SECTION 2. MEDICARE

                               CONTENTS

Overview
Eligibility and Coverage
  Aged
  Disabled
  Number of Beneficiaries
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
  Comparison of Medicare Lifetime Benefits with Beneficiary
            Contributions
Part A Services--Coverage and Payments
  Inpatient Hospital Services
  Skilled Nursing Facility Services
  Home Health Services
  Hospice Services
Part B Services--Coverage and Payments
  Physicians Services
  Services of Nonphysician Practitioners
  Clinical Laboratory Services
  Durable Medical Equipment and Prosthetics and Orthotics
  Hospital Outpatient Department Services
  Ambulatory Surgical Center Services
  Other Part B Services
End-Stage Renal Disease Services
  Coverage
  Reimbursement
Private Health Plans in Medicare
  Plan Options and Rules for Enrollment Before the Balanced
            Budget Act of 1997
  Trends in Plan Availability and Enrollment
  Plan Options and Rules for Enrollment in Medicare+ Choice
  Payments to Plans Through 1997
  Medicare+Choice Payments to Plans
  County Payment Rates, 1997-2003
  Adjusted Community Rate (ACR)
  Required Noncovered Services
  Additional Benefits and Premiums in the Medicare Risk Program
  Beneficiary Protections
  Plan Standards
  Demonstrations Authorized by the Balanced Budget Act
Selected Issues
  Utilization and Quality Control Peer Review Organizations
  Secondary Payer
  Supplementing Medicare Coverage
  Qualified Medicare Beneficiaries (QMBs)
Legislative History, 1980-97
CBO Savings and Revenue Estimates for Budget Reconciliation
        Acts, 1981-93

Medicare Historical Data
References

                               OVERVIEW

    Medicare is a nationwide health insurance program for the
aged and certain disabled persons. The program consists of two
parts--part A; hospital insurance and part B, supplementary
medical insurance. Total program outlays were $194.2 billion in
fiscal year 1996. Net outlays after deduction of beneficiary
premiums were $174.2 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 may also be covered, regardless of age. In fiscal year
1997, part A covered an estimated 38.1 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--$43.80 in 1997 and 1998. In fiscal year 1997,
part B covered an estimated 36.5 million aged and disabled
persons.

                                Benefits

    Part A provides coverage for inpatient hospital services,
up to 100 days of posthospital skilled nursing facility (SNF)
care, home health services, and hospice care. Patients must pay
a deductible ($760 in 1997 and $764 in 1998) 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 ($95
in 1997 and $95.50 in 1998). 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, outpatient
hospital 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 70
percent of Medicare benefit payments. 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 admitting diagnosis. 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 Health Care Financing
Administration (HCFA) within the Department of Health and Human
Services (DHHS). Much of the day-to-day work of reviewing
claims and making payments is done by intermediaries (for part
A) and carriers (for part B). These are generally commercial
insurers or Blue Cross Blue Shield plans.

                               Financing

    Medicare part A is financed primarily through the hospital
insurance (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 1997 and 1998, the premium is $43.80. Beneficiary
premiums have generally represented about 25 percent of part B
costs; Federal general revenues (that is, tax dollars) account
for the remaining 75 percent.

                            Federal Outlays

    Total program outlays were $194.2 billion in fiscal year
1996. Net outlays (that is, net of premiums beneficiaries pay
for enrollment, largely for part B) were $174.2 billion.
    Tables 2-1, 2-2, and 2-3 provide historical spending and
coverage data for Medicare. Table 2-4 provides State-by-State
information for fiscal year 1996.

                              TABLE 2-1.--MEDICARE OUTLAYS, FISCAL YEARS 1967-2007
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                        Percent
                                                                        Total     Medicare     Net      increase
                  Fiscal year                     Part A     Part B    Medicare   premium    Medicare    (over
                                                                       outlays    offsets    outlays     prior
                                                                                                         year)
----------------------------------------------------------------------------------------------------------------
1967..........................................     $2,597       $798     $3,395     ($647)     $2,748  .........
1968..........................................      3,815      1,532      5,347      (698)      4,649       69.2
1969..........................................      4,758      1,840      6,598      (903)      5,695       22.5
1970..........................................      4,953      2,196      7,149      (936)      6,213        9.1
1971..........................................      5,592      2,283      7,875    (1,253)      6,622        6.6
1972..........................................      6,276      2,544      8,820    (1,340)      7,480       13.0
1973..........................................      6,842      2,637      9,479    (1,427)      8,052        7.6
1974..........................................      8,065      3,283     11,348    (1,708)      9,640       19.7
1975..........................................     10,612      4,170     14,782    (1,907)     12,875       33.6
1976..........................................     12,579      5,200     17,779    (1,945)     15,834       23.0
TQ............................................      3,404      1,401      4,805      (541)      4,264         NA
1977..........................................     15,207      6,342     21,549    (2,204)     19,345         NA
1978..........................................     17,862      7,350     25,212    (2,443)     22,769       17.7
1979..........................................     20,343      8,805     29,148    (2,653)     26,495       16.4
1980..........................................     24,288     10,746     35,034    (2,945)     32,089       21.1
1981..........................................     29,248     13,240     42,488    (3,340)     39,148       22.0
1982..........................................     34,864     15,559     50,423    (3,856)     46,567       19.0
1983..........................................     38,551     18,317     56,868    (4,253)     52,615       13.0
1984..........................................     42,295     20,374     62,669    (4,942)     57,727        9.7
1985..........................................     48,667     22,730     71,397    (5,562)     65,835       14.0
1986..........................................     49,685     26,217     75,902    (5,739)     70,163        6.6
1987..........................................     50,803     30,837     81,640    (6,520)     75,120        7.1
1988..........................................     52,730     34,947     87,677    (8,798)     78,879        5.0
1989..........................................     58,238     38,316     96,554   (11,590)     84,964        7.7
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..........................................    125,300     68,946    194,246   (20,088)    174,158        8.9
1997 \1\......................................      136.1       72.7      208.8     (20.2)      188.6        8.3
1998 \1\......................................      141.1       79.6      220.7     (21.2)      199.5        5.8
1999 \1\......................................      144.6       88.8      233.4     (23.4)      210.0        5.3
2000 \1\......................................      147.9       98.4      246.3     (25.8)      220.4        5.0
2001 \1\......................................      156.7      112.8      269.5     (28.6)      241.0        9.3
2002 \1\......................................      157.9      121.0      278.9     (31.8)      247.1        2.5
2003 \1\......................................      168.6      138.5      307.0     (35.5)      271.6        9.9
2004 \1\......................................      178.8      154.3      333.1     (39.8)      293.4        8.0
2005 \1\......................................      195.6      174.2      369.8     (44.2)      325.6       11.0
2006 \1\......................................      200.7      182.8      383.5     (48.7)      334.8        2.8
2007 \1\......................................      219.8      207.7      427.5     (53.5)      374.0       11.7
----------------------------------------------------------------------------------------------------------------
\1\ CBO projections (excludes discretionary spending; in billions of dollars).

Note.--Totals may not add due to rounding. TQ = transitional quarter.

Source: Office of the President, 1997.

                    TABLE 2-2.--NUMBER OF AGED AND DISABLED ELIGIBLE ENROLLEES AND BENEFICIARIES, AND AVERAGE MEDICARE BENEFIT PAYMENTS PER ENROLLEE, SELECTED YEARS 1975-99
                                                                                  [Beneficiaries in thousands]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                                       Projected
                                                                                                                                                                  Average    Average    average
                                                       1975      1980      1985      1990      1994      1995       1996        1997        1998        1999       annual     annual     annual
                    Fiscal year                      (actual)  (actual)  (actual)  (actual)  (actual)  (actual)  (est.) \1\  (est.) \1\  (est.) \1\  (est.) \1\    growth     growth     growth
                                                                                                                                                                  1975-85    1985-95    1995-99
                                                                                                                                                                 (percent)  (percent)  (percent)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                       Part A

Persons enrolled (monthly average):
    Aged...........................................    21,795    24,571    27,121    30,050    32,233    32,650     32,925      33,114      33,312      33,521         2.2        1.9        0.7
    Disabled.......................................     2,047     2,967     2,943     3,313     4,181     4,489      4,750       5,003       5,249       5,504         3.7        4.3        5.2
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................    23,842    27,538    30,064    33,363    36,414    37,139     37,675      38,117      38,561      39,025         2.3        2.1        1.2
                                                    ============================================================================================================================================
Beneficiaries receiving reimbursed services:
    Aged...........................................     4,906     5,943     6,168     6,314     7,010     7,080      7,170       7,250       7,340       7,430         2.3        1.4        1.2
    Disabled.......................................       456       721       672       675       862       920        975       1,035       1.090       1,150         4.0        3.2        5.7
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................     5,362     6,664     6,840     6,989     7,872     8,000      8,145       8,285       8,430       8,580         2.5        1.6        1.8
                                                    ============================================================================================================================================
Average annual benefit per person enrolled: \2\ \3\
    Aged...........................................      $432      $853    $1,563    $1,947    $2,794    $3,078     $3,323      $3,616      $3,876      $4,151        13.7        7.0        7.8
    Disabled.......................................       460       948     1,809     2,176     2,700     2,874      3,054       3,256       3,442       3,638        14.7        4.7        6.1
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................       434       863     1,587     1,970     2,783     3,053      3,289       3,569       3,817       4,079        13.8        6.8        7.5
                                                    ============================================================================================================================================
                       Part B

Persons enrolled (average):
    Aged...........................................    21,504    24,422    27,049    29,426    31,335    31,622     31,891      32,177      32,361      32,547         2.3        1.6        0.7
    Disabled.......................................     1,835     2,698     2,672     2,907     3,638     3,874      4,087       4,304       4,545       4,780         3.8        3.8        5.4
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................    23,339    27,120    29,721    32,333    34,973    35,496     35,978      36,481      36,906      37,327         2.4        1.8        1.3
                                                    ============================================================================================================================================
Beneficiaries receiving reimbursed services:
    Aged...........................................    11,311    16,034    20,199    23,820    26,118    26,681     27,044      27,544      27,952      28,332         6.0        2.8        1.5
    Disabled.......................................       797     1,669     1,933     2,184     2,867     3,093      3,289       3,503       3,733       3,962         9.3        4.8        6.4
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................    12,108    17,703    22,132    26,004    28,985    29,774     30,333      31,047      31,685      32,294         6.2        3.0        2.1
                                                    ============================================================================================================================================
Average annual benefit per person enrolled: \2\
    Aged...........................................      $153      $348      $705    $1,250    $1,601    $1,728     $1,797      $2,011      $2,197      $2,410        16.5        9.4        8.7
    Disabled.......................................       259       610     1,022     1,603     2,154     2,282      2,408       2,370       2,500       2,657        14.7        8.4        3.9
                                                    --------------------------------------------------------------------------------------------------------------------------------------------
        Total......................................       161       374       734     1,282     1,658     1,788      1,867       2,054       2,234       2,441        16.4        9.3       8.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Represents projections of current law. Does not include legislative proposals.    \2\ Does not include administrative cost.    \3\ Includes part A catastrophic benefits in fiscal year
  1990.

Source: Health Care Financing Administration, Division of Budget.

                                             TABLE 2-3.--BENEFIT PAYMENTS BY SERVICE UNDER MEDICARE PART A AND PART B, SELECTED FISCAL YEARS 1975-98
                                                                                      [Dollars in millions]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                  1975               1980               1985               1990                1995           1998 (est.) \1\         Average annual growth
                                           ---------------------------------------------------------------------------------------------------------------------            (percent)
                                                                                                                                                                --------------------------------
                                            Percent   Amount  Percent   Amount   Percent   Amount    Percent   Amount    Percent   Amount    Percent    Amount    1975-85    1985-95    1995-98
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                  Part A

Inpatient hospital services...............     70.5   $9,947     67.4   $22,860     65.0   $45,218      55.3   $59,285      49.4   $87,441      47.6   $109,299       16.3        6.8        7.7
Skilled nursing facility services.........      1.9      273      1.2       392      0.8       550       2.6     2,821       5.1     9,104       6.0     13,779        7.3       32.4       14.8
Home health services......................      0.9      133      1.5       524      2.7     1,908       3.1     3,297       8.5    14,995       9.5     21,879       30.5       22.9       13.4
Hospice services..........................        0        0        0         0        0        34       0.3       318       1.0     1,854       1.0      2,214         NA       49.2        6.1
                                           -----------------------------------------------------------------------------------------------------------------------------------------------------
    Total benefit payments................     73.3   10,353     70.1    23,776     68.6    47,710      61.3    65,721      64.1   113,394      64.1    147,171       16.5        9.0        9.1
                                           =====================================================================================================================================================
                  Part B

Physician services \2\....................     21.7    3,067     23.0     7,813     24.1    16,788      27.0    28,922      22.8    40,376      20.2     46,325       18.5        9.2        4.7
Outpatient services.......................      3.7      529      5.3     1,803      5.6     3,917       7.8     8,365       8.2    14,576       8.7     19,902       22.2       14.0       10.9
Other medical and health services.........      1.2      169      1.6       528      1.6     1,103       3.9     4,165       4.8     8,530       7.1     16,229       20.6       22.7       23.9
                                           -----------------------------------------------------------------------------------------------------------------------------------------------------
    Total benefit payments................     26.7    3,765     29.9    10,144     31.4    21,808      38.7    41,452      35.9    63,482      35.9     82,456       19.2       11.3        9.1
                                           =====================================================================================================================================================
        Total parts A and B...............    100.0   14,118    100.0    33,920    100.0    69,518     100.0   107,173     100.0   176,876     100.0    229,627       17.3        9.8        9.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Represents law in effect prior to enactment of the Balanced Budget Act of 1997.    \2\ Includes other services.

NA--Not available.

Note.--Totals may not add due to rounding.

Source: Health Care Financing Administration, Division of Budget.

                   TABLE 2-4.--MEDICARE ESTIMATED BENEFIT PAYMENTS BY STATE, FISCAL YEAR 1996
----------------------------------------------------------------------------------------------------------------
                                                                     Medicare                        Estimated
                                                                     estimated     HI and/or SMI      benefit
                              State                                   benefit        Medicare      payments per
                                                                   payments \1\   enrollment \2\     enrollee
----------------------------------------------------------------------------------------------------------------
Alabama.........................................................      $3,349,478         650,941          $5,146
Alaska..........................................................         155,548          35,281           4,409
Arizona.........................................................       2,949,642         613,992           4,804
Arkansas........................................................       1,749,406         426,645           4,100
California......................................................      21,688,154       3,690,130           5,877
Colorado........................................................       2,021,955         432,283           4,677
Connecticut.....................................................       2,810,930         506,169           5,553
Delaware........................................................         474,232         103,216           4,595
District of Columbia............................................       1,206,754          77,271          15,617
Florida.........................................................      16,046,099       2,654,681           6,044
Georgia.........................................................       4,444,248         848,854           5,236
Hawaii..........................................................         612,461         152,948           4,004
Idaho...........................................................         522,788         152,673           3,424
Illinois........................................................       7,792,373       1,623,430           4,800
Indiana.........................................................       3,770,224         829,586           4,545
Iowa............................................................       1,641,893         475,130           3,456
Kansas..........................................................       1,630,982         385,357           4,232
Kentucky........................................................       2,610,256         595,583           4,383
Louisiana.......................................................       3,937,599         585,918           6,720
Maine...........................................................         791,042         205,132           3,856
Maryland........................................................       3,005,428         609,601           4,930
Massachusetts...................................................       5,884,023         942,272           6,245
Michigan........................................................       6,565,577       1,360,512           4,826
Minnesota.......................................................       2,593,008         635,709           4,079
Mississippi.....................................................       2,016,230         401,697           5,019
Missouri........................................................       4,122,022         838,377           4,917
Montana.........................................................         469,724         131,847           3,563
Nebraska........................................................         933,547         250,284           3,730
Nevada..........................................................       1,003,697         202,347           4,960
New Hampshire...................................................         652,613         159,275           4,097
New Jersey......................................................       5,958,095       1,177,159           5,061
New Mexico......................................................         799,360         215,930           3,702
New York........................................................      14,860,448       2,653,492           5,600
North Carolina..................................................       4,688,836       1,048,981           4,470
North Dakota....................................................         438,228         103,170           4,248
Ohio............................................................       7,870,293       1,676,437           4,695
Oklahoma........................................................       2,471,759         491,628           5,028
Oregon..........................................................       1,801,354         472,197           3,815
Pennsylvania....................................................      11,468,028       2,077,870           5,519
Rhode Island....................................................         866,931         169,186           5,124
South Carolina..................................................       2,144,121         520,408           4,120
South Dakota....................................................         446,865         117,421           3,806
Tennessee.......................................................       4,486,558         783,385           5,728
Texas...........................................................      12,732,603       2,116,951           6,015
Utah............................................................         812,811         191,387           4,247
Vermont.........................................................         306,150          84,454           3,625
Virginia........................................................       3,277,225         833,145           3,934
Washington......................................................       2,826,104         698,966           4,043
West Virginia...................................................       1,372,605         331,343           4,143
Wisconsin.......................................................       2,909,048         766,625           3,795
Wyoming.........................................................         197,719          61,465           3,217
Puerto Rico.....................................................         952,913         489,944           1,945
All other areas.................................................          36,142         321,269             112
                                                                 -----------------------------------------------
    Total all areas.............................................     191,176,132      37,979,904           5,034
----------------------------------------------------------------------------------------------------------------
\1\ In thousands of dollars.
\2\ As of September 30, 1996.

Note.--Benefit payments for all areas represent actual Department of Treasury (DOT) disbursements. Distribution
  of benefit payments by State is based on a methodology which considered actual payments to HMOs and estimated
  payments for other providers of Medicare services. Estimated payments were determined by applying the relative
  weight of each State's share of total fee-for-service provider payments for fiscal year 1996 to the DOT
  disbursements net of managed care payments.

Source: Health Care Financing Administration.

                        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 1997 monthly premium is $311 ($187 for
persons who have at least 30 quarters of covered employment).
The 1998 monthly premium is $309 ($170 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 1997 and
1998 premium is $43.80 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.) 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.

