Medicare Primer
Patricia A. Davis, Coordinator
Specialist in Health Care Financing
Scott R. Talaga, Coordinator
Analyst in Health Care Financing
Cliff Binder
Analyst in Health Care Financing
Jim Hahn
Specialist in Health Care Financing
Suzanne M. Kirchhoff
Analyst in Health Care Financing
Paulette C. Morgan
Specialist in Health Care Financing
Sibyl Tilson
Specialist in Health Care Financing
September 10, 2014
The House Ways and Means Committee is making available this version of this Congressional Research Service
(CRS) report, with the cover date shown, for inclusion in its 2014 Green Book website. CRS works exclusively
for the United States Congress, providing policy and legal analysis to Committees and Members of both the
House and Senate, regardless of party affiliation.
Congressional Research Service
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Medicare Primer

Summary
Medicare is a federal program that pays for covered health care services of qualified
beneficiaries. It was established in 1965 under Title XVIII of the Social Security Act to provide
health insurance to individuals 65 and older, and has been expanded over the years to include
permanently disabled individuals under 65. Medicare, which consists of four parts (A-D), covers
hospitalizations, physician services, prescription drugs, skilled nursing facility care, home health
visits, and hospice care, among other services.
Generally, individuals are eligible for Medicare if they or their spouse worked for at least 40
quarters in Medicare-covered employment, are 65 years old, and are a citizen or permanent
resident of the United States. Individuals may also qualify for coverage if they are a younger
person who cannot work because they have a medical condition that is expected to last at least
one year or result in death, have end-stage renal disease (permanent kidney failure requiring
dialysis or transplant), or have amyotrophic lateral sclerosis (ALS, Lou Gehrig’s disease). The
program is administered by the Centers for Medicare & Medicaid Services (CMS), and by private
entities that contract with CMS to provide claims processing, auditing, and quality oversight
services.
In FY2014, the program will cover approximately 54 million persons (45 million aged and 9
million disabled) at a total cost of about $618 billion. Spending under the program (except for a
portion of administrative costs) is considered mandatory spending and is not subject to the
appropriations process. Services provided under Parts A and B (also referred to as “original” or
“traditional” Medicare) are generally paid directly by the government on a “fee-for-service” basis,
using different prospective payment systems or fee schedules. Under Parts C and D, private
insurers are paid a monthly “capitated” amount to provide enrollees with at least a minimum
standard benefit. Medicare is required to pay for all covered services provided to eligible persons,
so long as specific criteria are met.
Since 1965, the Medicare program has undergone considerable change. For example, during the
111th Congress, the Patient Protection and Affordable Care Act (ACA; P.L. 111-148 and P.L. 111-
152) made numerous changes to the Medicare program that modify provider reimbursements,
provide incentives to increase the quality and efficiency of care, and enhance certain Medicare
benefits. However, in the absence of further congressional action, the Medicare program is
expected to be unsustainable in the long run. The Hospital Insurance (Part A) trust fund has been
estimated to become insolvent in 2030. Additionally, although the Supplementary Medical
Insurance (Parts B and D) trust fund is financed in large part through federal general revenues and
cannot become insolvent, associated spending growth is expected to put increasing strains on the
country’s competing spending priorities. As such, Medicare is expected to continue being a high-
priority issue in the 113th Congress, and Congress may consider a variety of Medicare reform
options ranging from further modifications of provider payment mechanisms to redesigning the
entire program.
This report provides a general overview of the Medicare program including descriptions of the
program’s history, eligibility criteria, covered services, provider payment systems, and program
administration and financing. A list of commonly used acronyms, as well as information on
beneficiary cost sharing, may be found in the appendices.

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Introduction
Medicare is a federal program that pays for covered health care services of qualified
beneficiaries. It was established in 1965 under Title XVIII of the Social Security Act to provide
health insurance to individuals 65 and older, and has been expanded over the years to include
permanently disabled individuals under 65. The program is administered by the Centers for
Medicare & Medicaid Services (CMS),1 within the U.S. Department of Health and Human
Services (HHS).
Medicare consists of four distinct parts:
 Part A (Hospital Insurance, or HI) covers inpatient hospital services, skilled
nursing care, hospice care, and some home health services. The HI trust fund is
mainly funded by a dedicated payroll tax of 2.9% of earnings, shared equally
between employers and workers.
 Part B (Supplementary Medical Insurance, or SMI) covers physician services,
outpatient services, and some home health and preventive services. The SMI trust
fund is funded through beneficiary premiums (set at 25% of estimated program
costs for the aged) and general revenues (the remaining amount, approximately
75%).
 Part C (Medicare Advantage, or MA) is a private plan option for beneficiaries
that covers all Parts A and B services, except hospice. Individuals choosing to
enroll in Part C must also enroll in Part B. Part C is funded through the HI and
SMI trust funds.
 Part D covers outpatient prescription drug benefits. Funding is included in the
SMI trust fund and is financed through beneficiary premiums, general revenues,
and state transfer payments.
Medicare serves approximately one in six Americans and virtually all of the population aged 65
and over. In 2014, the program will cover an estimated 54 million persons (45 million aged and 9
million disabled). The Congressional Budget Office (CBO)2 estimates that total Medicare
spending in 2014 will be about $618 billion; of this amount, close to $590 billion will be spent on
benefits.3 Almost a third of Medicare benefit spending is for hospital inpatient and outpatient
services (see Figure 1). CBO also estimates that federal Medicare spending (after deduction of
beneficiary premiums and other offsetting receipts) will be close to $518 billion in 2014,
accounting for about 14% of total federal spending and 3% of GDP. Medicare is required to pay
for all covered 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 and is not subject to the appropriations process.

1 Appendix A provides a list of commonly used acronyms in this report, including acronyms for Public Laws.
2 CBO April 2014 Medicare Baseline, http://www.cbo.gov/sites/default/files/cbofiles/attachments/44205-2014-04-
Medicare.pdf.
3 This estimate of benefit spending includes expected reductions in benefit payments due to sequestration under the
Budget Control Act of 2011, but does not include projected amounts paid to providers and later recovered.
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Medicare is expected to continue to be a high-priority issue in the 113th Congress. The program
has a significant impact on beneficiaries and other stakeholders as well as on the economy in
general through its coverage of important health care benefits for the aged and disabled, the
payment of premiums and other cost-sharing by those beneficiaries, its payments to providers
who supply those health care services, and its interaction with other insurance coverage.
Projections of future Medicare expenditures and funding indicate that the program will place
increasing financial demands on the federal budget and on beneficiaries. In response to these
concerns, Congress may consider a range of Medicare reform options, from making changes
within the current structure, including modifying provider payments and revising existing
oversight and regulatory mechanisms, to restructuring the entire program.
The committees of jurisdiction for the mandatory spending (benefits) portion of Medicare are the
Senate Committee on Finance, the House Committee on Ways and Means, and the House
Committee on Energy and Commerce. The House and Senate Committees on Appropriations
have jurisdiction over the discretionary spending used to administer and oversee the program.
Figure 1. Projected Medicare Benefit Spending, by Category, FY2014
($590 Billion*)
Outpatient
Prescription
Drugs
Hospital
Part A
Inpatient
Services
Part A and/or B
12%
Part B
$70 B
24%
$143 B
Medicare
Part C
Advantage
Part D
(includes other
group health
plans)
26%
$156 B
Skilled
5%
Nursing
$30 B
Facilities
3%
$19 B
Home
Health
12%
12%
$71 B
$73 B
7%
$41 B
Other Services
(includes hospice,
durable medical
Physician
equipment,
Payments
Hospital
ambulance and
laboratory services,
Outpatient
Part B drugs,
Services
outpatient dialysis)

Source: Figure by CRS based on data from the Congressional Budget Office, April 2014 Medicare Baseline.
Notes: * The sum of the spending estimates by benefit category ($603 billion) is greater than $590 billion. The
$590 billion estimate reflects expected reductions in payments due to sequestration under the Budget Control
Act of 2011, but does not include projected amounts paid to providers and later recovered. CBO did not break
out estimates of sequestration reductions or recoveries by type of service.
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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 had coverage only for inpatient hospital
costs. The new program, which became effective July 1, 1966, included Part A coverage for
hospital and post-hospital services and Part B coverage for doctors and other medical services. As
is the case for the Social Security program, Part A is financed by payroll taxes levied on current
workers and their employers; persons must pay into the system for 40 calendar quarters to
become entitled to premium-free benefits. Medicare Part B is voluntary, with a monthly premium
required of beneficiaries who choose to enroll. Payments to health care providers under both Part
A and Part B were originally based on the most common form of payment at the time, namely
“reasonable costs” for hospital and other institutional services or “usual, customary and
reasonable charges”4 for physicians and other medical services.
Medicare is considered a social insurance program and is the second largest such federal program,
after 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 qualify for both Medicare and Medicaid.
In the ensuing years, Medicare has undergone considerable change. P.L. 92-603, enacted in 1972,
expanded program coverage to certain individuals under 65 (the disabled and persons with end-
stage renal disease (ESRD)),5 and introduced managed care into Medicare by allowing private
insurance entities to provide Medicare benefits in exchange for a monthly capitated payment.
This law also began to place limitations on the definitions of reasonable costs and charges in
order to gain some control over program spending which, even initially, exceeded original
projections.
During the 1980s and 1990s, a number of laws were enacted that included provisions designed to
further stem the rapid increase in program spending through modifications to the way payments
to providers were determined, and to postpone the insolvency of the Medicare Part A trust fund.
This was typically achieved through tightening rules governing payments to providers of services
and limiting the annual updates in such payments. The program moved from payments based on
reasonable costs and reasonable charges to payment systems under which a predetermined
payment amount was established for a specified unit of service. At the same time, beneficiaries
were given expanded options to obtain covered services through private managed care
arrangements, typically health maintenance organizations (HMOs). 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).6 This law slowed the rate of growth in payments to providers and established new payment

