MedPAC Data Book 2007 - PDF by Jordanpeterson

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									   J U N E   2 0 0 7


  A DATA BOOK


Healthcare Spending
      and the
 Medicare Program
   J U N E   2 0 0 7


  A DATA BOOK


Healthcare Spending
      and the
 Medicare Program
Introduction

MedPAC’s Data Book is the result of discussions with congressional staff members regarding
ways that MedPAC can better support them. It contains the type of information that MedPAC
provides in publications like the March or June reports; it also combines data from other sources,
such as CMS. The format is condensed into tables and figures with brief discussion. Website
links to MedPAC publications or other websites are included on a “Web links” page at the end of
each section.

The Data Book provides information on national health care and Medicare spending, as well as
Medicare beneficiary demographics, dual-eligible beneficiaries, quality and access in the
Medicare program, and Medicare beneficiary and other payer liability. It also examines provider
settings—such as hospitals or post-acute care—and presents data on Medicare spending, percent
of beneficiaries using the service, number of providers, volume, length of stay, and margins, if
applicable. In addition, it covers the Medicare Advantage program and prescription drug
coverage for Medicare beneficiaries, including Part D.

Limited printed copies are being distributed. This report is, however, available through the
MedPAC website: www.medpac.gov.




                                                iii
Table of contents

Introduction .............................................................................................................................. iii

Sections

1         National health care and Medicare spending ..............................................................1

1-1       Medicare made up about one-fifth of spending on personal health care in 2005 ............................ 3
1-2       Medicare’s share of total spending varies by type of service, 2005 ................................................ 4
1-3       Health care spending has grown more rapidly than GDP, with public financing
          making up nearly half of all funding................................................................................................ 5
1-4       Trustees project Medicare spending to increase as a share of GDP ................................................ 6
1-5       Changes in spending per enrollee, Medicare and private health insurance ..................................... 7
1-6       Trustees and CBO project Medicare spending to grow at an annual average rate of
          7 percent to 8 percent over the next 10 years................................................................................... 8
1-7       Medicare spending is concentrated in certain services and has shifted over time ........................... 9
1-8       FFS program spending is highly concentrated in a small group of beneficiaries, 2002 ................10
1-9       Medicare HI trust fund is projected to be insolvent in 2019..........................................................11
1-10      Medicare faces serious challenges with long-term financing ........................................................12
1-11      Average monthly SMI benefits, premiums, and cost sharing are projected to grow
          faster than the average monthly Social Security benefit................................................................13
1-12      Medicare FFS providers: Number and spending ..........................................................................14

          Web links ......................................................................................................................................15

2         Medicare beneficiary demographics........................................................................... 17

2-1       Aged beneficiaries account for the greatest share of the Medicare population and program
          spending, 2004 ...............................................................................................................................19
2-2       Medicare spending rises as beneficiaries age, 2004 ......................................................................20
2-3       Beneficiaries who report being in poor health account for a disproportionate share
          of Medicare spending, 2004...........................................................................................................21
2-4       Enrollment in the Medicare program is projected to grow fastest in the next 30 years.................22
2-5       Characteristics of the Medicare population, 2004 .........................................................................23
2-6       Characteristics of the Medicare population, by rural and urban residence, 2004 ..........................24
2-7       Arthritis and hypertension are the most common diseases reported by
          Medicare beneficiaries, 2002 .........................................................................................................25

          Web links ......................................................................................................................................26


3         Dual-eligible beneficiaries............................................................................................ 27

3-1       Dual-eligible beneficiaries account for a disproportionate share of Medicare spending, 2004 .....29
3-2       Dual eligibles are more likely than nondual eligibles to be disabled or over 85 years old, 2004..30
3-3       Dual eligibles are more likely than nondual eligibles to report poorer health status, 2004 ...........31
3-4       Demographic differences between dual eligibles and nondual eligibles, 2004 .............................32
3-5       Differences in spending and service use between dual eligibles and nondual eligibles, 2004 ......33


                                                                           v
3-6   Both Medicare and total spending are concentrated among dual-eligible beneficiaries, 2004......34
3-7   Dual-eligible beneficiaries report generally good access to care...................................................35

      Web links ......................................................................................................................................36


4     Quality of care in the Medicare program................................................................... 37

4-1   Hospital mortality decreased, 2003–2005......................................................................................39
4-2   Safety of care: Adverse events affect many hospitalized beneficiaries, 2003–2005 .....................40
4-3   Most ambulatory care indicators show improvement or stability, 2003–2005 ..............................41
4-4   Share of home health patients achieving positive outcomes continues to increase .......................42
4-5   The quality of dialysis care has generally improved......................................................................43
4-6   Changes in safety of care for long-term care hospital patients, 2003–2005 ..................................44
4-7   Medicare Advantage plans improve, but rates are still low on some
      quality measures, 2001–2005.........................................................................................................45
4-8   Changes in SNF quality measures between 2000 and 2004 ..........................................................46

      Web links ......................................................................................................................................47

5     Access to care in the Medicare program .................................................................... 49

5-1   Beneficiaries’ reports of difficulties accessing care, 2000–2005...................................................51
5-2   Access to physicians is similar for Medicare beneficiaries and privately insured people .............52
5-3   Physicians’ acceptance of new patients is highest for private (non-HMO)
      and Medicare patients, 2006 ..........................................................................................................53
5-4   Most beneficiaries had little or no problem accessing home health and special therapy services.54
5-5   Ethnic and racial disparities in delaying or failing to obtain care, 2005........................................55
5-6   Beneficiaries differ in their reports of obtaining needed, urgent, or routine care, 2004 ................56

      Web links ...................................................................................................................................... 57

6     Medicare beneficiary and other payer financial liability ......................................... 59

6-1   Sources of supplemental coverage among noninstitutionalized Medicare beneficiaries, 2004 .....61
6-2   Sources of supplemental coverage among noninstitutionalized Medicare beneficiaries, by
      beneficiaries’ characteristics, 2004 ................................................................................................62
6-3   Total spending on health care services for noninstitutionalized FFS Medicare beneficiaries,
      by source of payment, 2004 ...........................................................................................................63
6-4   Per capita total spending on health care services among noninstitutionalized FFS
      beneficiaries, by source of payment, 2004.....................................................................................64
6-5   Variation in and composition of total spending among noninstitutionalized FFS beneficiaries,
      by type of supplemental coverage, 2004........................................................................................65
6-6   Out-of-pocket spending for premiums and health services per beneficiary, by insurance and
      health status, 2004..........................................................................................................................66

      Web links ......................................................................................................................................67




                                                                        vi
7      Acute inpatient services ............................................................................................... 69

       Short–term hospitals
7-1    Growth in Medicare’s payments for hospital inpatient and outpatient services, 1995–2005 ........71
7-2    Major diagnostic categories with highest volume, fiscal year 2005 ..............................................72
7-3    Number of acute care hospitals and Medicare discharges, by hospital group, 2005 .....................73
7-4    Cumulative change in total admissions and total outpatient visits, 1995–2005.............................74
7-5    Trends in Medicare and total hospital length of stay, 1995–2005 .................................................75
7-6    Hospital occupancy rates, 1997–2005 ...........................................................................................76
7-7    Hospital construction spending, 1999–2006..................................................................................77
7-8    Cumulative change in Medicare discharges and days of care per beneficiary, 1994–2004...........78
7-9    Medicare inpatient payments, by source and hospital group, 2005 ...............................................79
7-10   Payment and cost changes for Medicare inpatient services, 1995–2005 .......................................80
7-11   Medicare acute inpatient PPS margin, 1995–2005 ........................................................................81
7-12   Medicare acute inpatient PPS margin, by urban and rural location, 1995–2005 ...........................82
7-13   Overall Medicare margin, 1997–2005 ...........................................................................................83
7-14   Overall Medicare margin, by urban and rural location, 1997–2005 ..............................................84
7-15   Hospital total margin, 1995–2005..................................................................................................85
7-16   Hospital total margin, by urban and rural location, 1995–2005 ....................................................86
7-17   Hospital total margin, by teaching status, 1995–2005 ...................................................................87
7-18   Hospitals with high adjusted overall Medicare margins have lower costs and have been under
       more financial pressure than other hospitals..................................................................................88
7-19   Hospitals receiving IME and DSH payments, 2005 ......................................................................89
7-20   Medicare margins by teaching and disproportionate share status, 2005........................................90
7-21   Relationship between hospitals’ uncompensated care costs and disproportionate
       share payments, 2003.....................................................................................................................91
7-22   Change in Medicare hospital inpatient costs per discharge and private payer payment-to-cost
       ratio, 1986−2005 ............................................................................................................................92
7-23   Markup of charges over costs for all patient care services, 1995–2005 ........................................93
7-24   Number of critical access hospitals, 1999–2007............................................................................94

       Specialty psychiatric facilities
7-25   Medicare payments to inpatient psychiatric facilities (in billions), 1998–2006 ............................95
7-26   Inpatient psychiatric facilities, 2000–2006 ....................................................................................96

       Web links ......................................................................................................................................97

8      Ambulatory care .......................................................................................................... 99

       Physicians
8-1    FFS Medicare spending and payment updates for physician services, 1997–2011 .................... 101
8-2    Medicare spending per FFS beneficiary on physician services, 1997–2015 .............................. 102
8-3    Number of physicians billing Medicare is increasing steadily, 2000–2005 ............................... 103
8-4    Continued growth in the use of physician services per beneficiary, 2000–2005........................ 104
8-5    Quarterly changes in professional liability insurance premiums, 1993–2005 ............................ 105
8-6    Medicare episode costs vary by severity stage ........................................................................... 106
8-7    Relative resource use ratios for selected MSAs, 2002................................................................ 107
8-8    Hypertension episode resource use by type of service ............................................................... 108




                                                                        vii
       Hospital outpatient services
8-9    Spending on all hospital outpatient services, 1996–2006 ........................................................... 109
8-10   Most hospitals provide outpatient services ................................................................................. 110
8-11   Payments and volume of services under the Medicare hospital outpatient PPS,
       by type of service, 2005 .............................................................................................................. 111
8-12   Hospital outpatient services with the highest Medicare expenditures, 2005 .............................. 112
8-13   Medicare coinsurance rates, by type of hospital outpatient service, 2005.................................. 113
8-14   Transitional corridor payments as a share of Medicare hospital outpatient
       payments, 2003–2005 ................................................................................................................. 114
8-15   Medicare hospital outpatient, inpatient, and overall Medicare margins, 1999–2005 ................. 115

       Ambulatory surgical centers
8-16   Number of Medicare-certified ASCs increased over 50 percent, 2000–2006 ............................ 116

       Imaging services
8-17   Medicare spending for imaging services, by type of service, 2005 ............................................ 117
8-18   Radiologists received about 40 percent of Medicare payments for imaging services, 2005 ...... 118

       Web links ................................................................................................................................... 119

9      Post-acute care ........................................................................................................... 121

9-1    Growth in post-acute care providers has moderated, but home health agencies
       continue to increase..................................................................................................................... 123
9-2    Spending for post-acute care has risen in each setting, 1999–2005............................................ 124

       Skilled nursing facilities
9-3    Most common diagnoses among Medicare SNF patients accounted for more than a third of
       patients in 2004 ........................................................................................................................... 125
9-4    The number of Medicare admissions and covered days of SNF care is growing and
       stays are getting longer ............................................................................................................... 126
9-5    Share of facilities, stays, and payments varies by type of SNF .................................................. 127
9-6    A greater share of SNF patients was categorized into rehabilitation case-mix groups
       and received higher intensity rehabilitation ................................................................................ 128
9-7    Growth in freestanding SNFs’ costs per day is accelerating, but nonprofits’ growth is steadier 129
9-8    Freestanding SNF Medicare margins.......................................................................................... 130
9-9    Differences between hospital-based and freestanding skilled nursing facilities......................... 131
9-10   Costs per day are higher in hospital-based SNFs........................................................................ 132
9-11   Percent of SNF cases discharged to different post-acute care settings ....................................... 133

