Order Code RL33712
Medicare: A Primer
Updated January 2, 2007
Jennifer O’Sullivan
Specialist in Social Legislation
Domestic Social Policy Division

---

Medicare: A Primer
Summary
Medicare is the nation’s health insurance program for persons aged 65 and over
and certain disabled persons. In FY2007, the program will cover an estimated 43.7
million persons (36.7 million aged and 7.0 million disabled) at a total cost of $450
billion. Federal costs (after deduction of beneficiary premiums and other offsetting
receipts) will total $388 billion. In FY2007, federal Medicare spending will
represent approximately 14% of the total federal budget and 3% of Gross Domestic
Product (GDP). Medicare is an entitlement program, which means that it is required
to pay for services provided to eligible persons, so long as specific criteria are met.
Since Medicare was enacted in 1965, it has undergone considerable changes.
First, program coverage was expanded to include the disabled and persons with end-
stage renal disease (ESRD). Over time, increasing attention was placed on stemming
the rapid increase in program spending, which outpaced projections, even in the
initial years. This was typically achieved through tightening rules governing
payments to providers of services and stemming the annual updates in such
payments. The program moved from payments based on “reasonable costs” and
“reasonable charges” to payment systems under which a pre-determined payment
amount is established for a specified unit of service. At the same time, beneficiaries
were given the option to obtain covered services through private managed care
arrangements. Most Medicare payment provisions were incorporated into larger
budget reconciliation bills designed to control overall federal spending.
In 2003, Congress enacted a major Medicare bill, the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (MMA). This legislation placed
increasing emphasis on private sector management of benefits. It also created a new
voluntary outpatient prescription drug benefit to be administered by private entities.
Further, it introduced the concept of means testing into what had previously been
strictly a social insurance program.
Congress continues to register concern about the rapid rise in Medicare spending
and the ability of existing funding mechanisms to support the program over the long-
term. A combination of factors has contributed to the rapid increase in Medicare
costs. These include increases in overall medical costs, advances in health care
delivery and medical technology, the aging of the population, and longer life spans.
The issues confronting the program are not new; nor are the possible solutions likely
to get any easier. For a number of years, various options have been suggested;
however, legislative changes have focused on short-term issues. There is no
consensus on the long-term approach that should be taken.
This report provides an overview of Medicare. It begins with a brief program
history, and then outlines the key features of Parts A and B, also known as “Original
Medicare.” That is followed by overviews of Part C and Part D, a discussion of
program financing, and a brief discussion of future program directions. It will be
updated to reflect any legislative changes.

---

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicare: A Capsule Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Medicare History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Medicare Parts A and B: ‘Original Medicare’ . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Part A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Benefits and Beneficiary Cost-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Part A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Services for End-Stage Renal Disease Beneficiaries . . . . . . . . . . . . . . 16
Program Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Inpatient Hospital Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Skilled Nursing Facility (SNF) Care . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Home Health Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Hospice Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Physician Services and Other Services Paid
Under the Physician Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . 19
Clinical Diagnostic Laboratory Services . . . . . . . . . . . . . . . . . . . . . . . 20
Durable Medical Equipment (DME) . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Prosthetics and Orthotics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Hospital Outpatient Department (HOPD) Services . . . . . . . . . . . . . . . 20
Ambulatory Surgical Center (ASC) Services . . . . . . . . . . . . . . . . . . . 21
Part B Covered Drugs and Vaccines . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Ambulance Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
End-Stage Renal Disease (ESRD)
Dialysis and Transplant Services . . . . . . . . . . . . . . . . . . . . . . . . . 21
Medicare Part C: Medicare Advantage (MA) . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Plan Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Plan Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Payments to Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Part D: Outpatient Prescription Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Eligibility and Plan Enrollment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Low-Income Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Drug Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Interaction With Retiree Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Medicare Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

---

Medicare Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Part A Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Part B Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Part C Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Part D Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Medicare Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
45% Trigger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Additional Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Medicare Directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Key Medicare Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Appendix: Other CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
CRS Medicare Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
List of Tables
Table 1. Medicare Outlays, Selected Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Table 2. Distribution of Total Outlays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Table 3. Medicare Benefit Payments, by Category . . . . . . . . . . . . . . . . . . . . . . . 35
Table 4. Projected Growth in Medicare Population . . . . . . . . . . . . . . . . . . . . . . . 35
Table 5. Characteristics of Medicare Population, 2002 . . . . . . . . . . . . . . . . . . . . 36
Table 6. Percentage of Persons Age 65 and Over
Characterized as Poor or Near Poor, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . 36

---

Medicare: A Primer
Introduction
Medicare is the nation’s health insurance program for persons aged 65 and over
and certain disabled persons. In FY2007, the program will cover an estimated 43.7
million persons (36.7 million aged and 7.0 million disabled)1 at a total cost of $450
billion. Federal costs (after deduction of beneficiary premiums and other offsetting
receipts) will total $388 billion.2,3 In FY2007, federal Medicare spending will
represent approximately 14% of the total federal budget and 3% of GDP).4 Medicare
is an entitlement program, which means that it is required to pay for services
provided to eligible persons, so long as specific criteria are met. Spending under the
program (except for a portion of administrative costs) is considered mandatory
spending (not discretionary spending which is subject to the appropriations process).
Medicare serves approximately one in seven Americans and virtually all of the
population aged 65 and over. In 2004 (prior to implementation of the new drug
benefit), Medicare spending accounted for 52% of federal health spending and 16%
of all national health expenditures. Program spending represented 29% of national
spending on hospital services, 20% of such spending for physicians and clinical
services, and 2% of total drug spending. In 2015, program spending is expected to
account for 56% of federal spending and 20% of all national health expenditures.
Spending in that year is expected to account for 28% of national spending on hospital
services, 19% of such spending for physicians and clinical services, and 32% of total
drug spending.5

The Medicare program is generally viewed as achieving its goal of helping aged
and disabled persons meet many of their health care needs. However, the cost of the
1 Department of Health and Human Services, Budget in Brief, 2007
[http://www.hhs.gov/budget/docbudget.htm].
2 Congressional Budget Office (CBO), Medicare March 2006 Fact Sheet. (Includes $445
billion in mandatory spending and $5 billion in discretionary spending.)
3 Note that in August 2006, CBO issued an update of its Budget and Economic Outlook.
Slight re-estimates were provided for the mandatory spending portion of Medicare for
FY2007; no additional detail was provided. The March mandatory outlay number was $445
billion compared to $446 billion in August; the offsetting receipts figure was $61 billion in
March compared to $64 billion in August, and the net mandatory outlay number was $383
billion in March compared to $382 billion in August. This report uses the March 2006 Fact
Sheet since it includes discretionary spending and provides details on the various
components of Medicare spending.
4 CBO, Budget and Economic Outlook: An Update, August 2006.
5 [http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2005.pdf].

---

CRS-2
program and the significant year-to-year increases in such costs are a major concern
for the Congress and other observers. The Congressional Budget Office (CBO)
projects that program spending will double over the next ten years. The rapid growth
rate reflects a number of factors, including overall increases in medical care costs
(which typically exceed the rate of inflation in the economy as a whole), advances in
health care delivery and medical technology, and longer life expectancies. Additional
pressures will be placed on the program beginning in 2011, when baby boomers
(persons born between 1946 and 1964) begin turning 65, the age when they become
Medicare-eligible. For a number of years, Congress has looked at ways to stem the
rapid increases in Medicare spending. This effort is likely to intensify in the coming
years.
Medicare consists of four distinct parts: Part A (Hospital Insurance, or HI); Part
B (Supplementary Medical Insurance, or SMI); Part C (Medicare Advantage, or
MA); and Part D (the new prescription drug benefit added by the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003, or MMA). The
program is administered by the Centers for Medicare and Medicaid Services (CMS).
This report provides an overview of Medicare. It begins with a capsule
summary of key program features and major issues. This is followed by a more
extensive discussion beginning with a brief program history, and then an outline of
the key features of Parts A and B, also known as “Original Medicare.” That is
followed by overviews of Part C and Part D, a discussion of program financing, and
a brief discussion of future program directions. Concluding sections include an
overview of key program facts and a listing of CRS products that provide additional
information on topics addressed in this report.

---

CRS-3
Medicare: A Capsule Summary
KEY FACTS
! Nationwide health insurance program for aged (65 and
over) and disabled
! 43.7 million people enrolled in FY2007
! Total outlays in FY2007: $449.8 billion
! Net outlays (not including beneficiary premiums) in
FY2007: $388.4 billion
PROGRAM STRUCTURE
! “Original Medicare”
- Parts A and B
! Medicare Advantage - alternative to “Original
Medicare”
- Part C
! Prescription Drug Benefits
- Part D
“ORIGINAL MEDICARE”
! 84% of beneficiaries get services through Parts A and
B
! Part A and Part B - 2 different programs
- Different eligibility requirements
- Different benefits
- Different beneficiary cost-sharing
- Different financing

---

CRS-4
ELIGIBILITY
! Part A
- Almost all aged automatically eligible (they or their
spouse paid payroll tax during working career)
- Disabled who have received cash disability payments for
at least two years
- Persons with end stage renal disease (ESRD, kidney
disease)
! Part B
- Anyone who has Part A and all persons 65 and older
- Voluntary - almost everyone enrolls
BENEFITS
! Part A
- Inpatient hospital services
- Post-hospital skilled nursing facility (SNF) services
- Home health care (mostly post-hospital)
- Hospice care
! Part B
- Physicians services
- Laboratory services
- Therapy services
- Specified preventive services
- Outpatient hospital services
- Durable medical equipment
- Home health care (not covered under Part A)
- Ambulance Services

---

CRS-5
BENEFICIARY COST-SHARING
Part A
! Tied to “spell of illness” (starts with hospitalization
and ends when out of hospital and SNF for 60 days)
! In each spell of illness, beneficiary pays:
- Hospital care:
- Deductible ($992 in 2007)
- Days 61-90 - Daily charge ($248 in 2007)
- Days 91-150 - Daily charge for lifetime reserve days
($496 in 2007)
- Over 150 days - No coverage
- Post Hospital SNF Care
- Days 1 - 20: No cost-sharing
- Days 21- 100: Daily coinsurance charge ($124 in 2007)
- Over 100 days - No coverage
! Home Health - No cost-sharing
! Hospice care - Nominal cost-sharing
Part B
! Annual Deductible - ($131 in 2007); and
! Coinsurance - 20% of Medicare’s approved amount
! Exceptions:
- Some services exempt from deductible and/or coinsurance
- Mental health services: 50% cost-sharing
- Hospital outpatient services: Fixed amount which varies
by service category
PAYMENTS FOR SERVICES
! Payment rules under Part A and Part B differ for each
service category and are quite complex
! Generally a pre-determined payment amount is
established for a specific unit of service (such as a
hospital stay)
! Typically, the law establishes annual update rules;
however, they are frequently modified by Congress

