Medicare is the second-largest federal entitlement program after Social Security. This year the program will pay for the health care of some 39 million elderly and disabled people at a cost of about $216 billion, or 13 percent of federal outlays. The debate over the future of Medicare is occurring at a time when the growth in spending on Medicare has turned suddenly and unexpectedly flat. That trend, however, is not likely to continue.

The President's budget includes several initiatives to expand coverage and reduce spending in the Medicare program. Those proposals would have a small net effect on Medicare spending, reducing outlays by $19 billion through 2009. The President would also transfer general revenues to the Hospital Insurance Trust Fund. That transfer would delay the date of insolvency of the HI trust fund but would not address the future budgetary pressures that will result from projected rapid growth in Medicare spending over the coming decades. This chapter first reviews trends in Medicare spending and then discusses the President's proposals.
 

Trends in Medicare Spending

The patterns of growth for Medicare and private-sector health spending diverged in the 1990s after both had grown at double-digit rates in the 1980s. A dramatic slowdown in the growth of private health spending in the mid-1990s was matched only recently by Medicare. Private health insurance spending increased by less than 4 percent a year between 1993 and 1997, while Medicare spending continued to rise at an annual rate of almost 9 percent.

The growth of Medicare spending slowed sharply, however, in 1998. Total outlays, which had increased by more than 8 percent in 1997, rose by only 1.5 percent in 1998, and growth is expected to be extremely slow in 1999. Part of that slowdown was anticipated; the Balanced Budget Act of 1997 (BBA) lowered the projected growth of Medicare spending by an estimated 4 percentage points in 1998. The BBA reduced payment rates for many services and restrained the update factors for payments through 2002. Both fee-for-service providers and Medicare+Choice plans are experiencing lower increases in payments as a result.

But the actual rate of spending growth is considerably slower than the BBA provisions alone were expected to produce. Other factors appear to have contributed to the sudden flattening of Medicare expenditures, including greater compliance with Medicare payment rules and a longer time for processing claims.

Widely publicized efforts to clamp down on fraud and abuse in the program have resulted in greater compliance by providers with Medicare's payment rules. Those efforts include more rigorous screening of claims by Medicare contractors and tougher enforcement of Medicare laws by the Departments of Justice and Health and Human Services. Through investigations and lawsuits, those agencies have pursued a wide range of providers--including Columbia/HCA, teaching physicians, home health agencies, clinical laboratories, and providers of durable medical equipment--as well as Medicare contractors themselves. Although the total reduction in spending growth attributable to the improved compliance cannot be quantified, the Congressional Budget Office estimates that one response alone to recent enforcement efforts--less aggressive billing by hospitals--lowered growth in Medicare spending by 0.75 percentage points in 1998.

The average time for processing Medicare claims rose dramatically in 1998. Expanded compliance activities, combined with major efforts to prepare computer systems for 2000, contributed to longer payment lags, which can have a substantial effect on Medicare outlays. An increase of one week, for example, in the average time for processing claims reduces Medicare outlays for the fiscal year by 2.3 percent. But that reduction is only temporary because the delay merely moves outlays into the next fiscal year.

CBO expects that improved compliance with payment rules and longer claims-processing times will have little or no effect on the rate of growth of Medicare spending in the longer run. Mandatory Medicare outlays are therefore projected to grow at an average annual rate of about 7 percent through 2004, rising to slightly more than 8 percent over the 2004-2009 period (see Table 3-1). By 2009, total outlays are projected to be $444 billion--more than double the level in 1999. Much of the increase over the next few years reflects rising expenditures per enrollee; enrollment itself will expand only modestly as the last of the relatively small cohorts born in the late 1930s and early 1940s reach age 65.
 

Those baseline projections assume that payment lags will begin to return to more typical levels late in 2000, with a catch-up in spending and a resumption of normal spending growth in 2001 and 2002. That prediction is highly uncertain, however. Although the continuing attention focused on antifraud activities could slow the rate of spending growth for a considerable period, more typical Medicare expenditure patterns could resume sooner than CBO now predicts. If, for example, payment lags cause serious cash flow problems for providers, the Health Care Financing Administration (HCFA) might respond by instructing Medicare contractors to bypass claims-processing safeguards and accelerate payments.