       Home health agencies
9-12   Spending for home health care, 1993–2006................................................................................ 134
9-13   Trends in the provision of home health care............................................................................... 135
9-14   The home health product changed after the prospective payment system started ...................... 136
9-15   Margins for freestanding home health agencies ......................................................................... 137




                                                                       viii
        Long-term care hospitals
9-16    The top 15 LTC–DRGs in 2005 made up more than 60 percent of LTCH discharges............... 138
9-17    Medicare cases and Medicare spending have increased under the LTCH PPS .......................... 139
9-18    Since the PPS, LTCHs’ payments have risen faster than their costs .......................................... 140
9-19    LTCHs’ Medicare margins have increased under PPS............................................................... 141

        Inpatient rehabilitation facilities
9-20    Distribution of cases in inpatient rehabilitation facilities, 2006 ................................................. 142
9-21    The number of IRFs remained stable from 2004 to 2005 ........................................................... 143
9-22    Prior trend in volume of IRF cases reversed between 2004 and 2005........................................ 144
9-23    Per case payments for IRFs have risen faster than costs, post-PPS ............................................ 145
9-24    Inpatient rehabilitation facilities’ Medicare margin by type, 1998–2005................................... 146

        Web links ................................................................................................................................... 147

10      Medicare Advantage.................................................................................................. 149

10-1    Access to MA plans available to all Medicare beneficiaries ...................................................... 151
10-2    Access to zero-premium plans with MA drug coverage, 2006 and 2007 ................................... 152
10-3    Enrollment in MA plans, 1994–2007.......................................................................................... 153
10-4    Enrollment in PFFS plans grew faster than in other major plan types........................................ 154
10-5    Enrollment in types of plans, 2007 ............................................................................................. 155
10-6    Different requirements and provisions apply to different types of MA plans ............................ 156
10-7    Special needs plans have grown quickly..................................................................................... 157
10-8    The number of SNPs and SNP enrollment increased from 2006 to 2007................................... 158

        Web links ................................................................................................................................... 159

11      Drugs ........................................................................................................................... 161

11-1    Medicare spending for Part B drugs ........................................................................................... 163
11-2    Top 10 drugs covered by Medicare Part B, by share of expenditures, 2005 .............................. 164
11-3    Part D enrollment and other sources of drug coverage ............................................................... 165
11-4    Defined standard benefit parameters increase over time ............................................................ 166
11-5    Characteristics of Medicare PDPs .............................................................................................. 167
11-6    Benefits in the coverage gap among PDPs ................................................................................. 168
11-7    Average Part D premiums........................................................................................................... 169
11-8    Characteristics of MA–PDs ........................................................................................................ 170
11-9    Benefits in the coverage gap among MA–PDs ........................................................................... 171
11-10   Geographic distribution of PDPs in 2007 ................................................................................... 172
11-11   Distribution of Part D enrollees by organization ........................................................................ 173
11-12   In 2006, most Part D enrollees were in plans that distinguished between preferred and
        nonpreferred brands and include specialty tiers.......................................................................... 174
11-13   In 2006, the median PDP enrollee was in a plan that listed more than 1,300 drugs ................... 175
11-14   In 2006, the median MA–PD enrollee was in a plan that listed more than 1,200 drugs............. 176
11-15   The number of drugs listed in a therapeutic category available to the median enrollee
        depends on therapeutic class size and regulation........................................................................ 177
11-16   Most enrollees are in Part D plans that target prior authorization to selected categories ........... 178

        Web links ................................................................................................................................... 179


                                                                        ix
12         Other services ............................................................................................................. 181

           Dialysis
12-1       Number of dialysis facilities is growing and share of for-profit and freestanding
           dialysis providers is increasing ................................................................................................... 183
12-2       Medicare spending for outpatient dialysis services furnished by freestanding dialysis
           facilities, 1996 and 2005 ............................................................................................................. 184
12-3       Dialysis facilities’ capacity increased between 1995 and 2006 .................................................. 185
12-4       Characteristics of dialysis patients, by type of facility, 2005 ..................................................... 186
12-5       The ESRD population is growing, and most ESRD patients undergo dialysis........................... 187
12-6       Diabetics, the elderly, Asians, and Hispanics are among the fastest growing segments of the
           ESRD population ........................................................................................................................ 188
12-7       Aggregate margins vary by type of freestanding dialysis facility, 2005..................................... 189

           Hospice
12-8 Use of hospice among Medicare beneficiaries increased from 2000 to 2005............................. 190
12-9 Average length of stay in hospice by state, 2005........................................................................ 191
12-10 The number of proprietary hospices has increased, while the number of
      nonprofits has declined ............................................................................................................... 192
12-11 Growth in freestanding hospices continues ................................................................................ 193

           Clinical laboratory
12-12 Medicare spending for clinical laboratory services, in billions, FY 1996–2006 ........................ 194

           Web links ................................................................................................................................... 195




                                                                            x
                S E C T I O N




National health care and
  Medicare spending
Chart 1-1.              Medicare made up about one-fifth of spending on
                        personal health care in 2005

                                                  Total = $1.66 trillion

                                        Other private a
                                            4%
                                                                                Medicare
                       Out of pocket
                                                                                 20%
                           15%




                                                                                           Medicaid and all SCHIP
                                                                                                    18%


          Private health insurance
                   36%
                                                                              Other public b
                                                                                  7%


Note:     SCHIP (State Children’s Health Insurance Program). Out-of-pocket spending includes cost sharing for both privately and
          publicly insured individuals. Personal health care spending includes spending for clinical and professional services
          received by patients. It excludes administrative costs and profits. Premiums are included with each program (e.g.,
          Medicare, private insurance), rather than in the out-of-pocket category.
          a
            Includes industrial in-plant, privately funded construction, and nonpatient revenues, including philanthropy.
          b
            Includes programs such as workers’ compensation, public health activity, Department of Defense, Department of
          Veterans Affairs, Indian Health Service, state and local government hospital subsidies, and school health.

Source:   CMS, Office of the Actuary, National Health Expenditure Accounts, 2007.


•   Of the $1.66 trillion spent on personal health care in the United States in 2005, Medicare
    accounted for 20 percent, or $331 billion. Spending by all public programs—including
    Medicare, Medicaid, SCHIP, and other programs—accounted for 45 percent of health care
    spending. Medicare is the largest single purchaser of health care in the United States.
    Thirty-six percent of spending was financed through private health insurance payers and 15
    percent was from consumer out-of-pocket spending.

•   Medicare and private health insurance spending includes premium contributions from
    enrollees.

•   Note that Part D, Medicare’s voluntary outpatient prescription drug benefit, began in 2006
    and therefore is not reflected in these data from 2005.




                                           A Data Book: Healthcare spending and the Medicare program, June 2007                3
Chart 1-2.                                          Medicare’s share of total spending varies by type of
                                                    service, 2005
                                  100


                                                                                                29%
                                   80                                                                                  40%
                                                53%
    Share of spending (percent)




                                                                        72%                                                                   72%
                                   60
                                                                                               33%



                                   40           17%                                                                    44%
                                                                                                                                   0.1%

                                                                        7%
                                   20                                                          38%
                                                29%                                                                                           28%
                                                                        21%
                                                                                                                       16%

                                     0
                                              Hospital            Physician and           Home health            Nursing home           Durable medical
                                                                 clinical services                                                        equipment
                                                                                          Service type
                                                                     Medicare             Medicaid and all SCHIP               Other*


Note:                                SCHIP (State Children’s Health Insurance Program). Personal health spending includes spending for clinical and
                                     professional services received by patients. It excludes administrative costs and profits. Totals may not sum to 100 percent
                                     due to rounding.
                                     *Other includes private health insurance, out-of-pocket spending, and other private and public spending.

Source:                              CMS, Office of the Actuary, National Health Expenditure Accounts, 2007.



•                                 The level and distribution of spending differ between Medicare and other payers, largely
                                  because Medicare covers an older, sicker population and did not cover services such as
                                  outpatient prescription drugs and long-term care during this time period.

•                                 In 2005, Medicare accounted for 29 percent, 21 percent, 38 percent, 16 percent, and 28
                                  percent of spending on hospital care, physician and clinical services, home health services,
                                  nursing home care, and durable medical equipment, respectively.




4                                 National health care and Medicare spending
Chart 1-3.                                                 Health care spending has grown more rapidly than
                                                           GDP, with public financing making up nearly half of
                                                           all funding
                                          20%
                                                                                                                                  Actual     Projected
                                          18%

                                          16%                                                         Total health spending
    Health spending as a percent of GDP




                                          14%

                                          12%

                                          10%                                                          All private spending


                                          8%

                                          6%                                                                                                        All public
                                                                                                                                                    spending

                                          4%

                                          2%
                                                                                                                                                     Medicare
                                                                                                                                                     spending
                                          0%
                                            1965       1970        1975       1980       1985       1990        1995       2000       2005       2010       2015



Note:                                       GDP (gross domestic product). Total health spending is the sum of all private and public spending. Medicare spending is
                                            one component of all public spending.

Source:                                     CMS, Office of the Actuary, National Health Expenditure Accounts, 2007.



•                                   Total health spending consumes an increasing proportion of national resources, accounting
                                    for a double-digit share of gross domestic product (GDP) annually since 1982.

•                                   As a share of GDP, total health spending has increased from about 6 percent in 1965 to
                                    more than 16 percent in 2005. It is projected to reach 20 percent of GDP in 2016. Health
                                    spending’s share of GDP was stable throughout much of the 1990s due to slower growth in
                                    spending associated with greater use of managed care techniques and larger enrollment in
                                    managed plans as well as a strong economy.

•                                   Medicare spending has also grown as a share of the economy from less than 1 percent
                                    when it was started in 1965 to about 3 percent today. Projections suggest that Medicare
                                    spending will make up nearly 4 percent of GDP by 2016.

•                                   In 2005, all public spending made up about 45 percent of total health care spending and
                                    private spending made up 55 percent. By 2016, those percentages are projected to be 49
                                    percent and 51 percent, respectively.



                                                                             A Data Book: Healthcare spending and the Medicare program, June 2007                  5
Chart 1-4.                                    Trustees project Medicare spending to increase
                                              as a share of GDP
                                12
                                             Part A                                                                                           11.3
                                             Part B                                                                                    10.7
                                10           Part D                                                                            9.9
                                                                                                                      9.0
                                                                                                             8.0
    Share of GDP (percent)




                                 8

                                                                                                    6.5
                                 6

                                                                                           4.6

                                 4                                                3.4
                                                                          2.7
                                                                 2.3
                                                         1.9
                                 2
                                               1.3
                                       0.7

                                 0
                                      1970 1980        1990 2000         2005 2010 2020 2030 2040 2050 2060 2070                              2080

Note:                           GDP (gross domestic product). These projections are based on the trustees’ intermediate set of assumptions.

Source:                         2007 Annual Report of the Boards of Trustees of the Medicare Trust Funds.



•                            Over time, Medicare spending has accounted for an increasing share of gross domestic
                             product (GDP). From less than 1 percent in 1970, it is projected to reach more than 11
                             percent of GDP in 2080.

•                            With a 9.3 percent annual average rate of growth, nominal Medicare spending grew
                             considerably faster over the period from 1980 to 2005 than nominal growth in the economy,
                             which averaged 6.2 percent per year. For the future, Medicare spending is projected to
                             continue growing faster than GDP but at a rate somewhat closer to GDP growth, averaging
                             6.5 percent per year between 2005 and 2080 compared with an annual average growth rate
                             of 4.5 percent for the economy as a whole. In other words, Medicare spending is projected
                             to continue rising as a share of GDP but at a slower pace.

•                            During the 1990s, Medicare’s share of the economy grew more slowly than it did in other
                             periods. This was due to payment reductions enacted in 1997, combined with faster
                             economic growth. Beginning in 2010, the aging of the baby-boom generation, an expected
                             increase in life expectancy, and the Medicare drug benefit are all likely to increase the
                             proportion of economic resources devoted to Medicare. Additional factors such as
                             innovation in medical technology and interaction between the use of technology and
                             insurance coverage will also contribute to rapid increases in health care spending.



