Order Code RL33712
Medicare: A Primer
Updated August 1, 2008
Jennifer O’Sullivan
Specialist in Health Care Financing
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 FY2008, the program will cover an estimated 44.6
million persons (37.4 million aged and 7.3 million disabled) at a total cost of $459.4
billion. Federal costs (after deduction of beneficiary premiums and other offsetting
receipts) will total $389.9 billion. In FY2008, federal Medicare spending will
represent approximately 13% of the total federal budget and 3% of 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Medicare Parts A and B: “Original Medicare” . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Part A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Benefits and Beneficiary Cost-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Part A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Services for End-Stage Renal Disease Beneficiaries . . . . . . . . . . . . . . 15
Program Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Inpatient Hospital Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Skilled Nursing Facility (SNF) Care . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Home Health Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Hospice Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Physician Services and Other Services Paid Under the Physician
Fee Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Clinical Diagnostic Laboratory Services . . . . . . . . . . . . . . . . . . . . . . . 19
Durable Medical Equipment, Prosthetics and Orthotics (DMEPOS) . 19
Hospital Outpatient Department (HOPD) Services . . . . . . . . . . . . . . . 20
Ambulatory Surgical Center (ASC) Services . . . . . . . . . . . . . . . . . . . 20
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
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Interaction With Retiree Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Medicare Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Medicare Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Part A Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Part B Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Part C Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Part D Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Medicare Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
45% Trigger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Additional Insurance Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Medicare Directions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Key Medicare Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Appendix: Other CRS Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
CRS Medicare Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
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, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36


Medicare: A Primer
Introduction
Medicare is the nation’s health insurance program for persons aged 65 and over
and certain disabled persons. In FY2008, the program will cover an estimated 44.6
million persons (37.4 million aged and 7.3 million disabled)1 at a total cost of $459.4
billion. Federal costs (after deduction of beneficiary premiums and other offsetting
receipts) will total $389.9 billion.2 In FY2008, federal Medicare spending will
represent approximately 13% of the total federal budget and 3% of GDP.3 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 2006 (the first year of the new drug benefit),
Medicare spending accounted for an estimated 57% of federal health spending and
19% of all national health expenditures. Program spending represented 29% of
national spending on hospital services, 21% of such spending for physicians and
clinical services, and 18% of total drug spending (compared to 2% in 2005). In 2017,
program spending is expected to account for 58% of federal spending and 21% of all
national health expenditures. Spending in that year is expected to account for 31%
of national spending on hospital services, 20% of such spending for physicians and
clinical services, and 24% of total drug spending.4
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
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
1 Department of Health and Human Services, Budget in Brief, 2009 [http://www.hhs.gov/
budget/09budget/2009BudgetInBrief.pdf].
2 Congressional Budget Office (CBO), Medicare March 2008 Fact Sheet.
3 CBO, An Analysis of the President’s Budgetary Proposals for Fiscal Year 2009
[http://www.cbo.gov/ftpdocs/89xx/doc8990/03-19-AnalPresBudget.pdf] and Medicare
March 2008 Fact Sheet.
4 [http://www.cms.hhs.gov/NationalHealthExpendData/Downloads/proj2007.pdf]

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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.

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Medicare: A Capsule Summary
KEY FACTS
! Nationwide health insurance program for aged (65 and
over) and disabled
! 44.6 million people enrolled in FY2008
! Total outlays in FY2008: $459.4 billion
! Net outlays (not including beneficiary premiums) in
FY2008: $389.9 billion
PROGRAM STRUCTURE
! “Original Medicare”
- Parts A and B
! Medicare Advantage - alternative to “Original
Medicare”
- Part C
! Prescription Drug Benefits
- Part D
“ORIGINAL MEDICARE”
! 80% 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
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