                        Number of Beneficiaries

    In fiscal year 1996, 32.9 million aged and 4.8 million
disabled had protection under part A. Of those, 7.2 million
aged and 1.0 million disabled actually received reimbursed
services. In fiscal year 1996, 31.9 million aged and 4.1
million disabled were enrolled in part B. About 27.0 million of
the aged and 3.3 million of the disabled actually received
reimbursed services (table 2-2).

             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 ($760 in calendar year 1997; $764 in 1998). A
benefit period begins when a patient enters a hospital and ends
when he has not been in a hospital or SNF for 60 days. For days
61-90 in a benefit period, a coinsurance amount ($190 in
calendar year 1997; $191 in 1998) 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 ($380
in calendar year 1997; $382 in 1998) is imposed for each
reserve day.
    Skilled nursing facility care.--SNF care is up to 100 days
(following hospitalization) in a skilled nursing facility 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 ($95 in calendar
year 1997; $95.50 in 1998) amount.
    Home health care.--Home health visits are provided to
persons who need skilled nursing care on an intermittent basis,
or physical therapy, or speech therapy. The Balanced Budget Act
of 1997 gradually transfers 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 (that is,
postinstitutional visits) and during a home health spell of
illness. The transfer will be phased in over 6 years, between
1998 and 2003, with the Secretary transferring one-sixth of the
aggregate expenditures associated with transferred visits in
1998; two-sixths in 1999; three-sixths in 2000; four-sixths in
2001; five-sixths in 2002; and six-sixths in 2003. Beginning
January 1, 2003, part A will cover 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 will be 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 (fee schedule, reasonable charge, or reasonable
cost) 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.
    Other medical and health services.--Laboratory and 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
are also required.
    Specified preventive services.--These services include a
screening mammography once every 2 years for persons over age
65 and at specified intervals for the disabled; and effective
January 1, 1998 annual mammograms for all women over age 40. A
screening pap smear (and, effective January 1, 1998, a
screening pelvic exam) is authorized once every 3 years, except
for women who are at a high risk of developing cervical cancer.
Effective January 1, 1998, coverage is provided for specified
colorectal screening procedures. Effective July 1, 1998,
coverage is authorized for diabetes self-management training
services and bone mass measurements for high-risk persons.
Prostate cancer screenings are covered beginning January 1,
2000.
    Drugs and vaccines.--Generally Medicare does not pay for
outpatient prescription drugs or biologicals. Part B pays for
immunosuppressive drugs for 30 months following an organ
transplant (extended to 36 months after 1997), erythropoietin
for treatment of anemia for persons with chronic kidney
failure, and certain specified oral cancer drugs. The program
also covers flu shots, pneumococcal pneumonia vaccines, and
hepatitis B vaccines for those at risk.
    Home health services.--Home services include an unlimited
number of 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. As noted above, the
Balanced Budget Act of 1997 gradually transfers some home
health costs from part A to part B, beginning in 1998.
    Table 2-5 illustrates the deductible, coinsurance and
premium amounts for both part A and part B services from the
inception of Medicare.

                                     TABLE 2-5.--PART A AND PART B DEDUCTIBLE, COINSURANCE AND PREMIUMS, \1\ 1966-98
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                         Inpatient hospital \2\                               HI monthly premium \6\                     SMI premium
                               ------------------------------------------     Skilled    -------------------------------            --------------------
                                                           60 lifetime        nursing
         Calendar year           First 60    61st-90th     reserve days   facility 21st-                                     SMI
                                   days         day       (nonrenewable)     100th day    Effective    Full     Reduced  deductible  Effective   Amount
                                deductible  coinsurance  coinsurance per    coinsurance      date     amount    amount                  date
                                            per day \3\      day \4\        per day \5\
--------------------------------------------------------------------------------------------------------------------------------------------------------
1966..........................        $40           $10            (\7\)           (\7\)  .........  ........        NA        $50        7/66     $3.00
1967..........................         40            10            (\7\)           $5.00  .........  ........        NA         50   .........      3.00
1968..........................         40            10              $20            5.00  .........  ........        NA         50        4/68      4.00
1969..........................         44            11               22            5.50  .........  ........        NA         50   .........      4.00
1970..........................         52            13               26            6.50  .........  ........        NA         50        7/70      5.30
1971..........................         60            15               30            7.50  .........  ........        NA         50        7/71      5.60
1972..........................         68            17               34            8.50  .........  ........        NA         50        7/72      5.80
1973..........................         72            18               36            9.00       7/73       $33        NA         60    \8\ 9/73      6.30
1974..........................         84            21               42           10.50       7/74        36        NA         60        7/74      6.70
1975..........................         92            23               46           11.50       7/75        40        NA         60   .........      6.70
1976..........................        104            26               52           13.00       7/76        45        NA         60        7/76      7.20
1977..........................        124            31               62           15.50       7/77        54        NA         60        7/77      7.70
1978..........................        144            36               72           18.00       7/78        63        NA         60        7/78      8.20
1979..........................        160            40               80           20.00       7/79        69        NA         60        7/79      8.70
1980..........................        180            45               90           22.50       7/80        78        NA         60        7/80      9.60
1981..........................        204            51              102           25.50       7/81        89        NA         60        7/81     11.00
1982..........................        260            65              130           32.50       7/82       113        NA         75        7/82     12.20
1983..........................        304            76              152           38.00  .........       113        NA         75   .........     12.20
1984..........................        356            89              178           44.50       1/84       155        NA         75        1/84     14.60
1985..........................        400           100              200           50.00       1/85       174        NA         75        1/85     15.50
1986..........................        492           123              246           61.50       1/86       214        NA         75        1/86     15.50
1987..........................        520           130              260           65.00       1/87       226        NA         75        1/87     17.90
1988..........................        540           135              270           67.50       1/88       234        NA         75        1/88     24.80
1989..........................    \9\ 560            NA               NA      \10\ 25.50       1/89       156        NA         75        1/89     31.90
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
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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
  services were furnished. For services furnished prior to January 1, 1982, the coinsurance amounts are based on the inpatient hospital deductible
  applicable for the year 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.
\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
  Medicare 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
  other 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 of 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, 60 percent in 1997, and 55 percent in 1998 and thereafter.
\7\ Not covered.
\8\ For August 1973 the premium was $6.10.
\9\ In 1989, the HI deductible was applied on an annual basis, not a benefit period basis (unlike the other years).
\10\ In 1989, the SNF coinsurance was on days 1-8 of the 150 days allowed annually; for the other years it is on days 21-100 of 100 days allowed per
  benefit period.

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 there is 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, 1981, 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: (1) Outpatient physician services for mental illness; 50 percent of approved charges, up to a maximum of $250 in
  benefits per year; July 1, 1966, through December 31, 1987; $450 in benefits per year, January 1, 1988, through December 31, 1988; $1,100 in benefits
  per year, January 1, 1989, through December 31, 1989; beginning January 1, 1990, the limit was removed; (2) physical and occupational therapy services
  furnished by physical therapists in independent practice: maximum annual approved charges July 1, 1973 through December 31, 1981, $80 per year;
  January 1, 1982 through December 31, 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 January 1, 1994 and thereafter, $900 per year.

Source: Health Care Financing Administration, Office of the Actuary.

                               FINANCING

    The Medicare Hospital Insurance Trust Fund (HI) finances
services covered under Medicare part A. The Supplementary
Medical Insurance Trust Fund (SMI) 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 $106.9 billion (88.3 percent)
of the total $121.1 billion in income for fiscal year 1996.
Additional income sources include premiums paid by voluntary
enrollees, government credits, interest on Federal securities,
and taxation of a portion of Social Security benefits.
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 of $68,400 in 1998 continues to apply under
Social Security. Table 2-6 shows the history of the
contribution rates and maximum taxable earnings base for the HI
Programs.
Other income
    The following are additional sources of income to the HI
fund:
 1. Railroad retirement account transfers.--In fiscal year
        1996, $401 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.
 2. Reimbursements for uninsured persons.--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 1996, $419
        million was transferred to HI on this basis.

   TABLE 2-6.--CURRENT LAW SOCIAL SECURITY PAYROLL TAX RATES FOR EMPLOYERS AND EMPLOYEES AND TAXABLE EARNINGS
                                                 BASES, 1977-98
----------------------------------------------------------------------------------------------------------------
                                                            Employee and employer rates,
                                                                   each (percent)         HI taxable
                       Calendar year                       ------------------------------  earnings   Maximum HI
                                                              OASDI              OASDHI      base         tax
                                                            combined     HI     combined
----------------------------------------------------------------------------------------------------------------
1977......................................................      4.95      0.90      5.85     $16,500     $148.50
1978......................................................      5.05      1.10      6.05      17,700      194.70
1979......................................................      5.08      1.05      6.13      22,900      240.45
1980......................................................      5.08      1.05      6.13      25,900      271.95
1981......................................................      5.35      1.30      6.65      29,700      386.10
1982......................................................      5.40      1.30      6.70      32,400      421.20
1983......................................................      5.40      1.30      6.70      35,700      464.10
1984......................................................      5.70      1.30      7.00      37,800      491.40
1985......................................................      5.70      1.35      7.05      39,600      534.60
1986......................................................      5.70      1.45      7.15      42,000      609.00
1987......................................................      5.70      1.45      7.15      43,800      635.10
1988......................................................      6.06      1.45      7.51      45,000      652.50
1989......................................................      6.06      1.45      7.51      48,000      696.00
1990......................................................      6.20      1.45      7.65      51,300      743.85
1991......................................................      6.20      1.45      7.65  \1\ 125,00
                                                                                                   0    1,812.50
1992......................................................      6.20      1.45      7.65     130,200    1,887.90
1993......................................................      6.20      1.45      7.65     135,000    1,957.50
1994......................................................      6.20      1.45      7.65    \2\ none    no limit
1995......................................................      6.20      1.45      7.65        none    no limit
1996......................................................      6.20      1.45      7.65        none    no limit
1997......................................................      6.20      1.45      7.65        none    no limit
1998......................................................      6.20      1.45      7.65        none    no limit
----------------------------------------------------------------------------------------------------------------
\1\ Prior to 1991, the upper limit on tax earnings was the same as for Social Security. The Omnibus Budget
  Reconciliation Act of 1990 raised the limit in 1991 to $125,000. Under automatic indexing provisions, the
  maximum was increased to $130,200 in 1992 and $135,000 in 1993.
\2\ The Omnibus Budget Reconciliation Act of 1993 eliminated the indexing provision entirely beginning in 1994.

Source: Health Care Financing Administration.

 3. 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 ($311 in 1997; for persons who have at
        least 30 quarters of covered employment, $187 in 1997).
        This accounted for an estimated $1,107 million of
        financing in fiscal year 1996.
 4. Payments for military wage credits.--Sections 217(g) and
        229(b) of the Social Security Act, prior to
        modification by the Social Security Amendments of 1983,
        authorized annual reimbursement from the general fund
        of the Treasury to the HI Trust Fund for costs arising
        from the granting of deemed wage credits for military
        service prior to 1957, according to quinquennial
        determinations made by the Secretary of Health and
        Human Services. These sections, as modified by the
        Social Security Amendments of 1983, provided for a
        lump-sum transfer in 1983 for costs arising from such
        wage credits. In addition, the lump-sum transfer
        included combined employer-employee HI taxes on the
        noncontributory wage credits for military service after
        1965 and before 1984. After 1983, HI taxes on military
        wage credits are credited to the fund on July 1 of each
        year. The Social Security Amendments of 1983 also
        provided for: (1) quinquennial adjustments to the lump-
        sum amount transferred in 1983 for costs arising from
        pre-57 deemed wage credits; and (2) adjustments as
        deemed necessary to any previously transferred amounts
        representing HI taxes on noncontributory wage credits.
        In fiscal year 1996, this adjustment, including the
        quinquennial adjustment, was $2.3 billion.
 5. 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 $4.1 billion in fiscal year 1996.
 6. 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 $10.5
        billion in fiscal year 1996.

           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 years 1997 and 1998 is $43.80.
    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 (that is, cost-of-living adjustments
or COLAs). 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 on which the Social
Security COLA is based.
    Since the early 1980s, Congress has regularly voted to set
part B premiums at a level to cover 25 percent of program
costs, in effect overriding the COLA limitation. The 25-percent
provisions first became effective January 1, 1984. General
revenues covered the remaining 75 percent of part B program
costs. Congress took this general approach again in OBRA 1990.
However, OBRA 1990 set specific dollar figures, rather than a
percentage, in law for 1991-95. These dollar figures reflected
the Congressional Budget Office's (CBO) estimates of what 25
percent of program costs would be over the 5-year period.
Program costs grew at a slower rate than anticipated, in part
due to subsequent legislative changes. As a result, the 1995
premium of $46.10 covered an estimated 31.5 percent of program
costs.
    OBRA 1993 extended the policy of setting the part B premium
at a level to cover 25 percent of program costs for 1996-98. As
was the case prior to 1991, a percentage rather than a fixed
dollar figure was used. As a result, the 1996 premium was
$42.50, a full $3.60 less than the 1995 premium. The 1997 and
1998 premiums are $43.80. The Balanced Budget Act of 1997
permanently sets the part B premium equal to 25 percent of
program costs.

           Financial Status of Hospital Insurance Trust Fund

    The Hospital Insurance Trust Fund balance is dependent on
total income to the HI Trust Fund exceeding total outlays from
the fund. Tables 2-7 and 2-8 show historical information from
the 1997 Trustees' Report on the operation of the trust fund.
The Trustees' Report also included projections. However, the
Congress subsequently passed the Balanced Budget Act of 1997
which substantially changed the expected operations of the
fund. Tables 2-7, 2-8, and 2-9 show preliminary projections for
the 1997-2007 period made following the enactment of the
Balanced Budget Act.
    The 1997 Trustees' Report (Board of Trustees, Hospital
Trust Fund, 1997) stated that the program failed to meet both
short-range and long-range tests of financial adequacy.
Disbursements began to exceed income in 1995. Under the
trustee's 1997 intermediate assumptions, the fund would have
become insolvent in 2001. The Trustees' Report had projected
that the fund's shortfall would be $23.4 billion at the end of
calendar 2001. The shortfall would continue to build each year,
rising to $429.8 billion at the end of fiscal year 2006 and
$471.6 billion at the end of calendar year 2006.
     The projections included in the 1997 Trustees' Reports
have been substantially modified as a result of the enactment
of the Balanced Budget Act (table 2-9). This legislation
provides for the transfer of a portion of home health spending
(currently the fastest growing part A expenditure) from part A
to part B. It also includes additional provisions designed to
stem the growth in part A expenditures. These provisions
include the implementation of prospective payment systems for
home health services and skilled nursing facility services and
limits on the increases in hospital payments. When the Balanced
Budget Act of 1997 was enacted, CBO projected that the
insolvency date would be postponed from 2001 to fiscal year
2007. Subsequently, the administration estimated that the year
of exhaustion would be 2010 (see table 2-9).
     Despite short-term improvements, the fund still faces
insolvency. Beginning in fiscal year 1996, HI costs began to
rise faster than income. The CBO expects this trend to
continue, though at a somewhat slower pace as the result of the
Balanced Budget Act of 1997. The administration projects that
income will still slightly exceed costs over the short term and
costs will again exceed income after 2007. Historically, the
shortfall has been primarily attributable to the increase in
hospital payments which have accounted for over 65 percent of
HI benefit payments.
    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 1996, there were 3.9 workers
for every beneficiary; in 2030 there will only be an estimated
2.3.

                                                  TABLE 2-7.--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED FISCAL YEARS 1970-2007
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Income                                                           Disbursements                       Trust fund
                                ----------------------------------------------------------------------------------------------------------------------------------------------------------------
                                            Income                                          Payments
        Fiscal year \1\                      from     Railroad   Reimbursement   Premiums      for      Interest                                                              Net       Fund at
                                  Payroll  taxation  retirement  for uninsured     from     military    and other    Total     Benefits    Administrative      Total       increase     end of
                                   taxes      of       account      persons     voluntary     wage     income \2\   income   payments \3\   expenses \4\   disbursements    in fund      year
                                           benefits   transfers                 enrollees    credits
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Historical data (in millions of dollars):
    1970.......................    $4,785  ........       $64          $617     .........         $11        $137    $5,614      $4,804          $149           $4,953          $661      $2,677
    1975.......................    11,291  ........       132           481           $6           48         609    12,568      10,353           259           10,612         1,956       9,870
    1980.......................    23,244  ........       244           697           17          141       1,072    25,415      23,790           497           24,288         1,127      14,490
    1985.......................    46,490  ........       371           766           38           86       3,182    50,933      47,841           813           48,654     \5\ 4,103      21,277
    1986.......................    53,020  ........       364           566           40     \6\ -714       3,167    56,442      49,018           667           49,685    \7\ 17,370      38,648
    1987.......................    57,820  ........       368           447           40           94       3,982    62,751      49,967           836           50,803        11,949      50,596
    1988.......................    61,901  ........       364           475           42           80       5,148    68,010      52,022           707           52,730        15,281      65,877
    1989.......................    67,527  ........       379           515           42           86       6,567    75,116      57,433           805           58,238        16,878      82,755
    1990.......................    70,655  ........       367           413          113          107       7,908    79,563      65,912           774           66,687        12,876      95,631
    1991.......................    74,655  ........       352           605          367   \8\ -1,011       8,969    83,938      68,705           934           69,638        14,299     109,930
    1992.......................    80,978  ........       374           621          484           86      10,133    92,677      80,784         1,191           81,974        10,703     120,633
    1993.......................    83,147  ........       400           367          622           81  \9\ 12,484    97,101      90,738           866           91,604         5,497     126,131
    1994.......................    92,028    $1,639       413           506          852           80      10,676   106,195     101,535         1,235          102,770         3,425     129,555
    1995.......................    98,053     3,913       396           462          998           61      10,963   114,847     113,583         1,300          114,883           -36     129,520
    1996.......................   106,934     4,069       401           419        1,107            3      10,496   121,135     124,188         1,229          125,317        -4,182     125,338

Preliminary projections made following enactment of the Balanced Budget Act of 1997 (in billions of
 dollars):
    1997.......................  ........  ........  ..........  .............  .........  ..........  ..........     128.8  ............  ..............        138.1          -9.3       116.0
    1998.......................  ........  ........  ..........  .............  .........  ..........  ..........     125.6  ............  ..............        131.5          -5.9       110.1
    1999.......................  ........  ........  ..........  .............  .........  ..........  ..........     129.3  ............  ..............        131.5          -2.2       107.9
    2000.......................  ........  ........  ..........  .............  .........  ..........  ..........     137.6  ............  ..............        134.3           3.3       111.2
    2001.......................  ........  ........  ..........  .............  .........  ..........  ..........     146.0  ............  ..............        139.3           6.7       117.9
    2002.......................  ........  ........  ..........  .............  .........  ..........  ..........     155.4  ............  ..............        146.8           8.6       126.5
    2003.......................  ........  ........  ..........  .............  .........  ..........  ..........     165.5  ............  ..............        156.8           8.7       135.2
    2004.......................  ........  ........  ..........  .............  .........  ..........  ..........     173.8  ............  ..............        166.9           6.9       142.1
    2005.......................  ........  ........  ..........  .............  .........  ..........  ..........     183.6  ............  ..............        177.2           6.3       148.4
    2006.......................  ........  ........  ..........  .............  .........  ..........  ..........     191.4  ............  ..............        188.2           3.2       151.6
    2007.......................  ........  ........  ..........  .............  .........  ..........  ..........     200.9  ............  ..............        200.5           0.4       152.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\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 (beginning with the implementation of the prospective payment system on October 1, 1983).
\4\ Includes costs of experiments and demonstration projects.
\5\ Includes repayment of loan principal from the OASI Trust Fund of $1,824 million.
\6\ Includes the lump-sum general revenue adjustment of -$805 million, as provided for by section 151 of Public Law 98-21.
\7\ Includes repayment of loan principal from the OASI Trust Fund of $10,613 million.
\8\ Includes the lump-sum general revenue adjustment of -$1,100 million, as provided for by section 151 of Public Law 98-21.
\9\ Includes $1,805 million transfer from the SMI catastrophic coverage reserve fund, as provided for by Public Law 102-394.