6                            National health care and Medicare spending
       Chart 1-5.                                    Changes in spending per enrollee, Medicare and
                                                     private health insurance
                                25%

                                                                                                       Average annual percent change by period:
                                                                                                                   Medicare        ---PHI
                                                                                                       1970-2005        8.9           9.8
                                20%                                                                    1970-2003       10.8          12.0
                                                                                                       1993-1997        6.1           2.8
Per enrollee change (percent)




                                                                                                       1997-1999        1.3           4.4
                                                                                                       1999-2002        5.9           8.5
                                                                                                       2002-2005        6.6           8.0
                                15%




                                10%




                                5%




                                0%
                                      1970             1975            1980             1985                1990        1995             2000             2005


       Note:                          PHI (private health insurance). Chart compares services covered by Medicare and PHI, including hospital services,
                                      physician and clinical services, and durable medical products.

       Source:                        CMS, Office of the Actuary, National Health Statistics Group, 2007.


       •                        Although rates of growth in per capita spending for Medicare and private insurance often differ
                                from year to year, over the long term they have been quite similar. When comparing spending for
                                benefits that private insurance and Medicare have had in common—notably, excluding prescription
                                drugs—Medicare’s per enrollee spending has grown at a rate that is less than 1 percentage point
                                lower than that for private insurance over the 1970 to 2005 period.

       •                        This comparison is sensitive to the endpoints of time one uses for calculating average growth
                                rates. Also, private insurers and Medicare do not buy the same mix of services, and Medicare
                                covers an older population that tends to be more costly. In addition, the data do not allow analysis
                                of the extent to which these spending trends were affected by changes in the generosity of
                                covered benefits and, in turn, changes in enrollees’ out-of-pocket spending.

       •                        Differences appear to be more pronounced since 1985, when Medicare began introducing the
                                prospective payment system for hospital inpatient services. Some analysts believe that since the
                                mid-1980s, Medicare has had greater success at containing cost growth than private payers by
                                using its larger purchasing power. Others maintain that since the 1970s, benefits offered by private
                                insurers have expanded and cost-sharing requirements declined. In addition, enrollment in
                                managed care plans grew during the 1990s. These factors make the comparison problematic,
                                since Medicare’s benefits changed little over the same period.



                                                                       A Data Book: Healthcare spending and the Medicare program, June 2007                7
Chart 1-6.                                  Trustees and CBO project Medicare spending to
                                            grow at an annual average rate of 7 percent to
                                            8 percent over the next 10 years
                 1200
                                        Trustees - high                                           Actual       Projected
                                        Trustees - intermediate
                                        CBO
                 1000                   Trustees - low



                        800
Dollars (in billions)




                        600



                        400



                        200



                         0
                              1980       1984        1988        1992       1996        2000        2004        2008        2012        2016


Note:                         CBO (Congressional Budget Office). All data are nominal, gross program outlays (mandatory plus administrative
                              expenses) by calendar year.

Source:                       Medicare Trustees Report 2007. CBO March 2007 baseline.



•                       Medicare spending has grown about 11-fold, from $37 billion in 1980 to $408 billion in 2006.

•                       Medicare spending increased significantly in 2006 and will continue to increase in
                        subsequent years with the introduction of Part D, Medicare’s voluntary outpatient
                        prescription drug benefit.

•                       The Congressional Budget Office projects that mandatory spending for Medicare will grow at
                        an average annual rate of 7.3 percent from 2006 to 2017. The Medicare trustees’
                        intermediate projections for 2007 to 2016 assume about 7.8 percent average annual growth.
                        Forecasts of future Medicare spending are inherently uncertain, and differences can stem
                        from different assumptions about the economy (which affect provider payment annual
                        updates) and about growth in the volume and intensity of services delivered to Medicare
                        beneficiaries, among other factors.




8                       National health care and Medicare spending
Chart 1-7.                  Medicare spending is concentrated in certain
                            services and has shifted over time
     Total spending 1996 = $197 billion                                Total spending 2006 = $402 billion

                                                                             Outpatient prescription
          Other fee-                                                                 drugs
          for-service         Managed care                                            12%
           settings b            11%                                                                                   Hospital
              10%                                                                                                      inpatient a
                                                               Managed care                                              29%
    Home
                                                                  16%
    health
     9%
                                                Hospital
                                                inpatient a
    Skilled                                       45%
    nursing                                                       Other fee-
     facility                                                     for-service
       5%                                                          settings b                                             Hospital
                Physician                                            13%
                               Hospital                                       Home                                       outpatient
                  16%
                              outpatient                                       health                                       7%
                                 4%                                             3%       Skilled         Physician
                                                                                         nursing           15%
                                                                                          facility
                                                                                            5%


Note:      Medicare’s outpatient drug benefit began in 2006, and thus the distribution of spending for 2006 differs significantly from
           earlier years. Excludes administrative expenses. Spending amounts are gross outlays, meaning that they include
           spending financed by beneficiary premiums but do not include spending by beneficiaries (or spending on their behalf) for
           cost-sharing requirements of Medicare-covered services. Values are reported on a calendar year, incurred basis and do
           not include spending on program administration. Totals may not sum to 100 percent due to rounding.
           a
             Includes all hospitals—those paid under the prospective payment system (PPS) and PPS-exempt hospitals.
           b
             Includes hospice, outpatient laboratory, durable medical equipment, physician-administered drugs, ambulance services,
           ambulatory surgical centers, dialysis, rural health clinics, federally qualified health centers, and outpatient rehabilitation
           facilities.

Source:    CMS, Office of the Actuary, 2007.


•     Medicare spending is concentrated on certain services, and the distribution among services
      and settings can vary substantially over time.

•     In 2006, Medicare spent about $402 billion, or $10,221 per enrollee. Inpatient hospital
      services were by far the largest spending category (29 percent), followed by managed care
      (16 percent), physicians (15 percent), and other fee-for-service settings (13 percent).
      Medicare began its outpatient prescription drug benefit in 2006, which accounted for 12
      percent of spending that year.

•     Although inpatient hospital services still made up the largest spending category, spending
      for those services was a smaller share of total Medicare spending in 2006 than it was in
      1996, falling from 45 percent to 29 percent. Spending on beneficiaries enrolled in managed
      care plans has grown from 11 percent to 16 percent over the same period. The number of
      beneficiaries enrolled in managed care plans has grown rapidly over the past several years,
      and current enrollment is higher than it was a decade ago.



                                               A Data Book: Healthcare spending and the Medicare program, June 2007                     9
Chart 1-8.                     FFS program spending is highly concentrated in a
                               small group of beneficiaries, 2002
                100
                                           Next 4%
                        Mostly                                                                         19%
                 90                        Next 5%
                        costly 1%
                                           Next 15%
                 80

                 70
                                             Second                                                    29%
                 60                          quartile

                                                                                                                               88%
    Percent




                 50

                                                                                                       19%
                 40

                 30                           Least
                                              costly
                                                                                                       21%
                 20                            half


                 10
                                                                                                        9%                    3%
                  0
                                     Percent of beneficiaries                            Percent of program spending


Note:           FFS (fee-for-service).

Source:         Direct Research, LLC, based on a 0.1 percent sample of Medicare fee-for-service enrollees and their claims.



•        Medicare fee-for-service (FFS) spending is concentrated among a small number of
         beneficiaries. In 2002, the costliest 5 percent of beneficiaries accounted for 48 percent of
         annual Medicare FFS spending and the costliest quartile accounted for 88 percent. By
         contrast, the least costly half of beneficiaries accounted for only 3 percent of FFS spending.

•        Costly beneficiaries tend to include those who have multiple chronic conditions, those using
         inpatient hospital care, and those who are in the last year of life.




10            National health care and Medicare spending
Chart 1-9.               Medicare HI trust fund is projected to be insolvent
                         in 2019
                                            Year costs                                           Year HI trust
Estimate                                  exceed income                                     fund assets exhausted

High                                            2008                                                   2014
Intermediate                                    2011                                                   2019
Low                                             N/A                                                    2042


Note:     HI (Hospital Insurance), N/A (not available). Income includes taxes (payroll and Social Security benefits taxes, railroad
          retirement tax transfer), income from the fraud and abuse program, and interest from trust fund assets.

Source:   2007 Annual Report of the Boards of Trustees of the Medicare Trust Funds; CMS, Office of the Actuary.




•   The Medicare program is financed through two trust funds: one for Hospital Insurance (HI),
    which covers services provided by hospitals and other providers such as skilled nursing
    facilities, and one for Supplementary Medical Insurance (SMI) services, such as physician
    visits and Medicare’s new prescription drug benefit. Dedicated payroll taxes on current
    workers largely finance HI spending and are held in the HI trust fund. The HI trust fund can
    be exhausted if spending exceeds payroll tax revenues and fund reserves. General
    revenues finance roughly 75 percent of SMI services, and beneficiary premiums finance
    about 25 percent. (General revenues are federal tax dollars that are not dedicated to a
    particular use but are made up of income and other taxes on individuals and corporations.)

•   The SMI trust fund is financed with general revenues and beneficiary premiums. Some
    analysts believe that the levels of premiums and general revenues required to finance
    projected spending for SMI services would impose a significant burden on Medicare
    beneficiaries and on growth in the U.S. economy.

•   Medicare trustees project that under intermediate assumptions, the Hospital Insurance trust
    fund will be exhausted in 2019.

•   Under high cost assumptions, the HI trust fund could be exhausted as early as 2014.
    Under low cost assumptions, it would remain solvent until 2042.




                                           A Data Book: Healthcare spending and the Medicare program, June 2007                       11
Chart 1-10. Medicare faces serious challenges with long-term
            financing
                     12%
                                                          Actual      Projected


                     10%                                                             Total expenditures
                                                                                                                                 HI deficit

                      8%
    Percent of GDP




                      6%
                                                                                                              General revenue transfers

                      4%
                                                                                          State transfers


                      2%                                                                                                          Premiums


                                                                                  Tax on benefits                              Payroll taxes
                      0%
                        1966      1976      1986      1996       2006      2016      2026       2036      2046      2056       2066      2076


Note:                   GDP (gross domestic product), HI (Hospital Insurance). These projections are based on the trustees’ intermediate set of
                        assumptions. Tax on benefits refers to a portion of income taxes that higher income individuals pay on Social Security
                        benefits that is designated for Medicare. State transfers (often called the Part D “clawback”) refer to payments called for
                        within the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 from the states to Medicare for
                        assuming primary responsibility for prescription drug spending.

Source:                 2007 Annual Report of the Boards of Trustees of the Medicare Trust Funds.




•                    Under an intermediate set of assumptions, trustees project that Medicare spending will grow
                     rapidly, from about 3 percent of gross domestic product today to 7.5 percent by 2036 and to
                     more than 11 percent by 2080.

•                    Medicare trustees project that under intermediate assumptions, the Hospital Insurance trust
                     fund will be exhausted in 2019.

•                    Medicare’s problems with long-term financing may become more visible to policymakers
                     because of a warning system set up in the Medicare Prescription Drug, Improvement, and
                     Modernization Act of 2003. Each year, the trustees are required to project the share of
                     Medicare outlays that is financed with general revenues in the current and six succeeding
                     fiscal years. If two consecutive annual reports project that general revenue will fund 45
                     percent or more of Medicare outlays in any given year, then the President must propose and
                     the Congress must consider legislation to bring Medicare’s spending below this threshold. In
                     their 2007 report, the Medicare trustees projected that the program would hit this 45 percent
                     trigger in 2013—the last year of the seven-year projection window. Since this is the second
                     such report, the administration must propose and policymakers must consider broad
                     changes to Medicare's benefits and financing in the spring of 2008.