---

CRS-6
PART C: MEDICARE ADVANTAGE (MA)
! 16% of beneficiaries get services through MA
! MA offers coordinated care and certain other private
plan options for beneficiaries
! Voluntary for persons enrolled in both Part A and Part
B
! MA enrollees get all their services through the plan
! Medicare makes a pre-determined monthly capitation
payment to the MA plan for each beneficiary
! Capitation payments do not vary by amount of
services used
! Federal government caps its liability (plans at risk for
excess costs)
PART D: DRUG BENEFIT
! New in 2006
! Voluntary
! Anyone who has Part A or Part B or enrolled in Part C
can enroll
! Administered by private entities: MA plans and
prescription drug plans (PDPs)
! Plans must meet minimum standards
! Plans compete to offer benefits in the region
! Beneficiaries select among plans
! Persons with incomes below 150% of poverty have
assistance with premium and cost-sharing charges

---

CRS-7
MEDICARE FINANCING
Part A:
! Financed primarily by payroll taxes paid by current
workers and their employers:
- Employees pay 1.45% on all earnings
- Employers pay 1.45% on all earnings
- Self-employed pay 2.9% on all earnings
! Revenues credited to Hospital Insurance (HI) trust
fund
Part B:
! Financed by a combination of beneficiary premiums
and general revenues
- 25% from monthly premiums ($93.50 in 2007) paid by
current beneficiaries
- 75% from general revenues
- Beginning in 2007, single beneficiaries with incomes over
$80,000 and couples with incomes over $160,000 pay a
higher premium
! Revenues credited to Supplementary Medical
Insurance (SMI) trust fund
Part C:
! No separate financing mechanism
! Payments to MA plans made in appropriate parts from
HI and SMI trust funds
! Premiums, if any, vary by plan
Part D:
! Financed by a combination of beneficiary premiums
and general revenues
- Beneficiaries pay different premiums depending on the
plan they select
- On average beneficiary premiums represent 25.5% of
costs
- General revenues finance the remainder
! Revenues credited to separate account in SMI trust
fund

---

CRS-8
FINANCING: KEY POINTS
! Part A financed almost entirely by current workers
! Part B and Part D financed by premiums paid by
beneficiaries and general revenues (tax dollars)
! Pending insolvency discussion refers only to Part A
(currently estimated to become insolvent in 2018)
! Parts B and D do not become insolvent because of the
way they are financed
CURRENT CONCERNS
! Medicare’s overall growth rate not sustainable over
time
- Part A trust fund becomes insolvent
- Parts B and D cost and premium increases will be
substantial
! No easy solutions
! Some approaches focus on placing increasing reliance
on private sector to deliver and manage benefits
! Other approaches focus on making changes within the
current system

---

CRS-9
MEDICARE TRIGGER
! Enacted in 2003 as part of Medicare Modernization Act
(MMA)
- Intended to force consideration of reforms when there is “excess
general revenue spending”
- The law specifies that “excess spending” is reached when general
revenues represent 45% or more of total program outlays
! New requirement for Medicare annual trustees report
- Report required to specify if projected general revenue spending is
expected to exceed 45% of outlays within seven years
- President submits legislative proposal if finding is made for 2
successive years
- Congress required to consider proposal on expedited basis.
! 2006 report contained warning
! 2007 report expected to contain warning
! President must submit legislative proposal in early 2008 unless
Congress takes intervening action
! Proposals to reduce general revenue financing must focus on
Part B and Part D
! Proposals to reduce general revenue financing do not address
Part A solvency since Part A is funded largely by payroll taxes.
Medicare History
Medicare was enacted in 1965 (P.L. 89-97) in response to the concern that only
about half of the nation’s seniors had health insurance, and most of those only had
coverage for inpatient hospital costs. The new program, which became effective July
1, 1966, included coverage for hospital and post-hospital services under Part A and
doctors and other medical services under Part B. As was the case for the already
existing Social Security program, Part A was to be financed by payroll taxes levied
on current workers and their employers; persons had to pay into the system for 40
calendar quarters to become entitled to benefits. However, persons who turned 65
before 1968 were automatically covered, while those who turned 65 between 1967
and 1974 were covered under transitional provisions. Medicare Part B was
voluntary; beneficiaries who elected to enroll would pay a monthly premium. Over
90% of the eligible population enrolled. Payments to health care providers under
both Part A and Part B were to be based on the most common form of payment at the
time, namely “reasonable costs” for hospital and other institutional services or
“reasonable charges” for physicians and other medical services.
Medicare was considered a social insurance program, similar to Social Security.
The 1965 law also established Medicaid, the federal/state health insurance program
for the poor; this was an expansion of previous welfare-based assistance programs.
Some low-income individuals qualified for both programs.
In the ensuing 40 years, the Medicare program has undergone considerable
changes. P.L. 92-603, enacted in 1972, expanded program coverage to disabled

---

CRS-10
individuals and to persons with end-stage renal disease (ESRD). This law also began
to place limitations on the definitions of reasonable costs and reasonable charges.
This was in order to gain some control over program spending which, even in the
initial years, was in excess of the original projections.
During the 1980s and 1990s, a number of laws were enacted, which included
provisions designed to further stem the rapid increase in program spending and to
postpone the bankruptcy of the Medicare Part A trust fund. This was typically
achieved through tightening rules governing payments to providers of services and
stemming the annual updates in such payments. The program moved from payments
based on reasonable costs and reasonable charges to payment systems under which
a pre-determined payment amount is established for a specified unit of service. At the
same time, beneficiaries were given the option to obtain covered services through
private managed care arrangements, typically health maintenance organizations.
Most Medicare payment provisions were incorporated into larger budget
reconciliation bills designed to control overall federal spending.
This effort culminated in the enactment of the Balanced Budget Act of 1997
(BBA 97, P.L. 105-33). This law slowed the rate of growth in payments to providers
and established new payment systems for certain categories of providers. It also
established the Medicare+Choice program, which expanded private plan options for
beneficiaries and changed the way most plans were paid. BBA 97 further expanded
preventive services covered by the program.

Subsequently, Congress became concerned that the BBA 97 cuts in payments
to providers were somewhat larger than originally anticipated. Therefore, legislation
was enacted in both 1999 (Balanced Budget Refinement Act of 1999, BBRA,
P.L.106-113) and 2000 (Medicare, Medicaid, and SCHIP Benefits Improvement and
Protection Act of 2000, BIPA, P.L. 106-554) that was designed to mitigate the impact
of BBA 97 on providers.
In 2003, Congress enacted a major Medicare bill, the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (MMA, P.L.108-173). This
legislation included the first major benefit expansion since 1965 and placed
increasing emphasis on the private sector to deliver and manage benefits. It created
a new voluntary outpatient prescription drug benefit to be administered by private
entities. It also replaced the existing Medicare+Choice program with a new Medicare
Advantage (MA) program; payments to these plans were increased in order to
increase the availability of private plan options for beneficiaries. For the first time,
MMA introduced the concept of income testing into Medicare. Low-income
individuals get additional assistance under the new Part D drug program, while high
income persons pay larger Part B premiums beginning in 2007. MMA also modified
some provider payment rules and expanded covered preventive services. Finally, the
legislation created a specific process for overall program review if general revenue
spending exceeds a specified threshold.
During the 109th Congress, two laws were enacted that incorporated minor
modifications to Medicare’s payment rules. These were the Deficit Reduction Act
of 2005 (DRA, P.L.109-171) and the Tax Relief and Health Care Act of 2006 (P.L.
109-432).

---

CRS-11
Medicare Parts A and B: ‘Original Medicare’
In 2006, approximately 84% of Medicare beneficiaries received covered
services through Part A and Part B. The Part A and B structure, which remains to this
day, reflects the political compromises made at the time of enactment in 1965.
Together they are known as “Original Medicare.” However, the two programs have
different eligibility requirements, benefit structures, payment rules, and financing
mechanisms. This section provides an overview of the key features of the two
programs. (Medicare financing is discussed later in this report.)
Eligibility
Part A. Most persons age 65 or older are automatically entitled to Part A
because they or their spouse paid Medicare payroll taxes for at least 10 years on
earnings covered by either the Social Security or the Railroad Retirement systems.
Persons under age 65 who receive cash disability benefits from Social Security
or the Railroad Retirement systems for at least 24 months are also entitled to Part A.
(Since there is a five-month waiting period for cash payments, the Medicare waiting
period is effectively 29 months.) The 24-month waiting period is waived for persons
with amyotrophic lateral sclerosis (ALS, “Lou Gehrig’s disease”). The disabled
population also includes persons under age 65 with end stage renal disease (ESRD);
coverage for these individuals generally begins in the fourth month of dialysis
treatments or the month of a kidney transplant.
Persons over age 65 who are not automatically entitled to Part A may obtain
coverage by paying a premium. The 2007 monthly premium is $410 ($226 for
persons with at least 30 quarters of covered employment). In addition, disabled
persons who lose their cash benefits solely because of higher earnings, and
subsequently lose their extended Medicare coverage, may continue their Medicare
enrollment by paying the premium.
Part B. Part B is voluntary. All persons entitled to Part A (and persons over
65 not entitled to Part A) may enroll in Part B by paying a monthly premium. The
2007 monthly premium is $93.50. Beginning in 2007, some higher-income
individuals are paying higher premiums. (See the section on Financing, below.)
Persons who voluntarily enroll in Part A (because they are not automatically
entitled to Part A) must also enroll in Part B. ESRD beneficiaries are also required
to enroll in Part B.
Benefits and Beneficiary Cost-Sharing
Part A. Part A provides coverage for inpatient hospital services, post-hospital
skilled nursing facility (SNF) services, post-hospital home health services, and
hospice care, subject to certain conditions and limitations. Approximately 20% of
Part A enrollees use Part A services during a year.