Other administrative and judicial actions could also cause Medicare spending to rise in the near term. For instance, the settlement of current litigation or the acceptance (or loss on appeal) of a district court decision overturning Medicare's payment policies for outliers--inpatient stays with unusually high costs--could raise outlays by more than $4 billion in 1999 or 2000.

Medicare spending will grow more rapidly in the decades after 2009 as the baby boomers begin to turn 65. Between 2010 and 2030, the elderly population will grow at a rate three times faster than between 2000 and 2010. Medicare costs are likely to grow considerably faster than program enrollment, however. The cost per beneficiary of providing health care services, which has risen dramatically in the past, is likely to continue doing so. That anticipated growth reflects advances in medical technology that are expected to raise health care costs and a continued increase in the use of services by beneficiaries.

Projections of Spending and Enrollment in Medicare+Choice

The Balanced Budget Act established the Medicare+Choice program to expand the range of health plans from which beneficiaries could choose and to lay the foundation for a more competitive Medicare system. Building on the existing Medicare risk market, in which all of the plans were health maintenance organizations, the program allows a wide variety of health plans--including preferred provider organizations, point-of-service plans, and provider-sponsored organizations--to participate in Medicare. Medicare+Choice plans receive a fixed amount per enrollee, whereas traditional Medicare pays health care providers on a fee-for-service basis.

Payments for Medicare+Choice plans in CBO's baseline soar from $37 billion in 1999 to $141 billion in 2009 as enrollment in those plans continues to expand (see Table 3-2). The spending increase, however, also reflects growth in expenditures per enrollee that, under current law, will roughly mirror the performance of the fee-for-service sector. Despite that strongly positive trend, annual changes in Medicare+Choice spending will vary considerably. Those fluctuations reflect technical aspects of Medicare's reimbursement policy rather than sudden changes in underlying spending patterns.⁽¹⁾
 

For 1999, CBO projects that enrollment in Medicare's risk-based plans will grow by almost 12 percent, to 6.2 million. Although that increase is significant, it represents a sharp reduction from the previous estimate of 20 percent growth in 1999. The lower projection reflects the recent unanticipated withdrawal from the Medicare market of plans serving over 400,000 Medicare enrollees. A heightened awareness that plans can leave the market is likely to reduce the willingness of some Medicare beneficiaries to enroll in plans in the next few years.

CBO has also reduced the projected growth of enrollment in Medicare+Choice plans for 2000 and beyond because Medicare will phase in the risk adjustment of payment rates (to account for variations in per-enrollee costs based on health status) in a manner that will reduce spending below previously projected levels for enrollees in Medicare+Choice plans. CBO had previously assumed that risk adjustment would be done on a spending-neutral basis (see Box 3-1). Reducing payment increases to Medicare+Choice plans will impede their ability to offer the additional benefits, such as prescription drugs, that were expected to encourage more people to enroll. On balance, CBO projects that risk-based plans will account for 16 percent of Medicare enrollees in 1999, 22 percent in 2004, and 31 percent in 2009.
 

Because per-enrollee payments to Medicare+Choice plans are tied to fee-for-service expenditures, increased enrollment in those plans does not necessarily slow the rate of growth of Medicare spending. Although adjusting payments for risk will reduce the spending growth by an average of 0.1 percentage point a year through 2004, CBO projects that per-enrollee payments to Medicare+Choice plans will grow in line with fee-for-service spending in subsequent years.

Projections of Spending and Enrollment in the Medicare Fee-for-Service Program

CBO projects that spending in Medicare's fee-for-service program will increase from $175 billion in 1999 to $302 billion in 2009. That growth will occur despite shrinkage in fee-for-service enrollment, which will decline by 1.5 million over the next decade, and cuts in the growth of payment rates for many services.

Spending growth for different services will vary considerably over the same period. The extent of the recent slowdown in spending has also varied by type of service, although spending for all services has been affected by the 1.9 percent drop in fee-for-service enrollment that occurred in 1998 and the further 0.8 percent decline expected in 1999.