12                    National health care and Medicare spending
Chart 1-11. Average monthly SMI benefits, premiums, and cost
            sharing are projected to grow faster than the
            average monthly Social Security benefit
                                             $2,500
                                                                             Actual          Projected

                                                                                                                                      Average SMI benefit
Monthly amounts per person in 2003 dollars




                                             $2,000



                                                                                                   Average Social
                                             $1,500                                                Security benefit




                                             $1,000



                                                                                                                                         Average SMI premium
                                              $500                                                                                       plus cost sharing




                                                $0
                                                 1970       1980      1990       2000      2010       2020      2030      2040       2050      2060       2070      2080


Note:                                            SMI (Supplementary Medical Insurance). Average SMI benefit and average SMI premium plus cost-sharing values are for
                                                 a beneficiary enrolled in Part B and (after 2006) Part D. Beneficiary spending on outpatient prescription drugs prior to
                                                 2006 is not shown.

Source:                                          2007 Annual Report of the Boards of Trustees of the Medicare Trust Funds.


•                                            Between 1970 and 2005, the average monthly Social Security benefit (adjusted for inflation) increased
                                             by an annual average rate of 1.6 percent. Over the same period, average Supplementary Medical
                                             Insurance (SMI) premiums plus cost sharing and average SMI benefits grew by an annual average of
                                             4.5 percent and 5.9 percent, respectively. Under current hold-harmless policies, Medicare Part B
                                             premiums cannot increase by a larger dollar amount than the cost-of-living increase in a beneficiary’s
                                             Social Security benefit. From 2003 to 2006, Part B premium increases offset 20 percent to 40 percent of
                                             the dollar increase in the average Social Security benefit. For 2007, the increase in the Part B premium
                                             offsets 13 percent of the Social Security benefit increase. Part D premium increases are not subject to a
                                             hold-harmless provision.
•                                            Most beneficiaries who enroll in Medicare’s new prescription drug benefit see lower out-of-pocket (OOP)
                                             spending. One estimate suggests that in 2006, average OOP spending on drugs was 28 percent lower
                                             for Part D enrollees and 83 percent lower for recipients of Part D’s low-income subsidies. However, one
                                             in four enrollees was projected to face increases in OOP spending for drugs of $250 or less, on average.
                                             Beneficiaries’ OOP spending on prescription drugs prior to 2006 is not shown in this figure.
•                                            Growth over time in Medicare premiums and cost sharing will continue to outpace growth in Social Security
                                             income. Medicare trustees project that between 2006 and 2036, the average Social Security benefit will
                                             grow by just over 1 percent annually (after adjusting for inflation), compared with about 3 percent annual
                                             growth in average SMI premiums plus cost sharing.



                                                                                 A Data Book: Healthcare spending and the Medicare program, June 2007                  13
Chart 1-12. Medicare FFS providers: Number and spending
                                                                        Number of                        Spending
                                                                        providers                        CY 2006
Provider type                                                             2006                           (billions)

Inpatient hospitals                                                     6,193a                          $ 121.0
Hospital outpatient PPS                                                 3,905b                             21.5
Physicians                                                            644,308c                             58.4c
Skilled nursing facilities                                             15,025                              19.9
Home health agencies                                                    8,813                              13.1
Hospices                                                                3,036                               8.9
Ambulatory surgical centers                                             4,707                               2.3
End-stage renal disease facilities                                      4,594                               6.3d
Clinical laboratories                                                 196,296e                              7.1
Durable medical equipment suppliers                                  ~140,000f                              8.4

Note:     FFS (fee-for-service), CY (calendar year), PPS (prospective payment system). Data include program spending only and
          do not include cost sharing or administrative expenses.
          a
            Short-stay and non-short-stay hospitals.
          b
            Analysis does not include alcohol and drug abuse hospitals and critical access hospitals but does include psychiatric,
          rehabilitation, and children’s hospitals that bill under the outpatient PPS.
          c
            Number of physicians does not include limited licensed practitioners or nonphysician practitioners. However, spending
          reflects all expenditures under the physician fee schedule.
          d
            Spending estimate is for 2005.
          e
            Count is for laboratories subject to the Clinical Laboratory Improvement Act in 2005.
          f
            Many suppliers do not file a claim every year. For example, in a sample of 2004 claims, about 70,000 suppliers filed
          claims for reimbursement.

Source:   U.S. Department of Health and Human Services, 2006 CMS Statistics. Data on number of hospital clinical PPS providers
          are from CMS’s Provider of Service file. Spending data are from Office of the Actuary.



•    The most numerous Medicare providers are physicians, followed by clinical laboratories and
     durable medical equipment suppliers.

•    Among the more than 6,000 hospitals, 3,377 operate under the inpatient prospective
     payment system, 1,283 are critical access hospitals, 481 are psychiatric hospitals, and 394
     are long-term care hospitals.




14      National health care and Medicare spending
Web links. National health care and Medicare spending
•   The Trustees’ Report provides information on the financial operations and actuarial status of
    the Medicare program.

    http://www.cms.hhs.gov/ReportsTrustFunds/

•   The National Health Expenditure Accounts developed by the Office of the Actuary at CMS
    provide information about spending for health care in the United States.

    http://cms.hhs.gov/NationalHealthExpendData/

•   The CMS chart series provides information on the U.S. health care system and Medicare
    program spending.

    http://www.cms.gov/TheChartSeries/

•   The Congressional Budget Office provides projections of Medicare spending.

    http://www.cbo.gov/ftpdocs/78xx/doc7861/m_mschip.pdf

•   MedPAC’s March 2007 Report to the Congress provides an overview of Medicare and U.S.
    health care spending in Chapter 1, Context for Medicare Payment Policy.
    http://www.medpac.gov/chapters/Mar07_Ch01.pdf




                                A Data Book: Healthcare spending and the Medicare program, June 2007   15
            S E C T I O N




Medicare beneficiary
  demographics
Chart 2-1.              Aged beneficiaries account for the greatest
                        share of the Medicare population and program
                        spending, 2004

                 Percent of enrollees                                             Percent of spending

                                Disabled                                                         Disabled
                                 14.6%                                                            12.3%

                                              ESRD                                                             ESRD
                                              0.5%                                                             3.7%




    Aged                                                            Aged
    84.8%                                                           83.6%



Note:     ESRD (end-stage renal disease). ESRD refers to beneficiaries under age 65 with ESRD. The disabled category refers to
          beneficiaries under age 65 without ESRD. The aged category refers to beneficiaries age 65 and older. Totals may not
          sum to 100 percent due to rounding.

Source:   MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004.



•   The highest percentage of Medicare expenditures is for aged beneficiaries, reflecting their
    greater share of the Medicare population.

•   A disproportionate share of Medicare expenditures is devoted to Medicare beneficiaries who
    are eligible due to end-stage renal disease (ESRD). On average, ESRD beneficiaries cost at
    least five times as much as beneficiaries in other categories: $6,782 is spent per aged
    beneficiary, $6,023 per (non-ESRD) disabled beneficiary, and $54,370 per ESRD
    beneficiary. On average, Medicare spending per beneficiary is $7,121.




                                         A Data Book: Healthcare spending and the Medicare program, June 2007                19
Chart 2-2.                Medicare spending rises as beneficiaries age, 2004

                       Percent of enrollees                                            Percent of spending

                    85+                        Under 65                                                  Under 65
                    12%                                                         85+
                                                 15%                            18%                        16%




    75-84
     31%
                                                                                                                65-74
                                                                                                                 31%
                                                       65-74            75-84
                                                        42%              35%



Note:       Totals may not sum to 100 percent due to rounding.

Source:     MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004.



•    Per capita expenditures increase with age. Per capita expenditures were $5,226 for those
     ages 65 to 74, $8,059 for those 75 to 84, and $10,765 for those 85 and older. Per capita
     expenditures for Medicare beneficiaries under age 65, enrolled due to disability (both end-
     stage renal disease (ESRD) and non-ESRD) were $7,634. On average, Medicare spending
     per beneficiary was $7,121.

•    In each age group, much of the spending is concentrated among people with chronic
     conditions and those who die.




20      Medicare beneficiary demographics
Chart 2-3.                Beneficiaries who report being in poor health
                          account for a disproportionate share of Medicare
                          spending, 2004

                       Percent of enrollees                                           Percent of spending
                                           Poor
                                            9%                            Excellent or                           Poor
        Excellent or
         very good                                                         very good                             20%
           40%                                                               23%




                                                        Good or fair
                                                           51%



                                                                                                  Good or fair
                                                                                                     57%


Note:      Totals may not sum to 100 percent due to rounding.

Source:    MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004.



•   Most beneficiaries report relatively good health. Less than 10 percent report poor health.

•   Medicare spending is strongly associated with self-reported health status. Per capita
    expenditures are $4,082 for those with excellent health, $7,943 for those with good or fair
    health, and $15,448 for those with poor health. On average, Medicare spending per
    beneficiary is $7,121.




                                          A Data Book: Healthcare spending and the Medicare program, June 2007          21
Chart 2-4.                                         Enrollment in the Medicare program is projected
                                                   to grow fastest in the next 30 years

                                  110

                                  100                           Historical      Projected

                                   90

                                   80
    Beneficiaries (in millions)




                                   70

                                   60

                                   50

                                   40

                                   30

                                   20

                                   10

                                    0
                                    1970       1980      1990      2000      2010       2020      2030      2040       2050      2060      2070       2080


Note:                               Enrollment numbers are based on Part A enrollment only. Beneficiaries enrolled only in Part B are not included.

Source:                             CMS, Office of the Actuary, 2007.



•               The total number of people enrolled in the Medicare program will nearly double between
                2000 and 2030, from about 39 million to 79 million beneficiaries.

•               The rate of increase in Medicare enrollment will accelerate around 2010 when members of
                the baby-boom generation start to become eligible and will slow around 2030 when the
                entire baby-boom generation has become eligible.




22                                Medicare beneficiary demographics
Chart 2-5.               Characteristics of the Medicare population, 2004

                                          Percent of the                                                     Percent of the
Characteristic                          Medicare population              Characteristic                    Medicare population

Total (42,869,380*)                               100%
Sex                                                                     Education
    Male                                           44                     No high school diploma                          29%
    Female                                         56                     High school diploma only                        30
                                                                          Some college or more                            40
Race/ethnicity
    White, non-Hispanic                            78                   Income status
    African American, non-Hispanic                 10                      Below poverty                                   18
    Hispanic                                        8                      100–125% of poverty                             10
    Other                                           5                      125–200% of poverty                             21
Age                                                                        200–400% of poverty                             28
    < 65                                           15                      Over 400% of poverty                            23
    65–74                                          42
    75–84                                          31                  Supplemental insurance status
    85+                                            12                     Medicare only                                    10
Health status                                                             Managed care                                     13
    Excellent or very good                         40                     Employer                                         33
    Good or fair                                   51                     Medigap                                          21
    Poor                                            9                     Medigap/employer                                  5
Residence                                                                 Medicaid                                         17
    Urban                                          76                     Other                                             2
    Rural                                          24
Living arrangement
    Institution                                     5
    Alone                                          28
    Spouse                                         48
    Other                                          18


Note:     Urban indicates beneficiaries living in metropolitan statistical areas (MSAs). Rural indicates beneficiaries living outside
          MSAs. In 2004, poverty was defined as $9,060 for people living alone and as $11,430 for married couples. Totals may not
          sum to 100 percent due to rounding.
          *Based on a representative sample of the Medicare population.

Source:   MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004.



•   The Medicare population tends to be female, white, between the ages of 65 and 84, in good
    or fair health, and living with a spouse. Most beneficiaries live in urban areas, have
    graduated from high school, and have some form of supplemental insurance coverage.
    Almost half have incomes under 200 percent of poverty.