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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
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 ($1,024 in 2008)
- Days 61-90 - Daily charge ($256 in 2008)
- Days 91-150 - Daily charge for lifetime reserve days
($512 in 2008)
- Over 150 days - No coverage
- Post Hospital SNF Care
- Days 1 - 20: No cost-sharing
- Days 21- 100: Daily coinsurance charge ($128 in
2008)
- Over 100 days - No coverage
! Home Health - No cost-sharing
! Hospice care - Nominal cost-sharing
Part B
! Annual Deductible - ($135 in 2008); 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

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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
PART C: MEDICARE ADVANTAGE (MA)
! 20% 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

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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 ($96.40 in 2008) paid by
current beneficiaries
- 75% from general revenues
- High income enrollees (in 2008, single beneficiaries with
incomes over $82,000 and couples with incomes over
$164,000) 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
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 2019)
! Parts B and D do not become insolvent because of the
way they are financed

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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
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
! 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
- Legislative proposal must contain recommendations to reduce
percentage of total Medicare outlays funded by general revenues
- Congress required to consider proposal on expedited basis.
- Proposals to reduce the general revenue percentage can include
increases in dedicated funding sources (primarily payroll taxes
and premiums) and/or reductions in outlays for any part of the
program.
! 2006 report contained finding
! 2007 report contained finding
! President submitted legislative proposal in February
2008
! Proposal would increase Part D premiums for higher
income persons; incorporate value-based purchasing;
and modify the medical liability system.
! In July 2008, the House approved a resolution
specifying that the expedited parliamentary
procedures required by MMA would not apply in the
House for the remainder of the 110th Congress
! 2008 report also contained finding; submission of a
legislative proposal will be required in February 2009

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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
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.


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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
(TRHCA, P.L. 109-432). In the 110th Congress, additional changes were incorporated
in the Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA, P.L.
110-173) and the Medicare Improvements for Patients and Providers Act of 2008
(MIPPA, P.L.110-275).
Medicare Parts A and B: “Original Medicare”
Approximately 80% of Medicare beneficiaries receive 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.

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(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 2008 monthly premium is $423 ($233 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
2008 monthly premium is $96.40. 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.
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 ($1,024 in 2008);
! Days 61-90. Beneficiary pays a daily coinsurance charge ($256 in
2008);
! 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 ($512 in 2008).
! Days 151 and over. No coverage.
Inpatient mental health care in a psychiatric facility is limited to 190 days during a
patient’s lifetime.

CRS-11
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 ($128 in 2008).
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 60 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
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 ($135 in 2008). 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%

CRS-12
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 $1,810 per beneficiary annual cap (in 2008)
for all outpatient physical therapy services and speech language pathology services.
The second is a $1,810 per beneficiary annual cap (in 2008) 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, 2007, 2008, and 2009, 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. Effective January 1, 2009, the exam
must be conducted during the first year rather than the first six
months of enrollment and the deductible is waived.

CRS-13
! 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.
! 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

CRS-14
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.
! Additional Preventive Services. Effective on or after January 1,
2009, these are services identified by the Secretary, subject to
specified conditions.
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
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 ($1,024 in 2008). 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.)


CRS-15
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.
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, 2007. In that year,
CMS began a two-year transition to a payment system that uses severity-adjusted
DRGs. The new system has 335 base DRGs, most of which are split into two or

CRS-16
three Medicare severity (MS) DRGs generally based on the presence of a comorbidity
or complication. There are 743 MS-DRGs used for payment purposes.
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, 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. The teaching adjustment to
capital payments is discontinued over the next two years.
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.
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

CRS-17
compliance threshold to qualify for higher payments as an IRF
(historically set at 75%) is set at 60% starting July 1, 2006. In order
to be paid as an IRF, 60% of an entity’s Medicare patients must have
one of the qualifying medical conditions as either a primary or a
secondary condition. Medicare payments to an IRF are made under
a single PPS which covers both operating and capital costs.
Payments will vary according to the case mix group (CMG) to which
patients are assigned, based on their impairment level, functional
status, comorbidity conditions, and age. Five CMGs are reserved for
short-stay patients or those who die in the facility. Facility level
adjustments such as the area wage index, rural location, share of low
income patients, and teaching status would apply as well.
Medicare’s IRF-PPS also will provide additional payments for high
cost outliers.
! 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
an MS-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 the covered MS-LTC-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, outpatient, and independent laboratory 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.
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