Note.--Fiscal years 1997-2007 reflect estimated operations of fund under present law with effects of the Balanced Budget Act of 1997 on the basis of the midsession review of the fiscal year
  1998 budget assumptions.

Source: Board of Trustees, Federal Hospital Insurance Trust Fund (1997) and Social Security Administration unpublished tables.

                                                 TABLE 2-8.--OPERATIONS OF THE HOSPITAL INSURANCE TRUST FUND, SELECTED CALENDAR YEARS 1970-2007
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Income                                                           Disbursements                       Trust fund
                                ----------------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Income                                          Payments
         Calendar year                        from     Railroad   Reimbursement   Premiums     for      Interest                                                              Net       Fund at
                                  Payroll   taxation  retirement  for uninsured     from     military   and other    Total     Benefits    Administrative      Total       increase     end of
                                   taxes       of       account      persons     voluntary     wage    income \1\   income   payments \2\   expenses \3\   disbursements    in fund      year
                                            benefits   transfers                 enrollees   credits
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Historical data (in millions of dollars):
    1970.......................     $4,881  ........       $66          $863     .........        $11        $158    $5,979      $5,124          $157           $5,281          $698      $3,202
    1975.......................     11,502  ........       138           621           $7          48         664    12,980      11,315           266           11,581         1,399      10,517
    1980.......................     23,848  ........       244           697           18         141       1,149    26,097      25,064           512           25,577           521      13,749
    1985.......................     47,576  ........       371           766           41    \4\ -719       3,362    51,397      47,580           834           48,414     \5\ 4,808      20,499
    1986.......................     54,583  ........       364           566           43          91       3,619    59,267      49,758           664           50,422    \6\ 19,458      39,957
    1987.......................     58,648  ........       368           447           38          94       4,469    64,064      49,496           793           50,289        13,775      53,732
    1988.......................     62,449  ........       364           475           41          80       5,830    69,239      52,517           815           53,331        15,908      69,640
    1989.......................     68,369  ........       379           515           55          86       7,317    76,721      60,011           792           60,803        15,918      85,558
    1990.......................     72,013  ........       367           413          122    \7\ -993       8,451    80,372      66,239           758           66,997        13,375      98,933
    1991.......................     77,851  ........       352           605          432          89       9,510    88,839      71,549         1,021           72,570        16,269     115,202
    1992.......................     81,745  ........       374           621          522          86      10,487    93,836      83,895         1,121           85,015         8,821     124,022
    1993.......................     84,133  ........       400           367          675          81  \8\ 12,531    98,187      93,487           904           94,391         3,796     127,818
    1994.......................     95,280    $1,639       413           506          907          80      10,745   109,570     103,282         1,263          104,545         5,025     132,844
    1995.......................     98,421     3,913       396           462          954          61      10,820   115,027     116,368         1,236          117,604        -2,577     130,267
    1996.......................    110,585     4,069       401           419        1,199   \9\ 2,293      10,222   124,603     128,632         1,297          129,929        -5,325     124,942

Preliminary projections made following enactment of the Balanced Budget Act of 1997 (in billions of
 dollars):
    1997.......................  .........  ........  ..........  .............  .........  .........  ..........     129.1  ............  ..............        138.2          -9.1       115.8
    1998.......................  .........  ........  ..........  .............  .........  .........  ..........     124.5  ............  ..............        128.2          -3.7       112.1
    1999.......................  .........  ........  ..........  .............  .........  .........  ..........     131.1  ............  ..............        131.4          -0.3       111.8
    2000.......................  .........  ........  ..........  .............  .........  .........  ..........     139.6  ............  ..............        134.6           5.0       116.8
    2001.......................  .........  ........  ..........  .............  .........  .........  ..........     148.8  ............  ..............        140.2           8.6       125.5
    2002.......................  .........  ........  ..........  .............  .........  .........  ..........     158.1  ............  ..............        148.1          10.0       135.4
    2003.......................  .........  ........  ..........  .............  .........  .........  ..........     169.5  ............  ..............        158.2          11.3       146.8
    2004.......................  .........  ........  ..........  .............  .........  .........  ..........     177.8  ............  ..............        168.4           9.5       156.2
    2005.......................  .........  ........  ..........  .............  .........  .........  ..........     186.7  ............  ..............        178.8           7.9       164.2
    2006.......................  .........  ........  ..........  .............  .........  .........  ..........     195.7  ............  ..............        190.0           5.7       169.9
    2007.......................  .........  ........  ..........  .............  .........  .........  ..........     205.7  ............  ..............        203.3           2.3       172.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ 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.
\2\ Includes cost of peer review organizations (beginning with the implementation of the prospective payment system on October 1, 1983).
\3\ Includes costs of experiments and demonstration projects.
\4\ Includes the lump-sum general revenue adjustment of -$805 million, as provided for by section 151 of Public Law 98-21.
\5\ Includes repayment of loan principal from the OASI Trust Fund of $1,824 million.
\6\ Includes repayments of loan principal from the OASI Trust Fund of $10,613 million.
\7\ Includes the lump-sum general revenue adjustment of -$1,100 million, as provided for by section 151 of Public Law 98-21.
\8\ Includes $1,805 million transfer from the SMI catastrophic coverage reserve fund, as provided for by Public Law 102-394.
\9\ Includes the lump-sum general revenue adjustment of -$2,366 million provided for by section 151 of Public Law 98-21.

Note.--Fiscal years 1997-2007 reflect estimated operations of the fund under present law with effects of the Balanced Budget Act of 1997 on the basis of the midsession review of the fiscal
  year 1998 budget assumptions.

Source: Board of Trustees, Federal Hospital Insurance Trust Fund (1997) and Social Security Administration, unpublished tables.

  TABLE 2-9.--PROJECTIONS MADE FOLLOWING PASSAGE OF THE BALANCED BUDGET ACT OF 1997 FOR THE HOSPITAL INSURANCE TRUST FUND OF INCOME AND OUTLAYS, FISCAL
                                                YEARS 1997-2007, UNDER CBO AND ADMINISTRATION ASSUMPTIONS
                                                                [In billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    1997     1998     1999     2000     2001     2002     2003      2004      2005      2006      2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
CBO projections:
  Income........................................   $127.7   $131.0   $136.5   $142.3   $147.9   $154.2    $160.6    $166.9    $173.6    $180.4    $187.2
  Outlays.......................................    137.4    142.3    145.9    149.3    158.2    159.4     170.1     180.4     197.3     202.4     221.6
                                                 -------------------------------------------------------------------------------------------------------
    Net increase in fund........................     -9.7    -11.3     -9.4     -7.0    -10.3     -5.2      -9.5     -13.6     -23.7     -22.1     -34.4
                                                 -------------------------------------------------------------------------------------------------------
     Balance at end of year.....................    115.6    104.3     94.9     87.9     77.6     72.4      62.9      49.3      25.7       3.6     -30.8
                                                 =======================================================================================================
Administration projections:
  Income........................................    128.8    125.6    129.3    137.6    146.0    155.4     165.5     173.8     183.6     191.4     200.9
  Outlays.......................................    138.1    131.5    131.5    134.3    139.3    146.8     156.8     166.9     177.2     188.2     200.5
                                                 -------------------------------------------------------------------------------------------------------
    Net increase in fund........................     -9.3     -5.9     -2.2      3.3      6.7      8.6       8.7       6.9       6.3       3.2       0.4
                                                 -------------------------------------------------------------------------------------------------------
     Balance at end of year.....................    116.0    110.1    107.9    111.2    117.9    126.5     135.2     142.1     148.4     151.6    152.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office, August 1997, and Social Security Administration, October 1997, unpublished tables.

    The combination of expenditure and demographic factors is
also reflected in the increasing size of the HI Program
relative to other sectors of the economy. According to the 1997
Trustees' Report, the program's cost is expected to rise from
1.7 percent of gross domestic product (GDP) in 1996 to about 5
percent of GDP in 2070. This estimate was made prior to
enactment of the Balanced Budget Act of 1997.

     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 2-10 shows
historical information from the 1997 Trustees' Report (Board of
Trustees, Federal Hospital Insurance Trust Fund, 1997).

Comparison of Medicare Lifetime Benefits with Beneficiary Contributions

    Medicare beneficiaries typically get back considerably more
in Medicare benefits than they contribute in payroll taxes and
premiums over their lifetimes. CBO has estimated (based on the
1996 Trustees' Report) the extent to which Medicare enrollees'
contributions (through the HI payroll tax and the SMI premium)
cover the expected value of their benefits under the program.
Results are presented only for self-insured men and women (that
is, those who obtain benefits on the basis of their own work
history) who worked each year at an average wage from 1966
until retirement at age 65. Three groups of persons are shown--
persons who reach 65 as of 1985, 1995, and 2005. All estimates,
which were made prior to the enactment of the Balanced Budget
Act of 1997, are dependent on uncertain projections of future
health spending.
    For a self-insured man who worked continuously at an
average wage from 1966 (when Medicare began) until retirement
in 1985, the present discounted value of their contributions is
about 29 percent of the expected value of lifetime Medicare
benefits. For men retiring in 1995, contributions represent
about 37 percent of benefits; for those retiring in 2005,
contributions represent about 41 percent. Contributions through
HI payroll taxes increases relative to HI benefits for later
retirees because the HI payroll tax (which began in 1966) was
paid for a greater proportion of their working years.
Conversely, contributions through SMI premiums relative to SMI
benefits decline because, under the law in effect prior to the
Balanced Budget Act of 1997, after 1998 annual premium
increases were limited by the percentage increase in the Social
Security COLA (see table 2-11).

                  TABLE 2-10.--OPERATIONS OF THE SUPPLEMENTARY MEDICAL INSURANCE TRUST FUND (CASH BASIS), SELECTED FISCAL YEARS 1970-96
                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Income                                          Disbursements
                                      ------------------------------------------------------------------------------------------------------- Balance at
           Fiscal year \1\                                                  Interest                                                            end of
                                        Premium from       Government      and other      Total      Benefit   Administrative      Total       year \4\
                                          enrollees    contributions \2\   income \3\    income     payments      expenses     disbursements
--------------------------------------------------------------------------------------------------------------------------------------------------------
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
    1986.............................           5,699            18,076         1,228      25,003      25,169         1,049          26,218        9,432
    1987.............................           6,480            20,299         1,018      27,797      29,937           900          30,837        6,392
    1988.............................           8,756            25,418           828      35,002      33,682         1,265          34,947        6,447
    1989.............................      \5\ 11,548            30,712     \5\ 1,022  \5\ 43,282      36,867     \5\ 1,450      \5\ 38,317   \5\ 11,412
    1990.............................      \5\ 11,494            33,210     \5\ 1,434  \5\ 46,138      41,498     \5\ 1,524      \5\ 43,022   \5\ 14,527
    1991.............................          11,807            34,730         1,629      48,166      45,514         1,505          47,019       15,675
    1992.............................          12,748            38,684         1,717      53,149      48,627         1,661          50,288       18,535
    1993.............................          14,683            44,227         1,889      60,799  \6\ 54,214         1,845          56,059       23,276
    1994.............................          16,895            38,355         2,118      57,368      58,006         1,718          59,724       20,919
    1995.............................          19,244            36,988         1,937      58,169      63,491         1,722          65,213       13,874
    1996.............................          18,731            61,702         1,392      82,025      67,176         1,771          68,946       26,953
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For 1970 and 1975, fiscal years cover the interval from July 1 through June 30; fiscal years 1980-2005 cover the interval from October 1 through
  September 30.
\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\ The financial status of the program depends on both the total net assets and the liabilities of the program.
\5\ Includes the impact of the Medicare Catastrophic Coverage Act of 1988 (Public Law 100-360).
\6\ Includes the impact of the transfer to the HI Trust Fund of the SMI catastrophic coverage reserve fund on March 31, 1993 as specified in Public Law
  102-394. Actual benefit payments for 1993 were $52,409 million and the amount transferred was $1,805 million.

Source: Board of Trustees, Federal Supplementary Medical Insurance Trust Fund (1997).

  TABLE 2-11.--CONTRIBUTIONS AS A PERCENT OF EXPECTED LIFETIME BENEFITS
UNDER MEDICARE FOR SELECTED SELF-INSURED ENROLLEES REACHING AGE 65 AS OF
                           1985, 1995, OR 2005
------------------------------------------------------------------------
                                                        Year
                 Category                  -----------------------------
                                              1985      1995      2005
------------------------------------------------------------------------
Self-insured men who earned average wages:
    Hospital insurance....................      31.6      50.4      66.2
    Supplementary medical insurance.......      24.3      17.8      11.5
                                           -----------------------------
        Medicare total....................      28.9      37.3      41.0
                                           =============================
Self-insured women who earned average
 wages:
    Hospital insurance....................      26.0      42.7      56.9
    Supplementary medical insurance.......      24.5      16.9      11.8
                                           -----------------------------
        Medicare total....................      25.5      31.8      36.0
------------------------------------------------------------------------
Note.--Contributions include employers' and employees' hospital
  insurance (HI) payroll taxes, interest, and supplementary medical
  insurance (SMI) premiums. Any other taxes paid by enrollees are not
  included. Estimates are for beneficiaries with sufficient work history
  to qualify for benefits. However, up to 20 percent of Medicare
  beneficiaries qualify on the basis of their spouse's work history, not
  their own. For spouse-insured beneficiaries, contributions as a
  percent of benefits are lower because spouse-insured beneficiaries
  paid little or no HI payroll taxes. Estimates assume an expected
  lifetime at age 65 of 15 years for men (to age 80) and 19 years for
  women (to age 84). Present discounted values for expected benefits
  were obtained using the average interest rate projected for HI Trust
  Fund earnings over the same years.

Source: Congressional Budget Office.

    Contributions by self-insured women as a percentage of
expected benefits are smaller than they are for men. Actual
contributions by men and women are the same in the illustrative
calculations. However, a woman's lifetime benefits are larger
because a woman's lifetime expectancy is 4 years longer at age
65 (table 2-11).
    In 1995 dollars, the present discounted value of Medicare
benefits net of contributions (that is the net transfer or
subsidy value) is estimated at $32,222 for men and $41,355 for
women who retired in 1985. For those retiring in 1995, the
value is estimated at $51,813 for men and $68,777 for women.
CBO projects that values will continue to increase in the
future, reaching $71,868 for men and $91,594 for women by 2005
(table 2-12).

       TABLE 2-12.--PRESENT DISCOUNTED VALUE OF LIFETIME BENEFITS,
CONTRIBUTIONS, AND NET TRANSFER UNDER MEDICARE FOR SELECTED SELF-INSURED
            ENROLLEES REACHING AGE 65 IN 1985, 1995, OR 2005
                       [In constant 1995 dollars]
------------------------------------------------------------------------
                                                    Year
             Category             --------------------------------------
                                       1985         1995         2005
------------------------------------------------------------------------
Self-insured men who earned
 average wages:
    Benefits.....................     $45,305      $82,599     $121,898
    Contributions................      13,083       30,787       50,030
                                  --------------------------------------
        Net transfer.............      32,222       51,813       71,868
                                  ======================================
Self-insured women who earned
 average wages
    Benefits.....................      55,483      100,862      143,036
    Contributions................      14,128       32,084       51,442
                                  --------------------------------------
        Net transfer.............      41,355       68,777       91,594
------------------------------------------------------------------------
Note.--Contributions include employers' and employees' HI payroll taxes,
  interest, and SMI premiums. Any other taxes paid by enrollees are
  included. Net transfer is benefits net of contributions. Estimates are
  for beneficiaries with sufficient work history to qualify for
  benefits. However, up to 20 percent of Medicare beneficiaries qualify
  on the basis of their spouse's work history, not their own. For spouse-
  insured beneficiaries qualify on the basis of their spouse's work
  history, not their own. For spouse-insured beneficiaries,
  contributions as a percent of benefits are lower and the net transfer
  is larger because spouse-insured beneficiaries paid little or no HI
  payroll taxes. Estimates assume an expected lifetime at age 65 to 15
  years for men (to age 80) and 19 years for women (to age 84). Present
  discounted values for unexpected benefits were obtained using the
  average interest rate projected for HI Trust Fund earnings over the
  same years. The CPI-U was used to get constant 1995 dollars.

Source: Congressional Budget Office.