                                           A Data Book: Healthcare spending and the Medicare program, June 2007                   23
Chart 2-6.               Characteristics of the Medicare population, by rural
                         and urban residence, 2004

                                                              Percent of urban                  Percent of rural
Characteristics                                              Medicare population               Medicare population

Total                                                                  76%                                 24%
    Urban
    Rural

Sex
      Male                                                             44                                  45
      Female                                                           56                                  55

Race/ethnicity
   White, non-Hispanic                                                 76                                  86
   African American, non-Hispanic                                      10                                   7
   Hispanic                                                             9                                   3
   Other                                                                5                                   5

Age
   < 65                                                                14                                  17
    65–74                                                              42                                  43
    75–84                                                              31                                  28
    85+                                                                12                                  11

Health status
   Excellent or very good                                              41                                  36
   Good or fair                                                        50                                  52
   Poor                                                                 9                                  11

Income status
    Below poverty                                                      17                                  20
    100–125% of poverty                                                10                                  11
    125–200% of poverty                                                20                                  23
    200–400% of poverty                                                28                                  29
    Over 400% of poverty                                               25                                  16
Note:     Urban indicates beneficiaries living in metropolitan statistical areas (MSAs). Rural indicates beneficiaries living outside
          MSAs. In 2003, poverty was defined as $9,060 for people living alone and as $11,430 for married couples. Totals may not
          sum to 100 percent due to rounding.

Source:   MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004.



•     Close to one-fourth of all beneficiaries reside in rural areas.

•     Rural Medicare beneficiaries are more likely to be white (86 percent vs. 76 percent), to
      report being in poor health (11 percent vs. 9 percent), and to have incomes below 125
      percent of poverty (31 percent vs. 27 percent) compared to urban beneficiaries.




24      Medicare beneficiary demographics
Chart 2-7.                                                             Arthritis and hypertension are the most common
                                                                       diseases reported by Medicare beneficiaries, 2002
                                                    70
                                                                                                                                               Female
                                                           62                                                                                  Male
                                                                          60
                                                    60
 Percent of beneficiaries with disease/condition




                                                                               54

                                                    50           48



                                                    40


                                                                                        29
                                                    30

                                                                                                           21            20
                                                                                                      19
                                                    20                                                                           17   16       15   16
                                                                                                                    14

                                                    10
                                                                                              6


                                                     0
                                                           Arthritis    Hypertension Osteoporosis     Diabetes    Skin cancer Other cancer    Pulmonary
                                                                                                                                               disease

Source: CMS, Office of Research, Development, and Information.



•                                                  Arthritis, hypertension, osteoporosis, and diabetes are among the most prevalent chronic
                                                   conditions reported by Medicare beneficiaries.

•                                                  Female beneficiaries live longer, and the risk of chronic disease increases with age. Female
                                                   beneficiaries are more likely than male beneficiaries to have arthritis, hypertension, or
                                                   osteoporosis.




                                                                                    A Data Book: Healthcare spending and the Medicare program, June 2007   25
Web links. Medicare beneficiary demographics

•    The CMS Chart series provides a profile of Medicare beneficiaries.

     http://www.cms.gov/TheChartSeries/downloads/Sec3b_p.pdf

•    The CMS Data Compendium contains historic, current, and projected data on Medicare
     enrollment.

     http://www.cms.hhs.gov/DataCompendium/018_2006_Data_Compendium.asp#TopofPage

•    The CMS website provides information on Medicare enrollment by state.

     http://www.cms.hhs.gov/MedicareEnRpts

•    The CMS website provides information about the Medicare Current Beneficiary Survey, a
     resource on the demographic characteristics of Medicare beneficiaries.

     http://www.cms.hhs.gov/mcbs/




26    Medicare beneficiary demographics
        S E C T I O N




Dual-eligible
beneficiaries
Chart 3-1.               Dual-eligible beneficiaries account for a
                         disproportionate share of Medicare spending, 2004

                  Percent of enrollees                                              Percent of spending

                                             Dual eligible
                                                16%                                                              Dual eligible
                                                                                                                    25%




                                                          Nondual eligible
    Nondual eligible                                          75%
        84%


Note:     Dual eligibles are designated as such if the months they qualify for Medicaid exceed months they qualify for supplemental
          insurance.

Source:   MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004.



•     Dual-eligible beneficiaries are those who qualify for both Medicare and Medicaid. Medicaid
      is a joint federal and state program designed to help low-income persons obtain needed
      health care.

•     A disproportionate share of Medicare expenditures is spent on dual-eligible beneficiaries:
      Dual eligibles account for 16 percent of Medicare beneficiaries and 25 percent of Medicare
      spending.

•     Dual eligibles cost Medicare about 1.8 times as much as nondual eligibles: $10,884 is spent
      per dual-eligible beneficiary, and $5,975 is spent per non-dual-eligible beneficiary.

•     Total spending⎯which includes Medicare, Medicaid, supplemental insurance, and out-of-
      pocket spending across all payers⎯for dual eligibles averaged about $23,543 per person in
      2004, just over twice the amount for other Medicare beneficiaries.




                                          A Data Book: Healthcare spending and the Medicare program, June 2007                 29
Chart 3-2.               Dual eligibles are more likely than nondual eligibles
                         to be disabled or over 85 years old, 2004
                      Dual eligibles                                                     Nondual eligibles

                85+                                                                                          Under 65
                13%                                                                  85+
                                                                                                            (disabled)
                                                                                     12%
                                                      Under 65                                                 10%
                                                     (disabled)
                                                        40%

75-84
 22%




                                                                      75-84
                                                                      32%
                                                                                                                           65-74
                                                                                                                            46%

                    65-74
                     25%


Note:     Beneficiaries who are under age 65 qualify for Medicare because they are disabled. Once disabled beneficiaries reach
          age 65, they are counted as aged. Dual eligibles are designated as such if the months they qualify for Medicaid exceed
          the months they qualify for supplemental insurance.

Source:   MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004.



•    More than one-third of dual eligibles are disabled, compared with only 10 percent of the
     non-dual-eligible population. Dual eligibles are also somewhat more likely than nondual
     eligibles to be age 85 or older.




30      Dual-eligible beneficiaries
Chart 3-3.              Dual eligibles are more likely than nondual eligibles
                        to report poorer health status, 2004
                        Dual eligibles                                            Nondual eligibles


             Excellent or                                                                          Poor
                                                                   Excellent or                     7%
              very good                          Poor               very good
                18%                              21%                  44%




                                                                                                                  Good or fair
                                                                                                                     49%


                   Good or fair
                      60%




Note:     Totals may not sum to 100 percent due to missing responses. Dual eligibles are designated as such if the months they
          qualify for Medicaid exceed the months they qualify for supplemental insurance.

Source:   MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004.



•   Relative to nondual eligibles, dual eligibles report poorer health status. The majority report
    good or fair status, but about 20 percent of the dual-eligible population reports being in poor
    health (compared with less than 10 percent of the non-dual-eligible population).

•   Dual eligibles are more likely to suffer from cognitive impairment and mental disorders, and
    they have higher rates of diabetes, pulmonary disease, stroke, and Alzheimer’s disease
    than do nondual eligibles.

•   Nineteen percent of dual eligibles reside in institutions, compared with 2 percent of
    nondual eligibles.




                                         A Data Book: Healthcare spending and the Medicare program, June 2007                    31
Chart 3-4.               Demographic differences between dual eligibles and
                         nondual eligibles, 2004

                                                            Percent of dual-                        Percent of non-dual-
Characteristic                                           eligible beneficiaries                     eligible beneficiaries

Sex
  Male                                                                38%                                        45%
  Female                                                              62                                         55
Race/ethnicity
  White, non-Hispanic                                                 55                                         83
  African American, non-Hispanic                                      21                                          7
  Hispanic                                                            15                                          6
  Other                                                                9                                          4
Limitations in ADLs
  No ADLs                                                             47                                         71
  1–2 ADLs                                                            24                                         19
  3–6 ADLs                                                            29                                         10
Residence
  Urban                                                               72                                         77
  Rural                                                               28                                         23
Living arrangement
  Institution                                                         19                                          2
  Alone                                                               30                                         28
  Spouse                                                              17                                         54
  Children, nonrelatives, others                                      32                                         15
Education
  No high school diploma                                              55                                         23
  High school diploma only                                            23                                         31
  Some college or more                                                18                                         44
Income status
  Below poverty                                                       59                                          9
  100–125% of poverty                                                 21                                          8
  125–200% of poverty                                                 16                                         22
  200–400% of poverty                                                  3                                         33
  Over 400% of poverty                                                 1                                         28
Supplemental insurance status
  Medicare or Medicare/Medicaid only                                  92                                         12
  Medicare managed care                                                1                                         16
  Employer                                                             1                                         39
  Medigap                                                              1                                         25
  Medigap/employer                                                     0                                          6
  Other*                                                               6                                          2
Note:     ADL (activity of daily living). Dual eligibles are designated as such if the months they qualify for Medicaid exceed the months
          they qualify for other supplemental insurance. Urban indicates beneficiaries living in metropolitan statistical areas (MSAs).
          Rural indicates beneficiaries living outside MSAs. In 2004, poverty was defined as $9,060 for people living alone and $11,430
          for married couples. Totals may not sum to 100 percent due to rounding and exclusion of an “other” category.
          *Includes public programs such as the Department of Veterans Affairs and state-sponsored drug plans.

Source:   MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2004.

•    Dual eligibles qualify for Medicaid due to low incomes: Fifty-nine percent live below the
     poverty level, and 96 percent live below 200 percent of poverty. Compared to nonduals,
     dual eligibles are more likely to be female, African American, or Hispanic; lack a high school
     diploma; have greater limitations in activities of daily living; reside in a rural area; and live in
     an institution, alone, or with persons other than a spouse.


32      Dual-eligible beneficiaries
Chart 3-5.                Differences in spending and service use between
                          dual eligibles and nondual eligibles, 2004

                                                                          Dual-eligible                             Non-dual-eligible
Service                                                                   beneficiaries                               beneficiaries

Average Medicare payment for all beneficiaries

Total Medicare payments                                                      $10,884                                     $5,975

Inpatient hospital                                                              4,588                                      2,576
Physiciana                                                                      2,736                                      1,964
Outpatient hospital                                                             1,767                                        672
Home health                                                                       601                                        279
Skilled nursing facilityb                                                         851                                        322
Hospice                                                                           260                                        137


Percent of beneficiaries using service

Percent using any type of service                                                91.5%                                      86.8%

Inpatient hospital                                                               28.6                                       18.3
Physiciana                                                                       89.3                                       85.7
Outpatient hospital                                                              72.8                                       62.6
Home health                                                                      11.5                                        7.0
Skilled nursing facilityb                                                         8.0                                        3.4
Hospice                                                                           2.6                                        1.8
          a
Note:      Includes a variety of medical services, equipment, and supplies.
          b
           Individual short-term facility (usually skilled nursing facility) stays for the Medicare Current Beneficiary Survey population.
          Includes only fee-for-service Medicare beneficiaries. Dual eligibles are designated as such if the months they qualify for
          Medicaid exceed the months they qualify for supplemental insurance.

Source:   MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use file, 2004, which updates the previous
          analysis by Liu et al. in 1998.



•   Average per capita spending for dual eligibles is over 80 percent higher than for nondual
    eligibles⎯$10,884 compared to $5,975.

•   For each type of service, average Medicare per capita payments are higher for duals than
    for nonduals. The largest percentage difference between the two groups is in skilled nursing
    facility (SNF) and home health services, for which Medicare spends over twice as much on
    duals as on nonduals.

•   Higher average per capita spending for duals is a function of a higher proportion of duals
    using services than nonduals as well as greater volume or intensity of use among those
    using services. A higher proportion of duals than nonduals use at least one Medicare-
    covered service⎯92 percent versus 87 percent.

•   Duals are more likely to use each type of Medicare-covered service than nonduals; for
    example, duals are more than twice as likely to use SNF services.


                                           A Data Book: Healthcare spending and the Medicare program, June 2007                       33
Chart 3-6.                      Both Medicare and total spending are concentrated
                                among dual-eligible beneficiaries, 2004
                100
                                                                           5%
                 90                                                                                             29%
                                                                           15%
                 80                  38%

                 70
                                                                           30%
                 60
    Percent




                                                                                                                37%
                 50

                 40                  40%

                 30
                                                                           50%
                 20                                                                                             27%
                                     19%
                 10

                                    3%                                                                           7%
                   0
                          Medicare spending for                        Share of                        Total spending for
                              dual eligibles                         dual eligibles                      dual eligibles



Note:            Total spending includes Medicare, Medicaid, supplemental insurance, and out-of-pocket spending. Dual eligibles are
                 designated as such if the months they qualify for Medicaid exceed the months they qualify for supplemental insurance.