---

CRS-12
Inpatient Hospital Services. Coverage is linked to an individual’s benefit
period or “spell of illness”(defined as beginning on the day a patient enters a hospital
and ending when he or she has not been in a hospital or SNF for 60 days). An
individual admitted to a hospital more than 60 days after the last discharge from a
hospital or SNF begins a new benefit period. Coverage in each benefit period is
subject to the following conditions:
! Days 1-60. Beneficiary pays a deductible ($992 in 2007);
! Days 61-90. Beneficiary pays a daily coinsurance charge ($248 in
2007);
! Days 91-150. After 90 days, beneficiary may draw on one or more
60 lifetime reserve days, provided they have not been previously
used.(Each of the 60 lifetime reserve days can be used only once
during an individual’s lifetime.) Beneficiary pays daily coinsurance
charge ($496 in 2007).
! Days 151 and over. No coverage.
Inpatient mental health care in a psychiatric facility is limited to 190 days during a
patient’s lifetime.
Skilled Nursing Facility (SNF) Services. The program covers up to 100
days of post-hospital care for persons needing continued skilled nursing or
rehabilitation services on a daily basis. The SNF stay must be preceded by a hospital
stay of at least three days and the transfer to the SNF must occur within 30 days of
the hospital discharge. There is no beneficiary cost-sharing for the first 20 days.
Days 21-100 are subject to daily coinsurance charges ($124 in 2007).
Home Health Services. Medicare covers visits by a home health agency
when such services are required because an individual is confined to his or her home
and needs skilled nursing care on an intermittent basis or physical therapy or speech
language therapy. After establishing such eligibility, the continuing need for
occupational therapy services may extend the eligibility period. Covered services
include part-time or intermittent nursing care; physical or occupational therapy or
speech language pathology services; medical social services; home health aide
services; medical supplies and durable medical equipment. The services must be
provided under a plan of care established by a physician and the plan must be
reviewed by the physician at least every 62 days.
Home health services are covered under both Parts A and B. Part A covers up
to 100 visits following a stay in a hospital or SNF. Part A also covers all home
health services for persons not enrolled in Part B. All other home health services are
covered under Part B. There is no beneficiary cost-sharing for home health services
(though some other Part B services provided in connection with the visit, such as
durable medical equipment, are subject to cost-sharing charges).
Hospice Care. Hospice services are provided to terminally ill Medicare
beneficiaries with a life expectancy of six months or less for two 90-day periods
followed by an unlimited number of 60-day periods. The individual’s attending
physician and the hospice physician must certify the need for the first benefit period,
but only the hospice physician needs to recertify for subsequent periods. Hospice

---

CRS-13
services are for the palliation and management of the illness and include drugs, and
medical and support services. Hospice care is provided in lieu of most other
Medicare services related to the curative treatment of the terminal illness.
Beneficiaries electing hospice care from a hospice program may receive curative
services for illnesses or injuries unrelated to their terminal illness and they may
disenroll from the hospice at any time. Nominal cost-sharing is required for drugs
and respite care.
Part B. Medicare Part B covers physicians’ services, outpatient hospital
services, durable medical equipment, and other medical services. Over 80% of Part
B enrollees use Part B services during a year. The program generally pays 80% of the
approved amount (generally a fee schedule or other predetermined amount) for
covered services in excess of the annual deductible ($131 in 2007). The beneficiary
is liable for the remaining 20%.
Most providers and practitioners are subject to limits on amounts they can bill
beneficiaries for covered services. For example, physicians and some other
practitioners may choose whether or not to accept “assignment” on a claim (namely
to have the patient assign his or her right to payment to the physician). When a
physician accepts assignment, the physician can only bill the beneficiary the 20%
coinsurance plus any unmet deductible. When a physician agrees to accept
assignment on all Medicare claims in a given year, the physician is referred to as a
“participating physician.” Physicians who do not agree to accept assignment on all
Medicare claims in a given year are referred to as nonparticipating physicians.
Nonparticipating physicians may or may not accept assignment for a given service.
If they do not, they may charge beneficiaries more than the fee schedule amount on
nonassigned claims; however, these “balance billing” charges are subject to certain
limits.
For some providers, such as nurse practitioners and physician assistants,
assignment is mandatory; these providers can only bill the beneficiary the 20%
coinsurance and any unmet deductible. For other Part B services, such as durable
medical equipment, assignment is optional; providers may bill beneficiaries for
amounts above Medicare’s recognized payment level and may do so without limit.
Covered Part B services include the following:
Physicians Services. Covered services include surgery, consultation, and
home, office, and institutional visits. Certain limitations apply for services provided
by chiropractors and podiatrists. Beneficiary cost-sharing for outpatient mental health
treatment services equals 50% (rather than the usual 20%) of the approved amount.
Services of Non-Physician Practitioners. Covered services include those
provided by physician assistants, nurse practitioners, certified registered nurse
anesthetists, and clinical social workers.
Therapy Services. The program covers physical therapy and occupational
therapy and speech language pathology services. The program establishes annual
limits on covered services. The first is a $1,780 per beneficiary annual cap (in 2007)
for all outpatient physical therapy services and speech language pathology services.

---

CRS-14
The second is a $1,780 per beneficiary annual cap (in 2007) for all outpatient
occupational therapy services. The limits, which are updated annually, apply to
services provided by independent therapists as well as to those provided by
comprehensive outpatient rehabilitation facilities (CORFs) and other rehabilitation
agencies. The Secretary is required to implement an exceptions process, to be used
in 2006 and 2007, for services meeting specified criteria for medically necessary
services. The limits do not apply to outpatient services provided by hospitals.
Preventive Services. The program covers the following preventive services,
at specified screening intervals. The regular Part B deductible and cost-sharing
apply, except as otherwise specified.
! “Welcome to Medicare” Physical Exam. The program covers a one-
time physical exam within the first six months of enrollment in Part
B. Coverage is provided for a physical exam (not including clinical
laboratory tests) and referral for preventive and other screening
services covered under Part B.
! Vaccines. The program covers annual flu shots and pneumococcal
vaccines (usually needed only once in a lifetime). No deductible or
cost-sharing applies for these shots. The program also covers
Hepatitis B vaccines for persons at medium to high risk for Hepatitis
B.
! Mammograms. Annual screening mammograms are covered for
asymptomatic women 40 and over. The deductible does not apply.
! Pap Smears and Pelvic Exams. Biennial exams are covered. More
frequent tests may be covered under certain conditions. The
deductible does not apply.
! Colorectal cancer screening tests. The following tests are covered
for persons 50 and over (except no minimum age for screening
colonoscopies):
! Fecal Occult Blood Test - Once every 12 months;
! Screening Flexible Sigmoidoscopy - Once every 48 months;
! Screening Colonoscopy - Once every 10 years, but not within
48 months of a screening sigmoidoscopy; for high risk
individuals once every 24 months;
! Barium Enema - This test can substitute for a flexible
sigmoidoscopy or colonoscopy; it is covered every 24 months
for high risk individuals and every 48 months for other
persons.

! No cost-sharing applies for fecal occult blood test. The cost-
sharing for flexible sigmoidoscopies and colonoscopies
performed in hospital outpatient departments is 25%.
! Prostate Cancer Screening. The program covers annual screening
tests for men aged 50 and over. Tests covered include a digital rectal
exam and a prostate specific antigen (PSA) test. There is no
deductible or cost-sharing for the PSA test.
! Cardiovascular Screening. Tests that check cholesterol and other
blood fat (lipid) levels are covered once every five years.
! Bone Mass Measurement. The program covers the test once every 24
months for persons at risk for osteoporosis.

---

CRS-15
! Diabetes Screening and Self-Management Training. Screening tests
may be covered up to twice a year for at-risk individuals; no
deductible or cost-sharing applies. Diabetes self-management
educational and training services are covered when furnished in an
outpatient setting by a certified provider. The physician must certify
the need for services and they must be provided under a
comprehensive plan of care.
! Glaucoma Tests. They are covered annually for high-risk
individuals.
! Medical Nutrition Therapy (MNT) Services. MNT services are
covered for persons with diabetes or renal disease. The benefit
includes an initial assessment of nutrition and lifestyle assessment;
nutrition counseling; information regarding managing lifestyle
factors that affect diet; and follow-up visits to monitor progress
managing diet. Medicare covers 3 hours of one-on-one counseling
services the first year, and 2 hours each year after that. If the
beneficiary’s condition, treatment, or diagnosis changes, he or she
may be able to receive more hours of treatment with a physician’s
referral. A physician must prescribe these services and renew their
referral yearly if continuing treatment is needed into another
calendar year.
! Ultrasound Screening for Abdominal Aortic Aneurysms. Beginning
January 1, 2007, coverage is provided under certain circumstances
for persons with a family history or manifested risk factors. The
deductible does not apply.
Clinical Laboratory Tests; Diagnostic X-Ray Tests; Other
Diagnostic Tests; and X-Ray, Radium, and Radioisotope Therapy. There
is no coinsurance for clinical laboratory services.
Durable Medical Equipment (DME). Coverage is provided for equipment
that is durable, prescribed for use in the home, and primarily for medical purposes.
It includes such items as: walkers, wheelchairs, hospital beds, and home oxygen
equipment. Certain items require the doctor to complete a certificate of medical
necessity. A power wheelchair or scooter is only covered if the doctor states that it
is required, based on the patient’s medical condition. DME must be obtained from
a supplier enrolled in Medicare.
Prosthetic Devices. Coverage is provided for prosthetic devices (other than
dental) which replace all or part of an internal body organ, braces, and artificial limbs
and eyes. Also included are cataract glasses, contact lenses, or intraoccular lenses
(IOLs) after cataract surgery with an intraoccular lens; patient pays any additional
costs for insertion of presbyopia-correcting lens or for upgraded frame.
Drugs. Certain specified outpatient prescription drugs are covered under
Medicare Part B. (However, most outpatient prescription drugs are covered under
Part D, discussed below. ) Covered Part B drugs include drugs furnished incident to
physicians’ services, immunosuppressive drugs following a Medicare-covered organ
transplant, erythropoietin for treatment of anemia for persons with ESRD; oral anti-
cancer drugs (provided they have the same active ingredients and are used for the

---

CRS-16
same indications as chemotherapy drugs which would be covered if furnished
incident to physicians services); and drugs needed for the effective use of DME.
Outpatient Hospital Services and Services in Ambulatory Surgical
Centers (ASCs). Coinsurance for outpatient hospital services can range as high as
40% of the payment amount; however, in no case can the amount exceed the
inpatient hospital deductible ($992 in 2007). Regular cost-sharing applies for ASC
services.
Home Health Services. Home health services not covered under Part A are
covered under Part B. (See Part A discussion, above.)