                 PART A SERVICES--COVERAGE AND PAYMENTS

                      Inpatient Hospital Services

    Medicare part A provides reimbursement for inpatient
hospital care through the prospective payment system (PPS),
established by Congress in the Social Security Amendments of
1983 (Public Law 98-21). Before the enactment of PPS, Medicare
paid hospitals retrospectively for the full costs they
incurred, subject to certain limits and tests of
reasonableness. Congress had previously acted to contain
growing hospital costs by placing certain limits on routine
inpatient care operating costs. However, medical costs
continued to grow faster than the rate of inflation in the
early 1980s, so PPS was enacted to constrain the growth of
Medicare's inpatient hospital costs by providing incentives for
hospitals to provide care more efficiently (see appendix D for
further information about hospital services).
    Under PPS, fixed hospital payment amounts are established
in advance of the provision of services on the basis of a
patient's diagnosis. Hospitals that are able to provide
services for less than the fixed PPS payment may keep the
difference. Hospitals with costs that exceed the fixed PPS
payment lose money on the case. The system's fixed prices are
determined in advance on a cost-per-case basis, using a
classification system of over 500 diagnosis-related groups
(DRGs). Each Medicare case is assigned to one of the DRGs based
on the patient's medical condition and treatment. DRGs are
assigned relative weights to reflect the variation in the costs
of treating a particular diagnosis. The DRG-based payment rate
is designed to represent the national average cost per case for
treating a patient with a particular diagnosis. Payments for a
particular DRG will vary among different hospitals depending on
the hospital's location and certain other characteristics. In a
particular hospital, all cases assigned to the same DRG are
reimbursed at the same predetermined rate.
    The PPS payment rates are updated each year using an update
factor which is determined, in part, by the projected increase
in the hospital market basket index (MBI). The hospital MBI
measures the cost of goods and services that are purchased by
hospitals, yielding one price inflator for all hospitals in a
given year.
    In addition to the basic DRG payment for each case, PPS
hospitals may also receive certain supplemental Medicare
payments. Additional hospital payments include indirect medical
education costs, disproportionate-share hospital payments,
outlier payments, and payments for inpatient dialysis provided
to end-stage renal disease beneficiaries. Certain categories of
hospital expenses are not included in the PPS rates and are
reimbursed in some other way, including direct medical
education costs and capital-related costs. Certain facilities
receive special treatment under PPS, particularly certain types
of isolated or essential hospitals in rural areas, including
regional referral centers (RRCs), sole community hospitals
(SCHs), and Medicare-dependent small rural hospitals.
    Specialized facilities are excluded from PPS and are paid
on the basis of reasonable costs subject to rate of increase
limits. PPS-exempt facilities include psychiatric hospitals,
rehabilitation hospitals, children's hospitals, cancer research
centers, and long-term care hospitals. States are also allowed
to apply for a waiver from PPS and establish a prospective
system for setting hospital rates instead of what would be paid
under PPS; Maryland is the only State that continues to operate
under such a waiver.
    Table 2-13 provides 1995 data on the utilization of
inpatient hospital services by type of enrollee and type of
hospital.

                   Skilled Nursing Facility Services

Coverage
    The Medicare Program 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 of the program for up to 100 days per spell of illness
and must be provided in a skilled nursing facility certified to
participate in Medicare. A spell of illness is that period
which begins when a beneficiary is furnished

TABLE 2-13.--USE OF INPATIENT HOSPITAL SERVICES BY MEDICARE ENROLLEES, BY TYPE OF ENROLLEE AND TYPE OF HOSPITAL,
                                             CALENDAR YEAR 1995 \1\
----------------------------------------------------------------------------------------------------------------
                                    Bills \2\            Covered days of care               Reimbursement
                             -----------------------------------------------------------------------------------
Type of enrollee and type of                                                         Amount
          hospital            Number in  Per 1,000  Number in  Per bill  Per 1,000     in     Per bill     Per
                              thousands  enrollees  thousands            enrollees  millions            enrollee
----------------------------------------------------------------------------------------------------------------
All enrollees:
  All hospitals.............     12,474        336     86,041       6.9      2,317   $76,519    $6,134    $2,061
    Short stay..............     11,260        303     72,124       6.4      1,942    69,261     6,151     1,865
    Long stay...............      1,214         33     13,917      11.5        375     7,258     5,979       195
      Psychiatric...........        302          8      2,688       8.9         72       937     3,103        25
      All other.............        912         25     11,229      12.3        302     6,321     6,931       170
Aged:
  All hospitals.............     10,610        324     73,165       6.9      2,235    65,980     6,219     2,015
    Short stay..............      9,848        301     63,695       6.5      1,945    60,572     6,151     1,850
    Long stay...............        762         23      9,470      12.4        289     5,408     7,097       165
      Psychiatric...........         90          3        902      10.0         28       342     3,800        10
      All other.............        672         21      2,295       3.4         70     5,066     7,539       155
Disabled:
  All hospitals.............      1,864        424     12,876       6.9      2,931    10,539     5,654     2,399
    Short stay..............      1,412        321      8,429       6.0      1,919     8,689     6,154     1,978
    Long stay...............        452        103      4,447       9.8      1,012     1,850     4,093       421
      Psychiatric...........        213         48      1,787       8.4        407       596     2,798       136
      All other.............        239         54      2,660      11.1        605     1,254     5,247       285
----------------------------------------------------------------------------------------------------------------
\1\ Preliminary data. Totals may not add due to rounding.
\2\ Discharges not available by type of hospital.

Note.--Only services rendered by inpatient hospitals are included.

Source: Health Care Financing Administration, Bureau of Management and Strategy.

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 a 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, 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.
    Covered SNF services include the following:
  --Nursing care provided by or under the supervision of a
        registered nurse;
  --Room and board;
  --Physical or occupational therapy or speech-language
        pathology;
  --Medical social services;
  --Drugs, biologicals, supplies, appliances, and equipment
        ordinarily furnished by a SNF for the care of patients;
  --Medical services of interns and residents in training under
        an approved teaching program of a hospital with which
        the SNF has a transfer agreement; and
  --Other services necessary to the health of patients that are
        generally provided by SNFs.
Reimbursement
     Medicare has reimbursed the great bulk of skilled nursing
facility (SNF) care on a retrospective cost-based basis. This
has meant that SNFs have been paid after services were
delivered for the reasonable costs (as defined by program) they
incurred for the care they provided. For these purposes, the
costs SNFs incurred for providing services to beneficiaries
were divided into three major categories: (1) routine service
costs--nursing, room and board, administrative, and other
overhead costs; (2) ancillary services, such as therapy
services, laboratory, radiology procedures, supplies and other
equipment; and (3) capital-related costs, including net
depreciation expense, taxes, lease and rental payments,
improvements that extend the life of or increase productivity
of assets, net interest expense, and so forth.
     Routine costs have been subject to national average per
diem limits, adjusted to reflect differences in wage levels
from area to area. Ancillary service and capital costs have
been paid on the basis of reasonable costs and neither have
been subject to limits.
     Beginning July 1, 1998, the Balanced Budget Act of 1997
phases in a prospective payment system for SNFs that will pay a
Federal per diem rate for covered SNF services. Covered
services will include part A SNF as well as all services for
which payment may be made under part B during the period when
the beneficiary is provided covered SNF care (excluding,
however, physician services, certain nurse practitioner and
physician assistant services, certified nurse-midwife services,
qualified psychologist services, services of a certified
registered nurse anesthetist, certain dialysis services and
drugs, and in 1998 only, the transportation costs of
electrocardiogram equipment).
     The Federal per diem payment will cover routine service
costs, ancillary costs, and capital-related costs, but will not
include costs associated with approved educational activities.
The actual per diem rate received by a facility will include
adjustments for case mix based on a resident classification
system established by the Secretary to account for relative
resource utilization of different patient types. The labor-
related portion of the rate will also include budget-neutral
adjustments to reflect the relative levels of wages and wage-
related cost for the geographic area in which the facility is
located.
     The resident classification system used by the Secretary
for the new SNF prospective payment system is expected to be
similar to that developed under a Health Care Financing
Administration demonstration known as resource utilization
groups (RUGs)-III. Under RUGs-III, classification is based on
residents' clinical conditions; extent of services needed, such
as nursing care, rehabilitation, respiratory/ventilator care of
tube feedings; and functional status, such as the amount of
support needed to eat or toilet. This new system pays, for
example, three times more for bedridden, severely ill patients
needing a variety of therapies than for ambulatory patients who
need only posthospital monitoring and surgical wound treatment.
     For a beneficiary residing in a SNF (or a part of a
facility that includes a SNF) but no longer eligible for part A
SNF care, payments for part B covered services will have to be
made to the facility whether or not the item or service was
furnished by the facility, by others under arrangement, or
under any other contracting or consulting arrangement. This
requirement is often referred to as the ``consolidated
billing'' provision of the new law. Payment for part B items
and services must include a code identifying the items or
services delivered. In addition, bills submitted by physicians
must include the SNFs provider number.
 Growth in payments
     For the past several years, SNF care has been one of
Medicare's fastest growing benefits. SNF spending in calendar
year 1990 stood at $2.5 billion; by calendar year 1996 it had
increased to $11.7 billion, for an average annual growth rate
of 29 percent (see table 2-14). Because spending for SNF care
has been growing at a faster rate than other benefits, both its
share of total Medicare spending as well as its share of total
part A expenditures have increased significantly, actually
doubling during this same period. Table 2-14 presents
historical SNF spending data on a calendar year basis.
     Table 2-15 shows that since 1990 the number of Medicare
beneficiaries receiving SNF care grew from 638,000 to 1,145,000
in 1996 or by 79.5 percent; the number of covered days grew
from 25.1 million to 40.2 million or by 60 percent. Payment per
day, however, tripled, increasing by 198 percent during the
period, and reached $292 per day.

  TABLE 2-14.--ESTIMATED MEDICARE PAYMENTS FOR SKILLED NURSING FACILITY
                  CARE BY TYPE OF SERVICE, 1983-96 \1\
------------------------------------------------------------------------
                                                  Payments
                                                    (in        Percent
                                                 billions)    change \2\
------------------------------------------------------------------------
Calendar year:
    1983......................................         $0.5  ...........
    1984......................................          0.6          6.9
    1985......................................          0.6          2.9
    1986......................................          0.6          0.2
    1987......................................          0.6          8.8
    1988......................................          0.9         47.1
    1989......................................          3.5        275.7
    1990......................................          2.5        -29.0
    1991......................................          2.9         18.4
    1992......................................          4.5         55.3
    1993......................................          6.5         44.4
    1994......................................          8.4         29.2
    1995 \1\..................................         10.4         23.8
    1996 \1\..................................         11.7         12.5
------------------------------------------------------------------------
\1\ Estimated.
\2\ Rounding in payments may not reflect actual change.

Note.--Payments reported here are incurred expenditures, net of
  beneficiary copayments.

Source: Health Care Financing Administration, Office of the Actuary, and
  Prospective Payment Assessment Commission (1995, 1996).

       TABLE 2-15.--MEDICARE SKILLED NURSING FACILITY UTILIZATION AND PAYMENTS PER PERSON SERVED, 1983-96
----------------------------------------------------------------------------------------------------------------
                                                    People served             Days             Payment per day
                                               -----------------------------------------------------------------
                 Calendar year                                          Number      Per
                                                  Number   Per 1,000     (in       person     Amount    Percent
                                                           enrollees  millions)    served                change
----------------------------------------------------------------------------------------------------------------
1983..........................................    265,000          9        9.3       35.1        $56  .........
1984..........................................    299,000         10        9.6       32.2         58        3.2
1985..........................................    314,000         10        8.9       28.4         65       11.1
1986..........................................    304,000         10        8.2       26.8         71        9.6
1987..........................................    293,000          9        7.4       25.4         84       19.3
1988..........................................    384,000         12       10.7       27.8         87        2.6
1989..........................................    636,000         19       29.8       46.8        117       34.6
1990..........................................    638,000         19       25.1       39.5         98      -16.1
1991..........................................    671,000         20       23.7       35.3        123       25.9
1992..........................................    785,000         22       29.0       36.9        157       27.1
1993..........................................    908,000         25       34.4       37.9        188       20.1
1994..........................................  1,068,000         29       37.1       39.7        226       20.1
1995..........................................  1,110,000         30       39.8       35.1        267       18.1
1996 \1\......................................  1,145,000         30       40.2       35.1        242        9.3
----------------------------------------------------------------------------------------------------------------
\1\ Estimated.

Source: Health Care Financing Administration, Office of the Actuary.

     Tables 2-14 and 2-15 also show that SNF utilization and
spending first began to increase significantly in 1988 and
1989. These increases can be traced to significant changes that
occurred in the benefit at that time. First HCFA issued new
coverage guidelines that became effective early in 1988. The
guidelines provided SNFs a great deal more information than had
previously existed about criteria that must be met for a
beneficiary to receive Medicare coverage. 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 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
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. Table 2-14 shows that
spending for SNF care decreased by 29 percent between 1989 and
1990, but did not drop back to 1988 levels. 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 would not end with the
repeal of MCCA. This trend is reflected in data showing a 65-
percent increase, from 8,638 to 14,219, in facilities
participating in Medicare between 1989 and 1996.
    As noted above, large average annual rates of growth in
Medicare SNF spending can be explained not only by increases in
volume of services covered, but also by significant increases
in reimbursements per day of care. Prospective Payment
Assessment Commission analysis has shown that Medicare
reimbursement policies may explain this increase. While routine
care costs are subject to per diem limits, ancillary services
are not. Higher ancillary service use, therefore, results in
greater Medicare payments. In addition, a SNF may claim high
ancillary service use as a justification for an exemption from
routine service cost limits, thereby increasing those payments.
In 1990, charges for physical, occupational, speech, and
respiratory therapy services were approximately 15 percent of
total Medicare SNF charges. By 1994, these services represented
over 30 percent of charges. Although final payments for therapy
and other ancillary services are based on costs rather than
charges, these estimates reveal the relative importance of
these services in the overall growth of Medicare Program
payments for SNF services. This growth is expected to be
controlled in the future by the new SNF prospective payment
system mandated by the Balanced Budget Act of 1997.

