Medicare Structural Reform: Background and Options

Order Code RL31058
Report for Congress
Received through the CRS Web
Medicare Structural Reform:
Background and Options
Updated January 28, 2003
Hinda Ripps Chaikind, Jennifer O’Sullivan, and Jennifer Boulanger
Specialists in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Medicare Structural Reform: Background and Options
Summary
Medicare is a nationwide health insurance program for the aged and certain
disabled persons. Over its nearly 37-year history, it has provided important
protections for millions of Americans. However, the program is facing a number of
problems. One concern is that Medicare’s financing mechanisms will be unable to
sustain it in the long run. Many are also concerned that the program’s structure,
which in large measure reflects both the health care delivery system as well as
political considerations in effect at the time of enactment, has failed to keep pace
with the changes in the health care system as a whole.
The major problems facing Medicare, and possible solutions to these problems,
have been debated for a number of years. Some persons suggest that major structural
reforms are required. However, others contend that the existing system should be
improved rather than replaced. To date, no consensus has been reached. In recent
years, the major focus has been on providing prescription drug coverage for
beneficiaries. Some observers state that it would be inappropriate to add a new costly
benefit before structural reforms are enacted. Other observers state that seniors,
particularly low-income seniors, should not be required to wait for benefits until
resolution of the entire restructuring issue.
The 108th Congress is expected to consider a variety of Medicare reform
proposals. Some changes could be made while still retaining Medicare’s current
structure. Examples include increasing the program’s eligibility age, introducing
means testing, increasing beneficiary cost-sharing, and introducing innovations into
the current fee-for-service program. Other changes could only be made in the context
of major program restructuring. Proposals which have been suggested include
modernizing the benefit structure and combining the Part A and Part B programs.
Also receiving attention are variations of a premium support model under which
beneficiaries would be entitled to a specified level of financial support toward the
costs of Medicare covered services. Many of the proposals could be combined as
part of an overall reform package that would include prescription drug coverage. The
Congress may also review the operations of the agency that administers Medicare and
could consider restructuring that agency. This report will be updated to reflect
legislative activity.

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Contents
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicare and the Federal Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Medicare Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Benefit Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Coverage Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Interaction With Other Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Low-Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Benefit Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Beneficiary Perceptions and Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Program Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Current Reform Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Background on the Medicare Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Covered Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Payments for Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Medicare+Choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Supplementary Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Beneficiary Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Beneficiary Incomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Beneficiary Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Medicare Financing: Background and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Financing Part A and Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Financial Status of Part A and Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Part A Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Current Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Demographic Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Who Pays for Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Medicare and the Federal Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
HI “Surplus” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Status of Program as a Whole . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other Major Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Response to Changes in the Health Care Delivery System . . . . . . . . . . . . . 14
Medicare Benefits Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Role of Supplemental Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Managed Care Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Employer-Based Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Medigap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

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Protections for Low-Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Impact of Demographic and Other Changes . . . . . . . . . . . . . . . . . . . . . . . . 19
Reform Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Increasing the Program’s Eligibility Age From 65 to 67 . . . . . . . . . . . . . . . 20
Means Testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Modifications in Beneficiary Cost-Sharing . . . . . . . . . . . . . . . . . . . . . . . . . 24
Redesign the Medicare Benefit Package . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Medigap Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Combine Part A and Part B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Fee-for-Service (FFS) Modernizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Premium Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Derivation of Premium Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Evolution of Premium Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Legislative Activity in the 107th Congress . . . . . . . . . . . . . . . . . . . . . . 33
Current Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Medicare Administration Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Prospects for the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
List of Tables
Table 1. Proposed Eligibility Age by Year of Birth . . . . . . . . . . . . . . . . . . . . . . 21

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Medicare Structural Reform:
Background and Options
Overview
Medicare is a nationwide health insurance program for the aged and certain
disabled persons. Over its nearly 37-year history, it has provided important
protections for millions of Americans. However, the program is facing a number of
problems. One concern is that Medicare’s financing mechanism will be unable to
sustain it in the long run. Many are also concerned that the program’s structure,
which in large measure reflects both the health care delivery system as well as
political considerations in effect at the time of enactment, has failed to keep pace
with the changes in the health care system as a whole. A related concern is whether
the program’s benefit structure adequately responds to the health care needs of
today’s aged and disabled populations.
A number of observers have stated that the program is now at a critical juncture.
Some persons suggest that major structural reforms are required. However, others
contend that the existing system should be improved rather than revamped. The
following is a brief overview of the major issues underlying the debate. These issues
are discussed in more detail in subsequent sections of the report.
Medicare and the Federal Budget
Medicare is the nation’s second largest social welfare program, exceeded only
by Social Security. It is an open-ended entitlement program that provides coverage
for a defined package of services. Medicare is a mandatory spending program; it
pays for as many covered medical services as the eligible population uses. As a
result, it is difficult to control overall program spending.
Medicare is a key concern for policymakers, not only because of its role in
financing health care for the elderly, but also because it represents a major spending
item in the federal budget. Net program outlays (after deduction of beneficiary
premiums) will represent an estimated 11.4% of total federal outlays ($237 billion)
in FY 2003 and are expected to reach 14.9% of total federal outlays ($431.7 billion)
by 2012.
Medicare Financing
Solvency. Medicare is actually two programs – Medicare Part A and Medicare
Part B. Each program has a different financing mechanism. Medicare Part A is
primarily financed by current workers and their employers through a payroll tax.

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Medicare Part B (Supplementary Medical Insurance (SMI)) is financed by a
combination of monthly premiums levied on current beneficiaries and federal
general revenues (tax dollars).
Because of its financing mechanism, Part A has been subject to considerable
scrutiny. Almost from its beginning, the program has faced a projected shortfall. At
the present time, income to the Part A Hospital Insurance (HI) trust fund exceeds
benefit payments and administrative costs. However, this situation is slated to
reverse in the future with outgo exceeding income. At some point, the assets in the
program will be insufficient to pay benefits. Under current projections, the first year
that outgo will exceed income (excluding interest) is 2016 and the year the program
will become insolvent is 2030. These dates represent a significant improvement over
projections made only a few years earlier and reflect the impact of legislative changes
which had the effect of restraining the growth in Part A spending. Despite the short
term improvements, the long range deficit is significant. The long-range projections
reflect a number of factors including an increase in medical care costs, the increase
in size of the Medicare population with the retirement of the baby boomers, and a
reduction in the ratio of workers paying the payroll tax (which finances the Part A
program) to beneficiaries receiving benefits.
Many observers contend that it is no longer appropriate to view the Part A and
Part B programs separately. Part B does not face exhaustion because of the way it
is financed. However, projected spending growth in both programs is viewed as
unsustainable over time. Many persons suggest that a comprehensive approach is
required both to address the program’s financing issues and to bring the program’s
benefit structure into the 21st century.
Current Issues. Recently, considerable attention has been focused on the
Medicare Part A “surplus.” As noted, income to the HI trust fund during a year
currently exceeds outgo during the year. Some persons have labeled the difference
between HI income and outgo as a “surplus.” Any excess in a year is treated as part
of the overall “on budget” surplus (unlike the Social Security surplus which is off
budget). Some persons are concerned that the temporary Medicare surplus will be
used either for other government spending or to finance a new drug benefit, thereby
shortening the time before the program becomes insolvent. However, others suggest
that using the “surplus” for the Medicare population, for example to finance a new
drug benefit, might be appropriate.
Benefit Structure
Medicare’s benefit design has remained relatively unchanged since enactment
of the program in 1966. Many persons view this time as an opportunity to reexamine
the structure as well as the financing of the program. Several key components of the
current system are being reexamined.
Coverage Gaps. While Medicare provides broad protection against the costs
of many, primarily acute care, services, it only covers about one-half of beneficiaries’
total health care bill. The program includes significant cost-sharing charges for most
covered services, provides only limited protection for some other services (such as
prescription drugs and nursing home care) and includes no protection against the

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costs of some other services (such as hearing aids). Further, the program includes no
upper limit (“catastrophic limit”) on cost-sharing charges.
Interaction With Other Coverage. Most individuals have some coverage
in addition to basic Medicare benefits. Many observers have suggested that when
reviewing Medicare’s coverage, it is important to understand the interaction of this
supplementary coverage with Medicare. This is not an easy task, since there is wide
variation among plans in the services covered and total costs to beneficiaries.
Further, there are indications that the scope of supplementary coverage available to
some persons may be eroding.
Low-Income. Of particular concern to policymakers is the impact of out-of-
pocket health spending on low-income persons without supplementary insurance
protection. This population group is generally viewed as being the most at risk for
health costs not covered by Medicare.
Benefit Design. Currently Medicare guarantees beneficiaries coverage for a
defined set of benefits. Some observers have suggested that the concept of a defined
package of Medicare benefits should be reexamined. They suggest that the program
should use a defined contribution model under which the federal government would
guarantee a defined payment per beneficiary. A variation on this approach is known
as the premium support model. Under premium support, payment would be made
to private health care plans for a portion of the premiums charged by the plans for
covered Medicare benefits.
Beneficiary Perceptions and Concerns. Medicare provides millions of
senior citizens and disabled persons with significant protection against the costs of
their health care. Beneficiaries value the program and register strong opposition
when policymakers suggest reducing the benefits or increasing the program’s
premiums or cost-sharing charges. The ability of beneficiaries to shoulder additional
costs is of concern, particularly in light of the fact that most beneficiaries have
relatively modest incomes. For example, 65% of the Medicare population had
incomes below $25,000 in 2000.
Program Administration
For some time, observers have expressed concern over the way in which
Medicare has been administered. Some persons believe that the Centers for Medicare
& Medicaid Services (CMS), formerly the Health Care Financing Administration
(HCFA), has not been provided with sufficient resources, both staff and funding, or
management flexibility to enable it to carry out its ever increasing responsibilities.
Others believe it is time to restructure Medicare’s administrative entity – either by
separating Medicare administration from the oversight of Medicaid and other state-
based health programs or, alternatively, creating a separate entity to administer
Medicare’s managed care program and any new prescription drug benefit. This last
view may have been partially addressed by the 2001 administrative reorganization
of HCFA into CMS with its three major divisions: the Center for Medicare
Management responsible for Medicare’s fee-for-service program; the Center for
Beneficiary Choices responsible for beneficiary education, the Medicare +Choice

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program, and grievance and appeals; and the Center for Medicaid and State
Operations responsible for programs administered by the states.
Current Reform Discussion
The major problems facing Medicare, and possible solutions to these problems,
have been debated for a number of years. However, to date, no consensus has been
reached. In recent years, the major focus has been on providing prescription drug
coverage for beneficiaries. However, some observers have suggested that it would
be inappropriate to add a new costly benefit before the financial soundness of the
basic program is assured. They also suggest that drug coverage should not be added
until the whole benefit structure is reexamined. Other observers have stated that
seniors, particularly low-income seniors, need a drug benefit. They contend that
these persons should not be required to wait for drug benefits until resolution of the
entire restructuring issue. Further, some of these persons argue that while the
program needs improvements, major structural reforms are not required.
A number of these concerns were addressed by the National Bipartisan
Commission on the Future of Medicare (hereinafter referred to as the Medicare
Commission). This Commission, established by the Balanced Budget Act of 1997
(BBA, P.L. 105-33), was to develop recommendations concerning a number of
program issues. The recommendations were to be submitted to the Congress by
March 1, 1999. The Commission failed to get the required 11 of 17 Commissioners’
votes for a reform proposal. However, the “Breaux-Thomas proposal” (named after
Senator Breaux and Congressman Thomas, the two chairmen of the Commission)
gained 10 votes. This plan, which was based on the premium support model, served
as the basis for subsequent discussion of the issues. A modification of this proposal
was introduced in the 106th Congress (S.1895); this was known as “Breaux-Frist
1"(after Senators Breaux and Frist). A revised version, which focused primarily on
drug coverage and some managed care reforms, was also introduced several months
later (S.2807); this was known as “Breaux-Frist 2" Slightly revised versions of these
bills were introduced in the 107th Congress (S.357, the Medicare Preservation and
Improvement Act of 2001, and S.358, the Medicare Prescription Drug and
Modernization Act of 2001). They were also referred to as “Breaux-Frist 1" and
“Breaux-Frist 2.”
The primary focus of the discussion in the 107th Congress was on prescription
drug coverage. Additionally, the 107th Congress considered, but was also not able
to reach agreement on other Medicare issues, such as addressing declining enrollment
in the M+C program and reduced payments for physician services. The House
passed H.R. 4954, on June 28, 2002, legislation that included a prescription drug
benefit, and other major changes to the Medicare program, such as Medicare+Choice
program and provider payments. The Senate considered, but did not pass, S. 2729,
(the “Tripartisan” bill) that would have added a prescription drug benefit,
restructured Medicare cost sharing, and changed the program administration.