Other Medical and Health Services. Additional covered services include
ambulance services, home dialysis equipment and supplies, and services provided in
rural health clinics (RHCs) and federally-qualified health centers (FQHCs).
Services for End-Stage Renal Disease Beneficiaries. Individuals with
end stage renal disease (i.e. kidney disease) are eligible for all services covered under
Parts A and B. In addition, they are covered for dialysis services and, when provided,
kidney transplants.
Program Payments
When Medicare was first established, the program generally made payments on
the basis of “reasonable costs” and “reasonable charges.” However, program
expenditures quickly began to exceed expectations. As a result, Congress sought to
rein in expenditures by tightening payment rules. At first, limitations were placed on
the definitions of reasonable costs and reasonable charges. Subsequently, the
program moved toward payment systems under which a pre-determined payment
amount is established for a specified unit of service, such as a hospital discharge or
payment classification group. In 1983, the first prospective payment system (PPS)
was established for inpatient hospital services, Medicare’s largest spending category.
Under the inpatient PPS (IPPS), the payment amounts are intended to represent the
average cost for treating a patient for the same condition. Hospitals that are able to
keep costs below the fixed payment are able to keep the difference, while those with
costs exceeding the fixed payment lose money.
Over time, prospective payment and other pre-determined approaches, such as
fee schedules, were established for a number of other service categories. The rules
for each payment system are quite complex and differ for each system. Taken
together, they are sometimes characterized as “administered pricing,” since the price
the government sets for the period does not fluctuate by supply or demand. The law
generally specifies a formula for calculating an annual update to the payment amount,
though Congress frequently amends the statutory requirements.
The following discussion is intended as only a brief overview of Medicare
payment systems; for additional information, see CRS Report RL30526, Medicare
Payment Policies and other CRS reports listed in the Appendix.

---

CRS-17
Inpatient Hospital Services.
Short-Term General Hospitals.
Medicare pays acute care hospitals
using a prospectively determined payment for each discharge. A hospital’s payment
for its operating costs is the product of two components. The first component is a
national standardized amount adjusted by a wage index associated with the area
where the hospital is located or where it has been reclassified. The second component
is the diagnosis related group (DRG) weight; this reflects the relative hospital
resource use associated with the DRG to which the patient is assigned. DRGs are
revised periodically, with the most recent update effective October 1, 2006. There are
currently 536 DRGs. Additional payments are made for: cases with extraordinary
costs (outliers), indirect costs incurred by teaching hospitals for graduate medical
education, and disproportionate share (DSH) costs for hospitals serving a
disproportionate share of low-income patients. Additional payments may also be
made for qualified new technologies that have been approved for special add-on
payments. Note that physicians’ services provided during an inpatient stay are paid
under the physician fee schedule (discussed below), not under the IPPS system.
Payments are also made for capital costs. Medicare’s capital IPPS is structured
similarly to its operating IPPS for short-term general hospitals. A hospital’s capital
payment is based on a prospectively determined federal payment rate, which is 3%
higher for hospitals in large urban areas than for hospitals in other areas, depends on
the DRG to which the patient is assigned, and is adjusted by a hospital’s geographic
adjustment factor. Qualified hospitals will receive indirect medical education and
DSH adjustments to their capital payments as well.
Medicare makes payments outside the IPPS system for direct costs associated
with graduate medical education costs for hospital residents, subject to certain limits.
Medicare will also reimburse hospitals for 70% of the allowable costs associated with
beneficiaries’ unpaid deductible and copayment amounts.
Hospitals Receiving Special Consideration Under Medicare’s IPPS.
Special payment considerations may apply for hospitals meeting one of the following
designations. Generally this results in higher payments than would apply under the
IPPS system.
! Sole Community Hospital (SCH). An SCH is a facility located in a
geographically isolated area and deemed to be the sole provider of
inpatient acute care hospital services in a geographic area based on
distance, travel time, severe weather conditions, and/or market share
as established by specific criteria.
! Medicare Dependent Hospital (MDH). An MDH is a small rural
hospital with a high proportion of patients who are Medicare
beneficiaries. It cannot be an SCH and must have 100 or fewer beds.
! Rural Referral Center (RRC). An RRC is a relatively large hospital,
generally in a rural area, that provides a broad array of services and
treats patients from a wide geographic area, as established by
specific criteria.

---

CRS-18
IPPS Exempt Hospitals and Distinct Part Units. Certain hospitals or
distinct hospital units are exempt from IPPS and paid on an alternative basis.
! Inpatient Rehabilitation Facilities (IRFs). An IRF is a freestanding
hospital or hospital-based distinct part unit that meets the modified
“75% rule” and additional specified conditions. The rule specifies
a minimum percentage of the IRF’s inpatient population that must
have at least one of the qualifying medical conditions. The
percentage is currently 60%, and increases to 65% from July 1,
2007-June 30, 2008. The threshold will be set at 75% beginning
July 1, 2008. A patient must receive rehabilitation services for one
of 13 specified conditions. Payments to IRFs are made under a PPS
which includes both capital and operating costs. Patients are
assigned to one of 380 Case Mix Groups (CMGs), based on
impairment level, functional status, comorbidity condition and age
with 5 additional CMGs reserved for short-stay patients or patients
who die in the facility. Payments vary according to the CMG to
which the patient is assigned.
! Long-Term Care Hospitals (LTCHs). An LTCH is an acute care
general hospital that has a Medicare inpatient average length of stay
greater than 25 days. An LTCH is paid on a discharge basis under
a DRG-based PPS which includes both operating and capital costs.
The LTCH-PPS payment for a Medicare discharge is based on the
patient’s assignment into one of 520 covered LTCH-DRGs, as well
as facility-specific adjustments.
! Psychiatric Hospitals or Distinct Part Units. Payments to an
inpatient psychiatric facility (IPF) is based on a per diem PPS (IPF-
PPS). The system incorporates patient level adjustments for
specified DRGs, as well as facility-level adjustments. Payments are
higher in the earlier days of a stay.
! Children’s Hospitals and Cancer Hospitals. These hospitals are
paid on a reasonable cost basis, subject to certain limitations and,
in certain cases, incentive payments.
! Critical Access Hospitals (CAHs). A CAH is a limited-service
facility that is: located more than 35 miles from another hospital
(15 miles in certain circumstances); offers 24-hour emergency care;
has no more than 25 acute care inpatient beds; and has a 96-hours
or less average length of stay. As of January 1, 2006, states can no
longer designate entities as necessary providers of care in order to
qualify as a CAH. Certain grandfather provisions apply to those
previously designated by the states. CAHs are paid on the basis of
reasonable costs for inpatient and outpatient services; payments
equal 101% of reasonable costs. A CAH may elect either a
cost-based hospital outpatient service payment or an all-inclusive
rate which is equal to a reasonable cost payment for facility services
plus 115% of the fee schedule payment for professional (i.e.
physicians’) services.

---

CRS-19
Skilled Nursing Facility (SNF) Care. SNF services are paid under a PPS
which is based on a per diem urban or rural base payment rate, adjusted for case mix
and area wages. The per diem rate generally covers all services, including room and
board, provided to the patient that day. The case-mix adjustment is made using the
resource utilization groups (RUGs) system. The RUGs system uses patient
assessments to assign a beneficiary to one of 53 categories and to determine the
payment for the beneficiary’s care. Patient assessments are done at various times
during a patient’s stay and the RUG category a beneficiary is placed in can change
with changes in the beneficiary’s condition. Extra payments are not made for
extraordinarily costly cases (“outliers”).
Home Health Services. Home health services are paid under a home health
PPS, based on 60-day episodes of care; a patient may have an unlimited number of
episodes. Under the PPS, a nationwide base payment amount is adjusted by
differences in wages (using the hospital wage index). This amount is then adjusted
for case mix using the applicable Home Health Resource Group (HHRG) to which
the beneficiary has been assigned. The HHRG applicable to a beneficiary is
determined following an assessment of the patient’s condition and care needs using
the Outcome and Assessment Information Set (OASIS); there are 80 HHRGs.
Further payment adjustments may be made for outlier visits (for extremely costly
patients), a significant change in a beneficiary’s condition, a partial episode which
occurs because a beneficiary transfers from one agency to another, or a low
utilization adjustment for beneficiaries receiving four or fewer visits.
Hospice Care. Payment for hospice care is based on one of four prospectively
determined rates (which correspond to four different levels of care) for each day a
beneficiary is under the care of the hospice. The four rate categories are: routine
home care, continuous home care, inpatient respite care, and general inpatient care.
Payment rates are adjusted to reflect differences in area wage levels, using the
hospital wage index. Payments to a hospice are subject to an aggregate cap that limits
the average per beneficiary cost to a cap that is adjusted annually by changes to the
medical care expenditure category of the CPI-U.
Physician Services and Other Services Paid Under the Physician
Fee Schedule. A number of Part B services are paid under the physician fee
schedule. These include services of physicians, nonphysician practitioners, and
therapists. Most services described earlier as preventive services (except for
laboratory tests paid under the laboratory fee schedule) and diagnostic tests are paid
under the physician fee schedule. There are over 7,000 service codes under the fee
schedule.
The fee schedule assigns relative values to each service code. These relative
values reflect physician work (based on time, skill, and intensity involved), practice
expenses, and malpractice expenses. The relative values are adjusted for geographic
variations in the costs of practicing medicine. These geographically adjusted relative
values are converted into a dollar payment amount by a national conversion factor.
The conversion factor is updated each year by a formula specified in law. The update
percentage equals the Medicare Economic Index (MEI, which measures inflation)
subject to an adjustment to match spending under the cumulative sustainable growth
rate (SGR) system which establishes a target for total expenditures since 1996. If