CRS-18
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
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 has acted several times to avert reductions, thereby overriding
the statutory formula for the 2003-2009 period. The conversion factor for 2008 is
0.5% above that for 2007; the conversion factor for 2009 will be 1.1% above that for
2008. Unless Congress takes additional action, application of the SGR formula is

CRS-19
expected to result in a sizeable reduction in the conversion factor in 2010 and
continue to lead to annual reductions for the foreseeable future.
Additionally, physicians who report on selected quality measures for services
for which quality measures are established will receive bonus payment for those
services provided from July 2007-December 2010. The bonus payments are 1.5%
during the second half of 2007 and 2008 and 2.0% for 2009 and 2010. Additional
bonus payments will be made for 2009-2013 for Medicare professionals providing
covered services who are successful electronic prescribers.
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. For the 2009-2013, the inflation update that would otherwise
apply will be reduced by 0.5 percentage points each year
Durable Medical Equipment, Prosthetics and Orthotics (DMEPOS).
Except in competitive bidding areas described below, durable medical equipment
(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.
Prosthetics and orthotics are also paid on the basis of a fee schedule in areas that
are not competitive bidding areas. Fee schedule rates for prosthetics and orthotics,
however, 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.
The fee schedules are generally updated annually by the CPI-U (Consumer Price
Index), but Congress has often specified the reduction or elimination of updates in
certain years.
MMA required the Secretary to establish a competitive bidding program for
DMEPOS to replace the fee schedule payments. The program is required to be
phased in, starting in 10 of the largest metropolitan statistical areas, expanding to 80
of the largest metropolitan areas, and remaining areas. The Secretary may first phase
in items and services with the highest cost and highest volume, or those items and
services that the Secretary determines to have the largest savings potential first. The
Secretary may exclude certain areas from participation in the program. The program
started on July 1, 2008; however, MIPPA terminated the first round of contracts,
required the Secretary to rebid the first round in 2009, and delayed subsequent rounds
of the program until 2011, in addition to other changes.

CRS-20
The DRA reduced 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;
ownership of the equipment is then transferred to the beneficiary. For oxygen
equipment, the rental period was limited in DRA to a maximum of 36 months.
However, MIPPA eliminated the transfer-of-ownership requirement for oxygen
equipment. After the 36-month rental period, the supplier retains ownership of the
oxygen equipment but allows the beneficiary to continue using it. Medicare will
continue to pay for oxygen refills and will pay for maintenance and servicing not
covered by the manufacturer’s warranty after the 36-month rental period.
Hospital Outpatient Department (HOPD) Services. Under the
HOPD-PPS, the unit of payment is the individual service or procedure as assigned
to an ambulatory payment classification (APC). 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 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. The HOPD-PPS also includes
pass-through payments for new technologies (specific drugs, biologicals, and
devices) and payments for outliers. Starting in 2006, rural SCHs receive an
additional 7.1% in Medicare payments. Special provisions apply for cancer hospitals,
children’s hospitals, small rural hospitals (that are not SCHs) with 100 or fewer beds,
and SCHs with not more than 100 beds.
Ambulatory Surgical Center (ASC) Services. Beginning in January 2008,
Medicare pays for surgery-related facility services provided in ASCs using a payment
system based on the hospital OPPS (HOPD-PPS). The associated physician fees are
paid using the physician fee schedule. Each of the 3,300 procedures approved for
payment in an ASC is classified into an ambulatory payment classification (APC)
group on the basis of clinical and cost similarity. Integral items and services are
packaged with the primary service into an APC. Separate payments are made for
corneal tissue acquisition, brachytherapy sources, certain radiology services, many
drugs, and certain implantable devices. The ASC system uses the same payment
groups (APCs) as the OPPS. The relative weights for most procedures in the ASC
payment system is the same as the relative weights in the OPPS. The ASC system
uses a conversion factor based on a percentage of the OPPS conversion factor. The
percentage of this average dollar figure is set to ensure budget neutrality. By statute,
total payments under the new ASC payment system should equal total payments
under the old ASC payment system. A different payment method is used to set ASC
payment for new, office based procedures, separately payable drugs, and device-
intensive procedures. New, office-based procedures are services that are performed
in physician offices at least 50% of the time. Payment is set at the lower of the ASC
rate or the practice expense portion of the physician fee schedule payment rate. This
policy also applies to separably payable radiology services. Separately payable drugs
in an ASC are paid the same amount as if provided in a hospital outpatient