4 Also known as “customary, prevailing and reasonable charges,” this method based physician payments on charges
commonly used by physicians in a local community. The payment for a service was the lowest of (1) the physician’s
billed charge for the service, (2) the physician’s customary charge for the service, or (3) the prevailing charge for that
service in the community.
5 ESRD is a stage of kidney impairment that appears to be irreversible and permanent, requiring a regular course of
dialysis treatments or a kidney transplantation to maintain life.
6 For additional information on major legislative changes to Medicare from 1997 through 2012, see Chapter 2 of the
(continued...)
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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 of these plans
were paid. BBA 97 further expanded preventive services covered by the program.
Subsequently, Congress became concerned that the BBA 97 cuts in payments to providers were
somewhat larger than originally anticipated. Therefore, legislation was enacted in both 1999
(Balanced Budget Refinement Act of 1999, BBRA, P.L. 106-113) and 2000 (Medicare, Medicaid,
and SCHIP Benefits Improvement and Protection Act of 2000, BIPA, P.L. 106-554) to mitigate
the impact of BBA 97 on providers.
In 2003, Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 (MMA, P.L. 108-173),7 which included a major benefit expansion and placed increasing
emphasis on the private sector to deliver and manage benefits. The MMA included provisions that
(1) created a new voluntary outpatient prescription drug benefit to be administered by private
entities; (2) replaced the Medicare+Choice program with the Medicare Advantage (MA) program
and raised payments to plans in order to increase their availability for beneficiaries; (3)
introduced the concept of income testing into Medicare, with higher-income persons paying
larger Part B premiums beginning in 2007;8 (4) modified some provider payment rules; (5)
expanded covered preventive services; and (6) created a specific process for overall program
review if general revenue spending exceeded a specified threshold.9
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)10 and the Medicare Improvements for Patients and Providers Act
of 2008 (MIPPA, P.L. 110-275).11
In the 111th Congress, comprehensive health reform legislation was enacted that, among other
things, made statutory changes to the Medicare program. The Patient Protection and Affordable
Care Act (ACA; P.L. 111-148), enacted on March 23, 2010, included numerous provisions
affecting Medicare payments, payment rules, covered benefits, and the delivery of care. The
Health Care and Education Affordability Reconciliation Act of 2010 (the Reconciliation Act, or
HCERA; P.L. 111-152), enacted on March 30, 2010, made changes to a number of Medicare-
related provisions in the ACA and added several new provisions.12 Included in the ACA, as

(...continued)
House Committee on Ways and Means 2012 Greenbook at http://greenbook.waysandmeans.house.gov/2012-green-
book/chapter-2-medicare.
7 For more information, see CRS Report RL31966, Overview of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003.
8 See CRS Report R40082, Medicare: Part B Premiums, by Patricia A. Davis.
9 See CRS Report RS22796, Medicare Trigger, by Patricia A. Davis, Todd Garvey, and Christopher M. Davis.
10 For more information, see CRS Report RL34360, P.L. 110-173: Provisions in the Medicare, Medicaid, and SCHIP
Extension Act of 2007.
11 For more information, see CRS Report RL34592, P.L. 110-275: The Medicare Improvements for Patients and
Providers Act of 2008.
12 For more information, see CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care
Act (PPACA): Summary and Timeline, and CRS General Distribution Memorandum, Estimates of Medicare Savings in
the Patient Protection and Affordable Care Act, by Patricia A. Davis, August 31, 2012, available upon request.
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amended, are provisions that (1) constrain Medicare’s annual payment increases for certain
providers; (2) change payment rates in the Medicare Advantage program so that they more
closely resemble those in fee-for-service; (3) reduce payments to hospitals that serve a large
number of low-income patients; (4) create an Independent Payment Advisory Board (IPAB) that
will make recommendations to adjust Medicare payment rates;13 (5) phase out the Part D
prescription drug benefit “doughnut hole”; (6) increase resources and enhance activities to
prevent fraud and abuse; and (7) provide incentives to increase the quality and efficiency of care,
such as creating value-based purchasing programs for certain types of providers, allowing
accountable care organizations (ACOs) that meet certain quality and efficiency standards to share
in the savings,14 creating a voluntary pilot program that bundles payments for physician, hospital,
and post-acute care services, and adjusting payments to hospitals for readmissions related to
certain potentially preventable conditions.
Eligibility and Enrollment
Most persons aged 65 or older are automatically entitled to premium-free Part A because they or
their spouse paid Medicare payroll taxes for at least 40 quarters (10 years) on earnings covered by
either the Social Security or the Railroad Retirement systems. Persons under age 65 who receive
cash disability benefits from Social Security or the Railroad Retirement systems for at least 24
months are also entitled to Part A. (Since there is a five-month waiting period for cash payments,
the Medicare waiting period is effectively 29 months.)15 The 24-month waiting period is waived
for persons with amyotrophic lateral sclerosis (ALS, “Lou Gehrig’s disease”). Individuals of any
age with ESRD who receive dialysis on a regular basis or a kidney transplant are generally
eligible for Medicare. Medicare coverage for individuals with ESRD usually starts the first day of
the fourth month of dialysis treatments. In addition, individuals with one or more specified lung
diseases or types of cancer who lived for six months during a specified period prior to diagnosis
in an area subject to a public health emergency declaration by the Environmental Protection
Agency (EPA) as of June 17, 2009, are also deemed entitled to benefits under Part A and eligible
to enroll in Part B.
Persons over age 65 who are not entitled to premium-free Part A may obtain coverage by paying a
monthly premium ($426 in 2014) or, for persons with at least 30 quarters of covered employment,
a reduced monthly premium ($234 in 2014). 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 a premium, subject to limitations.
Generally, enrollment in Medicare Part B is voluntary. All persons entitled to Part A (and persons
over 65 not entitled to premium-free Part A) may enroll in Part B by paying a monthly
premium.16 For most Part B enrollees, the 2014 monthly premium is $104.90. Higher income
enrollees pay higher premiums. (See the “Part B Financing” section below.) While enrollment in

13 See CRS Report R41511, The Independent Payment Advisory Board, by Jim Hahn and Christopher M. Davis.
14 Groups of providers and suppliers who work together to manage and coordinate care for Medicare fee-for-service
beneficiaries. See CRS Report R41474, Accountable Care Organizations and the Medicare Shared Savings Program,
by Amanda K. Sarata.
15 For more information, see CRS Report RS22195, Social Security Disability Insurance (SSDI) and Medicare: The 24-
Month Waiting Period for SSDI Beneficiaries Under Age 65, by Scott D. Szymendera.
16 See CRS Report R40082, Medicare: Part B Premiums, by Patricia A. Davis.
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Part B is voluntary for most individuals, in most cases, those who voluntarily enroll in Part A
must also enroll in Part B. Additionally, ESRD beneficiaries and Medicare Advantage enrollees
(discussed below) must also enroll in Part B.
Together, Parts A and B of Medicare comprise “original Medicare,” which covers benefits on a
fee-for-service (FFS) basis. Beneficiaries have another option for coverage through private plans,
called the Medicare Advantage (MA or Part C) program. When beneficiaries first become eligible
for Medicare, they may choose either original Medicare or they may enroll in a private MA plan.
Each fall, there is an annual open enrollment period during which time Medicare beneficiaries
may choose a different MA plan, or leave or join the MA program.17 Beneficiaries are to receive
information about their options to help them make informed decisions.18 In 2014, the annual open
enrollment period will be from October 15 to December 7 for plan choices starting the following
January. Starting in 2012, MA plans with a 5-star quality rating are allowed to enroll Medicare
beneficiaries who are either in traditional Medicare or in an MA plan with a lower quality rating
at any time.
Finally, each individual enrolled in either Part A or Part B is also entitled to obtain qualified
prescription drug coverage through enrollment in a Part D prescription drug plan. Similar to Part
B, enrollment in Part D is voluntary and the beneficiary pays a monthly premium. Beginning in
2011, some higher-income enrollees pay higher premiums, similar to enrollees in Part B.
Generally, beneficiaries enrolled in an MA plan providing qualified prescription drug coverage
(MA-PD plan) must obtain their prescription drug coverage through that plan.19
In general, individuals who do not enroll in Part B or Part D during an initial enrollment period
(when they first become eligible for Medicare) must pay a permanent penalty of increased
monthly premiums if they choose to enroll at a later date. Individuals who do not enroll in Part B
during their initial enrollment period may enroll only during the annual open enrollment period,
which occurs from January 1 to March 31 each year. Coverage begins the following July 1.
However, the law waives the Part B late enrollment penalty for current workers who have
primary coverage through their own or a spouse’s employer-sponsored plan. These individuals
have a special enrollment period once their employment ends; as long as they enroll in Part B
during this time, they will not be subject to penalty.20

17 Starting in 2011, MA enrollees are only permitted to drop out of their MA plans and return to original Medicare
during the first 45-day period of each calendar year. Though they are no longer allowed to switch to another MA plan
as they were able to do previously, MA enrollees who use the 45-day period to disenroll from their MA plan may enroll
in a stand-alone Part D prescription drug plan (PDP), or may elect to enroll in other non-Medicare Advantage private
plan options, such as a Medicare Cost plan or a demonstration plan. MA enrollees will still be able to switch plans
during special enrollment periods, such as when an MA enrollee moves outside his or her plan’s service area or if an
enrollee’s MA plan is terminated.
18 In addition to the yearly Medicare & You Handbook, http://www.medicare.gov/publications/pubs/pdf/10050.pdf,
which is mailed to beneficiaries’ homes, beneficiaries can consult http://www.Medicare.gov to find information such as
the items and services covered under Medicare, cost sharing requirements, participating medical providers and private
health plan, and nursing home quality scores.
19 If a Medicare beneficiary enrolls in a Private Fee-for-Service (PFFS) plan that does not provide drug coverage, he or
she may enroll in a stand-alone Prescription Drug Plan (PDP). However, enrollees in other types of MA plans who
want Part D prescription drug coverage must choose a Medicare Advantage Prescription Drug (MA-PD) plan, which is
an MA plan that provides all Medicare required parts A, B, and D benefits. If a Medicare beneficiary enrolls in a local
HMO or regional PPO that does not offer drug coverage, he or she does not have the option to enroll in a stand-alone
PDP plan.
20 For additional information on enrollment periods see Medicare Publications: “Enrolling in Medicare Part A & Part
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Individuals who do not enroll in Part D during their initial enrollment period may enroll during
the annual open enrollment period, which corresponds with the Part C annual enrollment
period—from October 15 to December 7, with coverage effective the following January.
Individuals are not subject to the Part D penalty if they have maintained “creditable” drug
coverage through another source, such as retiree health coverage offered by a former employer or
union. However, once employees retire or have no access to “creditable” Part D coverage, a
penalty will apply unless they sign up for coverage during a special enrollment period. Finally,
for persons who qualify for the low-income subsidy for Part D, the delayed-enrollment penalty
does not apply.
Benefits and Payments
Medicare Parts A, B, and D each cover different services, with Part C providing a private plan
alternative for Medicare services, except hospice. The Parts A-D covered services are described
below, along with a description of Medicare’s payments.
Part A
Part A provides coverage for inpatient hospital services, post-hospital skilled nursing facility
(SNF) services, hospice care, and some home health services, subject to certain conditions and
limitations. Approximately 18% of Part A enrollees use Part A services during a year.
Inpatient Hospital Services
Medicare inpatient hospital services include (1) bed and board; (2) nursing services; (3) use of
hospital facilities; (4) drugs, biologics, supplies, appliances, and equipment; and (5) diagnostic
and therapeutic items and services. (Physicians’ services provided during an inpatient stay are
paid under the physician fee schedule and discussed below in the “Physicians and Non-physician
Practitioner Services” section.) Coverage for inpatient services 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 skilled nursing facility 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 ($1,216 in 2014).
 Days 61-90. Beneficiary pays a daily copayment charge ($304 in 2014).
 Days 91-150. After 90 days, the beneficiary may draw on one or more of 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.)
For lifetime reserve days, the beneficiary pays a daily copayment charge ($608 in
2013); otherwise the beneficiary pays all costs.