---

CRS-20
total expenditures exceed the target, the update for a future year is reduced.
Application of the SGR formula would have led to negative updates since 2002;
however, Congress overrode the reduction each year from 2003-2007. The 2007
conversion factor is frozen at the 2006 level. Additionally for the period July-
December 2007, physicians who report on selected quality measures for services for
which quality measures have been established will receive an additional 1.5% bonus
payment for those services. Unless Congress takes additional action, application of
the SGR formula is expected to continue to lead to annual reductions in the
conversion factor for the foreseeable future.
Clinical Diagnostic Laboratory Services. Clinical lab services are paid
on the basis of area-wide fee schedules. There is a ceiling on payment amounts equal
to 74% of the median of all fee schedules for the test. Fee schedule amounts are
frozen through 2008.
Durable Medical Equipment (DME). DME is paid on the basis of a fee
schedule. Items are classified into five groups for purposes of determining the fee
schedules and making payments: (1) inexpensive or other routinely purchased
equipment (defined as items costing less than $150 or which are purchased at least
75% of the time); (2) items requiring frequent and substantial servicing; (3)
customized items; (4) oxygen and oxygen equipment; and (5) other items referred to
as capped rental items. In general, fee schedule rates are established locally and are
subject to national limits, with floors and ceilings. The floor is equal to 85% of the
weighted average of all local payment amounts and the ceiling is equal to 100% of
the weighted average of all local payment amounts.
The Deficit Reduction Act of 2005 (DRA) changed the amount of time certain
items of DME can be rented before ownership of the item is transferred to the
beneficiary. For items in the capped rental category, such as hospital beds, nebulizers
and wheelchairs, the rental period changed from a period not to exceed 15 months,
to a maximum of 13 months. For oxygen equipment, the rental period was limited
in DRA to a maximum of 36 months. Medicare will continue to pay for oxygen
refills for equipment owned by the beneficiary, and Medicare will pay for
maintenance and servicing not covered by the manufacturer’s warranty on a
reasonable and necessary basis.
Prosthetics and Orthotics. Prosthetics and orthotics are paid on the basis
of a fee schedule. These rates are established regionally and are subject to national
limits which have floors and ceilings. The floor is equal to 90% of the weighted
average of all regional payment amounts and the ceiling is equal to 120% of the
weighted average of all regional payment amounts.
Hospital Outpatient Department (HOPD) Services. Under the
HOPD-PPS, the unit of payment is the individual service or procedure as assigned
to one of about 820 ambulatory payment classifications (APCs). To the extent
possible, integral services and items (excluding physicians services paid under the
physician fee schedule) are bundled within each APC. Specified new technologies
are assigned to new technology APCs until clinical and cost data are available to
permit assignment into a clinical APC. Medicare’s payment for HOPD services is
calculated by multiplying the relative weight associated with an APC by a conversion

---

CRS-21
factor. For most APCs, 60% of the conversion factor is geographically adjusted by
the IPPS wage index. Except for new technology APCs, each APC has a relative
weight that is based on the median cost of services in that APC. Certain APCs with
significant fluctuations in their relative weights have had the calculated change
dampened. The HOPD-PPS also includes pass-through payments for new technology
and payments for outliers. Starting in 2006, rural SCHs receive an additional 7.1%
in Medicare payments. Special provisions apply for cancer and children’s hospitals
and HOPDs in small rural hospitals (that are not SCHs) with 100 or fewer beds.
Ambulatory Surgical Center (ASC) Services. A fee schedule is used to
pay for the facility services related to a surgery provided in an ASC. The associated
physician services (surgery and anesthesia) are paid under the physician fee schedule.
CMS maintains the list of approved ASC procedures, which is required to be updated
every two years. Currently, more than 2,400 procedures are approved for ASC
payment and categorized into one of nine payment groups that comprise the ASC
facility fee schedule. The nine ASC payment rates reflect the national median cost
of procedures in that group; these rates are adjusted to reflect geographic price
variation using a hospital wage index. Payments are also adjusted when multiple
surgical procedures are performed at the same time. CMS has proposed a two-year
transition in the way Medicare calculates ASC payments, with major changes
implemented in 2008.
Part B Covered Drugs and Vaccines. Medicare’s payment for Part B
covered drugs equals 106% of the average sales price.
Ambulance Services. Ambulance services are paid on the basis of a national
fee schedule, which is being phased in. The fee schedule establishes seven categories
of ground ambulance services and two categories of air ambulance services. The
payment for a service equals a base rate for the level of service plus payment for
mileage. Geographic adjustments are made to a portion of the base rate. Additionally,
the base rate is increased for air ambulance trips originating in rural areas and
mileage payments are increased for all trips originating in rural areas. There is a 25%
bonus on the mileage rate for trips of 51 miles and more.
The national fee schedule is fully phased in for air ambulance services. For
ground ambulance services, payments through 2009 are equal to the greater of the
national fee schedule or a blend of the national and regional fee schedule amounts.
The portion of the blend based on national rates is 80% for 2007-2009. In 2010 and
subsequently, the payments in all areas will be based on the national fee schedule
amount.
End-Stage Renal Disease (ESRD) Dialysis and Transplant Services.
Dialysis services, paid for under Part B, are offered in three outpatient settings:
hospital-based facilities, independent facilities, and the patient’s home. There are two
methods for payment. Under Method I, facilities are paid a prospectively set amount,
known as the composite rate, for each dialysis session, regardless of whether services
are provided at the facility or in the patient’s home. The composite rate is derived
from audited cost data and adjusted for the national proportion of patients dialyzing
at home versus in a facility, and for area wage differences. Adjustments are made to
the composite rate for hospital-based dialysis facilities to reflect higher overhead

---

CRS-22
costs. Beneficiaries electing home dialysis may choose not to be associated with a
facility and may make independent arrangements with a supplier for equipment,
supplies, and support services. Payment to these suppliers, known as Method II, is
made on the basis of reasonable charges, limited to 100% of the median hospital
composite rate, except for patients on continuous cycling peritoneal dialysis, when
the limit is 130% of the median hospital composite rate. The composite rate is
case-mixed adjusted.
Kidney transplantation services, to the extent they are inpatient hospital
services, are subject to the IPPS. However, kidney acquisition costs are paid on a
reasonable cost basis.
Medicare Part C: Medicare Advantage (MA)
Approximately 16% of Medicare beneficiaries receive covered services through
Part C, rather than through “Original Medicare.” For a number of years, Medicare
beneficiaries have had the option of obtaining covered services through a managed
care arrangement offered by private plans. Under a managed care arrangement, a
plan agrees to provide all services covered under Medicare Parts A and B (except for
hospice care). In return, Medicare makes a per capita monthly payment to the plan.
The same monthly payment is made regardless of how many or how few services a
beneficiary actually uses. The plan is at-risk if costs, in the aggregate, exceed
program payments; conversely, the plan can retain savings if costs are less than
payments. This is different from the so-called fee-for-service system under Parts A
and B; under fee-for-service, a payment is made for each service (e.g., physician
visit) or each unit of service (e.g., a hospital stay) provided.
Medicare’s risk contract program was created in 1982. Under that program,
private entities, mostly health maintenance organizations (HMOs), contracted with
Medicare to provide covered services. The BBA, enacted in 1997, replaced the risk
contract program with the Medicare+Choice (M+C) program. The M+C program
established a new payment structure, which was designed both to reduce overall
spending and to reduce the existing variation in payments to plans across the country.
Following enactment of BBA 97, managed care plans began leaving the program,
citing insufficient Medicare payments; however, other factors also played a role for
some plans.
Subsequent legislation addressed some of the issues arising from passage of the
BBA. Most recently, Congress made substantial changes to the M+C program with
the passage of the MMA in 2003. The act created the Medicare Advantage (MA)
program to replace the M+C program and introduced several enhancements intended
to increase the availability of private plans to Medicare beneficiaries. It provided for
immediate payment increases to plans beginning in 2004. Beginning in 2006, it
changed the payment structure for local plans and provided for the introduction of
regional plans that operate like preferred provider organizations — a popular option
in the private health insurance market. The legislation also provided financial
incentives for plans to participate in this new regional option. Additionally, MA
enrollees have access to the Part D drug benefit through their MA plan.

---

CRS-23
Beginning in 2010, the MA program will offer a six-year program (referred to
as comparative cost adjustment) designed to test competition between local MA
plans and fee-for-service Medicare, in limited areas.
Plan Types
There are several different types of plans that can qualify as MA plans. They
include coordinated care plans, private fee-for-service plans, and certain other plan
types operating under exceptions or demonstration authority. The following are the
most common types of available plans:
! Health Maintenance Organizations (HMOs). HMO plans offer
services to plan members in designated service areas. Beneficiaries
are generally required to obtain services from hospitals and doctors
that are in the plan’s network. Some plans offer a point-of-service
option under which an individual may elect to obtain services from
a non-network provider; in such cases, the individual pays more for
the care. If the plan does not have a point of service option, the
individual must pay out-of-pocket, except in emergency cases, for
services provided by non-network providers.
! Local Preferred Provider Organizations (PPOs). Persons who enroll
in PPOs are generally able to see any doctor or other provider that
accepts Medicare. If enrollees use out-of-network (i.e. non-
preferred) providers, they will generally pay more, though the
amount varies by plan. Local PPOs generally serve individual
counties.
! Regional PPOs. Beginning in 2006, regional PPOs are available.
Regional PPOs serve an entire region which may be a single state or
multi-state area. MA regional plans cover both in- and
out-of-network required services and have both a unified Part A and
Part B deductible and a limit on out-of-pocket expenses; the limit
varies by plan. This is the only group that has a specific limit on out-
of-pocket spending in connection with Part A and Part B services.
! Special Needs Plans. These plans may limit all or most of their
membership to persons in certain long-term care facilities, low-
income persons eligible for both Medicare and Medicaid, or persons
with specified chronic or disabling conditions.
! Private Fee-for-Service (PFFS) Plans. Enrollees in private fee for
service plans can get services from any Medicare-approved doctor
or other provider that accepts the terms of the plan’s payment. The
plan itself, subject to certain restrictions, determines both its
payments and beneficiary cost-sharing amounts for covered services.
The plan may also offer additional benefits not covered under
Original Medicare.