CRS-21
department. Different rules apply for device intensive procedures (where a device
that is packaged into an APC accounts for more than half of its total payments). In
general, CMS seeks to minimize the financial incentives to shift services from one
setting (a physician office or hospital outpatient department) into an ASC.

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 fee
schedule. The fee schedule establishes seven categories of ground ambulance
services and two categories of air ambulance services. 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.
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.
Payments for ground ambulance services originating in rural areas are increased
by 3%, and payments for such services originating in other areas are increased by 2%
for the period July 1, 2008-December 31, 2009.
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. Patients electing home
dialysis may choose to be paid under either Method I or under Method II, as a series
of separately billable services.
Under Method I, 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. Beginning January 1, 2009, the payment rate for
dialysis services will be “site neutral,” and in applying the geographic index to
providers of services, the labor share will be based on the labor share otherwise
applied for renal dialysis facilities. Adjustments will no longer be made to the
composite rate for hospital-based dialysis facilities to reflect higher overhead costs.
Beginning January 1, 2011, Medicare dialysis payments will be bundled
(phased-in over four years) using a single payment for Medicare renal dialysis
services that includes (1) items and services included in the composite rate as of
December 31, 2010; (2) erythropoiesis stimulating agents (ESAs) for the treatment
of ESRD; (3) other drugs and biologicals for which payment was made separately
(before bundling); and (4) diagnostic laboratory tests and other items and services
furnished to individuals for the treatment of ESRD.

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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 20% of Medicare beneficiaries receive covered services through
Part C, rather than through “Original Medicare.” For a number of years, Medicare
beneficiaries who are eligible for Medicare Part A and enrolled in Part B have had
the option of obtaining covered services through private health plans. Under an
agreement with CMS, a plan agrees to provide all services covered under Medicare
Parts A and B (except for hospice care) in return for a capitated monthly payment.
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. In contrast, under the fee-for-service payment methodology used under
“Original Medicare,” a payment is made to a medical provider for each service (e.g.,
physician visit) or each unit of service (e.g., a hospital stay) provided.
Background
Medicare’s first 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 formula, 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 provisions 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

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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.
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 (which includes health maintenance organizations and
preferred provider organizations), private fee-for-service plans, Medical Savings
Account plans, and certain other plan types operating under exceptions or
demonstration authority. The following are the most common plan types available:
! 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 (RPPOs). Beginning in 2006, regional PPOs are
available. Regional PPOs serve one or more of the 26 regions
established by the Secretary. Each region consists of either 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 (SNPs). A SNP may be any plan type (such as
an HMO or PPO). However, unlike other plans, a SNP may, in
accordance with regulations, restrict enrollment to special needs
beneficiaries. Special needs beneficiaries are defined as MA eligible
individuals who reside in long-term care facilities, who are eligible
for both Medicare and Medicaid, or who meet requirements
specified by the Secretary that identify people who would benefit
from enrollment in a SNP for specified chronic or disabling
conditions. SNPs may restrict enrollment for periods before January
1, 2011.Starting January 1, 2010, all new enrollees to a SNP must