Source:          MedPAC analysis of the Medicare Current Beneficiary Survey, Cost and Use files, 2004.



•             Annual Medicare spending is concentrated among a small number of dual-eligible
              beneficiaries. The costliest 20 percent of duals account for 78 percent of Medicare spending
              on duals; in contrast, the least costly 50 percent of duals account for only 3 percent of
              Medicare spending on duals. Of the 1 percent of all beneficiaries for whom Medicare
              spending is the highest, one-third are dual eligible. Similarly, of the costliest 5 percent of
              beneficiaries, a quarter are dual eligible.

•             The distribution of total spending for dual eligibles is similar but somewhat less concentrated
              than the distribution of Medicare spending. For example, the top 5 percent of duals account
              for 29 percent of total spending, which includes Medicare, Medicaid, supplemental
              insurance, and out-of-pocket spending (compared with 38 percent of Medicare spending).

•             On average, total spending for duals is more than twice as high as that for nonduals—
              $23,543 compared to $11,736.




34             Dual-eligible beneficiaries
Chart 3-7.                Dual-eligible beneficiaries report generally good
                          access to care
                                                                                    Dual-eligible             Non-dual-eligible
    Question
                                                                                    beneficiaries              beneficiaries

    Do you have a personal doctor or nurse?
      Yes                                                                               83.1%                        90.4%

    In the last 6 months, if you needed care right
    away, did you usually or always get care as
    soon as you wanted?
        Yes                                                                              87.8                         93.0

    In the last 6 months, if you made any
    appointments with a doctor or health care
    provider, how often did you get an
    appointment as soon as you wanted?
        Usually or always                                                                85.8                         92.2


Source:    MedPAC analysis of CAHPS (Consumer Assessment of Health Plans Survey) for fee-for-service Medicare, 2004. Dual
           eligibles are designated as such if the months they qualify for Medicaid exceed the months they qualify for supplemental
           insurance.



•     Dual-eligible beneficiaries often possess characteristics associated with needing care⎯
      limitations in activities of daily living and poor health status, for example⎯as well as having
      difficulty obtaining care⎯such as being poor and poorly educated.

•     Survey results indicate that most duals report generally good access to care, although
      somewhat lower than beneficiaries with other sources of supplemental insurance.




                                           A Data Book: Healthcare spending and the Medicare program, June 2007                  35
Web links. Dual-eligible beneficiaries
•    Chapter 3 of the MedPAC June 2004 Report to the Congress provides further information on
     dual-eligible beneficiaries.

     http://www.medpac.gov/publications/congressional_reports/June04_ch3.pdf

•    The Kaiser Family Foundation provides information on dual-eligible beneficiaries.

     http://kff.org

•    The CMS Medicaid Chartbook provides information on the Medicaid program.

     http://www.cms.hhs.gov/thechartseries/downloads/2tchartbk.pdf




36    Dual-eligible beneficiaries
             S E C T I O N




Quality of care in the
 Medicare program
Chart 4-1.               Hospital mortality decreased, 2003–2005
                                       Risk-adjusted rates per 10,000
                                                                                         Percent change           Number of
Diagnosis or procedure               2003              2004              2005              2003–2005             cases in 2005

In-hospital mortality
  Pneumonia                           876               789              689                  –21%                    55,147
  Stroke                            1,081             1,019              951                  –12                     32,848
  AMI                               1,205             1,110            1,017                  –16                     32,466
  CHF                                 409               358              308                  –25                     32,179
  GI hemorrhage                       319               264              226                  –29                      9,506
  CABG                                399               355              300                  –25                      6,447
  Craniotomy                          881               814              737                  –16                      3,183
  AAA repair                        1,096               956              802                  –27                      1,803

30-day mortality
  Pneumonia                         1,543            1,452             1,339                  –13                    105,555
  Stroke                            1,812            1,767             1,702                   –6                     55,748
  AMI                               1,644            1,570             1,489                   –9                     46,411
  CHF                                 884              834               806                   –9                     70,084
  GI hemorrhage                       638              587               544                  –15                     19,366
  CABG                                399              366               312                  –22                      6,367
  Craniotomy                        1,155            1,094             1,007                  –13                      4,268
  AAA repair                        1,047              912               862                  –18                      1,852


Note:     AMI (acute myocardial infarction), CHF (congestive heart failure), GI (gastrointestinal), CABG (coronary artery bypass
          graft), AAA (abdominal aortic aneurysm). Rate is for discharges eligible to be counted in the measure.

Source:   MedPAC analysis of MedPAR discharges using Agency for Healthcare Research and Quality indicators and methods.



•   Rates of in-hospital mortality decreased between 2003 and 2005 for all conditions and
    procedures measured. The most substantial improvements occurred for gastrointestinal
    hemorrhage, congestive heart failure, coronary artery bypass graft, and abdominal aortic
    aneurysm repair.

•   Thirty-day mortality (as measured from admission) has also decreased. The most
    substantial improvements occurred for coronary artery bypass graft, abdominal aortic
    aneurysm repair, and gastrointestinal hemorrhage.




                                          A Data Book: Healthcare spending and the Medicare program, June 2007                     39
Chart 4-2.              Safety of care: Adverse events affect many
                        hospitalized beneficiaries, 2003–2005

                                                                                                               Observed
                                    Risk-adjusted rates per 10,000                      Difference              adverse
                                   2003         2004            2005                    2003–2005             events, 2005

Decubitus ulcer                      267              276                282                   15                 159,016

Failure to rescue                  1,225            1,114              1,058                 –167                   61,174

Postoperative PE
or DVT                                92                98               100                     8                  43,108

Accidental puncture/
laceration                            34                34                 35                    1                  38,771

Infection due to
medical care                          25                25                 15                 –10                   19,247

Postoperative
respiratory failure                   50                53                 59                    9                  11,944

Iatrogenic
pneumothorax                            8                8                  8                    0                  11,015

Postoperative hemorrhage
or hematoma                           17                17                 17                    0                   7,438

Postoperative sepsis                 120              131                121                     1                   6,715

Postoperative physiologic
and metabolic derangement               7                8                  8                    1                   2,679

Postoperative wound
dehiscence                            13                12                 15                    1                   1,982

Postoperative hip fracture              3                3                  3                    0                   1,051

Note:     PE (pulmonary embolism), DVT (deep vein thrombosis). Rate is for discharges eligible to be counted in the measure. The
          difference in rates between 2003 and 2005 may be affected by rounding.

Source:   MedPAC analysis of 100 percent of MedPAR discharges using Agency for Healthcare Research and Quality indicators
          and methods.



•    From 2003 to 2005, 6 of 12 rates of adverse events experienced by Medicare beneficiaries
     increased, indicating a decline in the safety of hospital care.

•    Two of the indicators have seen decreasing rates; these include failure to rescue, one of the
     most common and—because it results in death—most severe.




40      Quality of care in the Medicare program
Chart 4-3.               Most ambulatory care indicators show improvement
                         or stability, 2003–2005
                                                                          Number of indicators
Indicators                                       Improved                 Stable            Worsened                 Total


All                                                   22                     13                    3                    38
Anemia and GI bleed                                    2                      2                    0                        4
CAD                                                    3                      1                    0                        4
Cancer                                                 1                      3                    3                        7
CHF                                                    6                      2                    0                        8
COPD                                                   2                      0                    0                        2
Depression                                             0                      1                    0                        1
Diabetes                                               6                      1                    0                        7
Hypertension                                           1                      0                    0                        1
Stroke                                                 1                      3                    0                        4

Note:     GI (gastrointestinal), CAD (coronary artery disease), CHF (congestive heart failure), COPD (chronic obstructive
          pulmonary disease).

Source:   MedPAC analysis of Medicare Ambulatory Care Indicators for the Elderly from the Medicare 5 percent Standard
          Analytic Files.



•     The Medicare Ambulatory Care Indicators for the Elderly (MACIEs) track the provision of
      necessary care and rates of potentially avoidable hospitalizations for beneficiaries with
      selected medical conditions.

•     Out of 38 indicators, 22 improved, 13 did not change statistically, and 3 worsened from 2003
      to 2005. This finding suggests that in 2005 beneficiaries with these conditions were
      somewhat more likely to receive necessary care and avoid hospitalizations.

•     We found small declines in measures related to breast cancer. Specifically, we found
      declines of 2 to 3 percentage points in mammography screenings and clinically indicated
      breast imaging services.

•     For several conditions, declines in potentially avoidable hospitalizations occur concurrently
      with the provision of necessary clinical care for that condition. For example, in 2005, smaller
      shares of beneficiaries with diabetes were hospitalized concurrent with more beneficiaries
      having lipid and hemoglobin testing.




                                         A Data Book: Healthcare spending and the Medicare program, June 2007                   41
Chart 4-4.              Share of home health patients achieving positive
                        outcomes continues to increase

Measure                                           2003                2004                 2005                  2006

Improvement in:
    Walking around                                34                    36                   38                   40
    Getting out of bed                            49                    51                   52                   52
    Bathing                                       57                    60                   61                   67
    Managing oral medications                     35                    38                   39                   41
Patients have less pain                           57                    59                   61                   62
Any hospital admissions                           28                    28                   28                   28
Any unplanned ER use                              21                    21                   21                   21

Note:     ER (emergency room).

Source:   MedPAC analysis of CMS Home Health Compare data. The quality measures are reported for a May to June reporting
          year.



•    Most measures of quality from CMS’s public website Home Health Compare have shown
     improvement since 2003. Measures of function, pain, and medication management have
     improved, while those for adverse events such as readmission to a hospital or unplanned
     ER use have remained constant.




42      Quality of care in the Medicare program
Chart 4-5.               The quality of dialysis care has generally improved

Outcome measure                                          2001                 2002                2003                2004

Percent of in-center hemodialysis patients:
     Receiving adequate dialysis                            92                  92                  94                   95
     With anemia under control                              76                  76                  80                   83
     Dialyzed with an AV fistula                            31                  31                  35                   39
     Not malnourished                                       82                  82                  81                   82

Percent of all peritoneal dialysis patients:
     Receiving adequate CAPD                                68                  68                  70                   73
     Receiving adequate CCPD                                70                  70                  65                   59
     With anemia under control                              76                  76                  82                   82
     Not malnourished                                       61                  61                  63                   62

Note:     AV (arteriovenous), CAPD (continuous ambulatory peritoneal dialysis), CCPD (continuous cycler-assisted peritoneal
          dialysis). Data on dialysis adequacy and use of fistulas represent percent of patients meeting CMS’s clinical performance
          criteria. Patients with anemia under control include those with hemoglobin > 11 g/dL. Not malnourished includes patients
          with serum albumin >3.5/dL.

Source:   MedPAC analysis of 2001–2005 Annual Reports for ESRD Clinical Performance Measures Project from CMS.




•   The quality of dialysis care has improved for some measures. Between 2001 and 2004, the
    proportion of hemodialysis patients receiving adequate dialysis and whose anemia was
    under control increased.

•   Nutritional care is a clinical area in which substantial improvements in quality are needed.
    The proportion of hemodialysis and peritoneal dialysis patients who are malnourished has
    remained relatively constant during this time.

•   All hemodialysis patients require vascular access—the site on the patient’s body where
    blood is removed and returned during dialysis. Vascular access care is another clinical area
    in which substantial improvements in quality are needed. Use of arteriovenous (AV) fistulas,
    considered the best type of vascular access, increased from 31 percent to 39 percent of
    hemodialysis patients between 2001 and 2004. Clinical guidelines recommend that at least
    40 percent of all hemodialysis patients have an AV fistula.