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Background on the Medicare Program
Medicare is a nationwide health insurance program. In FY2003, the program
will cover an estimated 34 million aged persons and an additional 6 million disabled
individuals. CBO’s March 2002 baseline estimates total program outlays in FY2003
at $264.8 billion; net Medicare outlays (after deduction of beneficiary premiums) are
estimated at $237 billion. Medicare actually consists of two distinct parts — Part A
( HI) and Part B (Supplementary Medical Insurance, SMI).
Coverage
Medicare is not a means tested program; that is, there are no income or assets
tests for coverage. Almost all persons over age 65 are automatically entitled to
Medicare Part A. Part A also provides coverage, after a 24-month waiting period, for
persons under age 65 receiving social security cash benefits on the basis of disability.
Most persons who need a kidney transplant or renal dialysis are also covered,
regardless of age.
Participation in Medicare Part B is voluntary. All persons over 65 and all those
enrolled in Part A may enroll in Part B by paying a monthly premium ($58.70 in
2003). Most persons eligible to enroll in Part B do so.
Benefits
Covered Services. The Part A program covers the following services:
! Inpatient Hospital Services – Days 1-60 in a benefit period1 are
subject to a deductible ($840 in 2003). Days 61-90 in a benefit
period are subject to a daily coinsurance charge ($210 in 2003).
Beneficiaries have 60 lifetime reserve days which may be drawn
upon for stays in excess of 90 days; these lifetime reserve days are
subject to a daily coinsurance charge ($420 in 2003).
! Skilled Nursing Facility (SNF) Services – Up to 100 days post-
hospital care in a benefit period. Days 21-100 are subject to a daily
coinsurance charge ($105 in 2003)
! Home Health Care – No cost-sharing is required
! Hospice Care (home care services for the terminally ill). Nominal
copayments are charged for outpatient prescription drugs and respite
care.
Part B covers physicians services, laboratory services, durable medical
equipment, other medical services, as well as a portion of home health expenses. In
general, beneficiaries are liable for a $100 deductible. The program then pays 80%
of Medicare’s recognized payment amount, while the beneficiary is liable for the
1 A benefit period begins when a person enters a hospital or skilled nursing facility and ends
when the individual has not received hospital or skilled nursing care for 60 days in a row.
An individual can have an unlimited number of benefit periods.

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remaining 20%. Beneficiary cost sharing does not apply to clinical laboratory
services, certain preventive services, and home health care.
Payments for Services. Under “original” or “fee-for-service” (FFS)
Medicare, beneficiaries obtain services from providers of their choice. Medicare’s
payment policies determine the amounts that providers will be paid for covered
services and supplies used by the beneficiaries. These payment policies have moved
away from paying fees for each service rendered and basing this reimbursement on
allowable costs or allowable charges. Instead, Medicare uses different rate setting
methods for each provider type or category of service to determine payment amounts.
Depending upon the setting, services can be bundled together; most payment
amounts are predetermined in that they are set in advance; many are subject to certain
limits; some are still partially determined by a provider’s incurred costs. Medicare’s
current payment policies are myriad, complex, and often affected by past
reimbursement practices. Simply put, Medicare does not negotiate prices or solicit
bids to set competitively determined payments.
In general, Medicare uses either prospective payment systems or fee schedules
to establish specific predetermined payment amounts for each service or bundle of
services. Medicare adjusts these predetermined payments to account for factors, such
as the relative costliness of patients, and practice location or cost of living differences
that affect costs but cannot be controlled by the individual provider or supplier.
Under a prospective payment system (PPS), Medicare bases reimbursement on
the average costs associated with an episode of care, regardless of the scope, type,
and level of services provided to an individual patient. Medicare adopted the first
PPS for inpatient hospital services in the early 1980s. In this PPS, hospitals are paid
a standard amount or average cost for each discharge adjusted for a patient’s
diagnosis (specifically, a patient’s diagnosis related group or DRG) as well as, for
wage variations of a hospital’s geographic location, extent of physicians’ training
programs, and amount of care provided to low-income patients (as a disproportionate
share hospital). Most recently, Medicare has established prospective payment
systems for skilled nursing facility services (SNF) services, home health services, and
hospital outpatient services. The specifics of these payment policies, including the
unit of payment and patient classification system that establishes the episode of care,
vary by type of provider.
Medicare pays for a number of services under Part B using a fee schedule,
including physician and laboratory services as well as durable medical equipment.
Again the payments are determined in advance. However, the unit of payment tends
to be narrower than the services that are bundled together and used as the basis of
reimbursement in many of Medicare’s prospective payment systems. For example,
under the physician fee schedule, a payment is made for each service provided during
the office visit. In most cases, a physician can bill for more than one service
provided during that office visit. The examples where services are bundled together
and covered under one payment, such as a global fee which covers all physician
services provided for a surgical procedure, are few.
Medicare+Choice. Since the early 1980s, Medicare beneficiaries have been
able to enroll in some type of managed care plan, most commonly health

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maintenance organizations (HMOs). Beneficiaries get all of their Medicare services
through the HMO. The HMO agrees to assume the risk for paying for covered
services; in return, Medicare makes a predetermined monthly payment to the plan for
each enrollee.
The Balanced Budget Act of 1997 (BBA, P.L.105-33) established the
Medicare+Choice program. This program, which became effective January 1, 1999,
expanded the types of managed care arrangements that could potentially serve
Medicare beneficiaries to include, among others, private fee-for-service
organizations, preferred provider organizations, and provider sponsored
organizations. However, HMOs remain the primary managed care arrangement
available to Medicare beneficiaries. As of December, 2002, less than 13% of the
Medicare population obtained services through Medicare+Choice plans.
Traditionally, Medicare payments to HMOs varied considerably throughout the
country. In areas where payment rates were high (for example, Southern Florida),
HMOs were typically able (and were often required) to offer services in addition to
those covered under the basic Medicare program. Of particular importance was the
ability of a number of plans to offer prescription drug coverage at little or no
additional cost to beneficiaries. Conversely, in lower payment areas (for example
Minneapolis-St. Paul metro area), plans typically did not offer a similar scope of
additional benefits. If they did cover extra benefits, they charged the beneficiary a
premium (which was in addition to the Part B premium which all enrollees are
required to pay).
BBA significantly modified the payment methodology beginning January 1,
1998. The changes were designed to reduce the wide variation in payments and the
year-to-year volatility that resulted from the old payment rules, especially in less
populated counties. As a result, capitation payments in many previously high
payment areas are seeing relatively small year-to-year increases. The managed care
industry has argued that the changes in payment policies have resulted in inadequate
reimbursement rates. However, reviews by both the General Accounting Office
(GAO)2 and the Inspector General of the Department of Health and Human Services
(HHS)3 suggest that the payments are still adequate to cover the costs of Medicare
covered benefits. In many cases, the issue is whether plans can continue to offer a
range of extra services at relatively low cost to beneficiaries. Many plans question
whether they can continue to be competitive if they drop prescription drug coverage
or, alternatively, institute significant cost-sharing requirements for the coverage.
These concerns, coupled with other business considerations, led a number of
Medicare+Choice organizations to reduce their service areas or pull out of the
2 U.S. General Accounting Office. Medicare+Choice: Plan Withdrawals Indicate
Difficulty of Providing Choice While Achieving Savings. GAO/HEHS-00-183. September
2000.
3 U.S. Department of Health and Human Services. Office of Inspector General. Adequacy
of Medicare’s Managed Care Payments After the Balanced Budget Act of 1997.
Memorandum to HCFA Administrator, A-14-00-00212. September 18, 2000.

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CRS-8
program entirely.4 In response to these concerns, the Balanced Budget Refinement
Act of 1999 (BBRA, P.L.106-113) and the Medicare, Medicaid, and SCHIP Benefits
Improvement Protection Act of 2000 (BIPA, P.L.106-554) included provisions
designed to encourage organizations to participate in the Medicare+Choice program.
Administration
Since 1977, Medicare has been administered by the Centers for Medicare &
Medicaid Services (CMS), formerly the Health Care Financing Administration,
within the Department of Health and Human Services. CMS is also responsible for
overseeing Medicaid and the State Children’s Health Insurance program, enforcing
the Clinical Laboratory Improvement Act, and enforcing the Administrative
Simplification and Health Insurance Portability provisions of the Health Insurance
Portability and Accountability Act (HIPAA). To perform these duties, CMS has
about 4,500 full time employees, about 65% of whom work in the agency’s
headquarters offices in Baltimore, MD, and Washington, DC, with the remainder
working in the agency’s 10 regional offices around the country. In addition to the
agency’s federal workforce, CMS oversees about 47 claims processing contractors
(generally private insurance companies) who employ an estimated 22,000 people to
evaluate and pay Medicare claims. Other private and public sector employees – those
who work for quality improvement organizations (QIOs - formerly known as peer
review organizations) that determine the appropriateness of care in hospitals and
other settings, private sector accrediting agencies (such as the Joint Commission on
Accreditation of Healthcare Organizations or JCAHO), or state survey agencies –
also perform review, inspection, and evaluation functions to support the Medicare
program.
Supplementary Coverage
Most beneficiaries depend on some form of private or public coverage to
supplement their Medicare coverage. In the fall of 1999,5 about12.5% of community-
based (i.e., non-institutionalized) beneficiaries relied solely on the traditional fee-for-
service Medicare program for protection against the costs of care; about 17% of
beneficiaries were enrolled in managed care organizations.6 (The proportion enrolled
in Medicare managed care has since dropped below 13%.)
4 For a further discussion of M+C see CRS Report RL30702, Medicare+Choice, by Hinda
Ripps Chaikind and Madeleine Smith.
5 Some beneficiaries have supplemental protection throughout the year, while others may
only have the protection for a portion of the year. Different studies rely on different
measurements and therefore yield somewhat different data. The most recent study looks at
beneficiaries’ insurance status in the fall of 1999.
6 Data are from the Barrents group analysis of 1996-1999 Medicare Current Beneficiary
Survey (MCBS). Beneficiaries were classified by their primary health insurance and were
counted in only one of the following categories (in hierarchical order for beneficiaries with
more than one type): Medicare HMO, Medicaid, employer-sponsored plan, Medigap, other
public, and fee-for-service only. Laschober, Mary et. al. Trends in Medicare Supplemental
Insurance and Prescription Drug Coverage, 1996-1999. Health Affairs, Web Exclusive.
February 27, 2002.