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meet the definition of a special needs individual for the respective
plan.
! Private Fee-for-Service (PFFS) Plans. A PFFS plan is one that (1)
reimburses providers on a fee-for-service basis, (2) does not vary
rates for a provider based on utilization, and (3) does not restrict the
selection of providers who are lawfully authorized to provide
services and agree to accept the terms and conditions of payment
established by the plan. Starting in 2011, MIPPA require PFFS
plans to establish contracted networks of providers in areas where
two or more plans with networks (such as HMOs or local PPOs)
serve Medicare beneficiaries starting in 2011. PFFS plans sponsored
by an employer or union are required to establish contracted provider
networks throughout their entire service area starting in 2011.
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.
Payments to Plans
Payments to MA plans are based on a comparison of each plan’s estimated cost
of providing Medicare covered services (a bid) relative to the maximum amount the
federal government is willing to pay for providing those services in the plan’s service
area (a benchmark). If a plan’s bid is less than the benchmark, its payment will
equal to its bid plus a rebate equal to 75% of the difference (between the benchmark
and the bid). The rebate must be returned to the enrollees in the form of either
additional benefits; reduced cost sharing; a reduction in the monthly Part B premium,
prescription drug premium, or supplemental premium (for services beyond required
Medicare benefits); or some combination of these options. The remaining 25% of the
difference between the bid and the benchmark is 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.
Each year, plans wishing to participate in the MA program must submit new
bids. The Secretary has the authority to negotiate the bid amounts, except for PFFS

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plans. Benchmark amounts are increased each year by the greater of either 2% or
growth in overall Medicare. In years specified by the Secretary, a benchmark for an
area can be set at per capita spending in original Medicare if that amount is greater
than the benchmark the area would otherwise receive.
Beginning in 2006, the MA program began to offer MA regional plans. Like
local plans, regional plans must submit bids to the Secretary that, in relation to the
benchmark, determine the payment the plan receives for each enrollee. The regional
program is different from the local program in that the plan bids help determine the
benchmarks for each region. The regional benchmarks include two components: (1)
a statutorily determined amount (comparable to benchmarks described above), 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 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 shared risk with an MA regional plan
if its costs fell above or below a statutorily-specified risk corridor. Starting in 2014,
a stabilization fund is available to provide incentives for regional plans to enter into
or to remain in the MA program. Due to changes in MIPPA, the stabilization fund
is financed entirely with a portion of the savings from the regional plan bidding
process.
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

CRS-26
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. 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.
Special rules apply for persons who qualify for the low-income subsidy. These
persons are not subject to the delayed enrollment penalty otherwise applicable to
persons who miss the enrollment deadline.
Benefits
Qualified Part D plans are required to offer either “standard coverage” or
alternative coverage, with actuarially equivalent benefits. In 2008, “standard
coverage” has a $275 deductible, 25% coinsurance for costs between $276 and
$2,510. From this point, there is no coverage until the beneficiary has out-of-pocket
costs of $4,050 ($5,726.25 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.
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.

CRS-27
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 2008, subsidy payments equal 28% of the retiree’s gross drug costs
between $275 and $5,600. The federal government is not taking the subsidy in
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, are conducted by private Medicare contractors. Fiscal intermediaries (FIs)
perform claims administration functions for Part A services and Part B services
performed by Part A providers (such as hospitals and skilled nursing facilities).
Carriers perform claims administration functions for other Part B services.
Day-to-day program operations for MA plans, MA-PD plans, and PDPs are handled
by the plans themselves.
Under contracting reform, mandated by the MMA, the Secretary is authorized
to replace FIs and carriers with 19 competitively-selected, Medicare Administrative
Contractors (MACs) by 2011. Fifteen A/B MACs will perform claims processing
operations for Part A and B Medicare providers. The four regional carriers
(DMERCs), which previously handled all durable medical equipment claims in the
country, were transitioned to DME MACs. As of December 2007, 1 A/B MAC and
the 4 DME MACs were fully operational.