Postacute Care Services. Growth in payments for skilled nursing facility (SNF) and home health services--the fastest-growing areas of fee-for-service spending in Medicare during the decade preceding passage of the Balanced Budget Act--slowed significantly in 1998. The most dramatic change was in spending for home health care, which actually fell by 14.9 percent in 1998. SNF expenditures, by contrast, continued to rise but at less than half the rate of growth in 1997--8.9 percent compared with 21.1 percent. The slowdown in spending reflects the implementation of new prospective payment systems, increases in the time for processing claims, and--in the case of home health services--recoupment of earlier overpayments. The rise in claims-processing times was particularly marked for home health services; a new sequential billing process added to the lags caused by factors affecting Medicare services more generally.

The transition to prospective payment systems is expected to hold the average annual rate of growth in spending through 2001 to 1.9 percent for skilled nursing services and 3.5 percent for home health care. Spending is then projected to increase through 2009 at an average annual rate of 6.2 percent for SNF services and 7.5 percent for home health services.

Inpatient Hospital Services. Medicare payments for inpatient hospital services fell 2.5 percent in 1998, to $87 billion. The factors contributing to that drop include a decline in the volume of services provided (reflecting the drop in fee-for-service enrollment) and several provisions in the BBA that froze payment rates for most operating costs, reduced capital-related payment rates by 17.8 percent, and cut subsidies for medical education. In addition, the case-mix index--a measure of the relative costliness of the cases treated in hospitals paid under the prospective payment system--fell 0.5 percent in 1998. Much of that unprecedented drop in the index is probably attributable to widespread adoption by hospitals of less aggressive billing practices following antifraud initiatives that focused on those practices.

For most hospitals, the Balanced Budget Act limits cumulative increases in payment rates for operating costs to about 6 percentage points below inflation over the 1999-2002 period. CBO projects that the limit on rate increases, in combination with declining fee-for-service enrollment, will result in a 1.5 percent drop in payments for hospital inpatient services in 1999. Those payments are projected to begin rising in 2000, with annual growth rates averaging 4.5 percent from 2000 through 2009.

Physicians' Services. Medicare payments for physicians' services rose 3.0 percent in 1998, to $32 billion. Payments are projected to remain flat in 1999 and to grow at an average annual rate of 2.8 percent over the next decade, reaching $43 billion in 2009. That growth rate is a result of payment formulas enacted in the BBA that tie the growth of per-enrollee expenditures for physicians' services to the growth of gross domestic product per capita. Those formulas generate annual rate changes that oscillate widely around a smooth trend. CBO projects stable growth rates, however, because the timing of those oscillations is impossible to predict.

Outpatient Services. Payments to outpatient facilities--such as hospital outpatient departments, dialysis facilities, and rural health clinics--fell by 5.5 percent in 1998 and are projected to decline another 6.6 percent in 1999. Those reductions result largely from lower payment rates accompanying the transition to a prospective payment system for hospital outpatient services. Outpatient payments are projected to rebound in 2000 and grow at annual rates of 7 percent or more for the rest of the decade.

Spending for outpatient therapy services and other outpatient ancillary services--including pharmaceuticals, durable medical equipment, and chiropractic care--rose only 0.7 percent in 1998 as a result of reductions in payment rates and a cap on payments for therapy services performed outside hospitals. Projected payments for nonphysician professional services and outpatient ancillary services will grow only slightly in 1999 before taking off again in 2000. Annual spending growth is expected to average 11.3 percent from 1999 through 2009.
 

Proposals Affecting Medicare Spending in the President's Budget

The President's budget for 2000 includes provisions to expand Medicare coverage to new populations and to reduce the growth of spending in Medicare's fee-for-service sector. Populations newly eligible for Medicare would include certain people between the ages of 55 and 64, who would be allowed to buy in to the program, and the working disabled. The costs of those expansions would be more than offset by fee-for-service savings, which would have spillover effects on Medicare+Choice spending and also result in lower Part B (Supplementary Medical Insurance) premiums. The net effect would be savings in mandatory programs of about $9 billion through 2004 and $19 billion through 2009.

The budget also includes a $750 million demonstration project to enable Medicare beneficiaries to participate in clinical trials. That program would be paid for through the general fund rather than the Medicare trust funds.