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CRS-9
The majority of the community-based Medicare population (57.4% in the fall
of 1999) have private supplemental coverage. This private insurance protection may
be obtained through a current or former employer (33.1% had such coverage in the
fall of 1999). It may also be obtained through an individually-purchased policy,
commonly referred to as a “Medigap” policy (24.3% had these plans in the fall of
1999). In addition, a smaller percentage (about 10.9% in the fall of 1999) have
coverage under Medicaid, the means tested federal-state health insurance program
for the poor or persons who become poor after incurring large medical expenses. A
small group (1.9% in the fall of 1999) have supplemental coverage from one of a
variety of other sources (such as state-sponsored pharmacy assistance programs or
through the Veterans Administration).7
Beneficiary Characteristics
Beneficiary Incomes. Most beneficiaries have relatively low incomes. In
2000, 5% of beneficiaries had incomes of $5,000 or less, 20% had incomes between
$5,001 - $10,000, 17% had incomes between $10,001 and $15,000, and 22% had
incomes between $15,001 and $25,000. Twenty percent of the population had
incomes between $25,001 and $40,000, while only 16% had incomes over $40,000.8
Despite the relatively low average income levels, there has been a significant
improvement in the poverty rate for the elderly. In 1970, 24.6% of the elderly
population had incomes below poverty; in 2001 the figure had declined to10.1%.
However, the rate for children climbed slightly over the period (from 15.0% to
16.3%) and is now considerably above that for the elderly.9 These findings have
raised questions regarding the appropriate use of limited resources available to assist
persons across all age groups.
Beneficiary Spending. Most beneficiaries pay out-of-pocket for a portion
of their health care expenses. These payments vary not only by the total level of an
individual’s health care expenses, but also by whether or not the individual has
supplementary coverage and what type of supplementary coverage the individual has.
Several studies have examined the level of out-of-pocket expenses and the
relationship of these expenses to income. An analysis by researchers at the Urban
Institute estimated that elderly beneficiaries would spend, on average, $3,142 out-of-
pocket for their health care in 2000. Of this amount, 20.9% was for Medicare cost-
sharing charges, 20.5% for the Part B premium, 30.3% for non-Medicare services and
28.3% for premiums for supplemental health insurance. The authors estimated that
out-of-pocket spending represented 21.7% of income for elderly beneficiaries; the
percentage was significantly higher for those in poor health with no insurance
7 Ibid.
8 DHHS, Centers for Medicare and Medicaid Services. Program Information on Medicare,
Medicaid, SCHIP, and other Programs of the Centers for Medicare and Medicaid Services,
June 2002 edition.
9 U.S. Social Security Administration. Annual Statistical Supplement, 2001, and
[http://www.census.gov/hhes/poverty/poverty01/table1.pdf].

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CRS-10
(44.0%) and for older low-income single women in poor health (51.6%). The authors
further projected that out-of pocket spending would increase rapidly over the
following decade, in part because of the high growth rate for drug spending.10
A more recent study showed similar results. In 2002, the elderly’s mean out-of-
pocket spending is estimated at $3,757 accounting for 22.3% of income. Medicare
liability (Part B premium and cost-sharing) accounted for $1,470 of the total.11
Medicare Financing: Background and Issues
Financing Part A and Part B
The financing mechanisms for Part A and Part B are completely different. Part
A is primarily financed by current workers and their employers through a payroll tax.
Each pays a payroll tax of 1.45% on earnings. The self-employed pay 2.9%. Unlike
Social Security (which in 2003 has a taxable earnings base of $87,000), there is no
upper limit on the amount of earnings subject to the tax. Part B is financed by a
combination of monthly premiums levied on current program beneficiaries and
federal general revenues. In 2003, the monthly premium is $58.70. By law,
beneficiary premiums equal 25% of Part B costs; federal general revenues (i.e., tax
dollars) account for the remaining 75%.
Financial operations for Part A are accounted for through the Health Insurance
(HI) trust fund while those for Part B are accounted for through the Supplementary
Medical Insurance (SMI) trust fund. Both funds are maintained by the Department
of the Treasury.12 Each fund is overseen by a Board of Trustees who makes annual
reports to Congress concerning their financial status.
Financial Status of Part A and Part B
Almost from its inception, the HI trust fund has faced a projected shortfall.
When observers refer to the impending insolvency of Medicare they are actually
referring to the pending insolvency of the HI trust fund. The SMI trust fund does not
face exhaustion because of the way it is financed. However, the SMI trustees
continue to voice concern about the rapid growth in Part B program costs.
Part A Projections. The Board of Trustees projected insolvency for the HI
fund beginning with the 1970 report (which was less than 4 years after the program
10 Maxwell, Stephanie, Marilyn Moon, and Misha Segal. Growth in Medicare and Out-of-
Pocket Spending: Impact on Vulnerable Beneficiaries. Commonwealth Fund, Urban
Institute. January 2001.
11 Maxwell, Stephanie, Matthew Storeygard and Marilyn Moon. Modernizing Medicare
Cost-Sharing: Policy Options and Impacts on Beneficiary and Program Expenditures. The
Commonwealth Fund, November 2002.
12 The trust funds are an accounting mechanism; there is no actual transfer of money into
and out of the fund.

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CRS-11
went into effect). The insolvency date was postponed a number of times, primarily
due to legislative changes which had the effect of restraining the growth in program
spending. The lower growth rates were achieved largely through reductions in
payments to providers, primarily hospitals and physicians. Generally, these measures
were part of larger budget reconciliation laws which attempted to restrain overall
federal spending.
Efforts to curtail program spending intensified as Congress considered
legislation to bring the entire federal budget into balance and culminated in the
passage of the BBA.13 This legislation achieved significant savings in Medicare and
extended the solvency of the Part A trust fund. The legislation achieved these
savings by again slowing the rate of growth in payments to providers and by
establishing new payment methodologies for certain service categories. BBA also
provided for the transfer of some home health spending from Part A to Part B. While
the actual transfer from Part A did not reduce overall program spending, it did reduce
Part A spending and thus delayed the Part A projected insolvency date.
A number of observers contended that the savings achieved through the
enactment of BBA were greater than intended at the time of enactment and had
unintended consequences for health care providers. As a result of these concerns,
Congress subsequently enacted BBRA and BIPA. These measures were designed to
restore some of the BBA spending reductions.14
Current Projections. In early 1997, the trustees projected that the Part A
fund would become insolvent in 2001. Following enactment of BBA, significant
improvements were recorded in the short-term projections. These new projections
reflected a number of factors including BBA and strong economic growth. Despite
enactment of both BBRA and BIPA, which increased program spending, the trustees
have continued to delay the projected insolvency date. Most recently, the 2002 report
projects that the program will remain solvent until 2030, 5 years later than projected
in the 2000 report.
While short-term estimates have improved, the deficit is greater than previously
thought for the long-range projection period. In large measure, this is attributable to
a revision (beginning with the 2001 report) in the assumptions used to calculate
expenditure growth.
13 For a history and summary of BBA see CRS Report 97-802, Medicare Provisions of the
Balanced Budget Act of 1997 (BBA, P.L. 105-33), by Jennifer O’Sullivan, Celinda Franco,
Beth Fuchs, Bob Lyke, and Richard Price.
14 For a discussion of the BBRA and BIPA legislation as well as the Medicare cost estimates
made subsequent to enactment of BBA, see: 1) CRS Report RS20484, Trends in Medicare
Spending: Fact Sheet, by Hinda Ripps Chaikind; 2) CRS Report RL30860, Medicare
Provisions in the Balanced Budget Refinement Act of 1999 (P.L.106-113), by Carolyn
Merck, Jennifer O’Sullivan, Madeleine Smith, and Sibyl Tilson; and 3) CRS Report
RL30707, Medicare Provisions in the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA, P.L.106-554) by Hinda Ripps Chaikind,
Sibyl Tilson, Jennifer O’Sullivan, Carolyn Merck, and Madeleine Smith.

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CRS-12
The trustees state that to bring Part A into financial solvency over 75 years
(CY2002-CY2076), either outlays would have to be reduced by 38% or total income
increased by 60% (or some combination thereof) throughout the 75-year period. As
noted, the primary income source for Part A is payroll taxes. Many observers oppose
any increase in payroll taxes to support the program. They feel that current taxes
already represent a considerable drain on the incomes of many middle class workers.
They also suggest that merely increasing taxes would not address the program’s
inherent inefficiencies, including the inability of the program to constrain cost
growth.
Demographic Considerations
The financing problems facing Medicare are expected to be magnified starting
in 2011 when the program will begin to experience the impact of major demographic
changes. First, baby boomers (those born between 1946 and 1964) begin turning age
65. Second, there is a shift in the number of workers paying the Medicare payroll tax
and supporting those persons receiving benefits under Part A. Currently, there are
approximately 4.0 workers per beneficiary; in 2010 there will be 3.7. By 2030 the
ratio will have declined to 2.4.
Who Pays for Benefits
Another series of issues relates to who is, or should be, paying for covered
benefits. Many beneficiaries feel that the combination of the payroll tax they paid
during their working careers coupled with their Part B premiums represents full
payment for their Medicare benefits. Various studies have shown that this is not the
case. Most persons on Medicare today receive considerably more in Medicare
benefits over their lifetimes than they pay in; this trend is expected to continue into
future years for low and average wage earners; however, over time, high wage
earners are expected to pay more into the system than they get back.
Under the current system, current workers pay a payroll tax to cover benefits for
current Part A beneficiaries. Current workers also pay the majority of Part B costs
since the federal government (i.e., current taxpayers) funds 75% of the costs of that
program. These financing mechanisms have raised intergenerational equity issues.
Many younger persons recognize that the program provides significant help to their
parents and grandparents and has relieved them of some potential health-care
expenses for family members. However, some younger individuals contend that they
should not be required to assume a major portion of the costs for older populations.
Many of these same individuals question whether Medicare will be there when they
retire.
Medicare and the Federal Budget
Medicare is a key concern for policymakers, not only because of its role in
financing health care for the elderly, but also because it represents a major spending
item in the federal budget. The Congressional Budget Office (CBO) estimated total
Medicare outlays for FY2003 at $264.8 billion; net outlays (after deduction of
beneficiary premiums) are estimated at $237 billion. Net outlays represent an

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CRS-13
estimated 11.4% of total federal outlays in FY2003. CBO projected the percentage
would rise to 14.9% of total federal outlays by FY2012. CBO further estimated that
total Medicare spending would represent 2.4% of the gross domestic product (GDP)
in 2003, rising to 2.8% in 2012.15
Current Issues
HI “Surplus”. In general, income to the Hospital Insurance Trust fund during
a year exceeds outgo during the year.16 Under current projections, the first year that
outgo will exceed income, excluding interest, is 2016. The first year that outgo will
exceed income, including interest, is 2022. Some persons have labeled the difference
between HI income and outgo as a “surplus.” The trustees estimate that the total
surplus would be $453 billion over the FY 2002-FY 2011 period. In March 2002,
CBO estimated the surplus at $362 for the same period.
Any excess in a year is treated as part of the overall “on-budget” surplus (unlike
the Social Security surplus which is off budget). Many persons are concerned that
the temporary Medicare surplus would be used for other government spending rather
than debt reduction. To counter this, some Members have recommended that the
Medicare funds be placed in a “lockbox.” Under a lockbox proposal, a point of order
could be raised on the House or Senate floor against any tax or spending legislation
in a year that would reduce the on-budget surplus to less than the HI surplus receipts
in that year.17
Some persons argue that the surplus represents Medicare money and therefore
can be used for any Medicare-related purpose including a prescription drug benefit.
Others argue that if surpluses from the trust fund are used for a new drug benefit or
Medicare reform, the insolvency issues facing Medicare will occur much earlier than
currently projected.
Status of Program as a Whole. A number of observers have suggested that
it is inappropriate to view Medicare solvency only in terms of the Part A program.
Rather, they suggest that the program should be viewed as a whole. For this reason,
the trustees issued a combined report on Parts A and B in 2002. The trustees stated
that meeting the financial challenges facing the two parts of Medicare would require
integrated solutions. They also noted that the sooner solutions were enacted, the
more flexible and gradual they could be. They further estimated that combined Part
A and Part B expenditures are expected to rise from 2.4% of the gross domestic
product (in 2001) to 5.0% in 2035 and 8.4% in 2075.18
15 Congressional Budget Office. An Analysis of the President’s Budgetary Proposals for
2003, March 2002 (Table 5: CBO’s Baseline Budget Projections), and accompanying
Medicare tables.
16 Outgo exceeded income in 1995, 1996, and 1997.
17 See: CRS Report RS20165, Social Security and Medicare “Lock Boxes”, by David S.
Koitz, Dawn Nuschler, and Geoffrey Kollmann.
18 Board of Trustees of the Federal Hospital Insurance Trust Fund. 2001 Annual Report of
(continued...)