CRS-28
CMS also contracts with private organizations to conduct other administrative
functions such as detecting and collecting improper payments, investigating alleged
fraud and abuse, and ensuring the quality of care provided to Medicare beneficiaries.
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.
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 2008 monthly Part B premium is $96.40. Individuals receiving Social
Security benefits have their Part B premium payments automatically deducted from
their Social Security benefit checks. 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
(except in the case of higher income individuals subject to income-related
premiums).

CRS-29
Since the inception of Medicare, all Part B enrollees 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.
In response, Congress included a provision in MMA that required higher income
enrollees to pay higher premiums beginning in 2007. In 2008, individuals whose
modified adjusted gross income (AGI) in 2006 exceeded $82,000 and couples whose
modified AGI exceeded $164,000 are subject to higher premium amounts. In 2008,
they pay total premiums ranging from 31.7% to 61.7% 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 5% of enrollees will pay the higher premiums in 2008. For
singles, the higher monthly premium amounts are $122.20 for beneficiaries with
incomes (in 2006) over $82,000 and less than or equal to $102,000, $160.90 for
incomes over $102,000 and less than or equal to $153,000, $199.70 for incomes
greater than $153,000 and less than or equal to $205,000, and $238.40 for incomes
greater than $205,000. For couples filing joint tax returns, the premium amounts are
$122.20 for beneficiaries with incomes over $164,000 and less than or equal to
$204,000, $160.90 for incomes over $204,000 and less than or equal to $306,000,
$199.70 for incomes greater than $306,000 and less than or equal to $410,000, and
$238.40 for incomes greater than $410,000.
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.

CRS-30
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 2008 trustees report projects that under intermediate assumptions, the HI
trust fund will become insolvent in 2019. 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 exceed total income each
year beginning in 2008 (except for 2009). 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
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).
If the trustees determine that general revenue financing will exceed 45% of total
financing within seven years, an finding of “excess general revenue funding” is
made.” The 2006 report projected that the 45% level would first be exceeded in
FY2012; the 2007 report projected that it would first be exceeded in 2013. Both
findings were within the required seven-year test period. Both reports therefore, made
a determination of “excess general revenue funding.”
MMA requires 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). Since
warnings were issued in 2006 and 2007, the proposal was due within 15 days of
submission of the President’s FY2009 budget in early 2008.

CRS-31
The President submitted the required proposal in February 2008. It included
provisions to increase Part D premiums for higher income persons; incorporate
value-based purchasing; and modify the medical liability system. The Congress was
required to consider the proposal on an expedited basis, though passage of legislation
within a specific time frame was not required. On July 24, 2008, the House of
Representatives adopted a resolution which provides that the expedited parliamentary
procedures contained in MMA shall not apply in the House during the remainder of
the 110th Congress.
The 2008 trustees report also contained a funding warning. Therefore the
President will be required to submit a legislative proposal early in 2009.
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.)
! 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 one of the standardized plans, though not all plans are offered
in all states.
! 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

CRS-32
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
growth rate is sustainable over time. The 2008 trustees report noted that total
program expenditures, which represented 3.1% of GDP in 2006, were expected to
climb to 7.0% by 2035 and rise to 10.7% by 2080. It further noted that the level of
program expenditures is expected to exceed that for Social Security in 2028 and be
85% more than the cost of that program by 2082.
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