(...continued)
B,” http://www.medicare.gov/Pubs/pdf/11036.pdf; and “Understanding Medicare Part C & D Enrollment Periods,”
http://www.medicare.gov/Publications/Pubs/pdf/11219.pdf.
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 Days 151 and over. Beneficiary pays for all costs for these days.
Inpatient mental health care in a psychiatric facility is limited to 190 days during a patient’s
lifetime. Cost sharing is structured similarly to that for stays in a general hospital (above).
Medicare makes payments to most acute care hospitals under the inpatient prospective payment
(IPPS) system, using a prospectively determined amount for each discharge. Medicare’s
payments to hospitals is the product of two components: (1) a discharge payment amount adjusted
by a wage index for the area where the hospital is located or where it has been reclassified, and
(2) the weight associated with the Medicare severity-diagnosis related group (MS-DRG) to which
the patient is assigned. This weight reflects the relative costliness of the average patient in that
MS-DRG, which is revised annually, generally effective October 1st of each year.
Additional payments are made to hospitals for cases with extraordinary costs (outliers), indirect
costs incurred by teaching hospitals for graduate medical education, and disproportionate share
hospital (DSH) payments to those hospitals serving a certain volume of low-income patients.
Additional payments may also be made for qualified new technologies that have been approved
for special add-on payments. In FY2014, certain low volume hospitals will receive an add-on
payment for each Medicare discharge, an amount that ranges from 25% for hospitals with less
than 200 Medicare discharges to no adjustment for hospitals with more than 1,600 Medicare
discharges. Prospective payments are also made for inpatient capital costs.
Medicare also makes payments outside the IPPS system for direct costs associated with graduate
medical education (GME) for hospital residents, subject to certain limits. In addition, Medicare
reimburses hospitals for 65% of the allowable costs associated with beneficiaries’ unpaid
deductible and copayment amounts as well as for the costs for certain other services.
Additional payments or special treatment may apply for hospitals meeting one of the following
designations: (1) sole community hospitals (SCHs), (2) Medicare dependent hospitals, and (3)
rural referral centers. Certain hospitals or distinct hospital units are exempt from IPPS and paid
on an alternative basis,21 including (1) inpatient rehabilitation facilities, (2) long-term care
hospitals, (3) psychiatric facilities including hospitals and distinct part units, (4) children’s
hospitals and cancer hospitals, and (5) critical access hospitals.
Skilled Nursing Facility (SNF) Services
Medicare covers up to 100 days of post-hospital care for persons needing skilled nursing or
rehabilitation services on a daily basis.22 The SNF stay must be preceded by an inpatient hospital
stay of at least three days, and the transfer to the SNF typically must occur within 30 days of the
hospital discharge. There is no beneficiary cost-sharing for the first 20 days of a Medicare-
covered SNF stay. For days 21 to 100 beneficiaries are subject to daily copayment charges ($152
in 2014). The 100-day limit begins again with a new spell of illness.
SNF services are paid under a prospective payment system (PPS), which is based on a per diem
urban or rural base payment rate, adjusted for case mix (average severity of illness) and area

21 Hospitals in the state of Maryland are exempt from the IPPS and are paid under a state-specific payment system.
22 For additional information on Medicare’s skilled nursing facility benefit, see CRS Report R42401, Medicare Skilled
Nursing Facility Primer: Benefit Basics and Issues, by Scott R. Talaga.
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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)
classification system, which uses patient assessments to assign a beneficiary to one of 66 groups
that reflect the beneficiary’s expected use of services. 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”).
Hospice Care
The Medicare hospice benefit covers services designed to provide palliative care and
management of a terminal illness; the benefit includes drugs and medical and support services.
These services are provided to 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. Starting January 1, 2011,
a hospice physician or nurse practitioner must have a face-to-face encounter with the individual to
determine continued eligibility prior to the 180th day recertification, and for each subsequent
recertification. 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.
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 based
on a cap amount and the number of beneficiaries who received hospice services during the cap
year (November 1 to October 31). The cap amount is adjusted annually by changes to the medical
care expenditure category of the Consumer Price Index for all urban consumers (CPI-U).
Parts A and B
Home health services and services for individuals with end-stage renal disease are covered under
both Parts A and B of Medicare.
Home Health Services
Medicare covers visits by participating home health agencies for beneficiaries who (1) are
confined to home, (2) need skilled nursing care on an intermittent basis, or (3) need physical or
occupational therapy or speech language therapy.23 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

23 For additional information on Medicare’s home health benefit, see CRS Report R42998, Medicare Home Health
Benefit Primer: Benefit Basics and Issues, by Scott R. Talaga.
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language pathology services, medical social services, home health aide services, and 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 Medicare 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).
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, for episodes with five or
greater visits 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 153 HHRGs.
For episodes with four or fewer visits, the PPS reimburses the provider for each visit performed.
Further payment adjustments may be made for services provided in rural areas, outlier visits (for
extremely costly patients), a partial episode for beneficiaries that have an intervening event
during their episode, or an agency’s failure to submit quality data to CMS.
End-Stage Renal Disease (ESRD)
Individuals with ESRD are eligible for all services covered under Parts A and B. Kidney
transplantation services, to the extent they are inpatient hospital services, are subject to the
inpatient hospital PPS and are reimbursed by both Parts A and B. However, kidney acquisition
costs are paid on a reasonable cost basis under Part A. Dialysis treatments, when an individual is
admitted to a hospital, are covered under Part A.
Individuals with ESRD are eligible for all Part B Services. Part B also covers their dialysis
services, drugs, biologicals (including erythropoiesis stimulating agents used in treating anemia
as a result of ESRD), diagnostic laboratory tests, and other items and services furnished to
individuals for the treatment of ESRD.
In effect since January 1, 2011, the new ESRD prospective payment system (PPS) makes no
payment distinction as to the site where renal dialysis services are provided. With the
implementation of the ESRD PPS, Medicare dialysis payments provide a single “bundled”
payment for Medicare renal dialysis services that includes (1) items and services included in the
former payment system’s base 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. The new system is case-mix adjusted
based on factors such as patient weight, body mass index, comorbidities, length of time on
dialysis, age, race, ethnicity, and other appropriate factors as determined by the Secretary of
Health and Human Services. Under the ESRD Quality Incentive Program, dialysis facilities that
fail to meet the performance standards of the ESRD-related quality measures receive reduced
payments.
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Part B
Medicare Part B covers physicians’ services, outpatient hospital services, durable medical
equipment, and other medical services. Initially, over 98% of the eligible population voluntarily
enrolled in Part B, but in recent years, the percentage has fallen to about 93%.24 Over 70% of Part
B enrollees use Part B services during a year. The program generally pays 80% of the approved
amount (most commonly, a fee schedule or other predetermined amount) for covered services in
excess of the annual deductible ($147 in 2014). 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. When a physician accepts assignment, the physician can
only bill the beneficiary the 20% coinsurance plus any unmet deductible. When a physician
agrees to accept assignment on all Medicare claims in a given year, the physician is referred to as
a “participating physician.” There are several advantages to being a participating provider,
including higher reimbursement under the Medicare fee schedule, a lower beneficiary copayment,
and automatic forwarding of Medigap claims.
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. Alternatively, physicians may choose not to accept any Medicare payment and
enter into private contracts with their patients.
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;
for these services, applicable providers may bill beneficiaries for amounts above Medicare’s
recognized payment level and may do so without limit.25
Physicians and Non-physician Practitioner Services
Medicare Part B covers medically necessary physician services and medical services provided by
some non-physician practitioners. Covered non-physician practitioner services include, but are
not limited to, those provided by physician assistants, nurse practitioners, certified registered
nurse anesthetists, and clinical social workers. Certain limitations apply for services provided by
chiropractors and podiatrists. Beneficiary cost-sharing is typically 20% of the approved amount,
although most preventive services require no coinsurance from the beneficiary.
A number of Part B services are paid under the physician fee schedule. These include services of
physicians, non-physician practitioners, and therapists. Most services described below are paid
under the physician fee schedule. There are over 7,000 service codes under the fee schedule.