Policies to Expand Medicare Coverage

The President's proposals to allow people under age 65 to buy in to the Medicare program are similar to proposals that were in the budget last year. Two groups would be eligible to participate: people ages 62 to 64 who do not have private health insurance, Medicaid, or other public coverage; and certain workers ages 55 to 61 who lose their health insurance because of a job loss. The terms of participation would differ for the two groups.

A third proposal, to expand Medicare coverage for the disabled, is part of a broader initiative to allow the disabled to return to work and maintain their health insurance coverage. That initiative would use funding from both the Medicare and the Medicaid programs.

Buy-In for People Ages 62 to 64. The Administration proposes to allow people ages 62 to 64 who do not have employment-based health insurance, Medicaid, or other public coverage to enroll voluntarily in Medicare, provided they do so as soon as they are eligible. Events that would qualify people for enrollment include turning 62 or losing employment-based health insurance under certain circumstances between the ages of 62 and 64.

Medicare premiums under the buy-in would be paid in two parts, both of which would be updated annually:

• Before the age of 65, enrollees would pay premiums that reflected the average expected cost of benefits if everyone ages 62 to 64 participated in the buy-in. The monthly premium would be about $324 in 2001, the first year of the program. Premiums would be adjusted for geographic variation in Medicare's costs.
  
  
• At age 65 and thereafter, buy-in participants would pay a premium surcharge (in addition to their regular Medicare premium) to recapture for the government the extra costs that Medicare would pay as a result of adverse selection in the buy-in program. The surcharge would reflect the difference between the premium paid before age 65 and the higher average costs of people who chose to participate in the program. CBO estimates that a person who enrolled in the buy-in program in 2001 at age 62 and who stayed in the program until age 65 would pay a surcharge of about $23 a month in 2004.

CBO estimates that the Medicare buy-in for people ages 62 to 64 would raise outlays for Medicare benefits by $31.7 billion between 2001 (when the program begins) and 2009 (see Table 3-3).⁽²⁾ Premiums would total $28.4 billion, resulting in net Medicare outlays of $3.3 billion. About 473,000 people would participate in the program in 2001, rising to about 718,000 by 2009. In addition, Social Security benefits would increase by about $0.2 billion a year under CBO's assumption that approximately 1 percent of people ages 62 to 64 would retire if health insurance was available to them.
 

Buy-In for Displaced Workers Ages 55 to 61. The Administration proposes to allow certain workers ages 55 to 61 who lose health insurance because of a job loss to buy into the Medicare program. (Their spouses would also be eligible for coverage.) The program would be available only to people who met several eligibility requirements, including:

• Having health insurance coverage for at least 12 months immediately before enrolling in the program;
  
  
• Participating in their employer's plan immediately before losing their job;
  
  
• Being eligible for unemployment insurance benefits; and
  
  
• Being ineligible for any other employment-based or federal health insurance coverage. (That requirement means workers would first have to exhaust the 18 months of continued coverage from their former employer that is available under the Consolidated Omnibus Budget Reconciliation Act of 1985.)

Monthly premiums for the buy-in would be almost $440 per person in 2001. They would be updated annually and adjusted for geographic differences in costs. Those premiums would not quite cover the costs of the program in the short term, however, because the program would attract enrollees who are expected to have high medical expenditures. Thus, CBO projects that net Medicare outlays would rise by about $0.3 billion over the 2000-2009 period, reflecting outlays for benefits of $2.5 billion and premiums of $2.1 billion (see Table 3-3). The proposal would also encourage a small number of additional workers to seek unemployment insurance, raising federal outlays for unemployment compensation by an estimated $60 million over 10 years.

Participation in the program would be low as a result of the stringent eligibility requirements and the relatively high premiums that enrollees would pay. By 2009, about 50,000 people would be enrolled in the program at any point in time.

Medicare Coverage for the Working Disabled. The President's budget includes provisions under both Medicare and Medicaid to enable disabled people to return to work and maintain their insurance coverage. The Medicare proposal would entitle disabled people who return to work--thereby losing their eligibility for Social Security benefits--to lifetime coverage under Medicare Part A (Hospital Insurance). That entitlement would be available only to people who enrolled during the first 10 years after enactment of the legislation.