                                         A Data Book: Healthcare spending and the Medicare program, June 2007                   43
Chart 4-6.              Changes in safety of care for long-term care
                        hospital patients, 2003–2005
                            Risk-adjusted rates per 1,000 eligible discharges       Observed Total number
Patient safety                                                    Change in rate     adverse   of patients
indicator                  2003         2004         2005           2004–2005      events 2005    2005


Decubitus ulcer           128.6          148.3           152.2         2.6           16,601      104,027

Infection due to
  medical care              19.4          27.9            31.6        13.3              835      117,765

Postoperative
 PE or DVT                  53.5          54.3            55.9         2.9              872       15,526

Postoperative
 sepsis                   125.3          164.0           160.6        –2.1            1,535        9,012

Note:     PE (pulmonary embolism), DVT (deep vein thrombosis).

Source:   MedPAC analysis of MedPAR data from CMS.



•    These rates suggest that safety for long-term care hospital (LTCH) patients has
     deteriorated. The rates for three of four patient safety indicators (PSIs) increased from 2004
     to 2005, although the rate for one PSI, postoperative sepsis, declined.

•    Nevertheless, we need to be cautious about interpretation of the PSIs since they were not
     developed for LTCHs.

•    We used selected PSIs developed by the Agency for Healthcare Research and Quality to
     assess potentially avoidable adverse events resulting in acute hospital care for patients
     treated in LTCHs in 2003, 2004, and 2005. These PSIs had enough observations for the
     three years and were thought to be relevant to the type of care LTCHs deliver.

•    To distinguish patients who developed a PSI diagnosis in the LTCH, we included in the
     analysis only patients who did not have the pertinent diagnosis in the acute care hospital.
     Therefore, changes in these rates should not be a result of LTCHs admitting more patients
     who had these conditions in the acute care hospital.

•    The PSIs are risk adjusted so these indicators should not reflect a changing LTCH patient
     population over time.




44      Quality of care in the Medicare program
Chart 4-7.               Medicare Advantage plans improve, but rates are
                         still low on some quality measures, 2001–2005
Measure                                                        2001             2002           2003             2004           2005

Advising smokers to quit                                        60.8           61.5            63.3             64.7          75.5
Beta-blocker treatment after heart attack                       92.9           93.0            92.9              94.0         93.8

Breast cancer screening                                         75.3           74.5            74.0              74.0         71.6

Cholesterol management
    Control                                                     58.4           62.3            66.7             69.8           N/R
    Screening                                                   75.5           77.7            81.0             82.1           N/R

Controlling high blood pressure                                 53.6           56.9            61.4             64.6           66.4

Comprehensive diabetes care
    Eye exams a                                                 66.0           68.4            64.9             67.1           66.5
    HbA1c testing                                               85.7           85.0            87.9             89.1           88.9
    Lipid control (<130 mg/DL)                                  57.5           62.6            67.7             71.4           71.6
    Lipid profile                                               85.7           87.9            91.1             93.5           93.3
    Monitoring diabetic nephropathy                             51.9           57.3c           53.6             58.5           60.2
    Poor HbA1c control b                                        26.8           24.5            23.4             22.5           23.6

Antidepressant medication management c
    Acute phase                                                 51.3           52.1            53.3             56.3           54.9
    Continuation phase                                          36.8           37.7            39.2             42.1           41.0
    Contacts                                                    11.9           10.8            10.5             11.9           11.8

Follow-up after hospitalization for mental illness
    Less than 7 days                                            37.2           38.7            38.8             40.2           39.1
    Less than 30 days                                           60.6           60.6            60.3             60.7           59.3


Note:     N/R (not reported), HbA1c (hemoglobin A1c). Rates shown are percent of enrollees receiving the appropriate screening,
          for example, or percent of enrollees with a given condition or risk factor receiving indicated care (e.g., percent of smokers
          advised to quit smoking, or percent of enrollees who had a heart attack who received beta blockers). In the case of
          cholesterol management scores for 2005, the National Committee for Quality Assurance did not report results because
          there were errors in the coding specifications that led to incorrect lower rates.
          a
            The definition of these measures changed in 2003, making comparisons difficult.
          b
            Lower rates are better than higher ones for this measure.
          c
            Acute phase refers to the percent of patients receiving effective treatment after a new episode. Continuation refers to the
          percent of patients remaining on antidepressant continuously for six months after initial diagnosis. Contacts refer to the
          percent of patients who received at least 3 follow-up office visits in a 12-week acute phase.

Source: National Committee for Quality Assurance. 2005. The State of Health Care Quality. Washington, DC: NCQA.
        National Committee for Quality Assurance. 2006. The State of Health Care Quality. Washington, DC: NCQA.

•     Results for 2005 were similar to 2004, with the exception of the improvement in advising smokers to quit and the
      decline in the rate of breast cancer screening, which we also see in the Medicare fee-for-service population. (The
      reports that are the basis of these data do not indicate whether changes across years are statistically significant.)

•     Because many Medicare beneficiaries in Medicare Advantage plans are still not receiving clinically indicated
      services, opportunities for further improvement exist.




                                          A Data Book: Healthcare spending and the Medicare program, June 2007                     45
Chart 4-8.                                            Changes in SNF quality measures between 2000
                                                      and 2004
                                       4
                                                  Observed
                                                  Case-mix adjusted
                                       3          Fully adjusted                                                   2.80
     Average percentage point change




                                                                                                                                  2.05           2.03
                                       2



                                       1



                                       0

                                                                                     -0.4
                                       -1

                                                                      -1.3
                                       -2             -1.8
                                                       Discharge to community rate                         Potentially avoidable rehospitalization rate



Note:                                  SNF (skilled nursing facility). Table shows mean percentage point change in facility rates. Community discharges
                                       occurred within 30 days of the SNF admission. Potentially avoidable rehospitalizations include hospitalizations within 100
                                       days to an acute care hospital for heart failure, electrolyte imbalance, respiratory infection, sepsis, and urinary tract
                                       infection. Fully adjusted rates account for differences in case mix, staffing levels, length of the qualifying hospital stay,
                                       SNF location, facility type, and market characteristics.

Source:                                Kramer et al. 2007. Understanding temporal changes in and factors associated with SNF rates of community discharge
                                       and rehospitalization. A study conducted by staff at the Division of Health Care Policy and Research University of
                                       Colorado at Denver and Health Sciences Center for MedPAC. Washington, DC: MedPAC. http://www.medpac.gov/.




•            Two outcome measures—rates of discharges to the community within 30 days and
             potentially avoidable hospital readmissions (which include hospitalizations for heart failure,
             electrolyte imbalance, respiratory infection, sepsis, and urinary tract infections) within 100
             days—worsened between 2000 and 2004. The average facility rate of community discharge
             decreased 1.8 percentage points, and the rate of potentially avoidable rehospitalizations
             increased 2.8 percentage points.

•            Controlling for differences in case mix and facility and market characteristics reduced but did
             not eliminate the differences in the quality measures between 2000 and 2004. Differences in
             case mix accounted for about one-third of the change in rates over the period.

•            Other factors, including unmeasured case-mix differences, could explain some of the
             differences.




46                                Quality of care in the Medicare program
Web links. Quality of care in the Medicare program

•   Chapter 2 of the MedPAC June 2006 Report to the Congress discusses care coordination
    for Medicare beneficiaries and its implications for quality of care.

    http://www.medpac.gov/publications/congressional_reports/Jun06_Ch02.pdf

•   Chapter 2 of the MedPAC March 2007 Report to the Congress includes further information
    on quality in hospitals and outpatient dialysis services.

    http://www.medpac.gov/chapters/Mar07_Ch02.pdf

•   Chapter 3 of the MedPAC March 2007 Report to the Congress includes further information
    on quality in skilled nursing facilities, home health agencies, long-term care hospitals, and
    inpatient rehabilitation facilities. Chapter 4 of MedPAC’s June 2007 Report to the Congress
    discusses initiatives to improve the quality of home health services, and Chapter 8 of this
    report provides information on the quality of care provided by skilled nursing facilities.

    http://www.medpac.gov/chapters/Mar07_Ch03.pdf
    http://www.medpac.gov/chapters/Jun07_Ch04.pdf
    http://www.medpac.gov/chapters/Jun07_Ch08.pdf


•   Chapter 4 of the MedPAC March 2005 Report to the Congress outlines strategies to
    improve care through pay-for-performance incentives and information technology.

    http://www.medpac.gov/publications/congressional_reports/Mar05_Ch04.pdf

•   Chapter 2 of the MedPAC March 2004 Report to the Congress includes and discusses in
    further detail information similar to that included in many of these charts.

    http://www.medpac.gov/publications/congressional_reports/Mar04_Ch2.pdf

•   The CMS website provides further information on CMS quality initiatives, including those for
    dialysis care.

    http://cms.hhs.gov/quality

•   More information about Medicare’s quality initiatives for dialysis care can be found on the
    CMS website.

    http://www.cms.hhs.gov/ESRDqualityImproveInit/

•   Medicare provides information about home health agency outcomes on its consumer website.

    http://www.medicare.gov/HHCompare/Home.asp




                                 A Data Book: Healthcare spending and the Medicare program, June 2007   47
•    Chapter 3 of the MedPAC June 2007 Report to the Congress contains additional information
     on reported quality indicators for Medicare Advantage (MA) plans.

     http://medpac.gov/chapters/Jun07_Ch03.pdf

•    The National Committee for Quality Assurance (NCQA) publication cited in Chart 4-7,
     showing results for the kinds of measures shown in the table, is available from NCQA.

     http://web.ncqa.org/Default.aspx?tabid=447

•    Medicare Advantage plan-level results on quality measures can be obtained by using the
     Centers for Medicare & Medicaid Services (CMS) Medicare Personal Plan Finder.

     http://www.medicare.gov/MPPF/Include/DataSection/Questions/SearchOptions.asp

•    CMS makes available a downloadable data base of MA plan performance on quality
     measures, the MPPF–Medicare Advantage data set.

     http://www.medicare.gov/Download/DownloadDB.asp

•    The Commonwealth Fund published a chart book with information on Medicare quality in the
     spring of 2005.

     http://www.cmwf.org




48    Quality of care in the Medicare program
            S E C T I O N




Access to care in the
 Medicare program
Chart 5-1.                                      Beneficiaries’ reports of difficulties accessing care,
                                                2000–2005
                            15

                                                                                                                                                     a
                                                                                                               Delayed health care due to cost
                                                                                                               Did not see doctor b
                                                                                                               Trouble getting health care c
Percent of beneficiaries




                            10
                                          8.8
                                                                                                                                          8.0

                                          7.7                                                                                             7.4

                             5
                                          4.6                                                                                             4.3




                             0
                                         2000               2001               2002               2003                2004              2005


Note:                            These data reflect the answers given by noninstitutionalized beneficiaries.
                                 a
                                   Answered “yes” when asked if they delayed seeking medical care because they were worried about the cost.
                                 b
                                   Answered “yes” when asked if they had a serious health problem or condition about which they should have seen a
                                 doctor or other medical person, but did not.
                                 c
                                   Answered “yes” when asked if they had any trouble getting health care that they wanted or needed.

Source:                          MedPAC analysis of Medicare Current Beneficiary Survey, Access to Care file, 2005.



•                          In 2005, more than 90 percent of beneficiaries reported good access to care, regardless of
                           the question asked.

•                          When asked whether they delayed health care due to cost, 7.4 percent of beneficiaries
                           answered yes in 2005, compared to 7.7 percent in 2000.

•                          Similarly, the percentage reporting that they did not see a doctor despite having a serious
                           health problem or condition declined from 8.8 percent to 8.0 percent in 2005.

•                          The percentage of beneficiaries who reported trouble getting health care declined from 4.6
                           percent in 2000 to 4.3 percent in 2005.