---

CRS-24
In general, MA organizations are required to offer at least one plan with Part D
drug coverage. MA enrollees can only get Part D coverage through their MA plan.
An exception applies for private fee-for-service plans; unlike most other MA plans,
they are not required to offer Part D drug coverage, though they may elect to do so.
Individuals in PFFS plans not offering drug coverage may purchase drug coverage
through a stand-alone Part D drug plan.
Plan Enrollment
Beneficiaries newly eligible for Medicare Part A and enrolled in Part B can join
an MA plan. Other persons can generally join an MA plan, or switch from one MA
plan to another, only during the annual open enrollment period which occurs from
November 15-December 31 each year. In addition, MA enrollees can generally
change enrollment or drop out of their MA plans and return to Original Medicare
during the first three months of each calendar year, or, for new enrollees, the first
three months in which they are eligible to be enrolled in an MA plan. In certain
cases, such as when an MA enrollee moves, he or she may switch plans at that time.
However, at any time during 2007 or 2008, a beneficiary may enroll in an MA
plan that does not offer drug coverage, provided that the individual is eligible for Part
A and enrolled in Part B and, because of the date, is not otherwise eligible to enroll
in an MA plan. The choice to enroll in an MA without drug coverage can be made
regardless of whether the beneficiary is enrolled in a stand-alone prescription drug
plan.
Payments to Plans
The Secretary determines MA payment rates for the forthcoming year by
comparing plan bids (the plan’s estimate of the cost of providing required Medicare
Parts A and B services) to a benchmark (the maximum amount the federal
government is willing to pay a plan for providing these required benefits). After plans
submit their bids, the Secretary has the authority to negotiate the bid amount. The
Secretary calculates the benchmark by updating the previous year’s payment in a
local area by a statutorily required increase. If a plan’s bid is less than the benchmark,
its payment will equal its bid plus a rebate of 75% of the difference (between the
benchmark and the bid). The rebate may be used to provide additional benefits,
reduce cost sharing, or may be applied towards the monthly Part B premium,
prescription drug premium, or supplemental premium (for services beyond required
Medicare benefits). The remaining 25% of the difference will be retained by the
federal government. If a plan’s bid is equal to or above the benchmark, its payment
will be the benchmark amount and each enrollee in that plan will pay an additional
premium, equal to the amount by which the bid exceeds the benchmark.
Beginning in 2006, the MA program began to offer MA regional plans.
Organizations are required to submit a separate monthly bid amount for each plan
they intend to offer in a region in the following year. The regional benchmark
includes two components: (1) a statutorily determined amount, and (2) a weighted
average of plan bids. Thus, a portion of the benchmark is competitively determined.
Similar to local plans, plans with bids below the benchmark will be given a rebate

---

CRS-25
while plans with bids above the benchmark will require an additional enrollee
premium.
Additional financial incentives are provided to encourage regional plan
participation. During 2006 and 2007, Medicare will share risk with an MA regional
plan if its costs fall above or below a statutorily-specified risk corridor. Starting in
2012, there is a stabilization fund to provide incentives for regional plans to enter
into and to remain in the MA program. Initially, $3.5 billion will be available, with
additional amounts to be added to the fund in subsequent years.
Part D: Outpatient Prescription Drugs
As noted, MMA added a new voluntary outpatient prescription drug benefit,
beginning in 2006. Coverage is provided through private prescription drug plans
(PDPs) or MA prescription drug (MA-PD) plans. The program relies on these private
plans to provide coverage and to bear some of the financial risk for drug costs;
federal subsidies covering the bulk of the risk is provided to encourage participation.
Unlike other Medicare services, the benefits can only be obtained through
private plans. Further, while all plans have to meet certain minimum requirements,
there are significant differences among them in terms of benefit design, drugs
included on plan formularies (i.e. list of covered drugs) and cost-sharing applicable
for particular drugs.
Eligibility and Plan Enrollment
Each individual enrolled in Part A or Part B is entitled to obtain qualified
prescription drug coverage through enrollment in a prescription drug plan. A
beneficiary enrolled in an MA plan providing qualified prescription drug coverage
(MA-PD plan) obtains coverage through that plan. In general, MA enrollees can not
enroll in a stand-alone prescription drug plan under Part D.
Medicare beneficiaries enrolled in Part A or Part B on or before January 31,
2006, had to enroll by May 15, 2006; those eligible in February 2006 had until May
31, 2006. Those eligible for Medicare beginning March 2006 or later have an initial
seven-month enrollment period beginning three months before the month of
Medicare eligibility and ending seven months later. This initial eligibility period is
the same as that applicable for Medicare Part B.
An individual who does not enroll during his or her initial enrollment period is
only able to enroll during the annual open enrollment period, which occurs from
November 15-December 31 each year. Coverage begins the following January 1.
Persons who fail to enroll during their initial enrollment period are subject to a
penalty if they decide to enroll in the program at a later date. However, they are not
subject to the penalty if they have maintained “creditable” drug coverage through
another source. One source of possible creditable coverage is retiree health coverage
offered by a former employer or union.

---

CRS-26
Special rules apply for persons who qualify for the low-income subsidy, after
the close of the initial enrollment period on May 15, 2006. These individuals can
still enroll in a Part D plan in 2006 or 2007, and they will not be subject to the late
enrollment penalty otherwise applicable to persons who missed the enrollment
deadline.
Benefits
Qualified Part D plans are required to offer either “standard coverage” or
alternative coverage, with actuarially equivalent benefits. In 2007, “standard
coverage” has a $265 deductible, 25% coinsurance for costs between $266 and
$2,400. From this point, there is no coverage until the beneficiary has out-of-pocket
costs of $3,850 ($5,451.25 in total spending); this coverage gap has been labeled the
“doughnut hole.” Once the beneficiary reaches the catastrophic limit, the program
pays all costs except for nominal cost-sharing.
In 2007, most plans offer actuarially equivalent benefits rather than the standard
package. A number of plans have reduced or eliminated the deductible. Many plans
offer tiered cost-sharing under which lower cost-sharing applies for generic drugs,
higher cost-sharing applies for preferred brand name drugs, and even higher cost-
sharing applies for non-preferred brand name drugs. Some plans provide some
coverage in the doughnut hole; this is generally limited to generic drugs.
Low-Income Provisions
A major focus of the drug benefit is the enhanced coverage provided to
low-income individuals who enroll in Part D. Low-income enrollees, including
persons (known as “dual eligibles”- those persons enrolled in both Medicare and
Medicaid) who previously received drug benefits under Medicaid, have their
prescription drug costs paid under the new Part D. Persons with incomes below
150% of poverty have assistance with some portion of their premium and cost-
sharing charges. Persons with the lowest incomes have the highest level of benefits.
Drug Payments
Plans determine payments for drugs and are expected to negotiate prices. The
federal government is prohibited from interfering in the price negotiations between
drug manufacturers, pharmacies, and plans (the so-called “non-interference clause”).
Interaction With Retiree Plans
MMA included significant incentives for employers to continue to offer
coverage to their retirees. Specifically, special federal subsidy payments are made
to employers or unions offering drug coverage at least actuarially equivalent to
“standard coverage.” Subsidy payments are made on behalf of an individual covered
under a retiree plan who is eligible to enroll under a PDP or MA-PD plan, but elects
not to. In 2007, subsidy payments equal 28% of the retiree’s gross drug costs
between $265 and $5,350. The federal government is not taking the subsidy in

---

CRS-27
behalf of persons enrolled in TRICARE or the federal employees health benefits
(FEHB) program.
Employers or unions may select an alternative option (instead of taking the
subsidy) with respect to Part D. They may elect to pay a portion of the Part D
premiums. They may also elect to provide enhanced coverage, though this has some
financial consequences for the employer or union. Enhanced coverage may be
provided through supplementary or “wrap around” benefits. Alternatively, employers
or unions may contract with a PDP or MA-PD to offer the coverage. Finally, they
may become a Part D plan sponsor themselves for their retirees.
Medicare Administration
At the federal level, Medicare is administered by the Centers for Medicare and
Medicaid Services (CMS) within the Department of Health and Human Services
(HHS). Day-to-day program operations, including processing benefits and paying
claims under Parts A and B, are conducted by Medicare contractors known as
Medicare Fiscal Intermediaries and Carriers. These contractors are insurance
companies and similar entities. MMA provided for the replacement of these entities
with new Medicare Administrative Contractors (MACs), selected through a
competition process, which will handle both Parts A and B in a region. In July 2006,
CMS announced the award of the first of 15 A/B MAC contracts. The four regional
carriers (DMERCs), which previously handled all durable medical equipment claims
in the country, are being transitioned to DME MACs.
Day-to-day program operations for MA plans, MA-PD plans, and PDPs are
handled by the plans themselves.
Medicare Financing
Medicare is financed from three principal sources, namely payroll taxes, general
revenues, and premiums paid by beneficiaries. Different revenue sources are directed
to specific Parts of the program.
Medicare’s financial operations are accounted for through two trust funds, the
Hospital Insurance (HI) trust fund and the Supplementary Medical Insurance (SMI)
trust fund, which are maintained by the Department of the Treasury. The HI and SMI
trust funds are overseen by a board of trustees that makes annual reports to Congress.
The trust funds are an accounting mechanism; there is no actual transfer of
money into and out of a fund. Income to the trust funds is credited to the fund in the
form of interest-bearing government securities. Expenditures for services and
administrative costs are recorded against the fund. The securities represent
obligations that the government has issued to itself. As long as the trust fund has a
balance, the Treasury Department is authorized to make payments for it from the U.S.
Treasury.

---

CRS-28
Part A Financing
The primary source of funding for Part A is payroll taxes paid by employees and
employers. Each pays a tax of 1.45% on earnings; the self-employed pay 2.9%.
Unlike Social Security, there is no upper limit on earnings subject to the tax. Other
sources of income include 1) a portion of federal income taxes that individuals pay
on their social security benefits; 2) premiums paid by voluntary enrollees who are not
automatically entitled to Medicare Part A through their (or their spouse’s) work in
covered employment; 3) government credits; and 4) interest on federal securities held
by the trust fund. Income for Part A is credited to the HI trust fund.
Part B Financing
Medicare Part B is financed through a combination of beneficiary premiums and
federal general revenues. Beneficiary premiums equal 25% of estimated program
costs for the aged. (The disabled pay the same premium as the aged.) Federal general
revenues account for the remaining 75%. Income for Part B is credited to the SMI
trust fund.
The 2007 monthly Part B premium is $93.50. Individuals receiving Social
Security benefits have their Part B premium payments automatically deducted from
their Social Security benefit checks; however, an individual’s Social Security check
cannot go down from one year to the next as a result of the annual Part B premium
increase.
Since the inception of Medicare, all Part B enrollees have paid the same Part B
premium, regardless of their income level. For many years, Congress debated
whether or not it was appropriate for taxpayers to pay (through general revenue
financing) three-quarters of Part B costs for higher income persons, since low income
and middle income working persons might be subsidizing higher income elderly
persons.
Congress included a provision in MMA that requires higher income enrollees
to pay higher premiums beginning in 2007. In 2007, individuals whose modified
adjusted gross income (AGI) in 2005 exceeded $80,000 and couples whose modified
AGI exceeded $160,000 are subject to higher premium amounts. In 2007, they pay
total premiums ranging from 28.30% to 43.15% of the value of Part B. When fully
phased-in in 2009, higher income individuals will pay total premiums ranging from
35% to 80% of the value of Part B.
CMS estimates that 4% of enrollees will pay the higher premiums in 2007. For
singles, the higher monthly premium amounts are $106.00 for beneficiaries with
incomes (in 2005) over $80,000 and less than or equal to $100,000, $124.70 for
incomes over $100,000 and less than or equal to $150,000, $143.40 for incomes
greater than $150,000 and less than or equal to $200,000, and $162.10 for incomes
greater than $200,000. For couples filing joint tax returns, the premium amounts are
$106.00 for beneficiaries with incomes over $160,000 and less than or equal to
$200,000, $124.70 for incomes over $200,000 and less than or equal to $300,000,