CBO estimates that extending eligibility for Part A to the working disabled would increase net Medicare outlays by $1.4 billion over the 2000-2009 period. By 2009, when enrollment in the program would end, 59,000 people would be participating in the program.

Comparison with the Administration's Estimates. The Administration estimates that the two buy-in proposals for people ages 55 to 64 would raise net Medicare outlays by $1.4 billion over the 2000-2004 period. That estimate is about the same as CBO's estimate of $1.2 billion for the same period.

The Administration has combined its estimate of the Medicare expansion for the disabled with its estimate of the associated Medicaid provisions and has included additional costs for Social Security's Disability Insurance program. That combined estimate totals about $0.9 billion over the 2000-2004 period, which is similar to CBO's estimate of $1.2 billion.

Policies to Reduce Fee-for-Service Spending

The President proposes a variety of changes to reduce fee-for-service spending below projected levels, including:

• Reductions in payments for certain services;
  
  
• New requirements to improve compliance with Medicare's payment rules; and
  
  
• Replacing a "centers of excellence" demonstration project with a permanent program to give hospitals and other providers incentives for greater efficiency and a higher quality of care.

One-quarter of the savings in Medicare Part B spending would accrue to beneficiaries in the form of lower premiums. Thus, beneficiaries would save $1.4 billion through 2004 and $3.2 billion through 2009.

Reductions in Payments. The largest savings from reducing payments to providers would come from the President's proposal to freeze payment rates for inpatient hospital services in 2000. In principle, those rates are updated each year to reflect changes in the costs of hospital inputs. The BBA specified, however, that the annual updates would be lower than the increase in input prices through 2002, with the update in 2000 being 1.8 percentage points less than the increase in input prices. CBO estimates that this reduction will give hospitals a 1.1 percent rate increase in 2000. Freezing the rates in 2000, as the President proposes, would save $0.6 billion in 2000, $3.8 billion through 2004, and $8.7 billion through 2009.

In addition, the budget would further reduce Medicare's payments for the bad debts incurred by hospitals--those payments having already been lowered under the BBA--and extend the reduction in payments for bad debts to other providers. Those providers include SNFs, providers of outpatient physical therapy, comprehensive outpatient rehabilitation facilities, community mental health clinics, federally qualified health centers, and rural health clinics. Total savings from the reductions in bad-debt payments would be $0.4 billion in 2000, $2.0 billion through 2004, and $4.6 billion through 2009.

Other services for which payments would be reduced include outpatient pharmaceuticals, tests performed by clinical laboratories, and prosthetic and orthotic devices. The Administration also proposes to reduce Medicare's payments for erythropoietin, a drug used by patients with end-stage renal disease and receiving dialysis. Savings from all of those payment reductions would be $3.2 billion through 2004 and $6.0 billion through 2009.

Requirements to Improve Compliance with Medicare's Payment Rules. The President's budget includes several initiatives to improve compliance with Medicare's payment rules and reduce fraud and abuse. In particular:

• Group health plans would be required to notify Medicare of beneficiaries for whom they provide primary coverage. HCFA would then know immediately whether Medicare or a private insurer had primary responsibility to pay for a beneficiary's health services.
  
  
• New rules would restrict the provision of partial hospitalization services for mentally ill patients. In addition, the Secretary of Health and Human Services (HHS) would be given more authority to screen out unqualified providers of that benefit and could impose civil monetary penalties on physicians who falsely certify that patients need those services.
  
  
• The President proposes to reinstate the "reasonable diligence" standard for imposing civil monetary penalties on providers who submit false Medicare claims. That standard was changed under the Health Insurance Portability and Accountability Act of 1996, which raised the legal burden of proof for the federal government.

Centers of Excellence. The Balanced Budget Act took important steps toward improving the efficiency of Medicare's fee-for-service program by establishing prospective payment systems for several services. The President's budget would seek further efficiencies by extending and making permanent a "centers of excellence" program enabling Medicare to contract with certain hospitals for the treatment of particular disorders. Those hospitals would be chosen on a competitive basis.