                          Home Health Services

Coverage
    Both parts A and B of Medicare cover home health visits for
persons who need skilled nursing care on an intermittent basis
or physical therapy or speech therapy. Persons must also be
homebound and under the care of a physician who establishes and
periodically reviews a plan of care for the patient. While a
beneficiary cannot become eligible for home health on the basis
of needing only occupational therapy, this need can continue
eligibility for home health care coverage, even if intermittent
skilled nursing care or physical or speech therapy are no
longer needed.
    Medicare's home health benefit is intended to serve
beneficiaries needing acute medical care that must be provided
by skilled health care personnel, and was never envisioned as
providing coverage for the nonmedical supportive care and
personal care assistance needed by chronically impaired
persons. If beneficiaries meet the required eligibility
criteria, they become entitled to an unlimited number of home
health visits. Home health visits are not subject to
deductibles or coinsurance.
    For beneficiaries meeting the qualifying criteria,
Medicare's home health benefit covers the following services:
  --Part-time or intermittent nursing care provided by or under
        the supervision of a registered nurse;
  --Physical or occupational therapy or speech-language
        pathology services;
  --Medical social services;
  --Part-time or intermittent services of a home health aide
        who has successfully completed a training program
        approved by the Secretary;
  --Medical supplies (excluding drugs and biologicals) and
        durable medical equipment;
  --Medical services provided by an intern or resident in
        training under an approved training program with which
        the agency may be affiliated; and
  --Certain other outpatient services which involve the use of
        equipment that cannot readily be made available in the
        beneficiary's home.
    In 1989, as a result of an agreement reached in a class
action lawsuit, Duggan v. Bowen, HCFA published new manual
instructions that clarified the criteria which must be met for
Medicare coverage of home health services. The coverage
guidelines, for example, specify that to meet the requirement
of needing ``intermittent'' skilled nursing care, an individual
must have a medically predictable recurring need for skilled
nursing services. This need can be met in most instances if the
individual requires these services at least once every 60 days.
The guidelines further provide that a service is not considered
a skilled nursing service merely because it is performed by or
under the direct supervision of a licensed nurse; instead the
inherent complexity of the service, the condition of the
patient, and accepted standards of medical and nursing practice
must be considered. Skilled nursing services may be justified
for such purposes as treatment of illness or injury;
observation and assessment of a patient's condition when only
the specialized skills of a medical professional can determine
a patient's status; management and evaluation of a patient care
plan to ensure that essential nonskilled care is achieving its
purpose; and teaching and training activities for the patient
and the patient's family or care givers.
     The Balanced Budget Act included several provisions which
clarified coverage criteria for home health care:
  --Persons will no longer be able to qualify for Medicare's
        home health benefit on the basis of needing skilled
        nursing care for venipuncture for the purpose of
        obtaining a blood sample.
  --Effective for services furnished on or after October 1,
        1997, the Medicare statute includes definitions for
        part-time and intermittent skilled nursing and home
        health aide services. For purposes of receiving skilled
        nursing and home health aide services, ``part-time or
        intermittent'' is defined as skilled nursing and home
        health aide services furnished any number of days per
        week as long as they were furnished (combined) less
        than 8 hours each day and 28 or fewer hours each week
        (or, subject to review on a case-by-case basis as to
        the need for care, less than 8 hours each day and 35 or
        fewer hours per week). For purposes of qualifying for
        Medicare's home health benefit because of a need for
        intermittent skilled nursing care, ``intermittent'' is
        defined as skilled nursing care that is either provided
        or needed on fewer than 7 days each week, or less than
        8 hours of each day for periods of 21 days or less
        (with extensions in exceptional circumstances when the
        need for additional care is finite and predictable).
  --The Secretary of Health and Human Services is required to
        conduct a study on the criteria that should be applied
        for determining whether an individual should be
        considered homebound for purposes of qualifying for
        Medicare's home health benefit. The criteria should
        include the extent and circumstances under which a
        person may be absent from the home but nonetheless
        qualify. The Secretary is required to report to
        Congress by October 1, 1998, and make specific
        recommendations on such criteria.
  --Effective for services furnished on or after October 1,
        1997, the Secretary is required to establish normative
        guidelines for the frequency and duration of home
        health services. Payments will be denied for visits
        that exceed the normative standards. The Secretary is
        also authorized to establish a process for notifying a
        physician when the number of home health visits
        furnished according to a prescription or certification
        of the physician significantly exceeds the threshold
        normative guidelines. The Secretary may adjust the
        thresholds to reflect demonstrated differences in the
        need for home health services among different
        beneficiaries.
Reimbursement
    Home health care agencies have been reimbursed on the basis
of reasonable costs, up to specified limits. Cost limits are
determined separately for each type of covered home health
service (skilled nursing care, physical therapy, speech
pathology, occupational therapy, medical social services, and
home health aide), and according to whether an agency is
located in an urban or rural area. Cost limits, however, have
been applied to aggregate agency expenditures; that is, an
aggregate cost limit is set for each agency that equals the
limit for each type of service multiplied by the number of
visits of each type provided by the agency.
     The Balanced Budget Act reduces the per visit cost limits
from 112 percent of the mean labor-related and nonlabor per
visit cost to 105 percent of the national median of labor-
related and nonlabor costs for freestanding home health
agencies, effective for cost-reporting periods beginning
October 1, 1997 (in effect, delaying the cycle for updating the
limits).
     In addition, home health agencies, for cost-reporting
periods beginning on or after October 1, 1997, will be paid the
lesser of: (1) their actual costs (that is, allowable
reasonable costs); (2) the per visit limits, reduced to 105
percent of the national median, applied in the aggregate; or
(3) a new blended agency-specific per beneficiary annual limit
applied to the agency's unduplicated census count of patients.
The blended per beneficiary limit will be based 75 percent on
an agency's own costs per beneficiary and 25 percent on the
average cost per beneficiary for agencies in the same census
region (adjusted for differences in labor costs). These costs
will be calculated from cost reports for cost-reporting periods
ending in fiscal year 1994, recognizing 98 percent of
reasonable costs for that period and updating them by the home
health market basket. The costs associated with nonroutine
medical supplies would be included in this calculation. For new
providers and those providers without a 12-month cost-reporting
period ending in fiscal year 1994, the per beneficiary limit
will equal the median of these limits (or the Secretary's best
estimates) applied to home health agencies. Home health
agencies that have altered their corporate structure or name
will not be considered new providers for these purposes. For
beneficiaries using more than one home health agency, the per
beneficiary limitation will be prorated among the agencies.
     The Secretary is required to establish the per visit
limits in effect for fiscal year 1998 by January 1, 1998, and
the per beneficiary limits by April 1, 1998. For subsequent
fiscal years (beginning October 1), the Secretary will be
required to establish limits by the prior August 1.
Prospective payment for home health care
    Beginning October 1, 1999, the Secretary is required to
establish a prospective payment system (PPS) for home health
and implement the system. All services covered and paid on a
reasonable cost basis at the time of enactment of the Balanced
Budget Act including medical supplies, must be paid on a
prospective basis. For the new prospective system, the
Secretary will consider an appropriate unit of service and the
number, type, and duration of visits provided within that unit,
potential changes in the mix of services provided within that
unit and their cost, and a general system design that provides
for continued access to quality services. In implementing the
system, the Secretary can provide for a transition of not
longer than 4 years during which a portion of the payment will
be based on agency-specific costs, but only if aggregate
payments are not greater than they would have been if a
transition had not occurred.
     Under the new system, the Secretary will compute a
standard prospective payment amount (or amounts) that will
initially be based on the most current audited cost report data
available to the Secretary. For fiscal year 2000, payment
amounts under the prospective system must be computed in such a
way that total payments will equal amounts that would have been
paid had the system not been in effect, but will also reflect a
15-percent reduction in cost limits and per beneficiary limits
in effect September 30, 1999. To assure savings from this
reduction, the Secretary will be required to reduce cost limits
and per beneficiary limits in effect September 30, 1999, by 15
percent, even if the Secretary is not prepared to implement the
new system on October 1.
     The payment amount for a unit of home health service will
be adjusted by a case-mix adjustor factor established by the
Secretary to explain a significant amount of the variation in
the cost of different units of service. The labor-related
portion of the payment amount will be adjusted by an area wage
adjustment factor that reflects the relative level of wages and
wage-related costs in a particular geographic area as compared
to the national average.
     Claims for home health services furnished on or after
October 1, 1998, will have to contain an appropriate identifier
for the physician prescribing home health services or
certifying the need for care. Claims will also be required to
include information on the length of time of a service unit, as
measured in 15-minute increments. The categories of services
for which time information must be included on a claim are
skilled nursing care; physical and occupational therapy and
speech-language pathology; medical social services; and home
health aide services.
     In order for home health services to be considered covered
care, home health care agencies will be required to submit
claims for all services, and all payments will have to be made
to a home health agency without regard to whether the item or
service was furnished by the agency, by others under
arrangement, or under any other contacting or consulting
arrangement.
 Transfer of some home health payments to part B
     Under current law, both parts A and B of Medicare cover
home health. Neither part of the program applies deductibles or
coinsurance to covered visits, and beneficiaries are entitled
to an unlimited number of visits as long as they meet
eligibility criteria. Section 1833(d) of Medicare law prohibits
payments under part B for covered services to the extent that
individuals are also covered under part A for the same
services. As a result, the comparatively few persons who have
no part A coverage are the only beneficiaries for whom payments
have been made under part B.
     The Balanced Budget Act of 1997 gradually transfers 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 (that is, postinstitutional visits) and during a home
health spell of illness.
     The transfer will be phased in over a period of 6 years,
between 1998 and 2003, with the Secretary transferring one-
sixth of the aggregate expenditures associated with transferred
visits in 1998 and an additional one-sixth each year thereafter
until fully implemented in 2003. Beginning January 1, 2003,
part A will cover 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 will be
covered for services without regard to the postinstitutional
limitation.
    The increase in the part B premium attributable to
transferred expenditures will be phased in over a period of 7
years, between 1998 and 2004. For 1998, the part B premium will
be increased by one-seventh of the extra costs due to the
transfer; for 1999, the part B premium will be increased by
two-sevenths of the extra costs; for 2000, three-sevenths; for
2001, four-sevenths; for 2002, five-sevenths; for 2003, six-
sevenths; and for 2004, the total of the extra costs due to the
transfer.
     Postinstitutional home health services are defined for
these purposes as services furnished to a Medicare beneficiary:
(1) after an inpatient hospital or rural primary care hospital
stay of at least 3 consecutive days, initiated within 14 days
after discharge; or (2) after a stay in a SNF, initiated within
14 days after discharge. Home health spell of illness is
defined as the period beginning when a patient first receives
postinstitutional home health services and ending when the
beneficiary had not received inpatient hospital, SNF, or home
health services for 60 days.
     Claims administration for transferred visits will continue
to be done by part A fiscal intermediaries.
     In related Medicaid provisions, States will receive
allotments to cover under their Medicaid Programs that portion
of the Medicare part B premium attributable to the transfer of
visits to part B for Medicare beneficiaries with incomes
between 135 and 175 percent of poverty. The Federal Government
will pay 100 percent of these costs, just so long as a State
does not exceed its allotment. (See Specified Low-Income
Beneficiaries, below.)
     The Balanced Budget Act also includes a provision
requiring the Secretary, not later than October 1, 1997, to
report to the Commerce, Ways and Means, and Finance Committees
on an estimate of Medicare home health outlays under parts A
and B during each of fiscal years 1998-2002. Not later than the
end of each of the years 1999-2002, the Secretary is also
required to submit a report that compares actual outlays with
estimated outlays. If the Secretary finds for a fiscal year
that actual outlays were greater than estimated outlays, the
report is also required to include recommendations regarding
beneficiary copayments or such other methods as will reduce the
growth in outlays for Medicare home health services.
Growth in payments
    For the past several years, the home health benefit has
been Medicare's fastest growing benefit. As table 2-16
indicates, spending for home health began to increase in 1989
when the total stood at $2.5 billion. By 1996, spending had
increased to $18.1 billion, for an average annual rate of
growth of 33 percent. Because spending for home health has been
growing at a faster rate than other benefits, its share of
total net Medicare spending has also increased. Almost all home
health claims have been paid out of the Medicare Part A
Hospital Insurance Trust Fund, but beginning with fiscal year
1998, this will change as explained above.

       TABLE 2-16.--MEDICARE PAYMENTS FOR HOME HEALTH, 1983-96 \1\
------------------------------------------------------------------------
                                                  Payments
                Calendar year                       (in        Percent
                                                 billions)    change \2\
------------------------------------------------------------------------
1983..........................................         $1.6           NA
1984..........................................          1.8         17.5
1985..........................................          1.9          4.0
1986..........................................          1.9         -0.5
1987..........................................          1.9         -1.2
1988..........................................          2.0          8.3
1989..........................................          2.5         23.3
1990..........................................          3.9         53.2
1991..........................................          5.6         43.6
1992..........................................          7.9         41.1
1993..........................................         10.3         30.4
1994..........................................         13.3         30.1
1995..........................................         16.2         21.8
1996 \3\......................................         18.1         11.7
------------------------------------------------------------------------
\1\ Includes both part A and part B expenditures.
\2\ Rounding in payments may not reflect actual change.
\3\ Estimated.

NA--Not applicable.

Note.--Payments reported here are incurred expenditures rather than
  outlays.

Source: Health Care Financing Administration, Office of the Actuary and
  Prospective Payment Assessment Commission (1995, 1996).

    Table 2-17 shows that most of the growth in home health
spending has been the result of an increasing volume of
services being covered under the program, both in terms of
increasing numbers of users and an increasing number of covered
visits per user. The number of persons served per 1,000
enrollees increased from 50 in 1989 to 99 in 1996, an increase
of 98 percent over the period. Average number of visits per
person served increased from 27 in 1989 to 76 in 1996, an
increase of 181 percent.
    Increasing per-visit costs for home health services have
accounted for comparatively little spending growth. Payments
per visit increased at a relatively low rate, from $54 per
visit in 1989 to $62 in 1996, a 14.8-percent increase for the
period.
    Some portion of growth in the volume of covered visits may
represent a delayed response to an increasing need for skilled
home care resulting from incentives, contained within
Medicare's hospital prospective payment system, to discharge
patients more quickly to their homes. During early years of
hospital prospective payment, HCFA had in place medical review
and claims processing policies that had resulted in high denial
rates for home health care. These policies were relaxed by
1989. In addition, the 1989 revised home health guidelines are
believed to have liberalized coverage policies, increasing the
number of allowed visits per week and duration of eligibility.
Furthermore, 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. Other factors that explain growth
in spending include aging of the population, technological
advances that have made possible a level of care in the home
that previously was only available in hospitals and other
institutions, and increased supply of services because of the
expanding number of agencies participating in Medicare (9,939
in 1996 compared to 5,686 in 1989).

               TABLE 2-17.--MEDICARE HOME HEALTH CARE UTILIZATION AND PAYMENTS PER VISIT, 1983-96
----------------------------------------------------------------------------------------------------------------
                                        People served                  Visits
                                   -------------------------------------------------------
     Calendar year of service                               Number                 Per      Payment     Percent
                                      Number   Per 1,000     (in     Per 1,000    person   per visit  change \1\
                                               enrollees  millions)  enrollees    served
----------------------------------------------------------------------------------------------------------------
1983..............................  1,318,000         45       36.9      1,234         28        $43          NA
1984..............................  1,498,000         50       40.4      1,330         27         46         7.3
1985..............................  1,549,000         50       39.4      1,274         25         49         6.5
1986..............................  1,571,000         50       38.0      1,204         24         50         3.4
1987..............................  1,544,000         48       35.6      1,104         23         53         5.2
1988..............................  1,582,000         48       37.1      1,130         23         55         3.8
1989..............................  1,685,000         50       46.2      1,379         27         54        -0.9
1990..............................  1,940,000         57       69.5      2,038         36         56         2.2
1991..............................  2,223,000         64      100.2      2,875         45         56        -1.8
1992..............................  2,523,000         72      134.9      3,863         54         58         3.8
1993..............................  2,868,000         80      169.1      4,742         59         61         4.1
1994..............................  3,175,000         87      220.7      6,090         70         60        -0.3
1995..............................  3,570,000         96      266.4      7,158         75         61         0.7
1996 \2\..........................  3,735,000         99      285.7      7,578         76         62         3.8
----------------------------------------------------------------------------------------------------------------
\1\ Rounding in payments may not reflect actual change.
\2\ Estimated.

NA--Not applicable.

Source: Health Care Financing Administration, Office of the Actuary and Prospective Payment Assessment
  Commission (1995, 1996).

                            Hospice Services

Coverage and benefits
    Medicare covers hospice care, in lieu of most other
Medicare benefits, for terminally ill beneficiaries. Hospice
care emphasizes palliative medical care, that is, relief from
pain, and supportive social and counseling services for the
terminally ill and their families. Services are provided
primarily in the patient's home. The Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA), Public Law 97-248, first
authorized Medicare part A coverage for hospice care (for the
period November 1, 1983 to October 1, 1986); in 1986, Congress
made the hospice benefit a permanent part of the Medicare
Program, effective April 7, 1986.
     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. As a result of an
amendment in the Balanced Budget Act, persons 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 new election 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 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 DHHS; (5) homemaker
services; (6) medical supplies (including drugs and
biologicals) and the use of medical appliances; (7) physician
services; (8) short-term 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
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 may pay for (effective April 1, 1998).
    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 services--outpatient drugs or
biologicals and respite care--are 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 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.
Reimbursement
    In implementing Medicare's hospice benefit, HCFA
established a prospective payment methodology. Under this
methodology, 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. Reimbursement 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.
    The four rate categories for reimbursing hospices are:
 1. Routine home care day.--Routine home care day is 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 the volume or
        intensity of the services provided on any given day as
        long as less than 8 hours of care are provided. This
        rate is $95.77 for services provided between October 1,
        1997 and September 30, 1998.
 2. Continuous home care day.--A continuous home care day is 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. Currently
        this rate is $558.99 for 24 hours or $23.29 per hour.
 3. Inpatient respite care day.--An inpatient respite care day
        is one 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 caretakers. Currently this rate is
        $99.07.
 4. General inpatient care day.--A general inpatient care day
        is one 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, or
        inpatient unit of a freestanding hospice. Currently
        this rate is $426.05.
    To reflect differences in wage levels from area to area,
each of these four payment rates is adjusted by the hospital
area wage index used by Medicare for adjusting payments to
hospitals, skilled nursing facilities, and home health
agencies. HCFA separates each of the national payment rates for
hospice care into components which reflect the estimated
proportion of the rate attributable to wage and nonwage costs.
The wage component of each rate is then adjusted by the index
applicable to the area in which the hospice is located.
    The Omnibus Budget Reconciliation Act (OBRA) of 1989
required that the payment rates be increased by the hospital
market basket percentage increase each fiscal year. OBRA 1993,
however, reduced the updates for the prospective rates as
follows: for fiscal year 1994, the hospital market basket
percentage increase minus 2.0 percentage points; for fiscal
years 1995 and 1996, the hospital market basket minus 1.5
percentage points; and for fiscal year 1997, market basket
minus 0.5 percentage points.
    The Balanced Budget Act of 1997 reduces the hospice payment
update to market basket minus 1 percentage point for each of
fiscal years 1998-2002.
    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 applied on an aggregate rather than
a case-by-case basis. Therefore, each individual hospice's cap
amount is calculated by multiplying the yearly 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. The cap amount for the period November 1, 1996
through October 31, 1997, is $14,394. Cap amounts are updated
annually by the percentage change in the medical care component
of the Consumer Price Index (CPI-U) for Urban Consumers.
 Hospice program data
     Table 2-18 shows that the number of hospices participating
in Medicare has grown from 553 in 1988 to 2,090 in 1996. Table
2-19 indicates that spending for the benefit has increased
signifi-

               TABLE 2-18.--NUMBER OF HOSPICES BY PROVIDER TYPE WITH PERCENTAGE OF TOTAL, 1988-96
----------------------------------------------------------------------------------------------------------------
                                                                      Month and year
              Provider type              -----------------------------------------------------------------------
                                           7/88    7/89    5/90    9/91    1/92    5/93    8/94    6/95    10/96
----------------------------------------------------------------------------------------------------------------
Freestanding............................     191     220     260     394     404     499     608     656     762
Hospital based..........................     138     182     221     282     291     341     401     447     507
Skilled nursing facility based..........      11      13      12      10      10      10      12      18      21
Home health agency based................     213     286     313     325     334     438     583     674     800
                                         -----------------------------------------------------------------------
    Total...............................     553     701     806   1,011   1,039   1,288   1,604   1,795   2,090
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Program Operations.