24 For details, see the Annual Reports of the Board of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-
Trends-and-Reports/ReportsTrustFunds/index.html.
25 Certain durable medical equipment suppliers in competitive bidding areas are required to accept assignment.
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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 is based on the Medicare Economic Index (MEI, which
measures changes in the prices of the inputs required to provide physician services) subject to an
adjustment to match spending under the sustainable growth rate (SGR) system, which establishes
a target for total cumulative expenditures since 1996.26 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 each year since 2002. However, Congress has acted several times to avert reductions,
thereby overriding the statutory formula for the 2003-2014 period. In recent years, the update to
the conversion factor was 0% (compared to 2009 payment levels) for January through May 2010
and 2.2% for June 2010 through December 2012.27 The ATRA extended the SGR override for
another year and maintained physician fee schedule payments at the 2012 level through
December 2013.28 The Bipartisan Budget Act of 2013 (P.L. 113-67) further extended the SGR
override until April 1, 2014, and provided a 0.5% increase in the conversion factor beginning
January 1, 2014, from the 2012 level. Most recently, the Protecting Access to Medicare Act of
2014 (PAMA, P.L. 113-93) extended the 0.5% update through the rest of CY2014, and provided a
0% update for January 1, 2015, through March 31, 2015.
In addition to the fee schedule reimbursements, physicians who report on selected quality
measures for services for which quality measures are established will receive bonus payments for
those services provided beginning in July 2007. The bonus payments were 1.5% during the
second half of 2007 and for 2008, 2.0% for 2009 and 2010, 1.0% for 2011, and 0.5% in 2012. The
bonus remains at 0.5% in 2013 and 2014 for those who successfully report the measures.
Subsequently, those providers who fail to successfully report the measures will be subject to a
1.5% penalty in 2015 and a 2% penalty in 2016 and future years. Additional bonus payments will
be made for 2009-2013 for Medicare professionals providing covered services who are successful
electronic prescribers and in 2011-2014 for those who meet the requirements of a Maintenance of
Certification Program (MOCP).29
Therapy Services
Medicare covers medically necessary outpatient physician and occupational therapy, and speech-
language pathology services. The program has limits (therapy caps) on how much it pays for
outpatient therapy services in a calendar year. These limits are updated annually. In 2014, the
annual therapy cap amounts are (1) $1,920 for outpatient physical therapy services and speech
language pathology services; and (2) $1,920 for outpatient occupational therapy services. The

26 For details, see CRS Report R40907, Medicare Physician Payment Updates and the Sustainable Growth Rate (SGR)
System, by Jim Hahn.
27 The Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78) included an override of the statutory SGR
update for January and February 2012, and the Middle Class Tax Relief and Job Creation Act of 2012 (MCTRJCA,
P.L. 112-96) maintained the payment freeze through the end of 2012.
28 See CRS Report R42944, Medicare, Medicaid, and Other Health Provisions in the American Taxpayer Relief Act of
2012, coordinated by Jim Hahn.
29 For details, see CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable Care Act
(PPACA): Summary and Timeline, coordinated by Patricia A. Davis.
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limits apply to services provided in the following settings: physical therapists in private practice,
physician offices, skilled nursing facilities (when not covered under Part A), comprehensive
outpatient rehabilitation facilities (CORFs) and other rehabilitation agencies, critical access
hospitals (CAHs), and hospital outpatient departments.30
The DRA required the Secretary to implement an exceptions process to allow continued coverage
for medically necessary services after a beneficiary has reached the therapy cap, up to a certain
limit. A series of legislative acts have extended the exceptions process and increased the limits
each year since then. Until April 1, 2015, Medicare will continue to pay for therapy costs above
the $1,920 cap up to $3,700 for each category of therapy service for beneficiaries who qualify for
the exception. Under certain conditions, Medicare may pay for therapy costs that exceed $3,700 a
year; however, claims for such services require supporting documentation from the therapy
provider and are subject to a higher level of review by Medicare.
Preventive Services31
The original Medicare statute prohibited payment for covered items and services that are “not
reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the
functioning of a malformed body member,” which effectively excluded preventive and screening
services.32 In recent years, Congress has added and expanded Medicare coverage for a number of
such services through legislation, including MMA, MIPPA, and ACA. Under current law, if a
preventive service is recommended for use by the U.S. Preventive Services Task Force (USPSTF,
an independent evidence-review panel)33 and Medicare covers the service, all cost-sharing must
be waived. Also, the Secretary may add coverage of a USPSTF-recommended service that is not
already covered. Coverage for preventive and screening services currently includes, among other
services: (1) a “welcome to Medicare” physical exam during the first year of enrollment in Part B
and an annual visit and prevention plan thereafter; (2) flu vaccine (annual), pneumococcal
vaccine, and hepatitis B vaccine (for persons at high risk); (3) screening tests for breast, cervical,
prostate, and colorectal cancers; (4) screening for other conditions such as depression, alcohol
misuse, heart disease, glaucoma, and osteoporosis; and (5) intensive behavioral therapy for heart
disease and for obesity.34 Payments for these services are provided under the physician fee
schedule.
Clinical Laboratory and Other Diagnostic Tests
Part B covers outpatient clinical laboratory tests, such as certain blood tests, urinalysis, and some
screening tests, provided by Medicare-participating laboratories. These services may be furnished
by labs located in hospitals and physician offices, as well as by independent labs. Beneficiaries
have no copayments or deductibles for covered clinical lab services.

30 The MCTRJCA and ATRA applied the cap and threshold to therapy services furnished in hospital outpatient
departments and critical access hospitals in 2012 and 2013.
31 This section was written by Sarah A. Lister, Specialist in Public Health and Epidemiology at the Congressional
Research Service.
32 Social Security Act §1862(a)(1)(A); 42 U.S.C. 1395y(a)(1)(A).
33 U.S. Preventive Services Task Force, http://www.uspreventiveservicestaskforce.org/.
34 A complete list of covered services, intervals, and limitations is available at CMS, overview of Medicare prevention,
http://www.cms.gov/Medicare/Prevention/PrevntionGenInfo/index.html.
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Payments for outpatient clinical laboratory services are made on the basis of the clinical
laboratory fee schedule (CLFS) and are the lesser of the amount billed, the local fee for a
geographic area, or a national limit; the national limits are set at a percentage (74%) of the
median of all local fee schedule amounts for each laboratory test code. In general, annual
increases in clinical lab fees are based on the percentage change in the CPI-U. However,
Congress has modified the update in recent years by (1) freezing the fee schedule amounts
through 2008, (2) reducing the update that would otherwise apply by 0.5 percentage points for
2009-2010, (3) establishing a permanent multi-factor productivity adjustment and a 1.75
percentage point reduction for years 2011 through 2015, and (4) requiring an additional -2.0%
rebasing of the CLFS. As a result of these actions, the annual update to the local clinical
laboratory fee schedule for CY2014 decreases payment by 0.75%.35
Part B also covers diagnostic x-ray tests and other diagnostic tests, as well as x-ray, radium, and
radioisotope therapy. Generally, these services are paid for under the physician fee schedule.
Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS)
Medicare covers a wide variety of equipment and devices under the heading of durable medical
equipment (DME), and prosthetics, orthotics (PO) if they are medically necessary and are
prescribed by a physician. DME is defined as equipment that (1) can withstand repeated use, (2)
has an expected life of at least three years (effective for items classified as DME after January 1,
2012), (3) is used primarily to serve a medical purpose, (4) is not generally useful in the absence
of an illness or injury, and (5) is appropriate for use in the home. DME includes such items as
hospital beds, wheelchairs, blood glucose monitors, and oxygen and oxygen equipment. It also
includes related supplies, such as drugs and biologics that are necessary for the effective use of
the product. PO is defined as items that replace all or part of a body organ, such as colostomy
bags and pacemakers, as well as leg, arm, back, and neck braces and artificial legs, arms, and
eyes. Medicare also covers some items or supplies (S), such as disposable surgical dressings that
do not meet the definitions of DME or PO.
Except in competitive bidding areas (described below), Medicare pays for most DMEPOS based
on fee schedules. Medicare pays 80% of the lower of the supplier’s charge for the item or the fee
schedule amount. The beneficiary is responsible for the remaining 20%. In general, fee schedule
amounts are updated each year by a (1) measure of price inflation, and (2) a measure of economy-
wide productivity, which may result in lower fee schedule amounts from one year to the next.
Numerous studies and investigations have shown that Medicare pays more for certain items of
DME and PO than some other health insurers and some retail outlets.36 Such overpayments may
be due partly to the fee schedule mechanism of payment. MMA required the Secretary to
establish a Competitive Acquisition Program for certain DMEPOS in specified areas. Instead of
paying for medical equipment based on a fee schedule established by law, payment for items in

35 See CMS Medicare Learning Network Matters, Number MM8517, “Calendar Year (CY) 2014 Annual Update for
Clinical Laboratory Fee Schedule and Laboratory Services Subject to Reasonable Charge Payment,” at
www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-
MLN/MLNMattersArticles/Downloads/MM8517.pdf.
36 See General Accounting Office (GAO) report, “Medicare Payments for Oxygen,” May 15, 1997, GAO-97-120R;
HHS Office of the Inspector General report, “Medicare Home Oxygen Equipment: Cost and Servicing,” September
2006, OEI-09-04-00420.
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competitive bidding areas is based on the supplier bids. MIPPA delayed the program and required
the first round of the program to be re-bid, in addition to other changes. The re-bid took place in
2009 and the program started in nine metropolitan areas in January 2011.37 The second round
expanded the program to 91 additional areas starting July 2013.
Part B Drugs and Biologics38
Certain specified outpatient prescription drugs and biologics are covered under Medicare Part B.
(However, most outpatient prescription drugs are covered under Part D, discussed below.)
Covered Part B drugs and biologics 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. Generally, Medicare’s reimbursement for Part B covered drugs equals 106% of the drug
manufacturer’s reported average sales price (ASP). Health care providers also receive a separate
payment for administering Medicare Part B drugs. Medicare pays 80% of the amount paid to
providers, while the beneficiaries are responsible for the remaining 20%.
Hospital Outpatient Department Services
Hospitals provide two distinct types of services to outpatients: services that are diagnostic in
nature, and other services that aid the physician in the treatment of the patient. A hospital
outpatient is a person who has not been admitted by the hospital as an inpatient but is registered
on the hospital records as an outpatient. Generally, payments under the hospital outpatient
prospective payment system (OPPS) cover the operating and capital-related costs that are directly
related and integral to performing a procedure or furnishing a service on an outpatient basis.
These payments cover services such as the use of an operating suite, treatment, procedure, or
recovery room; use of an observation bed as well as anesthesia; certain drugs or pharmaceuticals;
incidental services; and other necessary or implantable supplies or services. Payments for services
such as those provided by physicians and other professionals as well as therapy and clinical
diagnostic laboratory services, among others, are separate.
Under the OPPS, the unit of payment for acute care hospitals is the individual service or
procedure as assigned to an ambulatory payment classification (APC). To the extent possible,
integral services and items (excluding physician 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 hospital outpatient payment 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 wage index used for the inpatient prospective payment system.
Except for new technology APCs, each APC has a relative weight that is based on the median cost

