System, 

Bethesda, MD, 2003. Web page: http://www.usrds.org/presentations.htm 

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