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CRS-14
Many observers have recommended using a comprehensive measure of
Medicare solvency. Some have suggested that this should occur in conjunction with
the merger of Part A and Part B into a single program. This issue is discussed further
in a later chapter.
Other Major Issues
While program financing is of major concern to policymakers, it is only one of
the issues facing Medicare. Other important issues include: whether the program has
responded to changes in the health care delivery system, whether the benefit package
adequately responds to the health care needs of aged and disabled beneficiaries, the
role of supplementary insurance coverage, and whether the needs of the low-income
are being addressed.
Response to Changes in the Health Care Delivery System
Many observers argue that the program’s current structure, relying primarily on
traditional fee-for-service mechanisms, has failed to adequately reflect changes that
have occurred in the health care delivery system as a whole. While 90% of persons
with employer-sponsored coverage are currently enrolled in some form of managed
care, as of December 2002 under 13% of the Medicare population was enrolled in
such arrangements. For the Medicare program, fee-for-service is expected to remain
the program’s predominant delivery system.
Medicare Benefits Package
Medicare provides broad protection against the costs of many, primarily acute
care, services. However, beneficiaries are still faced with significant additional
health care expenses. The program requires cost-sharing for most covered services,
provides only limited protection for some services (such as outpatient prescription
drugs and long-term care) and includes no protection against the costs of other
services (such as hearing aids and dentures). Further, unlike most large group health
insurance plans, Medicare contains no upper (“catastrophic”) limit on out-of-pocket
expenses. As a result, the program covers only about half of beneficiaries’ total
health bill.
Medicare’s benefit package is somewhat less generous than typical employment-
based coverage. It contains more generous coverage of mental illness and substance
abuse than typical employment-based plans for the non-elderly. However, it lacks
coverage for most outpatient prescription drugs, dental care, and a catastrophic limit
on the amount of out-of-pocket expenses. These items are generally found in
employment-based plans.
18 (...continued)
the Federal Hospital Insurance Trust Fund. Washington D.C. March 2001.

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CRS-15
Many observers have recommended expansions in Medicare coverage. In recent
years, the primary focus has been on prescription drugs. However, there is currently
no consensus on how a drug benefit should be structured. One of the chief concerns
is the potential cost of a new benefit and how these costs would be financed over
time. There are also a number of organizational and administrative questions. These
include whether a drug benefit should be enacted prior to or as part of overall
structural reform; whether the new benefit should be part of the Medicare program
itself or administered as a separate program; and the degree of reliance that should
be placed on the private sector, both for administering the benefit and assuming a
portion of the financial risk.19
Coverage of preventive services has also received attention in recent years.
Initially, Medicare coverage was restricted to the diagnosis and treatment of illness
or injury. Over time, coverage was added for some routine screening services.
Recently, significant expansion in preventive services was included in the BBA and
BIPA. Some persons have recommended additional expansions arguing that the
provision of preventive care services actually results in savings over the long term.
Role of Supplemental Coverage
As noted earlier, most beneficiaries have coverage to supplement some of
Medicare’s coverage gaps. There is wide variation among beneficiaries in the types
of coverage they have, the source of coverage, and depth of coverage. When
considering Medicare restructuring proposals, it is important to remember that these
proposals could have a very different impact depending on the type of supplemental
coverage (if any) held by the beneficiary. It is also important to consider the
implications of Medicare changes for other stakeholders providing this coverage such
as managed care plans, private insurers, and state governments.
Managed Care Plans. As noted earlier, a number of Medicare+Choice
organizations have reduced their service areas or dropped out of the program entirely.
Other plans have reduced their coverage of extra services such as prescription drugs
or increased the costs to beneficiaries for such services. As a result, many observers
state that the current Medicare+Choice program requires reform. Many of the
restructuring plans would incorporate a premium support or similar mechanism; this
is intended to encourage a larger number of plans to participate in the program. (See
discussion of premium support later in this report.) When reviewing various
proposals it is important to consider what the impact will be on the actual number of
plans willing to participate, the number of beneficiaries who will have a choice
among plans, and the benefits these plans will offer.
It is also important to consider whether plans will be able to design their
packages so that beneficiaries will be encouraged to enroll in a managed care
arrangement. Beneficiaries are typically risk adverse. Therefore it could be expected
that plans will need to be able to offer fairly broad coverage (including some
19 For a discussion of benefit design issues for prescription drugs, see: CRS Report
RL31640, Medicare Prescription Drug Coverage for Beneficiaries: Background and Issues,
by Jennifer O’Sullivan.

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CRS-16
prescription drug coverage) with predictable (and affordable) premium and cost
sharing charges. It will also be important for beneficiaries to know that the plans will
continue to participate in the program over time.
Employer-Based Coverage. There are indications that the percentage of
employers offering retiree health coverage for their Medicare-covered retirees is
dropping. In addition, many other employers are pursuing strategies to lower their
liabilities for retiree health costs. Some employers are moving toward a defined
dollar contribution model for retiree health benefits; this means that the employer
offers coverage up to a specified dollar amount, rather than offering coverage for a
specific package of benefits. Others are using Medicare+Choice plans and other
managed care organizations to deliver services to their retirees. These employer
choices have a significant impact on the supplemental health insurance available to
program beneficiaries.
It is not entirely clear how the implementation of Medicare reform would affect
the provision of employer-based retiree coverage. Obviously, this would in part
depend on how the reform is structured. Some observers cite the decline in the
percentage of employers offering such coverage; they suggest that this trend is likely
to continue and might perhaps accelerate if employers saw reform as an opportunity
to further reduce their involvement (though this trend might be countered somewhat
by union contracts with large employers). Others suggest that certain reforms (for
example, the addition of some prescription drug coverage) might slow the trend.
Many are concerned that any expansion in federal coverage might merely result
in a dollar-for-dollar offset in coverage provided by employers. Under this scenario,
federal dollars might increase but overall benefits for beneficiaries would remain
relatively unchanged. Several prescription drug proposals attempt to address this
concern by providing employers with financial incentives to maintain their drug
programs and have their retirees continue to receive services through these plans
rather than a new federal program.
Medigap. Beneficiaries with Medigap insurance have coverage for Medicare’s
deductibles and coinsurance and for some services not covered by Medicare.
Beneficiaries generally select a Medigap policy from one of 10 standardized plans.20
These are known as Plan A through Plan J. The Plan A package covers a basic
package of benefits. Each of the other nine plans includes the basic benefits plus a
different combination of additional benefits. Plan J is the most comprehensive.21
The intention of standardized policies is to enable consumers to better
understand policy choices and to prevent marketing abuses. However, some
observers suggest that the current policy options overemphasize first dollar coverage
20 Beneficiaries who originally purchased supplemental policies before July 1992, can
continue to renew these policies indefinitely. Approximately one-third of beneficiaries still
have these policies. (Chollet, Deborah J., Senior Fellow, Mathematica Policy Research Inc.,
Testimony before Senate Finance Committee, April 24, 2001.)
21 For a discussion of Medigap see: CRS Report RL31223, Medicare: Supplementary
“Medigap” Coverage, by Jennifer O’Sullivan

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CRS-17
(namely coverage of Medicare’s cost-sharing charges) which many beneficiaries
could potentially budget for. At the same time, the plans provide less generous
coverage for other services not covered by the program. (For example, only three
standardized plans – Plans H, I and J – cover some drug costs and even the most
generous requires significant out-of-pocket payments by beneficiaries.)
Many observers contend that Medigap premiums are difficult for many elderly
individuals to afford.22 Some observers have suggested that policy options should be
redesigned to place greater emphasis on catastrophic coverage. A change authorized
by BBA added two high deductible plans to the list of 10 standard plans. With the
exception of the high deductible feature, the benefit package under the high
deductible plans is the same as under Plan F or Plan J. The removal of first dollar
coverage was expected to result in lower premiums. However, these plans are not
widely available.
Many beneficiaries tend to be risk adverse. They, therefore, purchase Medigap
policies which protect them from most Medicare cost-sharing charges. While they
face substantial premium costs for coverage, they may face little or no out-of-pocket
costs at the time they actually use services. They thus perceive the service to be free
and therefore use more services. Spending for beneficiaries with private
supplemental coverage is estimated to be significantly higher than expenditures for
those without such coverage. A review of 1995 data by the Physician Payment
Review Commission (PPRC) showed that Medicare expenditures for beneficiaries
having Medicare coverage only were less than 75% of those for beneficiaries with
Medigap. (Medicare spending for beneficiaries with employer-provided benefits
averaged 10% less than spending for persons with Medigap.) Higher Medicare
spending reflects higher overall use of services. High service use among
beneficiaries with secondary insurance appears to be a direct consequence of having
such insurance. Comparison of service use between those with and without private
coverage suggests that there may be some overutilization of services by those with
supplementary coverage. However, some of the increased use of services likely
represents the provision of appropriate care. Therefore, persons without
supplementary coverage may not be getting some needed services.
Some observers suggest that as part of restructuring, the standardized Medigap
policies should be redesigned to prevent first dollar coverage, for example, Medigap
plans would be prohibited from paying the first $250 in Medicare cost-sharing
22 There is wide variation in Medigap premiums for both drug and non-drug policies
nationwide. This reflects a number of factors including differences in the benefits of Plan
A through Plan J, differences in medical underwriting practices, and differences in pricing
structures. For example, Weiss Ratings reports that in 2002, the premium for Plan A in
Florida ranged from $766 to $2,028; the premiums in Texas for Plan F ranged from $887
to $2,487; and the premium in Arkansas for Plan J ranged from $2,878 to $9,376. Weiss
further reported that the national average premium in 2002 for Plan F (the most commonly
sold) was $1,432.The national average premium for Plan J (the plan with the most drug
coverage) was $3,344.(Weiss Ratings, Inc., August 7, 2002 press release and information
provided by Weiss official). These are premiums for a 65-year old male. A March 2000
GAO survey of 1999 Medigap premiums showed that average premiums for 75-year olds
were higher than those for 65-year olds.

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CRS-18
charges. The intent of this approach would be to make beneficiaries more cost
conscious at the time they used covered services, thereby lowering Medicare
spending. It should also result in a reduction in Medigap premium costs.
Many persons have suggested that if certain reforms were made to Medicare (for
example, if there were an upper limit on out-of-pocket costs) beneficiaries would
have less need to purchase Medigap policies. However, given the risk adverse nature
of this population, it might be difficult to convince them that it was no longer
necessary to purchase supplementary coverage. Further, the insurance industry
would likely oppose an approach which could potentially result in a considerable
loss in revenues.
Medicaid. Some low-income aged and disabled persons receive full or partial
supplementary health coverage under Medicaid. Persons entitled to full Medicaid
protection generally have all of their health care expenses met by a combination of
Medicare and Medicaid. For these “dual eligibles” Medicare pays first. Medicaid
picks up Medicare cost-sharing charges and provides protection against the cost of
services generally not covered by Medicare, such as outpatient prescription drugs and
long-term care.
Several population groups are entitled to more limited Medicaid protection.
These are qualified Medicare beneficiaries (QMBs), specified low-income
beneficiaries (SLIMBs), and certain qualified individuals added by BBA. QMBs are
individuals with incomes below 100% of the poverty line and resources below 200%
of the resource limit established for the Supplemental Security Income (SSI)
program.23 SLIMBs are persons meeting the QMB criteria except that their income
limit is 120% of poverty. Medicaid pays Medicare’s cost-sharing and premium
charges for the QMB population; it pays only the Part B premium for the SLIMB
population. Medicaid coverage is limited to payment of these charges unless the
individual is otherwise eligible for full Medicaid benefits.24
Many persons eligible for QMB, or SLIMB coverage do not actually enroll in
these programs. Many observers attribute the low enrollment rates to the fact that the
programs are linked to Medicaid and therefore have a welfare stigma. However, the
enrollment levels would likely increase if the benefits available to this population
23 The 2002 monthly income limits for QMBs are $759 for an individual and $1,015 for a
couple (these numbers reflect a disregard of the first $20 of income). The resource limits
are $4,000 for a single and $6,000 for a couple; certain items such as an individual’s home
are excluded from the calculation.
24 BBA added temporary coverage for two groups of “qualified individuals (QIs).” The first
group (QI-1) was composed of persons, not eligible for Medicaid, whose income is between
120% and 135% of poverty. These persons were eligible to have their Part B premiums paid
through a block grant program. Potentially eligible persons are served on a first-come, first
served basis up to the state’s allocation limit under the block grant. The second group (QI-
2) was composed of persons whose income is between 135% and 175% of poverty; these
persons were only entitled to have a small portion of their Part B premium paid for ($3.91
in 2002). QI-1s and QI-2s were never entitled to full Medicaid coverage. The programs
ended December 2002; as of this writing they have not been extended.