37 Competitive bidding contracts are re-competed every three years. The contracts signed for the round 1 rebid ended
on December 31, 2013, and were re-competed effective January 1, 2014. For more information, see CRS Report
R41211, Medicare Durable Medical Equipment: The Competitive Bidding Program, by Paulette C. Morgan.
38 Biologics are generally derived from living organisms rather than inorganic chemical compounds.
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of services in that APC. The OPPS also includes pass-through payments for new technologies
(specific drugs, biologicals, and devices) and payments for outliers.39
Ambulatory Surgical Center Services
An ambulatory surgical center (ASC) is a distinct entity that furnishes outpatient surgical
procedures to patients who do not require an overnight stay after the procedure. According to
MedPAC, most ASCs are freestanding facilities rather than part of a larger facility, such as a
hospital. Medicare covers surgical and medical services performed in an ambulatory surgical
center that are (1) commonly performed on an inpatient basis but may be safely performed in an
ASC; (2) not of a type that are commonly performed or that may be safely performed in
physicians’ offices; (3) limited to procedures requiring a dedicated operating room or suite and
generally requiring a post-operative recovery room or short term (not overnight) convalescent
room; and (4) not otherwise excluded from Medicare coverage.
Beginning in January 2008, Medicare pays for surgery-related facility services provided in ASCs
using a payment system based on the OPPS. (Associated physician fees are paid for separately
under the physician fee schedule.) Each of the 3,300 procedures approved for payment in an ASC
is classified into an APC group on the basis of clinical and cost similarity. The ASC system uses
the same payment groups as the OPPS, and for most procedures, the same relative weights used
in the OPPS also apply. 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, so that 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.40 This
policy also applies to separately payable radiology services. Separately payable drugs in an ASC
are paid the same amount as if provided in a hospital outpatient 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). Separate payments are made for corneal tissue acquisition,
brachytherapy sources, certain radiology services, many drugs, and certain implantable devices.
Ambulance
Medicare Part B covers emergency and non-emergency ambulance services to or from a hospital,
critical access hospital, or a skilled nursing facility when other modes of transportation could
endanger the Medicare beneficiary’s health. In most cases, the program covers 80% of the
allowed amount for the service, and the beneficiary is responsible for the remaining 20%.
Generally, ambulance services are covered if (1) transportation of the beneficiary occurs; (2) the
beneficiary is taken to an appropriate location (generally, the closest appropriate facility); (3) the
ambulance service is medically necessary (other forms of transportation are contraindicated); (4)
the ambulance provider or supplier meets state licensing requirements; and (5) the transportation
is not part of a Medicare Part A covered stay.41 Medicare covers both scheduled and nonscheduled

39 Additionally, starting in 2006, rural sole community hospitals (SCHs) receive an additional 7.1% in Medicare
payments. Special payment protections apply to cancer hospitals, children’s hospitals, small rural hospitals (that are not
SCHs) with 100 or fewer beds, and SCHs.
40 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.
41 Under certain circumstances, Part B will cover an non-emergency ambulance service during a Part A covered stay,
(continued...)
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nonemergency transports if the beneficiary is bed-confined or meets other medical necessity
criteria. Medicare may also cover emergency ambulance transportation in an airplane or
helicopter if the beneficiary’s location is not easily reached by ground transportation or if long
distance or obstacles, such as heavy traffic, would prevent the individual from obtaining needed
care.
Medicare pays for different levels of ambulance services, which reflect the staff training and
equipment required to meet the patient’s medical condition or health needs. Generally, basic life
support is provided by emergency medical technicians (EMTs). Advanced life support is provided
by EMTs with advanced training or by paramedics. Medicare pays for ambulance services
according to a national fee schedule. The fee schedule establishes seven categories of ground
ambulance services and two categories of air ambulance services. Some rural ground and air
ambulance services may qualify for increased payments.42 Ambulance providers that are CAHs,
or that are entities that are owned and operated by a CAH, are paid on a reasonable cost basis if
they are the only ambulance provider within a 35 mile radius.
Rural Health Clinics and Federally Qualified Health Centers
Medicare covers Part B services in rural health clinics (RHCs) and federally qualified health
centers (FQHCs) provided by (1) physicians and specified non-physician practitioners; (2)
visiting nurses for homebound patients in home health shortage areas; (3) registered dieticians or
nutritional professionals for diabetes training and medical nutrition therapy; and (4) others, as
well as otherwise covered drugs.
RHCs and FQHCs are paid based on an “all-inclusive” rate per beneficiary visit subject to a per
visit upper limit, adjusted annually for inflation.
Part C, Medicare Advantage
Medicare Advantage (MA) is an alternative way for Medicare beneficiaries to receive covered
benefits. Under MA, private health plans are paid a per-person amount to provide all Medicare
covered benefits (except hospice) to beneficiaries who enroll in their plan. Medicare beneficiaries
who are eligible for Part A, enrolled in Part B, and do not have ESRD are eligible to enroll in an
MA plan if one is available in their area. Some MA plans may choose their service area (local MA
plans), while others agree to serve one or more regions defined by the Secretary (regional MA
plans). In 2014, nearly all Medicare beneficiaries have access to an MA plan and approximately
30% of beneficiaries are enrolled in one. Private plans may use different techniques to influence
the medical care used by enrollees. Some plans, such as health maintenance organizations
(HMOs), may require enrollees to receive care from a restricted network of medical providers;
enrollees may be required to see a primary care physician who will coordinate their care and refer
them to specialists as necessary. Other types of private plans, such as private fee-for-service

(...continued)
including transport of a skilled nursing facility (SNF) resident with end-stage renal disease to and from a dialysis
facility for dialysis services.
42 For additional information, see CRS Report RL30526, Medicare Payment Updates and Payment Rates, coordinated
by Paulette C. Morgan.
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(PFFS) plans, may look more like original Medicare, with fewer restrictions on the providers an
enrollee can see and minimal coordination of care.
In general, MA plans offer additional benefits or require smaller co-payments or deductibles than
original Medicare. Sometimes beneficiaries pay for these additional benefits through a higher
monthly premium, but sometimes they are financed through plan savings. The extent of extra
benefits and reduced cost-sharing varies by plan type and geography. However, MA plans are
seen by some beneficiaries as an attractive alternative to more expensive supplemental insurance
policies found in the private market.
By contract with CMS, a plan agrees to provide all required services covered in return for a
capitated monthly payment adjusted for the demographics and health history of actually enrolled
beneficiaries. The same monthly payment is made regardless of how many or 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 aggregate costs are less than payments. 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 will 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 equals its bid plus a rebate. Starting in 2012, the size of the rebate will be dependent
on plan quality and will range from 50% to 70% of the difference between the bid and the
benchmark. The rebate must be returned to enrollees in the form of either additional benefits,
reduced cost-sharing, reduced Part B or Part D premiums, or some combination of these options.
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.
The MA benchmarks are determined through statutorily specified formulas that have changed
over time. Since BBA 97, formulas have increased the benchmark amounts, in part, to encourage
plan participation in all areas of the country. As a result, however, the benchmark amounts (and
plan payments) in some areas are higher than the average cost of original FFS Medicare. The
ACA changed the way benchmarks are calculated by tying them closer to (or below) spending in
FFS Medicare, and adjusting them based on plan quality. At the time of passage, the
Congressional Budget Office expected the ACA changes to result in reduced MA enrollment and
plan subsidies for extra benefits, though the impact was expected to vary by market.
Subsequently, the Secretary announced an MA plan quality demonstration to test whether
different structures of bonus payments lead to greater quality improvements. The demonstration
increases the size of the quality-adjusted benchmarks above levels authorized in the ACA, and
expands the number of plans eligible to receive quality-adjusted benchmarks. The demonstration
may mitigate some of the reductions in enrollment and extra plan benefits that had been expected
with the passage of the ACA. The final year of the quality bonus demonstration is 2014.
In 2006, the MA program began to offer MA regional plans. Regional MA plans must agree to
serve one or more regions designated by the Secretary. There are 26 MA regions consisting of
states or groups of states. Regional plan 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 are given a rebate, while plans with bids above the
benchmark require an additional enrollee premium.
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In general, MA eligible individuals may enroll in any MA plan that serves their area. However,
some MA plans may restrict their enrollment to beneficiaries who meet additional criteria. For
example, employer-sponsored MA plans are generally only available to the retirees of the
company sponsoring the plan. In addition, Medicare Special Needs Plans (SNPs) are a type of
coordinated care MA plan that exclusively enrolls, or enrolls a disproportionate percentage of,
special needs individuals. Special needs individuals are any MA eligible individuals who are
either institutionalized as defined by the Secretary, eligible for both Medicare and Medicaid, or
have a severe or disabling chronic condition and would benefit from enrollment in a specialized
MA plan.
Part D
Medicare Part D provides coverage of outpatient prescription drugs to Medicare beneficiaries
who choose to enroll in this optional benefit.43 (As previously discussed, Part B provides limited
coverage of some outpatient prescription drugs.) In 2014, close to 41 million (about 75%) of
eligible Medicare beneficiaries are enrolled in Part D. Prescription drug coverage is provided
through private prescription drug plans (PDPs), which offer only prescription drug coverage, or
through Medicare Advantage prescription drug plans (MA-PDs), which offer prescription drug
coverage that is integrated with the health care coverage they provide to Medicare beneficiaries
under Part C. Plans must meet certain minimum requirements; however, there are significant
variations among them in benefit design, including differences in premiums, drugs included on
plan formularies, and cost-sharing for particular drugs.
Qualified Part D prescription drug plans are required to offer either “standard coverage” or
alternative coverage that has actuarially equivalent benefits. In 2014, “standard coverage” has a
$310 deductible and a 25% coinsurance for costs between $310 and $2,850. From this point, there
is minimal coverage until the beneficiary has out-of-pocket costs of $4,550 (about $6,455 in total
spending); this coverage gap has been labeled the “doughnut hole.”44 Once the beneficiary
reaches the catastrophic limit, the program pays all costs except for nominal cost-sharing. In
2010, Medicare sent a tax free, one-time $250 rebate check to each Part D enrollee who reached
the doughnut hole. Starting in 2011, the coverage gap is being gradually reduced each year until it
is eliminated in 2020.45 In 2014, a 50% discount is provided by drug manufacturers and Medicare
pays an additional 2.5% of the cost of brand-name drugs dispensed during the coverage gap. In
2014, Medicare also pays 28% of the cost of generic drugs dispensed during the coverage gap.
(See Figure 2.) By 2020, through a combination of manufacturer discounts and increased
Medicare coverage, Part D enrollees will be responsible for 25% of the costs in the coverage gap
(the same as during the initial coverage period). Most plans offer actuarially equivalent benefits
rather than the standard package, including alternatives such as reducing or eliminating the
deductible, or using tiered cost-sharing with lower cost-sharing for generic drugs.