                                      TABLE 2-19.--SELECTED MEASURES OF MEDICARE HOSPICE CARE, FISCAL YEARS 1988-95
                                                                   [By claim approved]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Fiscal year
                           Measure                            ------------------------------------------------------------------------------------------
                                                                  1988       1989       1990       1991       1992       1993        1994        1995
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash outlays by provider type:
    Freestanding.............................................      $52.1      $87.1     $130.7     $219.2     $444.2      $620.4      $724.2      $977.1
    Hospital based...........................................       13.5       33.0       57.0       92.0      168.0       205.3       226.1       319.3
    Skilled nursing facility based...........................        4.8        5.9        7.6        8.6       17.1        22.6        17.7        26.0
    Home health agency based.................................       47.8       79.3      113.5      125.7      224.3       303.7       348.7       508.1
                                                              ------------------------------------------------------------------------------------------
        Total................................................      118.4      205.4      308.8      445.4      853.6     1,151.9     1,316.7     1,830.5
                                                              ==========================================================================================
Cash outlays by care type:
    Routine home care........................................       95.7      175.2      262.8      376.6      720.0     1,004.9     1,158.6     1,611.6
    Continuous home care.....................................        2.5        2.6        3.1        3.9       10.4        12.2        14.5        25.6
    Inpatient respite care...................................        0.3        0.6        0.9        1.3        2.5         2.6         2.7         4.4
    General inpatient care...................................       18.9       25.5       39.6       59.7      114.0       125.5       134.1       179.1
    Physicians...............................................        0.9        1.4        2.4        3.9        6.7         6.7         6.8         9.8
                                                              ------------------------------------------------------------------------------------------
        Total................................................      118.4      205.4      308.8      445.4      853.6     1,151.9     1,316.7     1,830.5
                                                              ==========================================================================================
Average dollar amount per beneficiary:
    Freestanding.............................................      2,837      3,436      4,237      4,121      5,668       6,085       6,355       6,451
    Hospital based...........................................      3,129      3,217      3,832      4,234      5,296       5,361       5,631       5,740
    Skilled nursing facility based...........................      3,247      3,260      3,231      4,198      5,538       5,344       5,426       6,079
    Home health agency based.................................      2,965      3,395      3,994      3,993      5,169       5,239       5,408       5,509
                                                              ------------------------------------------------------------------------------------------
        Total................................................      2,935      3,378      4,037      4,108      5,452       5,681       5,935       8,049
                                                              ==========================================================================================
Number of beneficiaries:
    Freestanding.............................................     18,396     25,351     30,861     53,184     78,374     102,283     113,959     151,466
    Hospital based...........................................      4,315     10,269     14,870     21,717     31,734      38,295      40,156      55,631
    Skilled nursing facility based...........................      1,494      1,818      2,353      2,040      3,084       4,221       3,262       4,272
    Home health agency based.................................     16,151     23,364     28,407     31,472     43,391      57,969      64,472      91,238
                                                              ------------------------------------------------------------------------------------------
        Total................................................     40,356     60,802     76,491    108,413    156,583     202,768     221,849     302,608
                                                              ==========================================================================================
Average number of days a beneficiary elects hospice care:
    Freestanding.............................................      39.26      48.40      52.41      46.15      59.11        62.0        63.7        62.9
    Hospital based...........................................      37.70      41.24      45.85      44.19      54.57        53.8        55.4        56.7
    Skilled nursing facility based...........................      31.05      37.10      34.51      37.59      44.45        42.7        45.5        49.3
    Home health agency based.................................      35.26      43.14      46.46      42.45      52.59        52.2        53.3        63.8
                                                              ------------------------------------------------------------------------------------------
        Total \1\............................................      37.19      44.83      48.38      44.52      56.09        57.2        58.9        68.3
                                                              ==========================================================================================
Number of units by care type:
    Routine home care--days..................................  1,460,414  2,677,170  3,600,407  4,667,703  8,564,904  11,324,524  12,699,617  17,257,734
    Continuous home care--hours..............................    154,989    160,056    166,039    199,309    442,968     565,903     654,667   1,129,697
    Inpatient respite care--days.............................      4,223      8,398     12,573     14,867     28,495      27,887      28,769      45,932
    General inpatient care--days.............................     58,346     83,750    117,989    161,211    297,190     303,245     299,823     418,093
    Physicians--procedures...................................     19,257     24,442     39,587     53,491    111,716     115,560     110,790     165,066
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Weighted by the number of beneficiaries in each hospice type.

Note.--Totals may not add due to rounding.

Source: Health Care Financing Administration.

cantly, rising from $118.4 million in fiscal year 1988 to $1.8
billion in fiscal year 1995. The number of beneficiaries
electing Medicare's hospice benefit has increased from about
40,000 in fiscal year 1988 to almost 303,000 in fiscal year
1995. The average number of days a beneficiary spends in
hospice care has risen from 37 to 68 days during this period,
and the average amount spent per beneficiary has increased from
$2,935 to $8,049. The vast majority of care paid for by the
program is routine home care.

                 PART B SERVICES--COVERAGE AND PAYMENTS

                          Physicians Services

    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. Relative values reflect
three factors: physician work (time, skill, and intensity
involved in the service), 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 a dollar figure known as the conversion
factor. In 1997, there are three conversion factors--one for
surgical services, one for primary care services, and one for
other services. The conversion factors in 1997 are $40.96 for
surgical services, $35.77 for primary care services, and $33.85
for other services (for a further discussion of physician
payment issues, see appendix E).
    The conversion factors have been updated each year by a
formula called the default formula. However, Congress may elect
to reduce the update that would otherwise apply. The default
formula has been based on two factors: (1) inflation as
measured by the Medicare economic index (MEI); and (2) a
comparison of actual physician spending in a base period
compared to an expenditure goal known as the Medicare volume
performance standard (MVPS). Specifically, the update has been
equal to the MEI, plus or minus the difference between the MVPS
for the second preceding fiscal year and actual expenditures
for that year. (Thus fiscal year 1995 data were used in
determining the calendar year 1997 update.) However, regardless
of actual performance during the base period, there has been a
limit on the actual reduction (but not increase).
    The Balanced Budget Act of 1997 specified that there will
be a single conversion factor beginning in 1998. The 1998
amount--$36.69 is the 1997 primary care conversion factor,
updated to 1998 by the average of the three separate updates
that would occur in the absence of the legislation. Beginning
in fiscal year 1998, the MVPS is replaced with a cumulative
``sustainable growth rate'' based on real GDP growth. The 1998
rate is 1.5 percent. This new target will begin affecting
updates in 1999. An upper limit is placed on allowable fee
increases--3 percentage points above inflation. The lower limit
on decreases is changed from inflation minus 5 percentage
points to inflation minus 7 percentage points.
    Anesthesiologists are paid under a separate fee schedule
which uses base and time units. A separate conversion factor
($16.68 in 1997) applies. The Balanced Budget Act of 1997
specifies that beginning in 1998, the conversion factor equals
46 percent of the single conversion factor, except as adjusted
for changes in work, practice expense, or malpractice relative
value units. The 1998 factor is $16.88.
    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 out-of-pocket costs other than standard deductible and
coinsurance 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 procedure
is known as balance billing.
    Medicare's Participating Physician Program was established
to provide beneficiaries with the opportunity to select
physicians (designated as ``participating physicians'') who
have agreed to accept assignment on all services provided
during a 12-month period. Nonparticipating physicians continue
to be able to accept or refuse assignment on a claim-by-claim
basis. 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.

                 Services of Nonphysician Practitioners

    The physician fee schedule is also used for calculating
payments made for certain services provided by nonphysician
practitioners.
Physician assistants and nurse practitioners
    Currently, separate payments are made for physician
assistant services, when provided under the supervision of a
physician: (1) in a hospital, skilled nursing or nursing
facility; (2) as an assistant at surgery; or (3) in a rural
area designated as a health manpower shortage area. Payments
equal a percentage of what would be paid if the services were
performed by a physician, namely 65 percent of the fee schedule
amount for services performed as an assistant-at-surgery, 75
percent for other hospital services, and 85 percent for other
services, including services ``incident to'' physicians
services.
    Currently, separate payments are made for nurse
practitioner services, provided in collaboration with a
physician, which are furnished in a nursing facility. Payments
equal 85 percent of the physician fee schedule amount. Nurse
practitioners and clinical nurse specialists are paid directly
for services provided in collaboration with a physician in a
rural area. Payments equal 75 percent of the physician fee
schedule amount for services furnished in a hospital and 85
percent of the fee schedule amount for other services.
    The Balanced Budget Act of 1997 removes the restriction on
settings for these practitioners, effective January 1, 1998.
Payment for services can only be made if no facility or other
provider charges are paid in connection with the service.
Payment will equal 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 will equal 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 (CRNAs)
    CRNAs 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 CRNA are capped at a percentage of the amount that would be
paid if the anesthesiologist were practicing alone. The
percentage is 105 percent in 1997 and 100 percent in 1998 and
thereafter. 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 or occupational therapists in
independent practice are made under the physician fee schedule,
subject to an annual limit of $900 per patient in billed
charges for each type of therapist. Beginning in 1999, BBA
places a $1,500 per patient limit on all physical therapy
services and a separate $1,500 limit on all occupational
therapy services. The limits do not apply to services provided
by hospitals.

                      Clinical Laboratory Services

    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. 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 fee screen year 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 prospective payment system) 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.
    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. Allowable
increases in 1991, 1992, and 1993 were limited to 2 percent per
year. There were no increases in 1994 and 1995. The increase in
1996 was 2.9 percent. The increase in 1997 is 2.7 percent. The
Balanced Budget Act of 1997 freezes the fee schedule for the
1998-2002 period.
    Beginning in 1988, the law established national ceilings on
payment amounts. Initially the ceiling was set at 115 percent
of the median for all fee schedules for that test. This
percentage has been lowered several times. In 1997, the ceiling
is 76 percent of the median. The Balanced Budget Act sets the
ceiling at 74 percent of the median beginning in 1998.
    As of January 1, 1998, HCFA is eliminating the use of old
codes for certain automated panel/profile tests and replacing
them with revised codes. The Balanced Budget Act of 1997 makes
several changes with respect to the administration of the lab
benefit. It requires the Secretary to divide the country into
no more than five regions and designate a single carrier for
each region to process lab claims (excluding those for services
provided to inpatients of hospitals and skilled nursing
facilities) no later than July 1, 1999. The allocation of
claims to a particular carrier would be based on whether the
carrier serves the geographic area where the specimen is
collected or other method selected by the Secretary. The
requirement will not apply to those physicians office labs that
the Secretary determines would be unduly burdened by the
application of billing responsibilities with respect to more
than one carrier.
    The Balanced Budget Act also requires the Secretary, by
January 1, 1999, to adopt uniform coverage, administration, and
payment policies for lab tests using a negotiated rulemaking
process. The policies would be designed to eliminate variation
among carriers and to simplify administrative requirements. The
use of interim regional policies are permitted in cases where a
uniform national policy has not been established.
    Payment for clinical laboratory services (except for those
provided by a rural health clinic) may only be made on the
basis of assignment. The law specifically applies the
assignment requirement to clinical laboratory services provided
in physicians' offices. Payment for clinical laboratory
services equals 100 percent of the fee schedule amount; no
beneficiary cost sharing is imposed.
    Laboratories must meet the requirements of the Clinical
Laboratory Improvement 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.

        Durable Medical Equipment and Prosthetics and Orthotics

    Medicare covers a wide variety of durable medical equipment
(DME). Medicare law specifies that DME includes, but is not
limited to, iron lungs, oxygen tents, hospital beds, and
wheelchairs used in a patient's home. A patient's home can
include an institution, such as a home for the aged, so long as
the institution is not a hospital or skilled nursing facility.
Health Care Financing Administration (HCFA) guidelines
implementing the law provide a definition for DME that allows
additional items to be covered. The guidelines define DME as
equipment which: (1) can withstand repeated use; (2) is
primarily and customarily used to serve a medical purpose; (3)
generally is not useful to a person in the absence of an
illness or injury; and (4) is appropriate for use in the home.
Each of these requirements must be met before an item can be
considered covered DME. Medicare also covers related supplies
that are necessary for the effective use of DME; such supplies
include drugs and biologicals which must be put directly into
equipment in order for it to achieve its therapeutic benefit or
to assure its proper functioning. With these definitions, HCFA
has issued coverage guidelines for numerous DME items.
    Medicare law defines prosthetic devices as items that
replace all or part of an internal body organ (including
colostomy bags and intraocular lenses) and prosthetics and
orthotics such as leg, arm, back and neck braces, and
artificial legs, arms and eyes. Program guidelines give
additional examples of covered prosthetic devices. These
include cardiac pacemakers, breast prostheses for
postmastectomy patients, and a urinary collection and retention
system that replaces bladder function. Examples of prosthetics
and orthotics include rigid and semirigid back braces, special
corsets, and terminal limb devices, such as artificial hands
and hooks.
Reimbursement for durable medical equipment
    Medicare pays for DME on the basis of a fee schedule
originally enacted in the Omnibus Budget Reconciliation Act
(OBRA) of 1987 and modified on several occasions since then.
Prior to OBRA 1987, reimbursement for DME was generally made on
the basis of reasonable charges. The fee schedule first became
effective January 1, 1989.
    Under the DME fee schedule, reimbursement is the lesser of
either 80 percent of the actual charge for the item or the fee
schedule amount. Covered DME items are classified into five
groups for determining the fee schedule amounts: (1)
inexpensive or other routinely purchased durable medical
equipment (defined as equipment costing less than $150 or which
is purchased at least 75 percent of the time); (2) items
requiring frequent and substantial servicing; (3) customized
items (defined as equipment constructed or modified
substantially to meet the needs of an individual patient); (4)
other items of durable medical equipment (frequently referred
to as the ``capped rental'' category); and (5) oxygen and
oxygen equipment.
    In general, the fee schedules establish national payment
limits for DME. The limits have floors and ceilings. The floor
is equal to 85 percent of the weighted median of local payment
amounts and the ceiling is equal to 100 percent of the weighted
median of local payment amounts.
    Prosthetics and orthotics are also paid according to a fee
schedule that is based on principles similar to the DME fee
schedule. The fee schedule establishes regional payment limits
for covered items. The payment limits have floors and ceilings.
The floor is equal to 90 percent of the weighted average of
regional payment amounts; the ceiling is 120 percent. Fee
schedule amounts are updated annually by the Consumer Price
Index for all Urban Consumers.
     The Balanced Budget Act freezes payments for DME at the
1997 level for 1998-2002. It limits the update for prosthetics
and orthotics to 1 percent for those years.
     In addition, under the Balanced Budget Act, payments for
oxygen are reduced in 1998 to 75 percent of the 1997 payment
limits. Beginning in fiscal year 1999 and continuing through
subsequent years, oxygen payments are limited to 70 percent of
the 1997 levels. The Secretary is also authorized to establish
separate classes of oxygen and oxygen equipment and establish
separate national monthly payment limits for each class, as
long as expenditures are neither more nor less than what would
have been made without the separate classes. In addition, the
Secretary is required to establish service standards for home
oxygen providers. The General Accounting Office is required to
submit a report to Congress, including recommendations for
legislation, by February 1999 regarding beneficiary access to
home oxygen equipment.
     The Balanced Budget Act of 1997 also permits the Secretary
to establish fee schedules for certain items of medical
equipment which are currently paid on a reasonable charge
basis.
     Medicare payments for DME are intended to pay for items
which are reasonable and medically necessary. Upgraded or
deluxe items of DME purchased or rented for a beneficiary's
convenience or other purposes do not meet these criteria. A
beneficiary who wants an upgraded item must purchase it from
the supplier and then seek Medicare reimbursement. The
reimbursement will be based on the amount paid for the kind of
item normally used to meet the intended purpose. The Balanced
Budget Act authorizes (but does not require) the Secretary to
publish regulations allowing reimbursement for upgraded DME.
The regulations must include consumer protection safeguards and
a determination of fair market prices for upgraded items of
DME. If the regulations are released, a beneficiary could rent
or purchase an upgraded item and Medicare would pay the
supplier the standard fee for the item; the beneficiary would
be responsible for paying the additional cost of the upgrade.
The supplier's charge for the upgraded item could not exceed
the established fee schedule amount (if any).
    Table 2-20 shows total Medicare allowed payment amounts in
calendar year 1995 for DME, prosthetics and orthotics, and
other covered items that are not paid according to the fee
schedule, as well as non-DME items that are paid according to
the fee schedule.

TABLE 2-20.--ALLOWED AMOUNTS FOR DURABLE MEDICAL EQUIPMENT, PROSTHETICS,
         ORTHOTICS, AND CERTAIN OTHER ITEMS, CALENDAR YEAR 1994
                        [In millions of dollars]
------------------------------------------------------------------------
                                                                Allowed
                           Category                             amounts
------------------------------------------------------------------------
Inexpensive/routinely purchased \1\..........................     $367.0
Items with frequent maintenance \2\..........................       71.4
Customized items \3\.........................................        0.2
Capped rental \4\............................................      886.1
Oxygen \5\...................................................    1,654.9
Prosthetics/orthotics \6\....................................      802.6
Other \7\....................................................      922.0
                                                              ----------
      Total..................................................    4,704.2
------------------------------------------------------------------------
\1\ Inexpensive defined as equipment for which the purchase price does
  not exceed $150. Routinely purchased defined as equipment that is
  acquired 75 percent of the time by purchase. These items include
  commode chairs, electric heat pads, bed rails, and blood glucose
  monitors.
\2\ Paid on a rental basis until medical necessity ends; includes such
  items as ventilators and continuous and intermittent positive
  breathing machines.
\3\ Includes such items as wheelchairs adapted specifically for an
  individual. Payment based on individual determination.
\4\ Items of DME on a monthly rental basis not to exceed a period of
  continuous use of 15 months. Includes such items as hospital beds and
  wheelchairs.
\5\ Payment for oxygen and oxygen equipment based on a monthly rate per
  beneficiary. Payment not made for purchased equipment except where
  installment payments continue.
\6\ These items include covered prosthetic and orthotic devices (except
  for items included in the categories ``customized items'' and ``items
  requiring frequent maintenance,'' and transcutaneous electrical nerve
  stimulators, parenteral/enteral nutritional supplies and equipment,
  and intraocular lenses).
\7\ This category includes other covered items, such as enteral formulae
  and enteral medical supplies, that are not paid according to the fee
  schedules. It also includes non-DME items that are paid according to
  the DME fee schedule, such as surgical dressings.

Source: Health Care Financing Administration, Bureau of Data Management
  and Strategy. Data from the part B Medicare Annual Data System.