Under the proposal, the Secretary of HHS would be authorized to pay selected hospitals a single bundled rate for all services associated with an acute hospital admission. In 2001, contracts incorporating such global payments would be established with facilities for certain heart procedures and for knee and hip replacement surgery. Contracts for other procedures and medical conditions would be established in the future. The initiative would save a total of $0.3 billion through 2004 and $0.6 billion through 2009.
 

The President's Trust Fund Proposal

The President also proposes to augment Medicare's financing by transferring funds from the general fund to Medicare's Hospital Insurance (HI) Trust Fund. Medicare spending is drawn from two trust funds: the HI trust fund, which pays for Part A services, and the Supplementary Medical Insurance (SMI) Trust Fund, which pays for Part B services. Part A services include inpatient hospital care, home health services immediately following an inpatient stay, and SNF and hospice services. Part B services include physicians' services, other ambulatory services, and home health services for non-postacute care.⁽⁴⁾

Sources of Revenue for Medicare's Trust Funds

The HI trust fund relies primarily on payroll taxes, which account for 88 percent of its income. The remainder comes from taxation of Social Security benefits, premiums from beneficiaries who are not entitled to free enrollment in the Part A program, interest on fund balances, and other, smaller sources. By contrast, about 75 percent of SMI costs are financed by interest payments and transfers from the general fund, with premiums paid by beneficiaries accounting for the remaining 25 percent.

Taking both trust funds together, payroll taxes will account for 57 percent of Medicare's income in 1999, beneficiaries for 12 percent, interest payments for 5 percent, and the general fund for the remaining 26 percent (see Table 3-5). The portion of benefits paid by SMI, however, will rise over the next decade as the transfer of spending for non-postacute home health care from Part A to Part B is phased in. Consequently, general fund financing will grow as a share of total revenues, reaching 37 percent of the total by 2009. Payroll taxes will account for only 45 percent of receipts in that year.

The shift of most home health spending to Part B will also enable the HI trust fund to maintain a positive balance over the next decade. But HI outlays will exceed receipts in 2007, and the trust fund balance will erode at an accelerating rate in subsequent years.

Effect of the President's Proposals on the HI Trust Fund

The President's proposed changes in Medicare benefits and eligibility would have an extremely small impact on the HI trust fund--a net increase of $19 billion in 2009. The President also proposes, however, to address the solvency of the HI trust fund directly, by transferring $350 billion from the general fund to the trust fund over the next decade. That transfer would increase the balance in the trust fund in 2009 by an additional $435 billion ($350 billion plus $84 billion in additional interest payments) for a total of $595 billion (see Table 3-6).
 

That bookkeeping transaction would delay the date of insolvency of the HI trust fund by several years. But the transfer would do nothing to address the underlying problem: rapid growth in spending for Medicare, Social Security, and other federal programs will cause total outlays to outstrip total anticipated revenues. If the growth in program spending is to be curbed, a major restructuring of Medicare will be required.

1. The volatility of projected annual rates of growth in Medicare+Choice spending is an artifact of Medicare's reimbursement policy and does not reflect underlying changes in the program. Medicare generally pays Medicare+Choice plans on the first day of the month. When the first day falls on a weekend or holiday, payments are accelerated to the last business day of the preceding month. In addition, the Balanced Budget Act alters some payment dates for group plans. For those reasons, the number of payments varies each fiscal year from 11 to 13; the growth of Medicare spending for group plans surges in years with 13 payments and slows in years with 11 payments.

2. The basis for the estimate is similar to the approach that CBO used in the estimate of the President's budget for 1999. See Congressional Budget Office, An Analysis of the President's Budgetary Proposals for Fiscal Year 1999 (March 1998), pp. 37-42.

3. The President has also proposed a modification of the physician payment formula that would dampen the tendency of updates to physician payment rates to oscillate widely around a smooth trend, but would not affect the trend. CBO projects stable growth rates because the timing of those oscillations is impossible to predict. Therefore, CBO estimates that this provision would not have a significant effect on Medicare spending.

4. Before the BBA, most home health care spending came from the HI trust fund. Under the BBA, spending for non-postacute home health care is gradually being transferred to the SMI trust fund over a period of six years.

---

Please select a format in which to retrieve a document.

(Additional information about our document formats is available.)

---