43 The Part D program was created by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(P.L. 108-173), and began in 2006.
44 The actual level of total covered Part D spending before reaching the catastrophic threshold will depend on whether
the individual qualifies for the low-income subsidy and the portion of brand name and generic drugs purchased during
the coverage gap. For enrollees who do not receive the LIS, the amounts paid by the beneficiary and the 50%
manufacturer discount count as out-of-pocket costs, while the 2.5% coverage by Medicare of the cost of brand name
drugs and the 28% coverage of the cost of generic drugs do not.
45 For additional information, see CRS Report R41196, Medicare Provisions in the Patient Protection and Affordable
Care Act (PPACA): Summary and Timeline, coordinated by Patricia A. Davis.
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Figure 2. 2014 Standard Medicare Prescription Drug Benefit
Beneficiary
Out-of-Pocket
Spending
Enr ollee P ays
Plan Pays 15%;
Medicare Pays 80%
5 %
Brand Name Drugs
$6,455 in
50% Manufacturer
Total Drug Costs
Enr ollee P ay s
Discount
($4,550 out of pocket)
47.5% Brand Drug Costs
$3,605 2.5% Medicare Subsidy
72% Generic Drug Costs
Coverage Gap
(“Doughnut
Generics
Hole”)
28%
Medicare
Subsidy
Initial Coverage
Limit
$2,850 in
Enr ollee P ays
Plan Pays 75%
Total Drug Costs
2 5 %
($945 out of pocket)
$310 Deductible

Source: Figure by CRS based on data from CMS, Announcement of CY2014 Medicare Advantage Capitation Rates
and Medicare Advantage and Part D Payment Policies and Final Call Letter, Attachments IV and V, April 1, 2013.
Notes: Enrollees need to spend $4,550 in 2014 in out-of-pocket costs to reach the catastrophic threshold. Total
spending at the catastrophic threshold (beneficiary payments and amounts covered by the plans and manufacturer
discounts) may vary depending on the portion of brand name drugs and generic drugs used in the coverage gap since
a greater portion of the cost of brand name drugs counts toward the out-of-pocket spending total. Amounts paid by
the enrollee and the 50% manufacturer discount count as out-of-pocket costs, while the 2.5% coverage by Medicare
of the cost of brand name drugs and the 28% coverage of the cost of generic drugs do not.
Medicare’s payments to plans are determined through a competitive bidding process, and enrollee
premiums are tied to plan bids. Plans are paid a risk-adjusted monthly per capita amount based on
their bids during a given plan year. Part D plan sponsors 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”).
Part D also provides enhanced coverage for low-income enrolled individuals, such as persons
who previously received drug benefits under Medicaid (known as “dual eligibles”—enrollees in
both Medicare and Medicaid). Additionally, certain persons who do not qualify for Medicaid, but
whose incomes are below 150% of poverty, may also receive assistance for some portion of their
premium and cost-sharing charges.
MMA included significant incentives for employers to continue to offer coverage to their retirees
by providing a 28% federal subsidy. In 2014, the maximum potential subsidy per covered retiree
is $1,691 for employers or unions offering drug coverage that is at least actuarially equivalent
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(called “creditable” coverage), to standard coverage.46 Employers or unions may select an
alternative option (instead of taking the subsidy) with respect to Part D, such as electing 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. Alternatively, employers or unions
may contract with a PDP or MA-PD to offer the coverage or become a Part D plan sponsor
themselves for their retirees.
Administration
CMS administers the Medicare program through contracts with private entities, such as Medicare
Administrative Contractors (MACs). MACs help CMS run Medicare’s day-to-day operations by
paying reimbursement claims, processing provider and supplier enrollment applications,
providing education and outreach, administering appeals, operating toll-free call centers, and
other activities.
MMA required the Secretary to implement FFS contracting reform by 2011. Contracting reform
was intended to improve Medicare’s administrative services to beneficiaries and health care
providers through the use of new contracting tools including competition and performance
incentives. CMS initiated a first round of Parts A and B FFS contractor reform by awarding
contracts to 15 A/B MACs and four DME MACs. CMS plans to consolidate A/B MACs further to
10 contracts during a second round of contract awards, which began in July 2010 when CMS
issued a request for information from interested bidders.47 In 2013, CMS awarded two re-compete
contracts and fully implemented four other MAC jurisdictions.
In addition to MACs, CMS utilizes other private entities to assist with Medicare program
operation activities.48 CMS contracts with the following private organizations to protect the
Medicare trust funds from making improper payments and to identify, recover, and where
appropriate, prosecute, waste, fraud, and abuses: Recovery Audit Contractors (RACs), Zone
Program Integrity Contractors (ZPICs), Medicare Drug Integrity Contractors (MEDICs),
Comprehensive Error Rate Testing (CERT) contractors, and the Supplemental Medical Review
Contractor.49
Under MMA Section 306, Congress authorized a three-year demonstration to test RACs in FFS
Medicare Parts A and B, but based on early success, the demonstration was converted to a

46 The ACA changed how these subsidies are treated for tax purposes. Originally, MMA allowed employers to exclude
the retiree drug subsidies from their gross income, as well as claim a business deduction for retiree prescription drug
expenses. Beginning in 2013, the allowed deduction for retiree prescription drug coverage is reduced by the amount of
the federal drug subsidy received. For additional information, see CRS Report R41128, Health-Related Revenue
Provisions in the Patient Protection and Affordable Care Act (ACA), by Janemarie Mulvey.
47 For more information, see http://www.cms.gov/Medicare/Medicare-Contracting/Medicare-Administrative-
Contractors/Vision-of-Future-Fee-for-Service-Medicare-Environment.html.
48 Most program integrity authority was originally provided in the Health Insurance Portability and Accountability Act
of 1996 (HIPAA, P.L. 104-191), although a number of other laws have added fraud and abuse authority and sustained
HIPAA’s funding.
49 The Medicare Supplemental Medical Review Contractor is StrategicHealthSolutions, LLC. The SMRC will perform
medical review on Parts A and B, including DME as directed by CMS. The SMRC evaluates medical documentation to
verify whether Medicare claims comply with coverage, coding, payment, and billing, http://cms.hhs.gov/Research-
Statistics-Data-and-Systems/Monitoring-Programs/Medicare-FFS-Compliance-Programs/Medical-Review/SMRC.html.
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permanent program by the Section 302 of the Tax Relief and Healthcare Act of 2006 (TRHCA,
P.L. 109-432). ACA further expanded RACs nationwide and applied them to all Medicare Parts
(C and D, as well as A and B). Contracts were awarded to four private companies with territories
that cover approximately one-quarter of the country.50 RACs are responsible for reducing
Medicare’s improper payment rates by identifying underpayments and overpayments made to
providers, recovering overpayments, and working with providers to prevent future improper
payments. RACs are paid a contingency fee based on a percentage of the overpayments they
recover from Medicare providers and suppliers. In FY2012, the Medicare RAC contractors
identified approximately $2.4 billion in claims corrections, $2.3 billion of which were
overpayments and $109 million were underpayments.51
Medicare’s quality assurance activities are handled by state Survey Agencies and Quality
Improvement Organizations (QIOs), which operate in all states, the District of Columbia, Puerto
Rico, and the U.S. Virgin Islands. State survey agencies are responsible for inspecting Medicare
provider facilities (i.e., nursing homes, home health agencies, and hospitals) to ensure they are in
compliance with federal safety and quality standards referred to as Conditions of Participation.
QIOs monitor the quality of care delivered to Medicare beneficiaries and educate providers on the
latest quality improvement techniques.
In January 2011, CMS established a Center for Medicare and Medicaid Innovation (CMMI).52
The purpose of CMMI is to test and evaluate innovative payment and service delivery models to
reduce program expenditures under Medicare, Medicaid, and the State Children’s Health
Insurance Program (CHIP) while preserving or enhancing the quality of care furnished under
these programs. In selecting the models, the Secretary is required to give preference to those that
improve the coordination, quality, and efficiency of health care services.
Financing
Medicare’s financial operations are accounted for through two trust funds maintained by the
Department of the Treasury—the Hospital Insurance (HI) trust fund for Part A and the
Supplementary Medical Insurance (SMI) trust fund for Parts B and D. For beneficiaries enrolled
in Medicare Advantage (Part C), payments are made on their behalf in appropriate portions from
the HI and SMI trust funds. HI is primarily funded by payroll taxes, while SMI is primarily
funded through general revenue transfers and premiums. (See Figure 3.) The HI and SMI trust
funds are overseen by a Board of Trustees that provides annual reports to Congress.53
The trust funds are accounting mechanisms. 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. These securities represent obligations that the government has

50 The four FFS RACs are Region A: Performant Recovery, Region B: CGI, Inc., Region C: Connolly, Inc., and Region
D: HealthDataInsights.
51 CMS, Recovery Audit Program, at http://www.cms.gov/Research-Statistics-Data-and-Systems/Monitoring-
Programs/Medicare-FFS-Compliance-Programs/Recovery-Audit-Program/.
52 For more information, see http://innovations.cms.gov/.
53 For more information on Medicare financing, see CRS Reports CRS Report R43122, Medicare Financial Status: In
Brief, and CRS Report R41436, Medicare Financing, both by Patricia A. Davis.
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issued to itself. As long as a trust fund has a balance, the Treasury Department is authorized to
make payments for it from the U.S. Treasury.
Figure 3. Sources of Medicare Revenue: 2013
Payroll Taxes
38%
General Revenues
73%
73%
Beneficiary Premiums
88%
Payments from States
41%
Taxation of Social
Security Benefits
14%
13%
25%
Interest and Other
2%
1%
2%
6%
13%
3%
5%
2%
TOTAL MEDICARE
HI - PART A
SMI - PART B
SMI - PART D
REVENUE
$251 Billion
$255 Billion
$70 Billion
$576 Billion