Administration of the fee schedule
    Consolidation of administration.--On June 18, 1992, the
Health Care Financing Administration (HCFA) published a final
rule regarding DME claims payments. The rule established four
regional carriers to process all claims for DME and prosthetics
and orthotics. HCFA argued that, as a result of this
consolidation, greater efficiency in claims processing would be
achieved, and variance in coverage policy and utilization
parameters would be greatly reduced.
    In addition, the rule also required that the responsibility
for processing claims for beneficiaries residing within each
regional area would fall to the regional carrier for that area.
This change was made in order to eliminate ``carrier
shopping,'' that is, filing claims in those carrier areas that
have higher payment rates.
    Overused items.--OBRA 1990 required the Secretary to
develop a list of DME items frequently subject to unnecessary
utilization; the list must include seat-lift mechanisms;
transcutaneous electrical nerve stimulators (TENS); and
motorized scooters. Carriers are directed to determine, in
advance, whether payment will be made for items on the
Secretary's list. DME suppliers must obtain carriers' approval
before providing items on the list to Medicare beneficiaries.
    Certificates of medical necessity.--All DME must be
prescribed by a physician in order to be reimbursed by
Medicare. Instead of a physician's prescription, carriers may
require the physician to submit a certificate of medical
necessity to document that an item is reasonable and medically
necessary. OBRA 1990 prohibited DME suppliers from distributing
completed or partially completed certificates and established
penalties for suppliers who knowingly and willfully distribute
forms in violation of the prohibition. The purpose of this
provision was to prohibit DME suppliers from directly marketing
items to Medicare beneficiaries by providing them with
completed certificates that could then be submitted to their
physicians. It was hoped that requiring physicians to complete
the certificates would encourage them to take a more active
role in considering their patients' needs for DME, while
simultaneously reducing suppliers' ability to influence DME
acquisition.
    The Social Security Amendments of 1994 modified this
prohibition to allow suppliers to distribute forms to
physicians or beneficiaries with some limited information such
as the supplier's identification number, a description of the
item, or payment information.
    Inherent reasonableness.--The Secretary is permitted to
increase or decrease Medicare payments in cases where the
payment amount is ``grossly excessive or grossly deficient and
not inherently reasonable.'' The Secretary's authority to make
these payment adjustments is generally referred to as
``inherent reasonableness authority.''
    In order to make a payment adjustment, the Secretary must
demonstrate that the payment meets several criteria of inherent
reasonableness specified by law. In addition, the Secretary
must publish a notice in the Federal Register outlining his
proposal to reduce or increase payment amounts, the proposed
methodology for adjusting the payment amount, and the potential
impact of the payment adjustment. The Secretary is also
required to meet with representatives of the affected
suppliers, to provide a 60-day public comment period, and to
publish a final determination in the Federal Register. The
final determination must include an explanation of the factors
and data the Secretary took into consideration in making the
determination.
    According to HCFA, the Secretary rarely uses inherent
reasonableness authority because the requirements are too
stringent and the notice requirements too burdensome.
 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 (VA). In order to lower
payments, the Secretary currently must initiate the inherent
reasonableness process or rely on congressional legislation.
Thus, critics suggested granting the Secretary the authority to
engage in a competitive bidding arrangement similar to the one
used by the VA. The Balanced Budget Act provided such authority
on a limited basis by authorizing not more than five 3-year
competitive bidding demonstration projects. Within established
competitive acquisition areas, providers of part B services
(excluding physician services) will compete for contracts to
supply items or services. At least one of the projects must
include oxygen and oxygen equipment. The Secretary may limit
the number of suppliers within an area to that number necessary
to meet the projected demand for items and services covered
under the contract. The Secretary will evaluate the effect of
these projects on Medicare payments, access, quality, and
diversity of product selection and report these evaluations
annually to Congress. All projects must terminate by December
31, 2002.
Requirements for participation in Medicare
    The Social Security Amendments of 1994 established
requirements for suppliers of medical equipment. Some of the
requirements codified regulations proposed by HCFA in 1992. In
order to be paid under Medicare, suppliers must be issued a
supplier number. To obtain this number, the supplier must
receive and fill orders from its own inventory or inventory in
other companies with which it has contracted. Suppliers must
also deliver Medicare covered items to beneficiaries, honor any
warranties, answer any questions or complaints, maintain and
repair rental items, and accept returns of substandard or
unsuitable items. The law further required that the supplier
must comply with all State and Federal regulations, must
maintain an appropriate physical plant, and must have proof of
insurance coverage.
    The Secretary is not permitted, except under specific
circumstances, to issue multiple supplier numbers to one
supplier.
    The law also addressed marketing and sales activities of
suppliers. Except under specified conditions, a supplier is
prohibited from making unsolicited telephone calls to Medicare
beneficiaries to sell them equipment. If such a sale is made,
the supplier will not be paid by Medicare and costs paid by the
beneficiary must be refunded by the supplier. Penalties were
established for suppliers that violate this provision.

                Hospital Outpatient Department Services

    Medicare hospital outpatient department (OPD) services are
reimbursed under Medicare part B. Services provided in
outpatient hospital settings and included in expenditure data
for this service setting are: emergency room services, clinic,
laboratory, radiology, pharmacy, physical therapy, ambulance,
operating room services, end-stage renal disease services,
durable medical equipment, and other services such as computer
axial tomography and blood. Services rendered by physicians in
OPD settings are not included in these expenditure data.
    Prior to 1983, hospital outpatient services, excluding
physicians' services, were paid for on a reasonable cost basis.
Some services, such as emergency services, are still reimbursed
on a reasonable cost basis. However, Congress has enacted a
number of provisions that have altered the ways hospital OPDs
are paid for many of their services and has placed limits on
payments for others. For example, outpatient dialysis services
are paid on the basis of a fixed composite rate; clinical
laboratory services are paid on the basis of a fee schedule; x-
ray services are subject to a limit on payments; and ambulatory
surgical facility fees for surgeries performed in hospital
outpatient departments are based on a weighted average of the
hospital's costs and the prevailing fee that would be paid to a
freestanding ambulatory surgical facility in the area.
    The aggregate payment to hospital OPDs and hospital-
operated ambulatory surgical centers (ASCs) for covered ASC
procedures is equal to the lesser of the following two amounts:
(1) the lower of the hospital's reasonable costs or customary
charges less deductibles and coinsurance; or (2) the amount
determined based on a blend of the lower of the hospital's
reasonable costs or customary charges, less deductibles and
coinsurance, and the amount that would be paid to a
freestanding ASC in the same area for the same procedures. For
cost-reporting periods beginning on or after January 1, 1991,
the hospital cost portion and the ASC cost portion are 42 and
58 percent, respectively.
    Payments for services delivered in hospital OPDs were $12.9
billion in calendar year 1995. Payments to hospital OPDs
constituted approximately 20 percent of all Medicare part B
payments in 1995 and about 8 percent of total parts A and B
Medicare payments. Table 2-21 provides information on the
number of part B enrollees, covered charges, aggregated
reimbursements and reimbursements per enrollee for hospital
outpatient services from 1974 to 1995. Table 2-22 shows the
percent distribution of Medicare hospital OPD charges, by type
of service, for 1995.
    The law provides for a reduction in payment for services
paid on a cost-related basis, other than capital costs, by 5.8
percent of the recognized costs for payments. The Balanced
Budget Act of 1997 extends the reduction through cost-reporting
periods, occurring through January 1, 2000. The reduction also
applies to cost portions of blended payment limits for
ambulatory surgery and radiology services. The Balanced Budget
Act also extends the reduction in reimbursement for capital
costs for OPDs by 10 percent for cost-reporting periods
occurring through January 2000. Sole community hospitals and
rural primary care hospitals are exempt from these reductions.
     The Balanced Budget Act requires the Secretary to
establish a prospective payment system for covered OPD services
furnished beginning in 1999. The Secretary is required to
develop a classification system for covered OPD services, such
that services within each group are comparable clinically and
with respect to the use of resources. The Secretary is also
required to establish relative payment rates for covered OPD
services using 1996 hospital claims and cost report data, and
to determine projections of the frequency of use of each
service or group of services in 1999. In addition, she must
determine a wage adjustment factor to adjust for relative
geographic differences in labor and labor-related cost that
must be applied in a budget-neutral manner and establish other
adjustments as necessary, including adjustments to account for
variations in coinsurance payments for procedures with similar
resource costs, and to ensure equitable payments under the
system. Finally, the Secretary must develop a method for
controlling unnecessary increases in the volume of covered OPD
services.

   TABLE 2-21.--MEDICARE HOSPITAL OUTPATIENT CHARGES AND REIMBURSEMENTS BY TYPE OF ENROLLMENT AND YEAR SERVICE
                                        INCURRED, SELECTED YEARS 1974-95
----------------------------------------------------------------------------------------------------------------
                                                  Number of                           Program payments
                                                   SMI \1\      Covered   --------------------------------------
     Type of enrollment and year of service       enrollees    charges in
                                                      in       thousands    Amount in       Per       Percent of
                                                  thousands                 thousands     enrollee     charges
----------------------------------------------------------------------------------------------------------------
All beneficiaries:
    1974.......................................   23,166,570     $535,296     $323,383          $14         60.4
    1976.......................................   24,614,402      974,708      630,323           26         64.7
    1978.......................................   26,074,085    1,384,067      923,658           35         66.7
    1980.......................................   27,399,658    2,076,396    1,441,986           52         69.4
    1982.......................................   28,412,282    3,164,530    2,203,260           78         69.6
    1983.......................................   28,974,535    3,813,118    2,661,394           92         69.8
    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
    1986.......................................   30,589,728    8,115,976    4,881,605          160         60.1
    1987.......................................   31,169,960    9,794,832    5,690,786          183         58.2
    1988.......................................   31,617,082   11,833,919    6,371,704          202         53.8
    1989.......................................   32,098,770   14,195,252    7,160,586          223         50.4
    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          315         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
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:
    1974-95....................................          1.5         22.9         19.2         17.4         ----
    1974-83....................................          2.5         24.4         26.4         23.3         ----
    1984-95....................................          0.7         20.7         13.0         12.2         ----
================================================================================================================
Aged:
    1974.......................................   21,421,545      394,680      220,742           10         55.9
    1976.......................................   22,445,911      704,569      432,971           19         61.5
    1978.......................................   23,530,893    1,005,467      648,249           28         64.5
    1980.......................................   24,680,432    1,517,183    1,030,896           42         69.9
    1982.......................................   25,706,792    2,402,462    1,645,064           64         68.5
    1983.......................................   26,292,124    2,995,784    2,066,207           79         69.0
    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
    1986.......................................   27,862,737    6,529,273    3,809,992          137         58.4
    1987.......................................   28,382,203    7,859,038    4,522,841          159         56.4
    1988.......................................   28,780,154    9,790,273    5,098,546          177         52.1
    1989.......................................   29,216,027   11,855,127    5,767,589          197         48.7
    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
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:
    1974-95....................................          1.3         23.5         19.9         18.5         ----
    1974-83....................................          2.3         25.3         28.2         25.8         ----
    1984-95....................................          0.4         20.9         12.6         12.1         ----
================================================================================================================
Disabled:
    1974.......................................    1,745,019      140,617      102,641           59         73.0
    1976.......................................    2,168,467      270,139      197,352           91         73.1
    1978.......................................    2,543,162      378,600      275,409          108         72.7
    1980.......................................    2,719,226      559,213      411,090          152         73.5
    1982.......................................    2,705,490      762,068      558,195          206         73.2
    1983.......................................    2,682,411      817,335      595,187          222         72.8
    1984.......................................    2,651,247    1,006,351      707,575          267         70.3
    1985.......................................    2,677,869    1,270,015      870,560          325         68.5
    1986.......................................    2,726,991    1,586,703    1,071,613          393         67.5
    1987.......................................    2,787,757    1,773,664    1,167,945          417         65.8
    1988.......................................    2,836,928    2,043,646    1,273,158          449         62.3
    1989.......................................    2,882,743    2,340,124    1,392,897          483         59.5
    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
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:
    1974-95....................................          3.8         20.8         17.5         13.2         ----
    1974-83....................................          4.9         21.6         21.6         15.9         ----
    1984-95....................................          3.3         20.0         14.1         10.5         ----
----------------------------------------------------------------------------------------------------------------
\1\ 1974 is the first full year of coverage for disabled beneficiaries under Medicare; SMI = supplementary
  medical insurance.
\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: Health Care Financing Administration, Bureau of Data Management and Strategy. Data from the Medicare
  Decision Support System; data developed by the Office of Research and Demonstrations.

     The Secretary is authorized to periodically review and
revise the groups, relative payment weights, wages, and other
adjustments to take into account changes in medical practice,
medical technology, the addition of new services, new cost
data, and other relevant information. Any adjustments made by
the Secretary must be made in a budget-neutral manner. If the
Secretary determines that the volume of services increased
beyond amounts established through those methodologies, the
Secretary is authorized to adjust the update to the conversion
factor in a subsequent year.

 TABLE 2-22.--PERCENT DISTRIBUTION OF HOSPITAL OUTPATIENT CHARGES UNDER
                    MEDICARE BY TYPE OF SERVICE, 1995
------------------------------------------------------------------------
                                                              Percent of
                      Service category                         charges
------------------------------------------------------------------------
Radiology..................................................         20.5
Laboratory.................................................         13.0
Operating room.............................................         11.4
End-stage renal disease....................................          7.9
Pharmacy...................................................          6.2
Emergency room.............................................          3.2
Clinic.....................................................          1.7
Physical therapy...........................................          2.5
Medical supplies...........................................          9.3
All other \1\..............................................         20.4
------------------------------------------------------------------------
\1\ Includes computerized axial tomography, durable medical equipment,
  and blood.

Source: Health Care Financing Administration, Bureau of Data Management
  and Strategy; Data from the Medicare Decision Support System.

     A hospital may bill a beneficiary for the coinsurance
amount owed for the outpatient services provided. The
beneficiary coinsurance is based on 20 percent of the
hospital's submitted charges for the outpatient service,
whereas Medicare usually pays based on the blend of the
hospital's costs and the amount paid in other settings for the
same service. As a result, the amount the beneficiary pays in
coinsurance does not equal 20 percent of the program's
allowable payment. On average, beneficiaries pay 37 percent of
the total payment.
     The Balanced Budget Act provides for a new method for
determining beneficiary coinsurance beginning in 1999. Hospital
OPD coinsurance payments are limited to 20 percent of the
national median of the charges for the service (or services
within the group) furnished in 1996 updated to 1999 using the
Secretary's estimate of charge growth. The Secretary is
required to develop rules for the establishment of a
coinsurance payment amount for a covered OPD service not
furnished during 1996, based on its classification within a
group of such services. In addition, the Balanced Budget Act
provides for the entire fee schedule amount (program payments
plus beneficiary coinsurance payments) to be updated by the
market basket increase minus 1 percentage point for years 2000
through 2002, and by the market basket percentage increase in
subsequent years. Beneficiary coinsurance payments are to be
subtracted from the fee schedule amount to determine Medicare
Program payments. Over time, beneficiary cost sharing will move
closer to the 20 percent of Medicare's recognized amount
applicable for most part B services.
     The Secretary must establish a procedure under which a
hospital, before the beginning of a year (starting with 1999),
can elect to reduce the coinsurance payment for some or all
covered OPD services to an amount that is not less than 20
percent of the total amount (Medicare Program plus beneficiary
coinsurance payment) for the service involved, adjusted for
relative differences in labor costs and other factors. A
reduced coinsurance payment can not be further reduced or
increased during the year involved, and hospitals can
disseminate information on the reduction of coinsurance
amounts.

                  Ambulatory Surgical Center Services

    Medicare reimburses ambulatory surgical centers (ASCs) for
performing surgical procedures on an ambulatory basis. ASCs are
paid a prospectively determined rate for use of an operating
room associated with covered surgical procedures. Excluded are
the physicians charge for professional services performed and
other medical items and services (for example, durable medical
equipment for the patient's home use) for which separate
payment is authorized under Medicare. Participating ASCs are
paid 80 percent of the prospectively determined rate for
facility services, adjusted for regional wage variations. The
rate is intended to represent HCFA's estimate of a fair
payment, taking into account the costs incurred by ASCs
generally in providing services that are furnished in
connection with performing a surgical procedure.
    For payment purposes, ASC services are divided into nine
groups, and the ASC facility payment for all procedures in each
group is established at a single rate adjusted for geographic
variation. The ASC payment groups for fiscal year 1998 range
from $314 for a procedure in payment group one, to $928 for a
procedure in payment group eight. Payment for group nine,
allotted exclusively to extracorporeal shockwave lithotripsy
services, was established and published in the Federal Register
on December 31, 1991 (vol. 56, no. 251, 67666); however, a
court decision in American Lithotripsy Society v. Sullivan, 785
F.Supp. 1034 (D.D.C. 1992), currently prohibits payment for
these services under the ASC benefit. The Secretary is required
to review and update standard overhead amounts annually. The
ASC facility payment rates are required to result in
substantially lower Medicare expenditures than would have been
paid if the same procedure had been performed on an inpatient
basis in a hospital.
    Medicare also requires that payment for insertion of an
intraocular lens include an allowance that is reasonable and
related to the cost of acquiring the class of lens involved.
OBRA 1993 also reduced the amount of payment for an intraocular
lens inserted during or subsequent to cataract surgery in an
ASC on or after January 1, 1994 and before January 1, 1999, to
$150.
    OBRA 1993 eliminated inflation updates in the payment
amounts for ASCs for fiscal years 1994 and 1995. The Social
Security Act Amendments of 1994 (Public Law 103-432) required
the Secretary to survey, not later than January 1, 1995, and
every 5 years thereafter, the actual audited costs incurred by
ASCs, based on a representative sample of procedures and
facilities. In addition, the 1994 legislation provides for an
automatic application of an inflation adjustment during a
fiscal year when the Secretary does not update ASC rates based
on survey data of actual audited costs. The act also provides
that ASC payment rates be increased by the percentage increase
in the Consumer Price Index for Urban Consumers (CPI-U), as
estimated by the Secretary for the 12-month period ending with
the midpoint of the year involved, if the Secretary has not
updated rates during a fiscal year, beginning with fiscal year
1996. The update for 1996 was 2.9 percent; the update for 1997
was 2.6 percent.
    The Balanced Budget Act sets the annual update for ASC fees
at the CPI-U minus 2 percentage points for fiscal years 1998-
2002, specifying that the update cannot be less than zero. The
update for fiscal year 1998 was 0.6 percent. In 1997, there
were 2,433 ASCs, a 400-percent increase over the 485 facilities
which were participating in Medicare in 1985. As shown in table
2-23, payments for ASC services totaled $688.9 million in 1996.
Table 2-24 shows the top 10 procedures performed in ASCs in
1996.

TABLE 2-23.--MEDICARE-CERTIFIED AMBULATORY SURGICAL CENTERS: UTILIZATION
       AND PROGRAM BENEFIT PAYMENTS FOR FACILITY SERVICES, 1993-96
------------------------------------------------------------------------
                                              Allowed         Program
                               Number of    charges for    payments for
            Year               services    ASC facility    ASC facility
                                             services        services
------------------------------------------------------------------------
1993........................   1,059,644    $625,005,465    $495,313,388
1994........................   1,298,740     721,315,789     572,001,981
1995........................   1,497,934     836,270,472     659,726,047
1996 \1\....................   1,527,130     867,629,247     688,910,712
------------------------------------------------------------------------
\1\ Short file, as of December 1996 (89 percent complete).