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CRS-19
group were expanded. For example, many prescription drug proposals would provide
full or virtually full drug coverage to persons below 135% of poverty.
Medicare reforms that modify its benefit package could have specific budgetary
implications for the Medicaid program. If Medicare’s benefit package were
expanded, Medicaid’s obligations could potentially be reduced. Conversely, if
Medicare’s coverage were reduced (either through a reduction in services or the
introduction of significant up-front cost-sharing), Medicaid costs could go up
accordingly. States could choose to limit their cost increases by reducing the scope
of Medicaid benefits. In this instance, beneficiaries would be entitled to fewer
benefits.
The implications of any Medicare changes would depend, in part, on what
portion of any new costs would be assumed by the federal government versus the
state governments. Medicaid costs (including those for the QMB and SLIMB
programs) are shared by the federal government and the states. Many states have
specifically objected to “unfunded federal mandates;” in the case of Medicaid this
occurs when the federal government mandates coverage of specific population groups
and states are required to pay some of the costs. As a result of this concern,
expanded coverage in BBA was primarily paid for by the federal government.
Protections for Low-Income
Policymakers are concerned about the health care coverage available to low-
income populations. Persons with full Medicaid coverage have perhaps the most
comprehensive supplemental protection. Those persons with partial Medicaid
coverage have less generous protection. Low-income persons without any Medicaid
coverage are also the least likely to have private supplementary coverage. This
population group is viewed by many persons as being the most at risk for health care
costs not covered by Medicare. Many reform proposals would target the low-income
population (typically defined as below 135% or 150% of poverty) for special
assistance.
Impact of Demographic and Other Changes
Medicare will begin to face the impact of the baby boom population in 2011.
This will result in a rapid increase in the sheer number of aged Medicare
beneficiaries over the ensuing 20 years. The baby boom population is likely to live
longer than previous generations. This will mean an increase in the number of “old
old” beneficiaries (i.e., those 85 and over).
The combination of these factors is estimated to increase the size of the
Medicare population from 40.1 million in 2001 to 45.9 million in 2010 to 70.4
million in 2025.25
25 The Board of Trustees, Federal Hospital Insurance and Federal Supplementary Insurance
Trust Funds. 2002 Annual Report of The Board of Trustees, Federal Hospital Insurance and
Federal Supplementary Insurance Trust Funds, March 26,2002.

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The number and health status of the aged population will also be affected by
future advances in medical technology. Some changes will not only improve the
health status of the aged but also prolong lives. The net impact on per capita health
spending, and by extension on Medicare health spending, is difficult to predict.
Reform Options
As noted, the problems facing Medicare are not new. Until recently, the primary
focus has been on enacting short-term measures designed to achieve budget savings
and to postpone the Part A insolvency date. Generally this involved enacting
legislation limiting increases in payments to providers, primarily hospitals and
physicians. This approach culminated in the passage of the BBA. Limiting year-to-
year increases in provider payments helped to lower the overall program growth rate
and lengthen the solvency period for the Part A trust fund. However, most observers
agree that broader reforms are needed to address both the long-term financing issues
as well as to make needed program improvements.
The 108th Congress is expected to consider a variety of Medicare reform
proposals. Some changes could be made while still retaining Medicare’s current
structure. Examples include increasing the program’s eligibility age, introducing
means testing, increasing beneficiary cost-sharing, and introducing innovations into
the current fee-for-service program. Other changes could only be made in the context
of major program restructuring. Proposals which have been suggested include
modernizing the benefit structure, combining the Part A and Part B programs, or
replacing the program’s current guarantee of a defined benefit package with a
premium support system. Many of the proposals could be combined as part of an
overall reform package. The following is a discussion of some of the major
proposals offered to date.
Increasing the Program’s Eligibility Age From 65 to 67
The Social Security Act Amendments of 1983 (P.L. 98-21) was designed to
address long-range financing problems in the Social Security cash benefits program.
One provision in that law raised the full retirement age (the age at which one receives
unreduced cash benefits) from age 65 to 67 over the 2003-2027 period. The
Medicare eligibility age remained at 65.
Some persons have suggested that the Medicare eligibility age should be
increased according to the same phase-in schedule established for Social Security
benefits. (Table 1 shows what the phase-in schedule would be under this approach.)
The Senate-passed version of BBA included this provision; it proved very
controversial and was dropped in conference. The Breaux-Thomas proposal
considered by the Medicare Commission also recommended the same phased-in
increase in the eligibility age; however, under that proposal an exemption process
would be developed for affected beneficiaries with special needs, such as those
unable to work and otherwise get health coverage.

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CRS-21
Table 1. Proposed Eligibility Age by Year of Birth
Year of birth
Eligibility age
Year of birth
Eligibility age
Before 1938
65 years, 0 months
1955
66 years, 2 months
1938
65 years, 2 months
1956
66 years, 4 months
1939
65 years, 4 months
1957
66 years, 6 months
1940
65 years, 6 months
1958
66 years, 8 months
1941
65 years, 8 months
1959
66 years, 10 months
1942
65 years, 10 months
1960 and after
67 years, 0 months
1943-1954
66 years, 0 months
Source: Table prepared by CRS.
Proponents of raising Medicare’s eligibility age argue that it is reasonable given
the increases in life expectancy and general improvements in health status that have
occurred since the program was enacted in 1965. Average life expectancy for a 65-
year old increased from 14.3 years in 1960 to 17.7 years in 1999.26 Additionally,
people in their 60s are in generally better health and perhaps could work a few more
years.
Raising the age would result in program savings. The Senate-passed provision
would have phased-in beginning in CY2003. CBO estimated that the provision
would save $10.2 billion over the FY2003–FY2007 period.27 (Estimates were not
made for savings over the full phase-in period.)
Opponents of increasing the eligibility age argue that it would place a number
of seniors at risk. They cite the circumstances of the uninsured population aged 62-
64 and suggest that the problems could be magnified for the population aged 65-66.
Among the younger group, 15% were uninsured in 1998. Of these, 26% were poor
and 52% were neither employed nor the dependent spouse of an employed person28
— characteristics that would make it unlikely for these persons to be able to afford
insurance. Employment-based group coverage generally spreads costs across all
workers in the same health insurance plan. However, private non-group insurance
premiums for persons 62-64 generally reflect the higher risk attributable to the
individual policyholder’s age and health status.
26 DHHS, Centers for Disease Control and Prevention, National Center for Health Statistics.
Health, United States, 2002. DHHS pub. no. 2002-1232. August 2002.
27 Congressional Budget Office Cost Estimate. S. 947/H.R. 2015, Balanced Budget Act of
1997, as passed by the Senate on June 25, 1997. July 2, 1997.
28 Shea, Dennis G., Pamela Farley Short, and M. Paige Powell. Betwixt and Between:
Targeting Coverage Reforms to Those Approaching Medicare. Health Affairs,
January/February 2001.

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CRS-22
Raising the eligibility age could have the effect of lengthening the period when
some persons were uninsured or faced very high premiums for coverage. It is likely
that those most affected would be lower-paid workers. This suggests that higher paid
workers could keep their employment-based coverage for the additional 2 years.
However, recent trends in retiree health coverage suggest that this might not be the
case. A number of studies have shown that a declining share of large employers are
offering health benefits to their retirees (though most grandfather in benefits for
current retirees and those close to retirement). Further, the number of such
employers charging premiums, tightening eligibility requirements, encouraging the
use of managed care, and placing caps on coverage has increased.
The tendency of employers to restrict or drop coverage might be exacerbated if
the proposal to increase the eligibility age were enacted. Many employers might
decide that the provision of health insurance coverage for retirees was just too
expensive. A report by Hewitt Associates29 estimated that gradually raising the
eligibility age to 67 (using the same schedule applicable for social security) would
increase the actuarial costs for lifetime retiree benefits by 12% for large employers
with a younger workforce and 8% for employers with an older workforce. Once the
phase-in to age 67 were complete (or if there were no phase-in) the increase would
be 16% for employers with a younger workforce and 18% for those with an older
workforce. These figures reflect the fact that the employer’s average per capita cost
for a retiree before Medicare eligibility is about three times that of a retiree with
Medicare coverage ($4,000 vs. $1,350 in 1997).
Raising the eligibility age would also have implications for Medicaid. Under
current law, some low-income Medicare beneficiaries are also entitled to Medicaid
on the basis of age (currently 65 or over) or disability. Medicaid supplements
Medicare coverage for this group. If the Medicare eligibility age were raised,
Medicaid would (under current law) assume some expenses previously assumed by
Medicare. As a result, a portion of the anticipated Medicare savings would translate
into increased federal and state Medicaid costs. Alternatively, the eligibility age for
Medicaid could also be increased; however, this would leave some low-income
individuals without any insurance coverage.
Means Testing
Medicare is not a means tested program. There are no income or assets tests for
coverage. Further, the benefits and cost-sharing requirements are the same for all
persons, regardless of income. Many observers have questioned whether this
approach can be extended to any new prescription drug benefit. Some observers have
suggested that any new drug benefit should be targeted primarily toward the low-
income. Others have stated that the scope of coverage should be the same for all
beneficiaries; however, low-income beneficiaries should receive additional assistance
for premiums and cost-sharing charges.
29 Hewitt Associates LLC. Retiree Health Trends and Implications of Possible Medicare
Reforms. Report prepared for Kaiser Medicare Policy Project (Henry J. Kaiser Foundation
Grant Number 96-1710B), Washington, September 1997.

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CRS-23
Some observers have suggested that means testing should be incorporated into
the current program. In this case, the focus would be on requiring higher income
persons to assume a greater proportion of program costs. The most common
proposal is that of means testing the Part B premium. Under current law, all persons
enrolled in Part B pay a monthly premium equal to 25% of program costs. Federal
general revenues account for the remaining 75%; (sometimes referred to as the
federal subsidy). Many persons argue that it is inappropriate for taxpayers to pay
three-quarters of Part B costs for high income Medicare beneficiaries. They point out
that low and middle income working persons may be subsidizing higher income
elderly persons. In response to these concerns, proposals to income-relate the Part
B premium have been offered on a number of occasions.
The Senate-passed version of BBA would have provided for an income-related
Part B premium for individuals with incomes over $50,000 and couples with incomes
over $75,000. The federal subsidy would have been phased-out for individuals with
incomes between $50,000 and $100,000 and for couples with incomes between
$75,000 to $125,000. Individuals with incomes at or above $100,000 and couples
with incomes at or above $125,000 would have paid 100% of program costs.30 At
the time BBA was considered, it was estimated that approximately 5% of the
noninstitutionalized aged population would have experienced higher Part B
premiums.
The Senate-passed BBA provision was controversial and was dropped in
conference. Many observers are reluctant to introduce means testing into the current
program. They note that once means testing is approved, it would be easier to lower
the income threshold at some future date as part of a budget savings measure. Means
testing could thus affect persons with more modest incomes. Another concern is that
if some beneficiaries are required to pay 100% of Part B costs, they might drop
Medicare Part B and seek alternative coverage. At this point, insurers do not market
Part B coverage (except for supplementary coverage) to the over-65 population.
However, this might change if insurers felt there was a market for this type of
product. If too many healthier people dropped Part B, this could potentially result in
adverse selection, with sicker people staying in Part B and driving up the per capita
costs.
The major issue during the 1997 debate was how means testing would be
administered. Many claim that income-relating the Part B premium would be costly
to administer because of the need to obtain and verify income information. While
available through Internal Revenue Service (IRS) records, there is no other currently
operational system of identifying income. The Senate-passed version of BBA had
proposed that a parallel system to the IRS be created through CMS to identify income
level. Some argued that this proposal would have required a large resource
30 For example, the 2003 Part B premium is $58.70 per month ($704.40 per year) which
represents 25% of costs; the federal subsidy is $ 176.10 per month (which represents 75%
of costs). Over the year, the federal subsidy is $2,113.20. If the Senate provision were in
effect, individuals with incomes over $100,000, would be subject to a Part B premium of
$234.80 a month ($2,817.60 a year, 100% of costs). Individuals with incomes between
$50,000 and $100,000 would have monthly premium amounts between $58.70 (the current
amount) and $234.80.