Source: 2014 Report of the Medicare Trustees, Table II.B1.
Notes: Totals may not add to 100% due to rounding. HI is the Hospital Insurance Trust Fund, and SMI is the
Supplementary Medical Insurance Trust Fund.
Medicare expenditures are primarily paid for through mandatory spending—generally Medicare
pays for all covered health care services provided to beneficiaries. Aside from certain constraints
in HI described below, the program is not subject to spending limits. Additionally, most Medicare
expenditures (aside from premiums paid by beneficiaries) are paid for by current workers through
ordinary income taxes and dedicated Medicare payroll taxes, that is, current income is used to pay
current expenditures. Medicare taxes paid by current workers are not set aside to cover their
future Medicare expenses.
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 the employee’s earnings; the self-employed pay 2.9%. Beginning in 2013,
some higher-income employees pay higher payroll taxes.54 Unlike Social Security, there is no
upper limit on earnings subject to the tax. Other sources of income include (1) interest on federal
securities held by the trust fund, (2) a portion of federal income taxes that individuals pay on their
Social Security benefits, and (3) premiums paid by voluntary enrollees who are not automatically

54 For additional information, see Internal Revenue Service, Questions and Answers for the Additional Medicare Tax, at
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-
Medicare-Tax.
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entitled to Medicare Part A. Income for Part A is credited to the HI trust fund. Part A expenditures
for CY2014 are estimated to reach approximately $270 billion.55 About $222 billion of this
amount is expected to be funded by payroll taxes and $34 billion by interest income and other
sources; approximately $14 billion will need to be drawn out of accumulated assets in the HI trust
fund to make up the difference between expected income and expenditures.
As long as the HI trust fund has a balance, the Treasury Department is authorized to make
payments for Medicare Part A services. To date, the HI trust fund has never run out of money
(i.e., become insolvent), and there are no provisions in the Social Security Act that govern what
would happen if that were to occur. Since 2008, Part A expenditures have exceeded HI income
each year, and the assets credited to the trust fund have been drawn down to make up the deficit.
The 2014 report of the Medicare Board of Trustees estimates that under current law the HI trust
fund will become insolvent in 2030 (i.e., the balance of the trust fund will reach $0), at which
time there will no longer be sufficient funds to fully cover Part A expenditures.56
Part B Financing
Medicare Part B is financed mostly from federal general revenues and from beneficiary
premiums, which are set at 25% of estimated program costs for the aged. (The disabled pay the
same premium as the aged.) Income for Part B is credited to the SMI trust fund. Total spending
for Part B is estimated to reach about $263 billion in CY2014, with premiums financing about
$66 billion of that amount and general revenues financing most of the rest ($188 billion).57
The 2014 monthly premium is $104.90 for most Medicare beneficiaries who voluntarily enroll in
Part B. 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).58
Since 2007, higher-income enrollees pay higher premiums.59 In 2014, individuals whose modified
adjusted gross income (AGI) exceeds $85,000 and each member of a couple filing jointly whose
modified AGI exceeds $170,000 are subject to higher premium amounts. These higher-income
premiums range from 35% to 80% of the value of Part B, and affect fewer than 5% of Medicare
Part B enrollees.60 As a result of ACA, the income thresholds have been frozen at the 2010 level

55 2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical
Insurance Trust Funds, Table III.B4, p. 56, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-
Trends-and-Reports/ReportsTrustFunds/index.html. Note, the Medicare trustees generally report expenditures on a
calendar year basis, while CBO reports on a fiscal year basis.
56 For additional information on HI solvency estimates, see CRS Report RS20946, Medicare: Insolvency Projections,
by Patricia A. Davis.
57 Other income includes recoveries of amounts reimbursed from the trust fund that are not obligations of the trust fund
and other miscellaneous income. 2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and
Federal Supplementary Medical Insurance Trust Funds, Table III.C4, p. 89, http://www.cms.gov/Research-Statistics-
Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/index.html.
58 See CRS Report R40082, Medicare: Part B Premiums, by Patricia A. Davis, and CRS Report R40561, Interactions
Between the Social Security COLA and Medicare Part B Premiums, by Jim Hahn.
59 For additional information, see Social Security publication, Medicare Premiums: Rules for Higher-Income
Beneficiaries, http://www.socialsecurity.gov/pubs/EN-05-10536.pdf.
60 The higher monthly premium amounts for 2014 are based on 2012 income levels and are (1) $146.90—for single
(continued...)
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through 2019, which means that more people may be subject to the high-income premium over
time.
Part C Financing
Payments for spending under the Medicare Advantage program are made in appropriate portions
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. In CY2014, total spending for Part D is estimated to reach approximately $79
billion, with about $59 billion of that amount paid for by general revenues, $12 billion from
beneficiary premiums, and $8 billion from state transfers.61
In 2014, the base beneficiary premium is $32.42;62 however, beneficiaries pay different premiums
depending on the plan they have selected and whether they are entitled to low-income premium
subsidies. Additionally, beginning in 2011, higher income Part D enrollees pay higher
premiums.63 (The income thresholds are the same as for Part B, as described above.) On average,
beneficiary premiums are set at 25.5% of expected total Part D costs for basic coverage.
Medicare and Sequestration
The Budget Control Act of 2011 (BCA; P.L. 112-25) provided for increases in the debt limit and
established procedures designed to reduce the federal budget deficit, including the creation of a
Joint Select Committee on Deficit Reduction.64 The failure of the Joint Committee to propose
deficit reduction legislation by its mandated deadline triggered automatic spending reductions
(“sequestration” of mandatory spending and reductions in discretionary spending) in fiscal years

(...continued)
beneficiaries with income $85,001-$107,000 or for each member of a couple filing jointly with income $170,001-
$214,000; (2) $209.80—for single beneficiaries with income $107,001-$160,000 or for each member of a couple filing
jointly with income $214,001-$320,000; (3) $272.70—for single beneficiaries with incomes $160,001-$214,000 and
each member of a couple filing jointly with income $320,001-$428,000; and (4) $335.70—for single beneficiaries with
incomes greater than $214,000 and each member of a couple filing jointly income above $428,000.
61 2014 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical
Insurance Trust Funds, Table III.D3, p. 109, http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-
Trends-and-Reports/ReportsTrustFunds/index.html.
62 There is no “hold harmless” provision under Part D similar to that under Part B. Part D premium increases are not
affected by Social Security cost-of-living adjustments.
63 For additional information, see Social Security publication, Medicare Premiums: Rules for Higher-Income
Beneficiaries, http://www.socialsecurity.gov/pubs/EN-05-10536.pdf.
64 For a comprehensive discussion of the BCA, see CRS Report R41965, The Budget Control Act of 2011, by Bill
Heniff Jr., Elizabeth Rybicki, and Shannon M. Mahan.
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2013 through 2021. The American Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240) delayed
the automatic reductions by two months,65 while the Bipartisan Budget Act of 2013 (BBA, P.L.
113-67) extended sequestration for mandatory spending for an additional two years—through
FY2023.66 On February 15, 2014, the President signed into law an amended version of S. 25 (P.L.
113-82), which included a provision to extend BCA’s sequester of mandatory spending through
FY2024.
Section 256(d) of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA,
P.L. 99-177) contains special rules for the Medicare program in the event of a sequestration.
Among other things, it specifies that for Medicare, sequestration is to begin the month after the
sequestration order has been issued. Therefore, as the sequestration order was issued March 2013,
Medicare sequestration began April 1, 2013, and will continue through March 31, 2025.67
Under sequestration, Medicare’s benefit structure generally remains unchanged; however, benefit
related payments are subject to 2% reductions. In other words, most Medicare payments to health
care providers, as well as to MA and Part D plans, are being reduced by 2%.68 Certain Medicare
payments are exempt from sequestration and therefore not reduced. These exemptions include (1)
Part D low-income subsidies, (2) the Part D catastrophic subsidy, and (3) Qualified Individual
(QI) premiums. Some non-benefit related Medicare expenses, such as administrative and
operational spending, are subject to higher reductions, 7.3% in 2014.69
Additional Insurance Coverage
While Medicare provides broad protection against the costs of many, primarily acute care,
services, the program does not cover all services that may be used by its aged and disabled
beneficiaries. For example, Medicare does not cover eyeglasses, hearing aids, dentures, or most
long-term care services. Further, unlike most private insurance policies, 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 Medicare Advantage plans).
Most Medicare beneficiaries have some coverage in addition to Medicare. The following are the
main sources of additional coverage for Medicare enrollees.

65 For additional information, see CRS Report R42884, The “Fiscal Cliff” and the American Taxpayer Relief Act of
2012, coordinated by Mindy R. Levit.
66 Section 1205 of the Act also changed the sequestration percentages for Medicare in the last year of sequestration.
Instead of reducing Medicare benefits by a uniform 2% throughout the year, the sequestration level during the first six
months is to be 2.9% and in the last six months, 1.1%.
67 The first sequestration order was issued March 1, 2013. See OMB Report to the Congress on the Joint Committee
Sequestration for Fiscal Year 2013 at http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/
fy13ombjcsequestrationreport.pdf.
68 Section 256(d) of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA, P.L. 99-177)
contains special rules for the Medicare program in case of a sequestration. While BBEDCA ordinarily limits reduction
of certain Medicare spending to 4% under a sequestration order, the BCA limits the size of this reduction to 2%. See
CRS Report R42050, Budget “Sequestration” and Selected Program Exemptions and Special Rules, coordinated by
Karen Spar, for additional detail.
69 See CMS accounts in OMB Report to the Congress on the Joint Committee Reductions for Fiscal Year 2014 at
http://www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/
fy14_preview_and_joint_committee_reductions_reports_04102013.pdf.
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 Medicare Advantage. Many MA plans offer services in addition to those covered
under original Medicare, reduced cost sharing, or reduced Part B or D premiums.
All MA plans have a catastrophic cap.70
 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, at least
for prescription drug coverage, by offering subsidies to employers who offer drug
coverage, at least as good as that available under Part D.
 Medigap.71 Individual insurance policies that supplement fee-for-service
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 select from a set of standardized plans, though
not all plans are offered in all states.
 Medicaid.72 Certain low-income Medicare beneficiaries also may be eligible for
full or partial benefits under their state’s Medicaid program. Individuals eligible
for both Medicare and Medicaid are referred to as dual eligibles. The lowest-
income dual eligibles qualify for full Medicaid benefits, so that the majority of
their health care expenses are paid by either Medicare or Medicaid; Medicare
pays first, with Medicaid picking up most of the remaining costs. In addition to
full-benefit dual eligibles, state Medicaid programs pay Medicare premiums and
some cost-sharing for other partial dual eligibles, who have higher income than
full-benefit dual eligibles but are still considered to have low income.73
 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 2010, about 86% of Medicare beneficiaries had some form of additional coverage.74 (Some
persons may have had more than one type of additional coverage.)