CRS-33
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.
At one time, it was thought that the MMA provision relating to an excess
general revenue funding determination might have an impact on the Medicare
discussion this year. For the second straight year, the Medicare trustees report had
contained an excess general revenue funding determination under which general
revenues are expected to be greater than 45% of outlays within the next seven years.
(See “Financing” section, above.) As a result, the President was required to submit
a legislative proposal responding to the warning. The President submitted the
proposal in February 2008. MMA had required expedited congressional action.
However, on July 24, 2008, the House of Representatives adopted a resolution which
provides that the expedited parliamentary procedures contained in MMA shall not
apply in the House during the remainder of the 110th Congress.
The 2008 trustees report also contained a funding warning. Therefore, under the
MMA provisions, the President will be required to submit a legislative proposal early
in 2009.
It should be noted that the MMA provision defines general revenues as total
outlays minus dedicated revenues (primarily payroll taxes and premiums). Under this
calculation, increases in dedicated revenues and/or reductions in outlays in any part
of Medicare will lower general revenues and can be used to meet the trigger
requirements. It should be noted that lowering Part A spending lowers both overall
Medicare spending and “excess general revenue spending.” However, if no other
changes were made, spending under Parts B and D (and associated general revenue
financing ) would represent a larger proportion of total spending.

CRS-34
On the other hand, legislation directed at general revenue financing under Parts
B and D will not 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.
Key Medicare Statistics
Tables 1-3 show CBO estimates from the March 2008 Medicare Fact Sheet
which contains information on the various components of program spending. 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)
FY2008
FY2009
FY2013
FY2018
Total Outlays
$459.4
$491.5
$642.0
$894.6
Offsetting Receipts (premiums and
69.4
72.2
90.3
128.0
amounts paid by states)
Net Outlays
389.9
419.3
551.7
766.6
Source: Congressional Budget Office (CBO), Fact Sheet for CBO’s March 2008 Baseline: Medicare.
Note: Totals may not add due to rounding.
Table 2. Distribution of Total Outlays
($ in billions)
FY2008
FY2009
Amount
Percent
Amount
Percent
Benefits
$452.5
98.5
$484.7
98.6
Part A
225.3
49.0
240.3
48.9
Part
B
181.9
39.6
190.2
38.7
Part
D
45.5
9.9
54.3
11.0
Administration
7.0
1.5
6.9
1.4
Total
459.4
100.0
491.5
100.0
Source: Congressional Budget Office (CBO), Fact Sheet for CBO’s March 2008 Baseline: Medicare.
Notes: 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. Totals may not add due to rounding.

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Table 3. Medicare Benefit Payments, by Category
($ in billions)
FY2008
FY2009
Total
$452.5
$484.7
Part A, only
166.2
171.3
Hospital Inpatient Care
132.2
135.9
Skilled Nursing Facilities
22.9
23.5
Hospice
11.1
11.9
Part B, only
122.1
120.7
Physician Fee Schedule
56.4
52.6
Other Professional and Outpatient Ancillary
28.9
30.0
Other Facility Services
16.6
16.6
Hospital Outpatient
20.2
21.5
Parts A and B
110.5
130.1
Group Plans
94.1
112.8
Home Health Agencies
16.4
17.3
Part D
45.4
54.3
Payment to Prescription Drug Plans
25.1
32.2
Payments to Union/Employer-sponsored
3.2
3.3
Low-Income Subsidy Payments
17.1
18.8
Recoveriesa
8.3
8.2
Source: Congressional Budget Office (CBO), Fact Sheet for CBO’s March 2008 Baseline: Medicare.
Note: Totals may not add due to rounding.
a. Amounts paid to providers and later recovered
Table 4. Projected Growth in Medicare Population
(in millions)
FY2008 (est)
FY2013 (est.)
FY2018 (est.)
Total (Part A
44.0
49.4
57.2
enrollment)
Source: Congressional Budget Office (CBO), Fact Sheet for CBO’s March 2008 Baseline: Medicare.