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CRS-24
commitment. Many argue that given that the IRS already accesses income data, it
should be the entity to administer an income-related premium. However, others are
concerned that if the IRS administers the income-related premium it will be viewed
as a tax.
It should be noted that income verification for the low-income population (for
example for a new drug benefit) poses different issues. State Medicaid programs
already have an eligibility determination system in place, though they may not have
sufficient resources to assume the increased administrative burdens. Most
prescription drug proposals which rely on states to perform the eligibility function
would provide some additional federal assistance. In addition, states would realize
savings for those drug costs, previously paid by Medicaid, but now paid under the
federal program.
Modifications in Beneficiary Cost-Sharing
Some observers have suggested that beneficiary cost-sharing should be
modified. Some proposals would be limited to changing existing cost-sharing levels.
Other proposals, such as adding a catastrophic out-of-pocket limit, would likely be
linked to broader benefit design changes.
Proposed changes in current cost-sharing requirements include increasing the
Part B coinsurance from 20% to 25%, increasing the Part B deductible from the
current $100 to a level more comparable to that in private insurance plans (such as
$200-$250), and imposing coinsurance on services not currently subject to such
charges (such as home health care and lab services).
Increased cost-sharing would presumably make beneficiaries more cost
conscious in their use of services. However, some persons are concerned that
increasing cost-sharing charges could impede access for some beneficiaries. Data
show that 64% of Medicare beneficiaries had incomes below $25,000 in 2000.
Most beneficiaries have supplementary coverage and therefore would not
directly feel the impact at the time they obtained services. Persons likely to be most
immediately affected by changes in cost-sharing requirements are persons in fee-for-
service Medicare without any supplementary health insurance coverage. Many of
these individuals have incomes above the levels necessary to qualify for full
Medicaid or QMB coverage but not high enough for them to obtain other
supplementary protection.
Beneficiaries with employer-based coverage might or might not see increased
out-of-pocket expenses if cost-sharing charges were raised. This would depend on
their employer’s response. As noted previously, a number of employers are
rethinking the amount of supplementary coverage they are offering their retirees.
Beneficiaries with Medigap insurance (which covers cost-sharing charges) would
likely see increased premium charges unless Medigap modifications were made at
the same time. However, as noted earlier, other factors could offset these increases.
These include the addition of an out-of-pocket limit on Medicare cost-sharing
charges (catastrophic cap) and/or the prohibition on coverage of first dollar costs
under standardized Medigap packages.

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CRS-25
Redesign the Medicare Benefit Package
Many observers state that Medicare’s benefit structure does not reflect the
current health care delivery system. As noted earlier, Medicare’s benefit package is
somewhat less generous than typical employment-based coverage. Some persons
have suggested that a redesign is appropriate. They recommend inclusion of such
additional items as prescription drugs or a limit on out-of-pocket expenses
(sometimes referred to as a catastrophic cap). However, such expansions have the
potential for significantly increasing Medicare’s costs. (The possible coverage of
prescription drugs raises a series of program design issues. These are addressed in
a separate CRS report.31)
Other program reforms would, by definition, affect benefit design. For example,
under a premium support system (discussed later) beneficiaries might be given more
freedom in selecting a benefit package tailored to their individual needs. Any benefit
redesign would need to be considered in the context of the entire package of benefits
available to the Medicare population, including their supplementary coverage. For
instance, a program change which increased beneficiary cost-sharing charges might
at the same time include a broader benefit package and thus lessen the need to
purchase Medigap policies.
Medigap Modifications
Some have suggested that incentives in current Medigap policies should be
revised. As noted earlier, beneficiaries with Medigap coverage tend to perceive
services as “free” at the point when they are actually using them; thus they use more
services and cost Medicare more dollars than those without supplementary coverage.
Another concern is that while current Medigap policies offer good protection against
some Medicare-related costs, they offer less adequate protection against other
potential expenses of the elderly. For example, even the most generous Medigap
policy (Plan J) limits coverage for prescription drugs to 50% of the cost of
prescriptions after the policyholder meets a $250 per year drug deductible; the
maximum annual drug benefit is $3,000.
The BBA permitted beneficiaries to purchase policies which have high
deductibles in exchange for lower premium charges. The intent was to enable
beneficiaries to obtain catastrophic Medigap protection at a lower premium charge.
However, these plans are not widely available.
As noted earlier, some analysts have suggested taking this approach a step
further by prohibiting some or all of the 10 standard Medigap packages from offering
first dollar coverage. This presumably would make beneficiaries more cost conscious
in their use of services and by extension lower Medicare costs. It should also have
the advantage of lowering Medigap premiums. However, the elderly are generally
risk adverse and tend to want full coverage. Some of this concern might be allayed
31 CRS Report RL30819, Medicare Prescription Drug Coverage for Beneficiaries:
Background and Issues, by Jennifer O’Sullivan.

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CRS-26
if provision were made for full coverage after an individual had incurred a certain
level of catastrophic expenses.
Combine Part A and Part B
Frequently, proposals to redefine Medicare’s benefit structure include a
recommendation to combine the current Part A and B programs. Many persons
suggest that Medicare’s current two part structure is no longer appropriate. They
note that the vast majority of beneficiaries are enrolled in both programs. They also
cite the program’s increasing emphasis on managed care approaches and the fact that
the Medicare+Choice program requires enrollment in both Parts A and B. The
Breaux-Thomas proposal considered by the Medicare Commission would have
combined Part A and Part B. It would have replaced the separate Part A and Part B
deductibles with a single $400 combined deductible (in 2003), indexed in future
years to the growth in Medicare costs.
A variation of this approach was the “21st Century Medicare Act” (S.2729, the
“tripartisan bill”) offered by Senators Grassley, Snowe, Jeffords, Breaux and others
in the 107th Congress. Under this bill, beneficiaries could elect to receive benefits
under a new Part E, instead of under the existing Parts A and B. The revised benefit
package would have established a unified deductible, set a catastrophic cap on out-of-
pocket costs for all covered services, eliminated cost sharing for preventive care, and
modified cost sharing requirements for hospital services, home health care and
skilled nursing facility services. The existing Part A and B programs would have
been retained and payments would continue to be made from the appropriate fund.
In addition, the current financing mechanisms would be retained.
While many observers agree that the current structure may not be the most
appropriate in the face of today’s realities, they question how the two vastly different
systems can be combined. Of particular concern are the two different financing
structures. Part A is funded by current workers through a payroll tax, while Part B
is funded by current beneficiaries and federal general revenues. Under the current
design, Part A becomes insolvent when assets in the trust fund are not sufficient to
meet current obligations. Under current law, no general revenue financing is
available for Part A. A combination of the two programs could potentially alter this
situation, since all revenue sources would potentially be combined into a single fund.
Many are concerned that if the two programs were combined, there would be less
incentive to control costs since “general revenues would be available.” Alternatively,
combining the two programs could also result in a new test for the availability of
general revenue financing.
The Breaux-Thomas proposal presented to the Medicare Commission included
a new measure of Medicare solvency. Under the proposal, Part A and B trust funds
would be combined into a single fund with current revenue sources from both funds
maintained. Congress would be required to authorize any additional contributions
to the new trust fund in any year in which general revenue contributions were
expected to exceed 40% of annual outlays. At the time the proposal was considered
(early 1999), this trigger was not expected to be reached until after 2005. “Breaux-
Frist 1" (S. 357 in the 107th Congress) contained similar provisions.

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CRS-27
Fee-for-Service (FFS) Modernizations
Some have suggested that Medicare’s FFS program should incorporate certain
managed care techniques which are currently used by private insurers in their
indemnity insurance products to control spending and improve patient outcomes.
Specifically, Medicare could establish disease and case management programs that
identify and enroll individuals with certain health conditions in order to provide
higher quality of care at lower costs.32 Under these programs, Medicare beneficiaries
with health conditions such as congestive heart failure, chronic obstructive
pulmonary disease, diabetes, hypertension, arthritis, or chronic pain could elect to
participate in case management programs which would provide patient education (for
self-management of chronic conditions), prevention and management of services, or
other flexible benefits. The programs would employ tools such as data analysis to
help identify and target beneficiaries, bundled payments to physicians and other
providers (for all items and services used during an episode of care) and prior
authorization or review of services that could also be incorporated more generally
into FFS Medicare. Congress took steps in this direction in BBA by authorizing
payment for diabetes self-management training services and in BIPA which required
a 3-year disease management demonstration project that included coverage for
prescription drugs.
Others recommend that Medicare be permitted to use selective contracting or
to provide beneficiaries incentives to use selected providers. Some private plans
restrict enrollees to providers who meet certain cost or quality standards; others
preserve enrollees’ freedom of choice but give them financial incentives to choose
preferred providers. Presently CMS does not have the statutory authority to establish
or contract with networks of preferred provider organizations in Medicare FFS,
though Medicare+Choice does include this option. CMS recently launched a
preferred provider organization (PPO) payment demonstration in an effort to increase
PPO participation in the M+C program.
Finally, some believe that CMS should use competitive pricing or improved
procurement practices when paying for both health care and administrative services.
Private health plans use their buying power in the marketplace to realize savings in
the cost of goods and services through negotiated pricing. Aside from limited
demonstration projects,33 CMS sets payment rates through different rate-setting
methods (sometimes referred to as administered pricing) not competition between
32 Generally, case management programs target “high-risk” patients who are likely to suffer
costly hospitalizations and adverse health outcomes because of complex social and medical
vulnerabilities; disease management programs target patients with a relatively standard set
of needs related to a specific disease, although certain comorbid conditions may be
addressed as well.
33 For example, BBA authorized five competitive bidding demonstration projects for
nonphysician Part B services such as laboratory and durable medical equipment supplies in
competitive acquisition areas where private payers paid less than Medicare. Under the
demonstration, CMS is required to protect beneficiaries’ access to a broad range of
providers and suppliers as well as to maintain a viable number of providers and suppliers
in the marketplace to assure an effective procurement process in future years.

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CRS-28
or negotiation with health care providers. Even when purchasing claims processing
services, CMS is required to contract exclusively with certain private health insurers
for functions related to paying FFS bills and reimburses the insurers their costs for
these services.34 At a minimum, analysts propose that CMS be able to solicit
competitive bids and contract with entities other than insurance companies to provide
claims processing services.
These changes, in one form or another, have been recommended for
consideration by the National Academy of Social Insurance,35 were discussed by the
Medicare Commission, and were part of the Clinton Administration’s proposal to
modernize Medicare. However, there are no systematic data establishing the
prevalence of these managed care tools in the private sector. Still, evidence indicates
private insurers use many of the managed care tools primarily to control costs and,
to some lesser extent, enhance quality. At best, however, the literature on the
effectiveness of these programs with respect to cost savings or quality improvement
is mixed and there is little hard evidence that these programs save money or enhance
the coordination of care.
It should be noted that CMS has established various demonstration projects to
test the applicability and effectiveness of many of these managed care tools,
including case management, disease management, selective contracting, bundled
payments, competitive pricing and competitive procurement. Some of the projects
are ongoing; some have not yet been started; others are long completed. Depending
upon the project, the results have been mixed in terms of cost savings,
implementation costs, impact on utilization, beneficiary interest, and provider
resistance. Although small scale experiments are necessary in order to learn (and are
viewed as more prudent than wholesale changes to the program), the projects take a
long time to set up and are temporary by design.
However, at this point, most Medicare beneficiaries continue to receive care in
Medicare FFS where overuse, underuse and misuse of services are thought to be
common. Historically, a small proportion of Medicare beneficiaries has accounted
for a major proportion of Medicare expenditures. In 1996, 12.1% of Medicare
beneficiaries accounted for 75.5% of Medicare FFS payments. Many of the high-cost
beneficiaries are chronically ill with certain common diagnoses with much of the
Medicare expenditures attributed to repeated hospitalizations. As the population
ages, and life expectancy extends, the number of these beneficiaries is expected to
grow. According to some, Medicare FFS often fails to meet the needs of chronically
ill people, because: (1) treatment regimens for chronic illness often do not conform
to practice guidelines; (2) care is frequently rushed and overly dependent on patient
initiated followup; (3) providers typically devote little time to assessing function,
34 The Health Insurance Portability and Accountability Act (HIPAA) established the
Medicare Integrity Program (MIP) and gave CMS the flexibility to contract with other
entities to perform certain program safeguard functions that had been part of the claims
processing contracts.
35 From a Generation Behind to a Generation Ahead: Transforming Traditional Medicare,
Final Report of the Study Panel on Fee-for-Service Medicare, National Academy of Social
Insurance. January 1998.