Source: Health Care Financing Administration, Bureau of Data Management
  and Strategy. Data from part B Extract and Summary System.

   TABLE 2-24.--HIGH VOLUME PROCEDURES PERFORMED AT MEDICARE-CERTIFIED
                    AMBULATORY SURGICAL CENTERS, 1996
------------------------------------------------------------------------
                                                               Volume of
Current procedural terminology         Short descriptor         Medicare
             code                                                cases
------------------------------------------------------------------------
66984.........................  Remove cataract, insert lens.    525,520
66821.........................  After cataract laser surgery.    165,281
43239.........................  Upper GI endoscopy, biopsy...     78,391
45378.........................  Diagnostic colonoscopy.......     59,972
45385.........................  Colonoscopy, lesion removal..     41,699
62289.........................  Lumbar or caudal epidural....     35,340
45380.........................  Colonoscopy and biopsy.......     34,744
43235.........................  Upper GI endoscopy, diagnosis     24,055
45384.........................  Colonoscopy..................     22,537
52000.........................  Cystourethroscopy............     19,048
------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Data Management
  and Strategy. Data from the National Claims History Procedure Summary
  File.

                         Other Part B Services

Preventive services
    Screening mammograms.--In 1997, Medicare covered a
screening mammography once every 2 years for persons over age
65. The program covers mammographies for the disabled according
to the following schedule: age 35-39--one baseline screening;
age 40-50--one every 2 years, except one every year for women
at high risk; and age 50-64--one every year. The Balanced
Budget Act authorizes coverage for annual mammograms for all
women over age 40 beginning January 1, 1998. The deductible is
waived for these services.
     Payment for a mammogram is based on the lesser of the
actual charge, the amount established for the global procedure
under Medicare's fee schedule, or the payment limit established
for the procedure. The 1997 limit is $63.34; the 1998 limit is
$64.73.
    Screening Pap smears; pelvic exams.--In 1997, a screening
pap smear was authorized once every 3 years, except for women
who were at a high risk of developing cervical cancer.
Beginning in 1998, coverage is authorized every 3 years for
screening pelvic exams; annual coverage is authorized for women
at high risk. Payment is based on the clinical diagnostic
laboratory fee schedule (see above).
     Prostate cancer screening tests.--The Balanced Budget Act
authorizes coverage, beginning January 1, 2000, for an annual
prostate cancer screening test for men over age 50. The test
could consist of any (or all) of the following procedures: (1)
a digital rectal exam; (2) a prostate-specific antigen blood
test; and (3) after 2002, such other procedures as the
Secretary finds appropriate for the purpose of early detection
of prostate cancer.
     Colorectal screening.--The Balanced Budget Act authorizes
coverage of and establishes frequency limits for colorectal
cancer screening tests, effective January 1, 1998. 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 more than one every 4 years); (3) screening
colonoscopy for high-risk individuals (limited to one every 2
years); and (4) such other procedures as the Secretary finds
appropriate for the purpose of early detection of colorectal
cancer. Payment limits are established for the tests.
     The Balanced Budget Act requires the Secretary, within 90
days of enactment, to publish a determination on the coverage
of screening barium enema. The Secretary has determined that
barium enema tests, as an alternative to either a screening
flexible sigmoidoscopy or a screening colonoscopy, will be
covered in accordance with the same screening parameters
specified for those tests.
     Diabetes screening tests.--The Balanced Budget Act
specifies that, effective July 1, 1998, Medicare's covered
benefits will 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 will be covered only if the physician who is managing the
individual's diabetic condition certifies that the services are
needed 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. They are deemed to meet
the Secretary's standards if they meet standards originally
established by the National Diabetes Advisory Board and
subsequently revised by organizations that participated in the
establishment of standards of the Board, or if they are
recognized by an organization representing persons with
diabetes as meeting standards for furnishing such services.
     In addition, beginning January 1, 1998, Medicare will
cover blood glucose monitors and testing strips for type I or
type II diabetics (without regard to a person's use of insulin,
as determined under standards established by the Secretary in
consultation with appropriate organizations). The national
payment limit for testing strips is reduced by 10 percent
beginning in 1998.
     Bone mass measurements.--The Balanced Budget Act
authorizes coverage, beginning July 1, 1998, for bone mass
measurement 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. The
Secretary would be required to establish frequency limits.
Drugs/vaccines
    Medicare generally does not cover outpatient prescription
drugs. Despite the general limitation, Medicare law
specifically authorizes coverage for the following drugs:
  --Immunosuppressive drugs.--Drugs used in immunosuppressive
        therapy (such as cyclosporin) during the first 30
        months following a covered organ transplant. The
        coverage period is extended to 3 years beginning in
        1998.
  --Erythropoietin (EPO).--EPO for the treatment of anemia for
        persons with chronic kidney failure.
  --Osteoporosis drugs.--Injectable drugs approved for the
        treatment of postmenopausal osteoporosis provided to an
        individual by a home health agency. A physician must
        certify that the individual suffered a bone fracture
        related to postmenopausal osteoporosis and that the
        individual is unable to self-administer the drug.
  --Oral cancer drugs.--Oral drugs used in cancer chemotherapy
        when identical to drugs which would be covered if not
        self-administered.
    The Balanced Budget Act also authorizes coverage, effective
January 1, 1998, for oral antinausea drugs used as part of an
anticancer chemotherapeutic regimen, subject to specified
conditions.
    Generally, Medicare payment for drugs has been based on the
lower of the estimated acquisition cost or the national average
wholesale price. These provisions do not apply when payment is
based on reasonable costs. Special limits apply in the case of
erythropoietin; the limit is $10 per 1,000 units. Osteoporosis
drugs can only be paid on the basis of reasonable costs.
    The Balanced Budget Act specifies that, effective January
1, 1998, in any case where payment is not made on a cost or
prospective payment basis, the payment will equal 95 percent of
the average wholesale price. The Secretary is authorized to pay
a dispensing fee to pharmacies. Further, the Secretary is
required to study the effect of this provision on average
wholesale prices.
    Medicare also pays for influenza virus vaccines (flu
shots), pneumococcal pneumonia vaccine, and hepatitis B vaccine
for persons at risk of contracting hepatitis B. Cost-sharing
charges do not apply for pneumococcal pneumonia or influenza
virus vaccines; cost-sharing charges do apply for hepatitis B
vaccines.
Ambulance services
    Medicare pays for ambulance services provided certain
conditions are met. The services must be medically necessary
and other methods of transportation must be contraindicated.
Ambulance services are currently paid on the basis of
reasonable costs when such services are provided by a hospital;
otherwise the payment is based on reasonable charge screens
developed by individual carriers based on local billings (which
may take a variety of forms). Based on these local billing
methods, carriers develop screens for one or more of the
following four main billing methods: (1) a single all inclusive
charge reflecting all services, supplies, and mileage; (2) one
charge reflecting all services and supplies, with separate
charge for mileage; (3) one charge for all services and
mileage, with separate charges for supplies; and (4) separate
charges for services, mileage, and supplies. Within each broad
payment method, additional distinctions are made based on
whether the service is basic life support service or advanced
life support, whether emergency or nonemergency transport was
used, and whether specialized advanced life services were
rendered.
    The Balanced Budget Act of 1997 specifies that the
reasonable cost and charge limits will apply through 1999, with
annual increases equal to the CPI minus 1 percentage point. A
fee schedule will be implemented in 2000. The aggregate amount
of payments in 2000 cannot exceed what would be paid if the
interim reductions remained in effect in that year. Annual
increases in subsequent years will equal the CPI increase,
except that in 2001 and 2002 there will be a 1-percentage point
reduction. The act specifies that coverage is provided for
advanced life support services provided by paramedic intercept
service providers in rural areas under contract with one or
more volunteer ambulance services.

                    END-STAGE RENAL DISEASE SERVICES

                                Coverage

    The Medicare Program covers individuals who suffer from
end-stage renal disease if they are: (1) fully insured for old
age and survivor insurance benefits; (2) entitled to monthly
Social Security benefits; or (3) spouses or dependents of
individuals described in (1) or (2). Such persons must be
medically determined to be suffering from end-stage renal
disease and must file an application for benefits. In 1996, 8.4
percent of the population suffering from end-stage renal
disease (ESRD) who needed renal dialysis and 11.6 percent who
needed kidney transplants did not meet any of these
requirements and thus were not eligible for Medicare renal
benefits.
    Benefits for qualified end-stage renal disease
beneficiaries include all part A and part B medical items and
services. ESRD beneficiaries are automatically enrolled in the
part B portion of Medicare and must pay the monthly premium for
such protection.
    Table 2-25 shows estimates of expenditures, number of
beneficiaries, and the average expenditure per person for all
persons with ESRD (including the aged and disabled) from 1974
through 2002. Total projected program expenditures for the
Medicare End-Stage Renal Disease Program for fiscal year 1998
are estimated at $11.0 billion. In fiscal year 1998, there are
an estimated 287,169 beneficiaries, including successful
transplant patients and persons entitled to Medicare on the
basis of disability who also have ESRD.

 TABLE 2-25.--END-STAGE RENAL DISEASE MEDICARE BENEFICIARIES AND PROGRAM
                         EXPENDITURES, 1974-2002
                  [Expenditures in millions of dollars]
------------------------------------------------------------------------
                                Expenditures        HI        Per person
          Fiscal year            (HI & SMI)   beneficiaries      cost
------------------------------------------------------------------------
1974..........................          $229        15,993        $4,319
1975..........................           361        22,674        15,921
1976..........................           512        28,941        17,691
1977..........................           641        35,889        17,861
1978..........................           800        43,482        18,398
1979..........................         1,009        52,636        19,169
1980..........................         1,245        54,725        22,750
1981..........................         1,464        61,487        23,810
1982..........................         1,640        69,267        23,676
1983..........................         1,984        78,361        25,319
1984..........................         2,325        87,609        26,538
1985..........................         2,835        96,965        29,237
1986..........................         3,165       106,568        29,699
1987..........................         3,490       117,020        29,824
1988..........................         3,998       128,075        31,216
1989..........................         4,653       140,324        33,159
1990..........................         5,251       154,575        33,971
1991..........................         5,634       170,718        33,003
1992..........................         6,433       186,729        34,451
1993..........................         7,192       202,988        35,429
1994..........................         7,877       220,359        35,747
1995..........................         8,652       237,469        36,436
1996..........................         9,560       254,157        37,614
1997..........................        10,252       270,672        37,875
1998..........................        11,008       287,169        38,334
1999..........................        11,849       303,765        39,007
2000..........................        12,795       320,593        39,909
2001..........................        14,121       337,774        41,806
2002..........................        15,606       355,387        43,914
------------------------------------------------------------------------
Note.--Estimates for 1979-2001 are subject to revision by the Office of
  the Actuary, Office of Medicare and Medicaid Cost Estimates;
  projections for 1994-2001 are under the fiscal year 1996 budget
  assumptions.

Source: Health Care Financing Administration, Office of the Actuary.

    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 2-26 shows that new enrollment for all Medicare
beneficiaries receiving ESRD services grew at an average annual
rate of 7.4 percent from 1989 to 1994. 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 2-26
shows the greatest rate of growth in program participation is
in people over age 75, at 12.0 percent, followed by people of
ages 65-74 with a growth rate of 9.1 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.
    The rates of growth in older and sicker patients entering
treatment for end-stage renal disease 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 patients
enrolling in Medicare's End-Stage Renal Disease Program.
    End-stage renal disease is invariably fatal without
treatment. Treatment for the disease takes two forms:
transplantation and dialysis. Although the capability to
perform transplants had existed since the 1950s, problems with
rejection of transplanted organs limited its application as a
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.
    Table 2-27 indicates that the number of kidney transplants
in 1995 was more than double the number performed in 1980.
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 now 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.
    For all of these reasons, dialysis is likely to remain the
primary treatment for end-stage renal disease. Dialysis is an
artificial method of performing the kidney's function of
filtering blood to remove waste products. There are two types
of dialysis: hemodialysis and peritoneal dialysis. In
hemodialysis, still the most common form of dialysis, blood is
removed from the body, filtered and cleansed through a
dialyzer, sometimes called an artificial kidney machine, before
being returned to the body. There are three types

                    TABLE 2-26.--MEDICARE END-STAGE RENAL DISEASE PROGRAM INCIDENCE BY AGE, SEX, RACE, AND PRIMARY DIAGNOSIS, 1989-94
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                    Average
                                                                                                                                    annual      Percent
          Age, sex, race, and primary diagnosis              1989        1990        1991        1992        1993        1994       percent     change
                                                                                                                                    change      1993-94
--------------------------------------------------------------------------------------------------------------------------------------------------------
Age:
  Under 15 years........................................         417         462         465         419         444         437         0.9        -1.6
  15-24 years...........................................       1,327       1,282       1,289       1,362       1,315       1,268        -0.9        -3.6
  25-34 years...........................................       3,442       3,459       3,556       3,580       3,628       3,496         0.3        -3.6
  35-44 years...........................................       4,718       5,174       5,590       5,954       5,825       5,986         4.9         2.8
  45-54 years...........................................       5,947       6,275       6,859       7,642       8,019       8,756         8.0         9.2
  55-64 years...........................................       9,230       9,973      10,796      11,430      11,631      12,426         6.1         6.8
  65-74 years...........................................      11,554      12,964      14,499      16,007      16,542      17,851         9.1         7.9
  75 years and over.....................................       6,845       7,765       8,932      10,275      10,813      12,046        12.0        11.4

Sex:
  Male..................................................      23,569      25,708      27,958      30,251      31,289      33,259         7.1         6.3
  Female................................................      19,911      21,646      24,028      26,418      26,928      29,007         7.8         7.7

Race:
  Asian.................................................         831       1,032       1,117       1,266       1,318       1,456        11.9        10.5
  Black.................................................      12,608      13,538      14,962      16,520      16,976      17,638         6.9         3.9
  White.................................................      28,983      31,564      34,669      37,477      38,072      40,532         6.9         6.5
  American Indian.......................................         540         580         633         792         618         689         5.0        11.5
  Other/unknown.........................................         518         640         605         614       1,233       1,951        30.4        58.2

Primary diagnosis:
  Diabetes..............................................      14,456      16,219      18,715      20,792      20,368      23,417        10.1        15.0
  Glomerulonephritis....................................       5,701       5,852       5,944       6,161       5,953       6,256         1.9         5.1
  Hypertension..........................................      12,408      13,544      15,014      16,831      15,839      17,705         7.4        11.8
  Polycystic-kidney disease.............................       1,268       1,400       1,484       1,548       1,359         969        -5.2       -28.7
  Interstitial nephritis................................       1,389       1,397       1,538       1,569       1,392       1,585         2.7        13.9
  Obstructive nephropathy...............................         980         945       1,019       1,091         960         944        -0.7        -1.7
  Other.................................................       2,678       2,866       3,588       3,931       4,157       5,030        13.4        21.0
  Unknown...............................................       2,506       2,481       2,760       3,018       2,594       2,453        -0.4        -5.4
  Not reported..........................................       2,094       2,650       1,924       1,728       5,595       3,907        13.3       -30.2
                                                         -----------------------------------------------------------------------------------------------
    Total number of new enrollees.......................      43,480      47,354      51,986      56,669      58,217      62,266         7.4         7.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Data Management and Strategy; data from the Program Management and Medical Information System,
  September 1996 update.

          TABLE 2-27.--TOTAL KIDNEY TRANSPLANTS PERFORMED IN MEDICARE-CERTIFIED U.S. HOSPITALS, 1979-95
----------------------------------------------------------------------------------------------------------------
                                                                          Living donor         Cadaveric donor
                     Calendar year                          Total    -------------------------------------------
                                                         transplants    Number    Percent     Number    Percent
----------------------------------------------------------------------------------------------------------------
1979...................................................        4,189      1,186         28      3,003         72
1980...................................................        4,697      1,275         27      3,422         73
1981...................................................        4,883      1,458         30      3,425         70
1982...................................................        5,358      1,677         31      3,681         69
1983...................................................        6,112      1,784         29      4,328         71
1984...................................................        6,968      1,704         24      5,364         76
1985...................................................        7,695      1,876         24      5,819         76
1986...................................................        8,976      1,887         21      7,089         79
1987...................................................        8,967      1,907         21      7,060         79
1988...................................................        8,932      1,816         20      7,116         80
1989...................................................        8,899      1,893         21      7,006         78
1990...................................................        9,796      2,091         21      7,705         79
1991...................................................       10,026      2,382         24      7,644         76
1992...................................................       10,115      2,536         25      7,579         75
1993...................................................       10,934      2,828         26      8,106         74
1994...................................................       11,312      3,000         26      8,312         73
1995...................................................       11,902      3,416         29      8,426         71
----------------------------------------------------------------------------------------------------------------
Source: Health Care Financing Administration, Bureau of Data Management and Strategy.

of peritoneal dialysis. Intermittent peritoneal dialysis (IPD)
and continuous cycling peritoneal dialysis (CCDP) requires the
use of a machine while continuous ambulatory peritoneal
dialysis (CAPD) does not require the use of a machine. Under
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. Hemodialysis is usually performed three times
a week, IPD is performed once or twice a week, while CAPD and
CCPD require daily exchanges of dialysate fluid.

                             Reimbursement

    Medicare reimbursement for facility-based dialysis services
provided by hospital-based and independent facilities are paid
at prospectively determined rates for each dialysis treatment
session. The rate, referred to as a composite rate, is derived
from 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 facilities to reflect higher overhead
costs.
    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 continuous cycling peritoneal dialysis,
in which case the limit is 130 percent of the median hospital
composite rate.
    Kidney transplantation services, to the extent they are
inpatient hospital services, are subject to the prospective
payment system. However, kidney acquisition costs are paid on a
reasonable cost basis.
    The composite rate is not routinely updated, nor are method
II reasonable charge payments. There is no specific update
policy for reasonable costs of kidney acquisition; 100 percent
of reasonable costs are reimbursed. In fiscal year 1998, the
composite rate is $130 for hospitals and $126 for freestanding
facilities.       

Continue to the next part of this section.