---

CRS-29
$143.40 for incomes greater than $300,000 and less than or equal to $400,000, and
$162.10 for incomes greater than $400,000.
Part C Financing
Payments for spending under the Medicare Advantage program are made in
appropriate parts from the HI and SMI trust funds. There is no separate trust fund for
Part C.
Part D Financing
Medicare Part D is financed through a combination of beneficiary premiums and
federal general revenues. In addition, certain transfers are made from the states.
These transfers, referred to as “clawback payments,” represent a portion of the
amounts states could otherwise have been expected to pay for drugs under Medicaid
if drug coverage for the dual eligible population had not been transferred to Part D.
Part D revenues are credited to a separate Part D account within the SMI trust fund.
Beneficiaries pay different premiums depending on the plan they have selected
(and whether or not they are entitled to low-income premium subsidies). On average,
beneficiary premiums account for 25.5% of expected total Part D costs for basic
coverage. Part D premium payments may be automatically deducted from Social
Security benefit checks, paid directly to the PDP sponsor or MA-PD organization,
or made through an electronic funds transfer.
Medicare Solvency
When people refer to the pending insolvency of Medicare, they are actually
referring to the pending insolvency of the HI trust fund. Medicare trustees define
insolvency as occurring when trust fund assets at the beginning of the year are
insufficient to pay program benefits for the forthcoming year. Because of the way it
is financed, the SMI fund (including the Part D account) does not face insolvency
although its rapid growth rate is a drain on federal spending. Further, continued
premium increases may place a financial burden on some beneficiaries.
The 2006 trustees report projects that under intermediate assumptions, the HI
trust fund will become insolvent in 2018. The report further states that beginning in
2004, tax income (from payroll taxes and from the taxation of Social Security
benefits) began to fall below expenditures. Expenditures will exceed total income
beginning in 2010. If income falls short of expenditures, costs are met by drawing on
HI fund assets through transfers from the general fund of the Treasury until the fund
is depleted.
45% Trigger
The rapid increases in total Medicare costs has long been of concern to Congress
and others. The trustees have emphasized the importance of examining the program
as a whole, rather than just the HI trust fund. Of particular concern is the fact that
over time the economy will be unable to support the increasing reliance on general

---

CRS-30
revenues, which in large measure come from taxes paid by the under-65 population.
In response, MMA required the annual trustees report to include an expanded
analysis of Medicare expenditures and revenues. Specifically, each year the trustees
must determine whether general revenue financing will exceed 45% of total Medicare
outlays within the next seven years. General revenue financing is defined as: total
Medicare outlays minus dedicated financing sources (i.e., HI payroll taxes; income
from taxation of Social Security benefits; state transfers for prescription drug
benefits; premiums paid under Parts A, B, and D; and any gifts received by the trust
funds). The 2006 trustees report projected that the 45% trigger will first be exceeded
in 2012, which is within the required seven-year test period (i.e., 2006-2012). The
2006, report, therefore, made a determination of “excess general revenue Medicare
funding.” (CBO projects the trigger will be reached in FY2011.)
MMA further required that if an excess general revenue funding determination
is made for two successive years, the President is required to submit a legislative
proposal to respond to the warning. The proposal must be submitted, within 15 days
of submission of the next President’s Budget (unless during the intervening period
legislation is enacted, which eliminates such excess general revenue funding). The
Congress is required to consider the proposal on an expedited basis. However,
passage of legislation within a specific time frame is not required.
Additional Insurance Coverage
Medicare provides broad protection against the costs of many, primarily acute
care, services. However, the program does not cover all services which may be used
by its aged and disabled beneficiaries. Medicare does not cover eyeglasses, hearing
aids, dentures, or most long-term care services. Further, unlike most private
insurance polices, it does not include an annual “catastrophic” cap on out-of-pocket
spending on cost-sharing charges for services covered under Parts A and B (except
for persons enrolled in regional PPOs under MMA). Prior to implementation of the
drug benefit in 2006, the program generally covered only about one-half of
beneficiaries’ total health care expenses. (More recent data are not available.)
Most Medicare beneficiaries have some coverage in addition to Medicare. The
following are the main sources of additional coverage for Medicare enrollees.

! Medicare Advantage. Many MA plans offer services in addition to
those covered under Original Medicare.
! Employer Coverage. Coverage may be provided through a current
or former employer. In recent years, a number of employers have cut
back on the scope of retiree coverage. Some have dropped such
coverage entirely, particularly for future retirees. As noted earlier,
the MMA attempted to stem this trend by offering subsidies to
employers who offer drug coverage, at least as good as that available
under Part D. (See discussion, above.)

---

CRS-31
! Medigap. Individual insurance policies which supplement Medicare
are referred to as Medigap policies. Beneficiaries with Medigap
insurance typically have coverage for a portion of Medicare’s
deductibles and coinsurance; they may also have coverage for some
items and services not covered by Medicare. Individuals generally
select from one of 10 standardized plans, though not all plans are
offered in all states. MMA added two additional standardized plan
types. Unlike the other standardized plans, these new plans eliminate
first-dollar coverage for most Medicare cost-sharing; they also
include an annual out-of-pocket limit on Medicare cost-sharing
charges. MMA also prohibited, beginning January 1, 2006, the sale
of Medigap policies with prescription drug coverage. Individuals
who previously had such policies could renew them provided they
did not enroll in a prescription drug plan under the new Part D.
Alternatively, if they enrolled under Part D, they could continue to
enroll in a Medigap plan, but without drug coverage.
! Medicaid. Certain low-income Medicare beneficiaries may also be
eligible for full or partial benefits under their state’s Medicaid
program. Persons eligible for the full range of benefits (known as
the “full dual eligibles”) generally have the majority of their health
care expenses met through a combination of coverage under the two
programs; Medicare pays first, with Medicaid picking up most of the
remaining costs. Certain other individuals are entitled to more
limited protection under one of three Medicaid Savings programs.
The Qualified Medicare Beneficiary (QMB) program pays Medicare
Part B premiums and Medicare cost-sharing charges for persons
under 100% of poverty. The Specified Low-Income Medicare
Beneficiary (SLMB) program pays Part B premium charges for those
between 100% and 120% of poverty, while the Qualified Individual
(QI) program pays such premiums for those between 120% and
135% of poverty.
! Other Public Sources. Individuals may have additional coverage
through the Department of Veterans Affairs, or TRICARE for
military retirees eligible for Medicare (and enrolled in Part B).
In the years prior to implementation of the drug benefit, close to 90% of
beneficiaries had some form of additional coverage. (Some persons may have had
more than one type of such coverage.) More recent information is not available.
Medicare Directions
The Medicare program is likely to be the subject of continuing review for a
number of years. Both Congress and the Medicare trustees continue to register
concern about the rapid rise in Medicare spending and the ability of existing funding
mechanisms to support the program over the long-term. Only the Part A fund faces
an actual insolvency date. However, few observers believe that the program’s total

---

CRS-32
growth rate is sustainable over time. The 2006 trustees report noted that total
program expenditures, which represented 2.5% of GDP in 2005, were expected to
climb to 7.3% by 2035 and rise to 11.0% by 2080. It further noted that the level of
program expenditures is expected to exceed that for Social Security in 2027 and to
represent almost twice the cost of that program by 2080.
A combination of factors have contributed to the rapid increase in Medicare
costs. These include increases in overall medical costs, advances in health care
delivery and medical technology, increases in the percentage of the population over
65, and longer life spans. The trend is expected to accelerate in 2011 when the baby
boom generation (persons born between 1946 and 1964) begin to turn 65 and become
eligible for Medicare. The issues confronting the program are not new, nor are the
possible responses likely to get any easier. Solutions involve raising taxes, cutting
benefits, raising beneficiaries’ out-of-pocket costs, or some combination of these
approaches. Members of Congress, Medicare trustees, and many other observers
continue to warn that the problems need to be addressed. At the same time, some
Members and beneficiary advocates express concern about the potential impact of
any solution on beneficiaries’ out-of-pocket costs or access to needed services.
It seems likely that in the short-term, Congress will focus its attention on
specific Medicare issues, for example physician payment updates. It may also
consider Medicare spending reductions as part of legislation (such as budget
reconciliation) designed to reduce overall federal spending below specified levels
over a specific time period.
At the same time, the Administration, Congress and others may also examine
a broad range of policy options designed to achieve more long term reforms. For a
number of years, various options have been suggested; however, there is no
consensus on the approach that should be taken. One option is placing increasing
reliance on the private sector to deliver and manage benefits. This is the approach
first used for managed care options under Part C. More recently, the new Part D drug
benefit gave increased flexibility to private entities. Within federally-established
parameters, individual entities design their benefit packages and determine payment
amounts. The intention is to encourage competition by allowing beneficiaries to
select coverage that best meets their needs. Proponents claim that this will result in
lower overall costs as well as enable the federal government to distance itself from
the business of establishing detailed payment rules for each service category.
Some Members and other observers oppose the efforts to change the basic
structure of Medicare. They contend that a single nationwide benefit structure,
administered by the federal government, has served beneficiaries well and should be
retained. They contend that any necessary savings for Part A and B services can be
achieved within the context of the existing program and suggest that increased MA
payments have actually increased overall program costs. Additionally, some persons
also suggest that savings could be achieved under Part D if the federal government
were allowed to enter into price negotiations with drug manufacturers.
The 2007 trustees report is likely to focus additional attention on Medicare’s
future. It is expected that the report will, for the second straight year, contain an
excess general revenue funding determination. (See Financing section, above.) As a

---

CRS-33
result, the President will be required to submit a legislative proposal responding to
the warning. The proposal is due within 15 days of submission of the 2009
President’s Budget which will occur at the beginning of 2008. However, submission
of a proposal will not be required if, prior to that date, Congress enacts legislation
which eliminates such excess general revenue funding. As of this writing, it is
difficult to predict what actions Congress might take in 2007.
It should be noted that legislation designed to bring general revenue spending
below the 45% trigger level will primarily affect spending under Parts B and D, since
three-quarters of spending under those programs comes from general revenues.
Legislation directed at general revenue financing will not, however, address the
pending insolvency of Part A which is funded primarily by payroll taxes. It is
therefore expected that Congress will need to examine a variety of options in the
coming years.