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CRS-29
providing instruction in behavior change or self-care, or addressing emotional or
social distress; and, (4) finally, care is fragmented, with little communication across
settings and providers.36 In essence, Medicare spends a large amount of money on
a small proportion of chronically ill beneficiaries; many unplanned hospitalizations
of these beneficiaries appear to be preventable; and care might be better managed if
FFS Medicare were changed so providers had stronger incentives to do so.
Some of the FFS modernizations discussed here face major hurdles in
implementation. Medicare FFS accounts for a significant portion of revenue for
physicians, hospitals, other providers and suppliers. Innovations that steer FFS
Medicare business away from some providers or are perceived as inequitably
benefitting some providers at the expense of others can cause economic disruptions
in the marketplace, will be controversial, and may elicit a call for congressional
intervention. Similarly, a program targeting certain beneficiaries that is perceived as
advantageous by other excluded beneficiaries may be controversial as well. Some
believe that managed care techniques that are available to private insurers may be
significantly more difficult for Medicare to adopt.
Premium Support
One technique for restructuring the Medicare program is a premium support
system, an approach for providing financial assistance (a premium subsidy) to
individuals for the purchase of their health care insurance. Individuals would be able
to choose from a set of competing plans and use their subsidy to pay all of or part of
the plan premium, depending on the level of the subsidy and the actual premium
charged by the plan. The level of premium support could be set at a fixed dollar
amount, or at a fixed percentage of the total plan premium. While the premium
subsidy would be set at basically the same amount for all participating individuals
(with adjustments in payments for geographic variations, demographic and other risk
factors), the decision as to what constitutes the benefit package and payments to
providers could be left completely or partially to the discretion of the entities offering
the health insurance. Options for approved benefit packages could range from
allowing a limited choice among only one or two benefit packages with a core set of
benefits to allowing maximum choice by placing no restrictions on the design of the
benefit package, or anywhere in between.
The goal of a premium support approach is to give individuals some amount of
flexibility to choose the health insurance coverage that meets their needs, along with
incentives to choose plans that are the best value for them within financial constraints
they may have for supplementing the premium subsidy. The premium support model
differs from the current Medicare program model which operates as a defined benefit
model with administered pricing. The current Medicare program guarantees
beneficiaries a defined set of benefits under an open-ended entitlement program and
determines the prices that will be paid to providers. Under premium support,
beneficiaries would instead be entitled to a level of support for their Medicare
covered services.
36 For further information see, Chen, Arnold, et al. Best Practices in Coordinated Care.
Washington, Mathematica Policy Research, March 22, 2000.

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CRS-30
Variations of the premium support concept have emerged as one of the leading
proposals for re-inventing or restructuring Medicare. Proponents say it would both
reduce Medicare spending growth and provide a more efficient health care insurance
model for Medicare beneficiaries. Just as Medicare was originally designed to reflect
the structure of private health insurance in 1965, many argue that the program has not
kept pace with market innovations and with health insurance plan coverage typically
provided today. As a result, they contend, the current Medicare program reflects an
antiquated system that must be reformed. At the core of the debate on premium
support is the tension between those who want to control spending growth and those
beneficiaries who are concerned about reform and any increases in their out-of-
pocket costs.
In essence, a shift from a defined benefit program to a premium support program
would represent a major paradigm shift in health insurance coverage. For the
Medicare program and population in particular, there are a number of special issues
and problems related to a shift from a defined benefit program to premium support
program.
Derivation of Premium Support. Many health economists have proposed
that price competition among health plans would improve the efficiency of health
care spending. In fact, premium support is a variant of “managed competition”
purchasing reforms advocated by Alain Enthoven and other economists. In 1995,
Aaron and Reischauer37 introduced their concept of premium support for Medicare.
They defined a Medicare premium support system as one in which Medicare would
pay a defined sum toward the purchase of a health insurance policy that provided a
defined set of services. In effect, Medicare beneficiaries would receive a
predetermined amount of money (a premium subsidy) to use towards the purchase
of a health plan, which would in turn provide a defined set of benefits. They
proposed to vary federal support across health care markets, but not within an area.
Aaron and Reischauer’s premium support model would involve: 1) defining the
health-care market area; 2) accepting bids from entities for the provision of the
defined benefit package; 3) developing local marketing organizations to handle the
sale of insurance that would assist Medicare beneficiaries; 4) providing “risk-
adjusted payments,” that is payments which would vary based on an individual’s
demographic and health factors; and 5) phasing-in the system using a blend of cost-
based and per-capita (a fixed dollar amount per person) reimbursement. Each of
these components raises a number of implementation issues. The first question is
how to make this dramatic change more acceptable to beneficiaries. Their solution
involved redesigning the benefits package to include some form of prescription drug
benefits as well as catastrophic coverage. They envisioned a standard benefit
package, along with standardized cost-sharing requirements, so that participants
could more easily compare costs and quality.
However, others argue that there is a trade-off between standardizing plans to
make it easier to compare benefits and allowing maximum choice and flexibility by
37 Aaron, Henry J., and Robert D. Reischauer. The Medicare Reform Debate: What is the
Next Step. Health Affairs, winter 1995.

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permitting insurers to design different plans for the varying needs of the population.
More flexibility would give individuals more choice to purchase the health insurance
that fits their needs and budget. The current Medicare+Choice program requires that
all private plans offer the standard Medicare benefit package and then provides strict
guidelines for adding services, with specific cost-sharing requirements. This differs
from the federal employees health benefits plans (FEHBP), which has established
few minimum benefits requirements and, therefore, provides both plans and
purchasers maximum flexibility. Opponents of offering an FEHBP type plan to
Medicare beneficiaries claim that seniors need the standardized plans to eliminate
confusion and guarantee adequate and appropriate coverage.
Determining a suitable federal contribution, or premium subsidy, raises other
issues. Aaron and Reischauer suggested setting the federal payment at 95% of the
cost of the current Medicare package in each market area, with some adjustments.
Over the phase-in period, the federal contribution would be set to grow more slowly
than projected current-law baseline costs, so that in the long run, the federal Medicare
contribution would reflect the per capita spending growth of the non-elderly. Aaron
and Reischauer recognized this model had the potential to lead to risk segmentation
caused by income differences. Risk segmentation occurs when individuals with a
larger risk of consuming medical services are in one set of plans, while those
individuals with a smaller risk of using services are in another set of plans. Because
higher income individuals tend to be healthier than lower income individuals, plans
with high deductibles and high cost-sharing would attract relatively wealthier and
therefore healthier beneficiaries. To counter this and to provide more equity, their
model would require both supplements for low-income participants to allow this
population to have some choice among plans and risk-adjusting the government
contribution to ensure that plans that enrolled higher-cost individuals would be
reasonably compensated.
The infrastructure necessary to sustain a Medicare premium support system
would take time to build. It would be necessary to create an environment of
competition among plans, develop the apparatus to regulate the marketing of
insurance, implement risk adjustment procedures38 and overcome difficulties of
increasing Medicare costs for many current beneficiaries. They suggested dual
Medicare systems – the “old” program for current enrollees, and the new structure
for newly eligible beneficiaries, while acknowledging that new enrollees might not
provide a sufficient population base for this phase in. They would leave in place the
Medicare system of administered pricing, at least during the transition period, as well
as significant federal regulation, to ensure that the new system could be shored-up in
case of a failure.
Evolution of Premium Support. Since the original Aaron and Reischauer
plan, a number of different proposals have been offered for establishing premium
support. As one study pointed out, despite their differences, premium support
38 Medicare+Choice payments are currently risk adjusted to account for variations in
demographic characteristics and inpatient hospital stays. Beginning in 2004, a new risk
adjustment methodology will be phased-in that will also include data from ambulatory
settings.

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models tend to share 6 core features:39 1) beneficiaries would be able to select a
Medicare approved plan on an annual basis; 2) plans would calculate and then submit
a “bid” for the total premium amount they would charge; 3) the “bids” would provide
a basis for calculating the federal payment amount; 4) the federal government would
provide a fixed premium subsidy; 5) beneficiaries would pay different premiums,
depending on the plan they selected; and 6) the traditional Medicare program would
compete on the same terms as private plans. Policymakers have yet to reach
consensus on these six elements. For example, some premium support proposals
require the Medicare FFS program to compete on the same playing field as private
plans, while others do not include FFS in their premium support model.
As noted earlier, the “Breaux-Thomas” proposal presented to the Medicare
Commission would have provided premium support to pay part of the total premium
for an approved health plan selected by a Medicare beneficiary. The FFS program
would compete for enrollment on the same basis as other approved private plans, so
that the government would pay a portion of the cost of providing traditional
Medicare-covered benefits. Under the proposal, a new Medicare Board would be
established to administer the program, and would be given broad powers to oversee
and negotiate with plans.
Building on the Commission’s model, “Breaux-Frist 1" introduced in the 106th
Congress would have set the premium subsidy at 88% of the nationally weighted
average of plan premiums. Beneficiary premiums would vary depending on the cost
of the plan they selected, ranging from potentially no premium to premiums covering
all of the excess costs that exceeded the subsidy level. Plans would be required to
provide a benefit package equivalent to current Medicare coverage, called core
benefits. All plans, including Medicare FFS, would be required to offer high-option
plans that included some prescription drug coverage and coverage to limit yearly
Medicare out-of-pocket expenditures for covered services other than drugs.
Subsidies would be provided to low-income beneficiaries to purchase at least one of
the high option plans covering prescription drugs. Plans would submit bids,
providing information about benefits covered under the plan, the proposed premium
to be charged for enrollment, and the service area. Plans would be allowed to have
reasonable variation in cost-sharing. The proposal also included the establishment
of an independent Medicare Board to oversee health plan competition and beneficiary
choice.
President Clinton also outlined a proposal for Medicare restructuring during the
106th Congress. This was largely incorporated into legislation introduced by Senator
Moynihan (S.2342, The Medicare Modernization Act of 2000). This legislation
would have created a competitive defined benefit program, administered by CMS
(then HCFA), that allowed for competitive bids for a standard Medicare benefit
package. This legislation differed from previous premium support proposals,
because it did not include the FFS program in the competitive bidding process.
However, prescription drug coverage was included in this legislation.
39 Oberlander, Jonathan. Is Premium Support the Right Medicine for Medicare? Health
Affairs, September/October 2000.