70 Starting in 2011, all MA plans are required to include a maximum out-of-pocket (OOP) limit determined by CMS.
Prior to 2011, only MA regional plans were required to include a catastrophic cap on OOP spending.
71 See CRS Report R42745, Medigap: A Primer, by Carol Rapaport.
72 See CRS Report R43357, Medicaid: An Overview, coordinated by Alison Mitchell.
73 In addition to individuals eligible for full Medicaid benefits, other low-income Medicare beneficiaries are entitled to
limited benefits under the Medicare Savings Program (MSP). MSP includes three benefit categories each with different
benefit levels: (1) Qualified Medicare Beneficiaries (QMBs), (2) Specified Low-Income Beneficiaries (SLMB), and (3)
Qualified Individuals (QIs). For QMBs, state Medicaid programs pay Medicare Part B premiums and Medicare cost-
sharing (deductibles and co-payments) when beneficiaries’ incomes are under 100% of the federal poverty level (FPL).
For SLMBs, state Medicaid programs pay Part B premiums when beneficiaries’ incomes are between 100% and 120%
of the FPL. For QIs, Medicaid pays premiums when beneficiaries’ incomes are between 120% and 135% of poverty.
To be eligible for MSP, Medicare beneficiaries must also meet Medicaid’s other eligibility requirements (e.g., meet
citizenship or legal residency requirements).
74 Kaiser Family Foundation analysis of the CMS Medicare Current Beneficiary Survey Cost and Use File, 2010, in
Medigap Reform: Setting the Context for Understanding Recent Proposals, January 2014, Exhibit 1, http://kff.org/
medicare/issue-brief/medigap-reform-setting-the-context/.

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Appendix A. Acronyms
ACA
Patient Protection and Affordable Care Act, as modified by the Health Care and
Education Reconciliation Act of 2010 (P.L. 111-148 and P.L. 111-152)
ACO
Accountable Care Organization
AGI
Adjusted Gross Income
APC
Ambulatory Payment Classification
ASC
Ambulatory Surgical Center
ASP
Average Sales Price
ATRA
American Taxpayer Relief Act of 2012 (P.L. 112-240)
BBA 97
Balanced Budget Act of 1997 (P.L. 105-33)
BBRA
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (P.L. 106-
113)
BCA
Budget Control Act of 2011 (P.L. 112-25)
BIPA
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000
(P.L. 106-554)
CAH
Critical Access Hospital
CBO
Congressional Budget Office
CMI
Center for Medicare and Medicaid Innovation
CMS
Centers for Medicare & Medicaid Services
CORF
Comprehensive Outpatient Rehabilitation Facility
CPI
Consumer Price Index
CPI-U
Consumer Price Index for Urban Consumers
DGME
Direct Graduate Medical Education
DME
Durable Medical Equipment
DMEPOS
Durable Medical Equipment, Prosthetics, Orthotics, and Other Medical Supplies
DRA
Deficit Reduction Act of 2005 (P.L. 109-171)
DRG
Diagnosis Related Group
DSH
Disproportionate Share Hospital
ESRD
End-Stage Renal Disease
FFS
Fee-for-Service
FPL
Federal Poverty Level
FQHC
Federally Qualified Health Center
GAO
Government Accountability Office
GDP
Gross Domestic Product
GME
Graduate Medical Education
HCERA
Health Care and Education Reconciliation Act of 2010 (P.L. 111-152)
HHA
Home Health Agency
HHRG
Home Health Resource Group
HHS
Department of Health and Human Services
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HI
Hospital Insurance (Medicare Part A)
HMO
Health Maintenance Organization
HOPD
Hospital Outpatient Department
IME
Indirect Medical Education
IPAB
Independent Payment Advisory Board
IPF
Inpatient Psychiatric Facility
IPPS
Inpatient Prospective Payment System
IRF
Inpatient Rehabilitation Facility
LIS
Low-Income Subsidy
LTC
Long-Term Care
LTCH
Long-Term Care Hospital
MA
Medicare Advantage
MA-PD
Medicare Advantage – Prescription Drug (Plan)
MAC
Medicare Administrative Contractor
MCTRJCA
Middle Class Tax Relief and Job Creation Act of 2012
MedPAC
Medicare Payment Advisory Commission
MEI
Medical Economic Index
MIPPA
Medicare Improvements for Patients and Providers Act of 2008 (P.L. 110-275)
MMA
Medicare Prescription Drug Improvement and Modernization Act of 2003 (P.L.
108-173)
MMSEA
Medicare, Medicaid and SCHIP Extension Act of 2007 (P.L. 110-173)
MS-DRG
Medicare Severity Diagnosis Related Groups
MSP
Medicare Savings Program
OIG
Office of Inspector General
OMB
Office of Management and Budget
OPPS
Outpatient Prospective Payment System
PAMA
Protecting Access to Medicare Act of 2014 (P.L. 113-93)
PDP
Prescription Drug Plan
PFFS
Private Fee-for-Service
PO
Prosthetics and Orthotics
PPS
Prospective Payment System
QI
Qualified Individual
QIO
Quality Improvement Organization
QMB
Qualified Medicare Beneficiary
RAC
Recovery Audit Contractor
RBRVS
Resource-Based Relative Value Scale
RHC
Rural Health Clinic
RUG
Resource Utilization Group
SCH
Sole Community Hospital
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Medicare Primer

SGR
Sustainable Growth Rate
SLMB
Specified Low-Income Beneficiaries
SMI
Supplementary Medical Insurance (Medicare Parts B and D)
SNF
Skilled Nursing Facility
SNP
Special Needs Plan
SSA
Social Security Act
SSI
Supplemental Security Income
TRHCA
Tax Relief and Health Care Act of 2006 (P.L. 109-432)
USPSTF
United States Preventive Services Task Force
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Medicare Primer

Appendix B. 2014 Medicare Beneficiary Costs
Table B-1. Part A (Hospitalization Insurance)
2014 Premiums, Deductible and Additional Cost-Sharing
Premiums
Individuals with:
2014 Monthly Premium
40 or more quarters of Social Security credits
$0
30 - 39 quarters of Social Security credits
$234
0 - 29 quarters of Social Security credits
$426
Deductible and Additional Cost-Sharing
Inpatient Hospital
Deductible
$1,216 per benefit period
Days 1-60
No copayment
Days 61-90
$304 per day
Days 91-150
$608 per day (for up to 60 lifetime reserve days)
After 150 Days
Beneficiary pays 100%
Skilled Nursing Facility (SNF)
Days 1-20
No copayment
Days 21-100
$152 per day
After 100 Days
Beneficiary pays 100%
Home Health
No copayment
Hospice
No copayment for hospice care; copayment of up to $5
per outpatient drug prescription

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link to page 36 Medicare Primer

Table B-2. Part B (Supplementary Medical Insurance)
2014 Premiums, Deductible and Additional Cost-Sharing
Premiums
Yearly income in 2012 (2013 Tax Return)
File Individual Tax Return
File Joint Tax Return
2014 Monthly Premiuma
$85,000 or less
$170,000 or less
$104.90
above $85,000 up to $107,000
above $170,000 up to $214,000
$146.90
above $107,000 up to $160,000
above $214,000 up to $320,000
$209.80
above $160,000 up to $214,000
above $320,000 up to $428,000
$272.70
above $214,000
above $428,000
$335.70
Deductible
Deductible
$147 per year
Additional Cost-Sharing
Physician and Non-Physician Practitioner Services 20% co-insurance, plus up to an additional 15% of the
amount if the medical provider does not accept
assignment
Outpatient Hospital Care
20% coinsurance
Ambulatory Surgical Services
20% coinsurance
Durable Medical Equipment
20% coinsurance
Physical, Occupational, and Speech Therapy
20% coinsurance, certain limits may apply
Clinical Laboratory Services
No coinsurance, deductible does not apply
Home Health
No coinsurance, deductible does not apply
Outpatient Mental Health Services
20% coinsurance
Most Preventive Services
No coinsurance
a. May be higher if enrolled late in Part B.

Table B-3. Part C (Medicare Advantage)
Premiums, deductibles and additional cost-sharing vary by plan. (See https://www.medicare.gov/find-a-plan/questions/
home.aspx for plan premiums.)

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link to page 37 Medicare Primer

Table B-4. Part D (Outpatient Prescription Drug Benefit)
2014 Premiums, Deductible and Additional Cost-Sharing
Premiums
Premiums vary by plan. (See https://www.medicare.gov/find-a-plan/questions/home.aspx for plan premiums.) Higher
income beneficiaries pay an income-related monthly adjustment amount in addition to their plan premiums.
Beneficiaries who receive the low-income subsidy generally pay no premium.
Yearly income in 2012 (2013 Tax Return)
File Individual Tax Return
File Joint Tax Return
2014 Monthly Premiuma
$85,000 or less
$170,000 or less
Plan Premium
above $85,000 up to $107,000
above $170,000 up to $214,000
Plan Premium + $12.10
above $107,000 up to $160,000
above $214,000 up to $320,000
Plan Premium + $31.10
above $160,000 up to $214,000
above $320,000 up to $428,000
Plan Premium + $50.20
above $214,000
above $428,000
Plan Premium + $69.30
Deductible and Additional Cost-Sharing
The amounts below apply to the standard Part D benefit; actual benefits and cost-sharing requirements may vary by
plan. Beneficiaries receiving low-income subsidies pay reduced cost-sharing amounts.
Deductible
$310
Initial Coverage (up to $2,850 in total drug costs)
25% coinsurance
Coverage Gap (between $2,850 and approximately $6,455
Beneficiary pays 72%% of the cost of generic drugs; and
in total drug costs)
47.5% of brand name drugs.
Catastrophic Coverage (above $4,550 in beneficiary out-of-
Minimum of $2.55 for generic drugs, $6.35 for brand
pocket spending)
drugs; or 5% coinsurance.
a. May be higher if enrolled late in Part D.

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