---

CRS-34
Key Medicare Statistics
Tables 1-3 show CBO estimates from the March 2006 Medicare Fact Sheet
which contains information on the various components of program spending.6 CBO
March baseline numbers are the numbers Congress uses when it considers legislation.
Slightly different estimates are provided by the Medicare trustees.
Table 1. Medicare Outlays, Selected Years
($ in billions)
FY2006
FY2007
FY2011
FY2016
Total Outlays
$381.6
$449.8
$609.8
$916.9
Offsetting Receipts (premiums and
50.1
61.3
85.3
138.3
amounts paid by states)
Net Outlays
331.5
388.4
524.5
778.6
Totals may not add due to rounding.
Source: Congressional Budget Office (CBO), Fact Sheet for CBO’s March 2006 Baseline: Medicare.
Table 2. Distribution of Total Outlays
($ in billions)
FY2006
FY2007
Amount
Percent
Amount
Percent
Benefits
$374.7
98.2
$443.0
98.5
Part A
188.2
49.3
210.5
46.8
Part
B
157.5
41.3
174.7
38.8
Part
D
29.1
7.6
57.8
12.9
Administration
6.9
1.8
6.8
1.5
Total
381.6
100
449.8
100
Totals may not add due to rounding.
Note: Spending for Part C is made in appropriate parts from the Part A and B trust funds and is
recorded under benefits totals for Part A or Part B.
Source: Congressional Budget Office (CBO), Fact Sheet for CBO’s March 2006 Baseline: Medicare.
6 Note that in August 2006, CBO issued an update of its Budget and Economic Outlook.
Slight re-estimates were provided for the mandatory spending portion of Medicare for
FY2007; no additional detail was provided. The March mandatory outlay number was $445
billion compared to $446 billion in August; the offsetting receipts figure was $61 billion in
March compared to $64 billion in August, and the net mandatory outlay number was $383
billion in March compared to $382 billion in August. This report uses the March 2006 Fact
Sheet since it includes discretionary spending and provides details on the various
components of Medicare spending

---

CRS-35
Table 3. Medicare Benefit Payments, by Category
($ in billions)
FY2006
FY2007
Total
$374.7
$443.0
Part A, only
Hospital Inpatient Care
126.8
136.6
Skilled Nursing Facilities
17.8
19.4
Hospice
9.3
10.6
Part B, only
Physician Fee Schedule
60.3
62.8
Other Professional and Outpatient Ancillary Services
28.4
31.3
Other Facility Services
17.9
19.3
Hospital Outpatient
19
21.2
Parts A and B
Group Plans
53
67.4
Home Health Agencies
13.1
14.7
One Time Technical Adjustment
0
1.9
Part D
Payment to Prescription Drug Plans
16.7
38.3
Payments to Union/Employer-sponsored Plans
2.4
4.9
Low-Income Subsidy Payments
9.9
14.6
Totals may not add due to rounding.
Source: Congressional Budget Office (CBO), Fact Sheet for CBO’s March 2006 Baseline: Medicare.
Table 4. Projected Growth in Medicare Population
($ in millions)
FY2006 (est)
FY2011 (est.)
FY2016 (est.)
Total (Part A
42.1
46.2
53.1
enrollment)
Source: Congressional Budget Office (CBO), Fact Sheet for CBO’s March 2006 Baseline: Medicare.

---

CRS-36
Table 5. Characteristics of Medicare Population, 2002
(by percent)
Race
100
Age
100
White (not Hispanic or Latino)
79.2
Aged
85.9
Black (not Hispanic or Latino)
9.4
65-74
44.8
Hispanic or Latino
7.4
75-84
30.3
Other
4.0
85 and over
10.8
Sex
100
Disabled
14.1
Male
43.9
Under 45
3.8
Female
56.1
45-64
10.3
Totals may not add due to rounding.
Source: Department of Health and Human Services, Centers for Disease Control and Prevention,
National Center for Health Statistics, Health, United States 2006, November 2006, p. 407,
[http://www.cdc.gov/nchs/data/hus/hus06.pdf].
Table 6. Percentage of Persons Age 65 and Over
Characterized as Poor or Near Poor, 2004
Poor *
Near Poor *
All Races and Origins
9.8
28.1
Hispanic or Latino
18.7
34
Black or African American, only
23.9
34.7
Asian only
13.6
25.5
White only, not Hispanic or Latino
7.5
27.1
*Poor is defined as family income less than 100% of the poverty level and near poor is defined as
family income between 100% and 199% of the poverty level. Assets are not considered.
Note: Includes some aged persons not enrolled in Medicare; does not include the disabled.
Source: Department of Health and Human Services, Centers for Disease Control and Prevention,
National Center for Health Statistics, Health, United States 2006, November 2006, p. 94.
[http://www.cdc.gov/nchs/data/hus/hus06.pdf].

---

CRS-37
Appendix: Other CRS Products
Recent Legislation
! CRS Report RL33131: Budget Reconciliation FY2006: Medicaid,
Medicare, and State Children’s Health Insurance Program (SCHIP)
Provisions, by Evelyne P. Baumrucker, Hinda Chaikind, April
Grady, Jim Hahn, Jean Hearne, Elicia J. Herz, Bob Lyke, Paulette C.
Morgan, Jennifer O’Sullivan, Richard Rimkunas, Julie Stone, Sibyl
Tilson, and Karen Tritz;
! CRS Report RL31966: Overview of the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (MMA), by
Jennifer O’Sullivan, Hinda Chaikind, Sibyl Tilson, Jennifer
Boulanger, and Paulette C. Morgan;
! CRS Report RL32005: Medicare Fee-for-Service Modifications and
Medicaid Provisions of H.R. 1 as Enacted, (MMA provisions) by
Sibyl Tilson, Jennifer Boulanger, Jean Hearne, Steve Redhead,
Evelyne Baumrucker, Julie Stone, Bernadette Fernandez, and Karen
Tritz.
In General
! CRS Report RL30526: Medicare Payment Policies, by Sibyl Tilson,
Hinda Chaikind, Jennifer O’Sullivan, Carol O’Shaughnessy,
Paulette C. Morgan, and Julie Stone;
! CRS Report RL33306: Medicare: FY2007 Budget Issues, by Hinda
Chaikind, Paulette C. Morgan, Carol O’Shaughnessy, Jennifer
O’Sullivan, Julie Stone, and Sibyl Tilson;
! CRS Report RL33713: Pay for Performance in Health Care, by Jim
Hahn;
! CRS Report RL33587: Medicare Secondary Payer — Coordination
of Benefits, by Hinda Chaikind;
! CRS Report RL31223: Medicare: Supplementary “Medigap”
Coverage, by Jennifer O’Sullivan.
Financing
! CRS Report RS20173: Medicare: Financing the Part A Hospital
Insurance Program, by Jennifer O’Sullivan;
! CRS Report RS20946: Medicare: History of Part A Trust Fund
Insolvency Projections, by Jennifer O’Sullivan;
! CRS Report RL32582: Medicare: Part B Premiums, by Jennifer
O’Sullivan;
! CRS Report RS21731: Medicare: Part B Premium Penalty, by
Jennifer O’Sullivan.

---

CRS-38
Part A Issues
! CRS Report RS22399: Recent Developments in Medicare Affecting
Long-Term Care Hospitals, by Sibyl Tilson;
! CRS Report RL32640: Medicare Payment Issues Affecting Inpatient
Rehabilitation Facilities (IRFs), by Sibyl Tilson;
! CRS Report RS21465: Medicare’s Skilled Nursing Facility
Payment, by Julie Stone;
! CRS Report RS22195: Social Security Disability Insurance (SSDI)
and Medicare: The 24-Month Waiting Period for SSDI Beneficiaries
Under Age 65, by Julie M. Whittaker.
Part B Issues
! CRS Report RL31199: Medicare: Payments to Physicians, by
Jennifer O’Sullivan;
! CRS Report RL31419: Medicare: Payments for Covered Part B
Prescription Drugs, by Jennifer O’Sullivan.
Medicare Advantage
! CRS Report RL32618: Medicare Advantage Payments, by Hinda
Chaikind and Paulette C. Morgan.
Part D Prescription Drug Program
! CRS Report RL33136: Medicare: Enrollment in Medicare Drug
Plans, by Jennifer O’Sullivan;
! CRS Report RL32902: Medicare Prescription Drug Benefit:
Low-Income Provisions, by Jennifer O’Sullivan
! CRS Report RL33041: Medicare Drug Benefit: Retiree Provisions,
by Jennifer O’Sullivan;
! CRS Report RL33300: Standardized Choices: Medigap Lessons for
Medicare Part D, by Jim Hahn;
! CRS Report RS22059: The Pros and Cons of Allowing the Federal
Government to Negotiate Prescription Drug Prices, by Jim Hahn
! CRS Report RL31525: Beneficiary Cost-Sharing Under the
Medicare Prescription Drug Benefit, by Jim Hahn.

---

CRS-39
CRS Medicare Contacts
Staff Contact
Issue Area
Phone
Hinda Chaikind
Medicare Advantage
7-7569
ESRD
Medicare Secondary Payer
Jim Hahn
Medicare Prescription Drugs- Part D
7-4914
Pay for Performance, Price Transparency
Gretchen A.
Drug Pricing
7-1686
Jacobson
Medical Devices
Paulette C.
Medicare Advantage
7-7317
Morgan
Durable Medical Equipment
Jennifer
Medicare Prescription Drugs- Part D
7-7359
O’Sullivan
Medicare Financing (including Part B premium)
Beneficiary Issues
Physicians and Other Part B Providers
Part B Drugs
Holly Stockdale
CMS Administration
7-9553
Fraud and Abuse
Quality Improvement Organizations
Julie Stone
Skilled Nursing Facilities
7-1386
Home Health Services
Hospice Care
Sibyl Tilson
Inpatient Hospital Services
7-7368
Outpatient Hospital Services
Ambulatory Surgical Center Services
Inpatient Rehabilitation Facilities
Rural Issues
crsphpgw

---