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Table 5. Characteristics of Medicare Population, 2002
(by percent)
Race
100
Age
100
White (not Hispanic or
78.2
Aged
84.8
Latino)
Black (not Hispanic or
9.6
65-74
43.8
Latino)
Hispanic or Latino
7.5
75-84
29.8
Other
4.7
85 and over
11.2
Sex
100
Disabled
15.2
Male
44.1
Under 45
3.8
Female
55.9
45-64
11.4
Source: Department of Health and Human Services, Centers for Disease Control and
Prevention, National Center for Health Statistics, Health, United States 2007, November
2007, p. 411.
[http://www.cdc.gov/nchs/data/hus/hus07.pdf]
Note: Totals may not add due to rounding.
Table 6. Percentage of Persons Age 65 and Over
Characterized as Poor or Near Poor, 2005
Poora
Near Poora
All Races and Origins
10.1
26.7
Hispanic or Latino
19.9
34.7
Black or African American, only
23.3
34.5
Asian only
12.8
20.1
White only, not Hispanic or
7.9
25.4
Latino
Source: Department of Health and Human Services, Centers for Disease Control and
Prevention, National Center for Health Statistics, Health, United States 2007, November
2007, p. 97. [http://www.cdc.gov/nchs/data/hus/hus07.pdf].
Note: Includes some aged persons not enrolled in Medicare; does not include the disabled.
a. 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.

CRS-37
Appendix: Other CRS Products
Recent Legislation
! CRS Report RL34592, P.L.110-275: The Medicare Improvements
for Patients and Providers Act of 2008, by Hinda Chaikind, Jennifer
O’Sullivan, Sibyl Tilson, Paulette Morgan, Holly Stockdale, Jim
Hahn, Gretchen A. Jacobson, Richard Rimkunas, Evelyne
Baumrucker, April Grady, Jean Hearne, Elicia J. Herz, Julie Stone,
Gene Falk, and Emile Stoltfus
! CRS Report RL34360, P.L. 110-173: Provisions in the Medicare,
Medicaid, and SCHIP Extension Act of 2007, by Hinda Chaikind,
Jim Hahn, Jean Hearne, Elicia J. Herz, Gretchen A. Jacobson,
Paulette C. Morgan, Chris L. Peterson, Holly Stockdale, Jennifer
O’Sullivan, Julie Stone, and Sibyl Tilson
! 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, Julie Stone and Paulette C.
Morgan
! CRS Report RL34359, Medicare: FY2009 Budget Issues, by Hinda
Chaikind, Jim Hahn, Gretchen A. Jacobson, Paulette C. Morgan,
Jennifer O’Sullivan, Holly Stockdale, 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
! CRS Report RL34217, Medicare Program Integrity: Activities to
Protect Medicare from Payment Errors, Fraud, and Abuse, by
Holly Stockdale

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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 Report RS22796, Medicare Trigger, by Hinda Chaikind and
Christopher M. Davis
! CRS Report RL34407, The President’s Proposed Legislative
Response to the Medicare Funding Warning, by Hinda Chaikind,
Jim Hahn, Jennifer O’Sullivan, and Henry Cohen
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 RL33921, 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 Scott Szymendera
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
! CRS Report RS22769, Medicare Clinical Laboratories Competitive
Bidding Demonstration, by Barbara English
Medicare Advantage
! CRS Report RL34151, Private Fee for Service (PFFS) Plans: How
They Differ from Other Medicare Advantage Plans, by Paulette C.
Morgan, Hinda Chaikind, and Holly Stockdale
! CRS Report RL32618, Medicare Advantage Payments, by Hinda
Chaikind and Paulette C. Morgan
Part D Prescription Drug Program
! CRS Report RL34280, Medicare Part D Prescription Drug Benefit:
A Primer, by Jennifer O’Sullivan
! CRS Report RL33782, Federal Drug Price Negotiation:
Implications for Medicare Part D, by Jim Hahn

CRS-39
! CRS Report RL33802, Pharmaceutical Costs: A Comparison of
Department of Veterans Affairs (VA), Medicaid, and Medicare
Policies
, by Gretchen A. Jacobson, Sidath Viranga Panangala, and
Jean Hearne

CRS-40
CRS Medicare Contacts
Staff Contact
Issue Area
Phone
Hinda Chaikind
Medicare Trigger
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
Part B Drugs
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
Holly Stockdale
Medicare Advantage
7-9553
CMS Administration
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