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Subsequently, Senators Breaux and Frist introduced S.2807, the Medicare
Prescription Drug and Modernization Act of 2000 (Breaux-Frist 2), which was a
scaled down version of Breaux-Frist 1. This bill would provide for optional
Medicare prescription drug coverage, establish a Competitive Medicare Agency
similar in concept to the Medicare Board, and allow for competitive bidding within
the Medicare+Choice program. However, this bill did not include FFS in the
competitive bidding process.
Legislative Activity in the 107th Congress. As noted earlier, slightly
revised versions of “Breaux-Frist 1" and “Breaux-Frist 2" were introduced in the
107th Congress (S.357 and S.358). Additionally, on June 28, 2002 the House passed
H.R. 4954, the Medicare Modernization and Prescription Drug Act of 2002, which
included provisions similar to components of premium support. The Senate
considered S. 2729 ( introduced by Senator Grassley et al., - the Tripartisan option),40
legislation that included an option for restructuring Medicare. Both H.R. 4954 and
S. 2729 included options for prescription drug coverage. M+C beneficiaries could
choose, but were not required to elect, plans with the new prescription drug benefit.
H.R. 4954 would have established a new Medicare+Choice competition
program, as well as a new demonstration program in no more than 4 sites chosen
from those areas with high concentrations of M+C enrollees. Under the competition
program, M+C plans would submit a bid for the premium amount they planned to
charge and once accepted, the premiums would be measured against a government
set benchmark amount (similar to the concept of a premium subsidy). Medicare
enrollees would chose an M+C plan and if the subsidy was less than the plan
premium, enrollees would have to pay the additional amount for these more
expensive plans. Conversely, Medicare beneficiaries would qualify for a rebate for
enrolling in less expensive plans.
While the competition program under H.R. 4954 would only affect M+C
enrollees, the demonstration program could affect all Medicare beneficiaries residing
in the demonstration area. In the demonstration program, the government would set
its benchmark (or premium subsidy) to incorporate both FFS and M+C components.
In addition to potential premium “adjustments” for M+C enrollees, those FFS
enrollees residing in the demonstration area would also be eligible for rebates or
subject to increased Part B premiums depending on the FFS bid in the demonstration
area. If FFS beneficiaries were required to pay higher premiums, then some healthier
beneficiaries who did not want to pay an increased amount might switch from FFS
to a lower cost M+C plan.
Under S. 2729 (the Tripartisan option), Medicare beneficiaries would be entitled
to elect to receive enhanced Medicare benefits under a new Part E. There would be
a unified deductible along with a serous illness threshold so that beneficiaries would
not be responsible for any cost-sharing (deductible, coinsurance and copayments)
once this threshold had been reached. For individuals choosing managed care, there
would be a new M+C payment system. Each year the Secretary would calculate a
40 S. 2729 was actually considered as S.Amdt. 4310 during the debate on S. 812, the Greater
Access to Pharmaceuticals Act.

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benchmark amount (or premium subsidy) for each M+C payment area, to cover
Medicare benefits under Part E. The Medicare Commissioner for the Medicare
Competitive Agency ( a newly created agency in this legislation) would determine
the difference between each adjusted plan bid and subsidy in order to determine the
payment amount, the Part E premium, and the M+C monthly basic beneficiary
premium reduction. Similar to the competition program in the House bill, Medicare
M+C enrollees would pay additional premiums for more expensive plans or
conversely, they would qualify for a rebate for enrolling in less expensive plans.
Current Issues. As the108th Congress debates various options for
modernizing the Medicare program, many issues will be considered. For example,
changes to the program could be broad and encompass the entire program, including
FFS and managed care, or could be more limited, changing just one segment, such
as beneficiary cost-sharing or managed care. If changes to FFS are included, then
perhaps the largest stumbling block is the potential for higher than expected
premiums for beneficiaries who choose to remain in Medicare FFS. The CMS
actuaries estimated that under the original Breaux-Frist 1 plan, enrollees remaining
in FFS in 2003 could expect to pay premiums that were 47% higher than the Part B
premium under current law.41 Although a larger premium subsidy could reduce this
differential, any expected savings to the Medicare program would also be lowered.
The domino effect of Medicare FFS plan price spiraling could further serve to
increase FFS costs. As relatively healthy beneficiaries decided that the FFS
premiums were no longer a good value, they could make the decision to move to
lower cost plans, thus leaving a smaller pool of higher-cost beneficiaries in FFS.
This smaller pool of sicker beneficiaries would further drive up the costs of FFS
Medicare. For the majority of Medicare beneficiaries who are currently in FFS, these
changes could prove to be very unsatisfactory.
Comprehensive Medicare reform would not only affect beneficiaries, it would
also have a significant impact on health care providers and others who have an
interest in the Medicare program, such as suppliers and persons investing in health
plans. The success of a major innovation, such as premium support, would depend
in a large part on the way these groups viewed and then responded to the changes.
Other components of a premium support model each present their own
challenges, and the possibilities for combinations of different solutions are huge. For
example, S.357 would offer a limited number of plans, so as to minimize beneficiary
confusion and make comparing plans for quality and efficiency relatively easy. The
age, disability, and health care needs of the Medicare population are significant
hurdles faced by policymakers seeking major Medicare changes, and a standardized
package could be designed to address common needs of this population, while
minimizing confusion about plan comparability. This is similar to the current
structure of the Medicare+Choice program. However, limiting the variety across
41 Memorandum written by Rick Foster, Office of the Actuary on February 23, 2000. The
47% increase could be even higher if more beneficiaries choose to enroll in plans that cost
less than FFS. This estimate assumed no change in the distribution of enrollees in private
plans versus FFS.

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plans would make it more difficult for plans to offer maximum choice to
beneficiaries and to tailor plans for different health care preferences and needs.
Developing a premium “bid” that would cover a core benefit package is viewed
as one of the cornerstones of Medicare structural reform, because it would introduce
competition into the Medicare system by allowing plans to independently determine
the premium they would charge. Under the current Medicare+Choice program, plans
are given a preset per capita amount for each enrollee, with explicit rules for
determining cost-sharing and premiums. Under Medicare’s current rules, a plan may
not earn a higher rate of return from its Medicare business than it does in the
commercial market.42
Another feature of a premium support model involves determining the federal
government level of the premium subsidy and then providing that subsidy to
beneficiaries. Subsidies could be set as a percentage of the average or the total of the
plan “bids”, so that higher-cost plans would require larger beneficiary contributions.
The opposing issues here are saving money versus providing incentives for
beneficiaries to choose the plans that fit their needs. The higher the subsidy, the
fewer incentives individuals would have to act as prudent purchasers. Once coverage
is purchased, there is even less incentive to act as a prudent purchaser. However, the
smaller the subsidy, the less “choice” or flexibility low-income individuals would
have in choosing a plan. If FFS were to become a relatively expensive option, then
low-income individuals and even individuals living in areas with no alternative to
FFS would be placed in a particularly disadvantageous situation.
In a premium support model, premiums for the approved plans may vary
depending on the plan selected. Thus individuals choosing more expensive plans
would be required to pay a larger share of the premium. For individuals with limited
resources, this could translate into limited choice. They might only be able to select
plans with little or no additional premiums above the subsidy level. While a larger
premium subsidy for low-income individuals would reduce or eliminate this problem,
depending on the level of the subsidy, savings to the Medicare program could also
be reduced. As previously discussed, this division between higher-income and
therefore healthier beneficiaries could lead to risk segmentation as well as issues of
inequality.
Other issues that must be considered for restructuring include how to best gain
beneficiary support and acceptance; and how to implement, phase-in, and administer
such a program. To the extent that beneficiaries envision this reform as part of a
larger plan to modernize the Medicare benefit package, including the provision of
prescription drug coverage and stop-loss coverage, they might be more willing to
accept broad Medicare reform. This comprehensive change may best be diffused by
phasing-in such a system, although again the various methodologies offer a trade-off
between savings and efficiency. Opponents of such a system would be quick to point
out that once a premium subsidy is set, it would be relatively easy to achieve
42 See CRS Report RL30702, Medicare+Choice, by Hinda Chaikind, Madeline Smith and
Paulette Morgan, for a detailed discussion of payments and benefits in the Medicare+
Choice program.

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budgetary savings by either reducing the percentage or even holding it constant in the
face of inflationary increases and changes in medical technology. Over time, the
subsidy could erode to represent a smaller and smaller share of the actual cost of total
premiums. Effectively only those with higher incomes would be able to afford the
higher-cost plans, as they became even more expensive.
Another key consideration is the participation of plans. The current
Medicare+Choice program is experiencing difficulties as plans withdraw from the
program. Ensuring that the premium support model was more attractive to plans so
that they would choose to participate and then remain in the program would be
crucial. Today, few plans are available in rural areas, in part because of the difficulty
of forming provider networks. Most individuals in these areas must rely on FFS, not
because they necessarily prefer this option, but because there is no other choice for
Medicare coverage. If FFS is included in a premium support model, and FFS
becomes an higher-cost option, then financial protections for individuals with little
or no choice may be necessary to guarantee equity. However, if FFS is not included
in a premium support model, then it would be difficult to contain Medicare growth.
Medicare Administration Restructuring
CMS is responsible for the oversight and administration of the Medicare
program as well as other duties. CMS is located within the Department of Health and
Human Services. The Administrator of CMS is appointed by the President,
confirmed by the Senate, and reports to the Secretary of Health and Human Services.
In the summer of 2001, CMS was reorganized to concentrate the major policy and
operations functions of fee-for-service Medicare into the Center for Medicare
Management and to concentrate the policy and operations functions of
Medicare+Choice and beneficiary enrollment and education functions into the Center
for Beneficiary Choices.
Several of the reform bills proposed in both the 106th and 107th Congresses
would have changed the administrative structure of Medicare. Other bills would
have placed the administration of a new prescription drug benefit in the current CMS.
Much of the impetus for restructuring stemmed from the belief of some observers
that the Medicare agency was neither responsive nor capable of administering
complex new benefits such as a prescription drug benefit. As a developer and
administrator of administered pricing formulas, some believed that the Medicare
agency did not have (and could not attract) staff capable of running a much more
competitive and dynamic benefit. They also believed that there was an inherent
conflict of interest in administering both the existing fee-for-service and a new
managed care program. Critics of wholesale restructuring believed that the problems
of the agency arose from chronic underfunding and a dramatically increasing
workload, especially since passage of BBA.
Some of the proposals would have established a Medicare Board, either to
administer the new agency or to act as an advisory committee to the entity
responsible for program administration. To varying degrees, the new administrative
entity would be given greater flexibility in managing the program than CMS now has.

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An alternative plan replaced CMS with two separate agencies within HHS: one
agency would administer Medicare, the other would administer Medicaid and other
state-operated health programs.43 Proponents of this change suggested that even with
additional resources, the operational tasks currently assigned to CMS are unwieldy
and would overwhelm any administrative entity charged with oversight of Medicare.
Critics, however, cite the need for coordinated federal action in health care due to
overlapping activities, such as survey and certification efforts, that affect the
Medicare and Medicaid programs jointly as one reason to keep CMS’s current
functions together in one agency. In their view, the 2001 administrative
reorganization of CMS that established separate administrative entities within the
same agency may have been an adequate response, particularly if agency resources
are increased.
It is unclear whether the 2001 reorganization satisfies critics of Medicare’s
management. Some may remain skeptical whether CMS could oversee an expanded,
more complex Medicare program, in part, because they doubt that the agency’s
internal culture, geared toward regulation of the fee-for-service program, could ever
be reoriented to administer competitively-based programs. They also question
whether conflict exists in administering both the existing fee-for-service and a
competing new managed care program. Moreover, some express concern over the
willingness of CMS to adapt its regulatory approach if it manages a new prescription
drug benefit. On the other hand, others see the possibility that the change in agency
leadership may transform the agency’s culture and regulatory orientation. Some
point to greater efforts to communicate agency policy and hear from stakeholders as
evidence of change. Further, some believe that the agency’s efforts to implement a
prescription drug card may give the agency the needed administrative expertise in the
area of prescription drugs.
Still other analysts contend that problems with Medicare’s administration stem
from inadequate resources, not necessarily organizational shortcomings. In an open
letter to Congress in January 1999, 14 experts representing a variety of perspectives,
cited the unwillingness to provide CMS with the resources and administrative
flexibility to accomplish its assigned tasks as the source of the agency’s difficulties.
In their view, these constraints had been imposed at a time when Congress had
imposed additional responsibilities and some of the agency’s most capable
administrators had left. These concerns have not been allayed by the change in the
agency’s management, name, or structure.
Depending upon the administrative structure selected, two separate agencies
responsible for administering different elements of a Medicare program could face
programmatic and managerial problems, such as inconsistent treatment of Medicare
beneficiaries, confusion among beneficiaries and providers, conflicting regulations,
and duplicative staff functions. These problems could be compounded by the
absence of a higher official who has direct management responsibility over both
agencies who can resolve interagency disputes.
43 Etheredge, Lynn. Medicare’s Governance and Structure: A Proposal. Health Affairs, v.
19, no. 5, September/October 2000.

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Prospects for the 108th Congress
At this writing, press reports indicate that the President will be forwarding a
proposal to the Congress that may limit prescription drug coverage to persons who
enroll in managed care plans. Congress will once again debate Medicare reform
legislation; what specific action it will take can not be predicted at this point.

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