                                                                A Data Book: Healthcare spending and the Medicare program, June 2007                     51
Chart 5-2.               Access to physicians is similar for Medicare
                         beneficiaries and privately insured people
                                                      Medicare                                       Private insurance
                                                   Age 65 and older                                     Age 50–64

Survey question                                 2005                2006                           2005                2006
Unwanted delay in getting an appointment: Among those who had an appointment, “How often did you
have to wait longer than you wanted to get a doctor’s appointment?”
   For routine care
     Never                               74%*           75%*             67%*             69%*
     Sometimes                           21             18*              25               21*
     Usually                               3             3*               5                 5*
     Always                                2             3                3                 4
     For illness or injury
       Never                                      82                84*                            75*                  79*
       Sometimes                                  15                11*                            19                   15*
       Usually                                     1                 2                              3                    2
       Always                                      1                 1*                             2                    2*

Getting a new physician: Among those who tried to get an appointment with a primary care physician or a
specialist, “How much of a problem was it finding a primary care doctor/specialist who would treat you? Was it…”
   Primary care physician
     No problem                             75             76                         75                75
     Small problem                          12             10                         16                16
     Big problem                            13             14                          9                 9
     Specialist
       No problem                                 89                80                             86                   83
       Small problem                               6                 7                              7                    9
       Big problem                                 5                11                              6                    7

Not accessing a doctor for medical problems: “In the past year, do you think you should have seen a
doctor for a medical problem, but did not?”
                                            7         8*                       12              11*

Note:     Numbers may not sum to 100 percent due to rounding. Missing responses are not presented. For the 2005 survey n=4,021
          (2,012 Medicare; 2,009 privately insured). For the 2006 survey n=4,029 (2,005 Medicare, 2,024 privately insured).
          *Indicates a statistically significant difference between the Medicare and privately insured populations, at a 95 percent
          confidence level.

Source:   MedPAC-sponsored telephone surveys conducted August–September 2005 and 2006.

•    Medicare beneficiaries and privately insured people age 50 to 64 reported very similar experiences
     accessing physicians. For some indicators, Medicare beneficiaries enjoyed slightly better access than
     their privately insured counterparts.

•    Most Medicare beneficiaries and people age 50 to 64 did not have a delay getting an appointment
     due to scheduling issues. For both groups, appointment scheduling was easier for illness or injury
     appointments than for routine care. Both reported more difficulty finding a primary care physician
     than a specialist, but most were able to access either type with little or no problem.

•    In 2006, 8 percent of Medicare beneficiaries and 11 percent of privately insured individuals said they
     think they should have seen a doctor for a medical problem in the past year, but did not. Physician
     availability issues (e.g., appointment time, finding a doctor) were less common reasons for not seeing
     a doctor than other reasons, such as cost.


52      Access to care in the Medicare program
Chart 5-3.                Physicians’ acceptance of new patients is highest
                          for private (non-HMO) and Medicare patients, 2006

                                                                          Type of patient insurance
                                                                                                Non-
                                                   Private,                                    Medicaid              Medicaid
                                                  non-HMO              FFS Medicare             HMO              (including HMO)

 Percent of physicians who are
 accepting at least some new
 patients
    Overall*                                          98.3%                  96.7%                86.3%                  70.4%
     Urban                                            98.5                   97.2                 86.4                   68.4**
     Rural                                            96.8                   93.1                 85.8                   84.8**

        Proceduralists                                99.0                   97.9                 91.9**                 75.4
        Surgeons                                      99.1                   99.1**               88.2                   74.2**
        Nonproceduralists                             97.5                   94.8**               83.6**                 66.4**


Note:      HMO (health maintenance organization), FFS (fee-for-service). Proceduralists include physicians in medical specialties
           that are procedurally oriented (cardiology, dermatology, gastroenterology, and radiation oncology). Nonproceduralists
           include physicians in all other nonsurgical specialties.
           *The distribution of responses in this row is significantly different from FFS Medicare patients (p<0.0001), chi-square test.
           **Responses by type of physician are statistically significant within insurance group, at a 95% confidence level.

Source:    MedPAC-sponsored survey of physicians conducted by the NORC at the University of Chicago and The Gallup
           Organization.




•    Most physicians (almost 97 percent) accept at least some new Medicare FFS patients, and
     a smaller share (80 percent) accept all or most (data not shown). Acceptance of new
     Medicare FFS patients compares favorably with Medicaid and HMO patients but is a little
     lower than for private non-HMO patients.

•    For almost all payers, rural physicians were less likely to accept new patients than their
     urban counterparts, except in the case of Medicaid.

•    In our sample, nonproceduralists (e.g., primary care physicians) were less likely than other
     types of physicians to accept new patients by each given insurance type. Statistically, this
     difference is not significant across all payers.




                                            A Data Book: Healthcare spending and the Medicare program, June 2007                     53
 Chart 5-4.             Most beneficiaries had little or no problem
                        accessing home health and special therapy services

                                         Home health                                       Special therapy

                           2001        2002        2003        2004             2001        2002         2003        2004

    Did you experience an access problem?
    No problem              74%         76%          77%         78%*             84%         85%         85%         85%*
    A small problem         13          13           12          12*               9           8           8           8*
    A big problem           12          12           11          11*               7           7           6           6

Note:     Percentages are proportions of those who answered the question. Missing responses were not included. Columns do not
          total 100 percent due to rounding.
          *The difference between 2001 and 2004 is significant at the p<0.05 level.

Source:   MedPAC analysis of Consumer Assessment of Health Plans Survey, 2001–2004. Data for 2005 are not available.



•     Most beneficiaries had little or no problem accessing home health services (90 percent) and
      special therapy services (93 percent) in 2004. Special therapy services include physical and
      occupational therapies and speech–language pathology services.

•     In 2004, 78 percent of beneficiaries reported having no problems accessing home health
      services, a slight increase over the share in 2001.

•     In 2004, 85 percent of beneficiaries reported having no problems accessing special therapy
      services, a slight increase over the share in 2001.




54      Access to care in the Medicare program
Chart 5-5.                                        Ethnic and racial disparities in delaying or failing
                                                  to obtain care, 2005
Delayed getting care due to cost

                                       10

                                                                                                                                8.1
                                        8               7.6                                 7.4
          Percent of U.S. population




                                        6


                                        4


                                        2


                                        0
                                              White, non-Hispanic                 Black, non-Hispanic                        Hispanic

Failed to obtain care due to cost

                                   10
      Percent of U.S. population




                                       8
                                                                                            6.5                                 6.3
                                       6
                                                       4.9

                                       4


                                       2


                                       0
                                              White, non-Hispanic                 Black, non-Hispanic                        Hispanic


Source:                            National Center for Health Statistics, Centers for Disease Control and Prevention: National Health Interview Survey, 2005.



•   Rates of delaying care due to cost are slightly higher for Hispanic than for non-Hispanic
    beneficiaries; rates of failing to get care due to cost are higher for both black and Hispanic
    beneficiaries than for white non-Hispanic beneficiaries. These differences may be related to
    income and presence of supplemental coverage.




                                                                   A Data Book: Healthcare spending and the Medicare program, June 2007                  55
Chart 5-6.              Beneficiaries differ in their reports of obtaining
                        needed, urgent, or routine care, 2004

                                              No problem                             Always got care as
                                                getting                                soon as wanted
Beneficiary characteristic                    needed care                         Urgent              Routine

Overall                                               90%                             73%                        63%

Aged (65 years and older)                             92                              76                         64
Disabled (Under 65)                                   83                              63                         56

White                                                 92                              75                         64
African American                                      85                              68                         63
Hispanic                                              81                              61                         55

Medicare only                                         84                              66                         61
Dually eligible                                       81                              67                         59
Supplemental Insurance                                93                              76                         64


Source:   Research Triangle Institute analysis of data from the Medicare Fee-for-Service National Implementation Subgroup
          CAHPS Analysis 2004, submitted to CMS.



•    The percentage of beneficiaries reporting no problem getting needed care is significantly
     higher than those who reported that they could get urgent or routine care as soon as they
     wanted it. This may seem inconsistent, but the last two questions add the dimension of
     timing into their responses. It appears that while most beneficiaries are able to get care, they
     may not get it as soon as they want it.

•    Disabled beneficiaries under 65 were more likely than aged beneficiaries to report problems
     receiving needed, urgent, or routine care.

•    The presence and type of supplemental insurance also affected beneficiaries’ ability to
     obtain care with no problems. Sixty-seven percent of dually eligible beneficiaries reported
     they always got urgent care as soon as they wanted, compared with 73 percent of all
     beneficiaries. Seventy-six percent of beneficiaries with supplemental insurance reported the
     same experience.

•    Hispanics had a harder time than other ethnic and racial groups getting needed, urgent, and
     routine care.




56    Access to care in the Medicare program
Web links. Access to care in the Medicare program

•   Chapter 2B of the MedPAC March 2007 Report to the Congress provides more information
    on beneficiary access to physicians.

    http://www.medpac.gov/chapters/Mar07_Ch02b.pdf

•   Chapter 3 of the MedPAC March 2003 Report to the Congress provides a broad overview
    about beneficiary access to health care.

    http://www.medpac.gov/publications/congressional_reports/Mar03_Ch3.pdf

•   The Commonwealth Fund released a chart book in spring 2005 which has further
    information on access in the Medicare program.

    http://www.cmwf.org

•   Additional information about physician acceptance of new Medicare patients can be found at:

    http://www.hschange.org




                               A Data Book: Healthcare spending and the Medicare program, June 2007   57
                  S E C T I O N




  Medicare beneficiary and
other payer financial liability
Chart 6-1.               Sources of supplemental coverage among
                         noninstitutionalized Medicare beneficiaries, 2004
                                                  No supplemental
                                                     coverage
                                                       9.3%

                                                                                             Medigap
                       Medicare                                                               28.8%
                      managed care
                         14.5%


                     Other public
                       sector
                        1.5%


                              Medicaid
                               14.0%




                                                                          Employer
                                                                          sponsored
                                                                            31.9%

Note:     Beneficiaries are assigned to the supplemental coverage category that applied for the most time in 2004. They could have
          had coverage in other categories throughout 2004. Other public sector includes federal and state programs not included in
          other categories. Analysis includes only beneficiaries living in the community. It excludes beneficiaries who were not in
          both Part A and Part B throughout their enrollment in 2004 or who had Medicare as a second payer.

Source:   MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2004.


•   Most beneficiaries living in the community have coverage that supplements or replaces the
    Medicare benefit package. About 91 percent of beneficiaries have supplemental coverage or
    participate in Medicare managed care.

•   Almost 61 percent have private-sector supplemental coverage such as medigap (about 29
    percent) or employer-sponsored retiree coverage (about 32 percent).

•   About 16 percent have public-sector supplemental coverage, primarily Medicaid.

•   Fourteen percent participate in Medicare managed care. This includes Medicare Advantage,
    cost, and health care prepayment plans. These types of arrangements generally replace
    Medicare coverage and often add to it.

•   The proportion of beneficiaries who have managed care enrollment on this diagram (about
    14 percent) is much smaller than the proportion listed in Chapter 10 (19 percent). The
    difference is due the fact that the results in this chart reflect 2004 data, and the results in
    Chapter 10 reflect 2007 data. Managed care enrollment grew substantially in the intervening
    years.



                                         A Data Book: Healthcare spending and the Medicare program, June 2007                  61
Chart 6-2.               Sources of supplemental coverage among
                         noninstitutionalized Medicare beneficiaries, by
                         beneficiaries’ characteristics, 2004
                                Number of         Employer-                                      Medicare       Other
                               beneficiaries      sponsored         Medigap                      managed        public     Medicare
                               (thousands)        insurance        insurance       Medicaid        care         sector       only
All beneficiaries                  36,326              32%              29%             14%           14%          2%            9%
Age
   Under 65                         5,025              16                6             46             7            2           23
   65–69                            7,869              38               30              9            12            1           10
   70–74                            7,709              35               30              9            17            1            8
   75–79                            6,833              33               34              8            18            2            5
   80–84                            4,999              32               35              9            17            2            6
   85+                              3,891              32               37             10            15            1            6
Income status
   Below poverty                    6,019              10               15             52            10            2           12
   100 to 125% of poverty           3,507              16               26             29            14            3           13
   125 to 200% of poverty           7,827              27               29             10            17            2           14
   200 to 400% of poverty          10,630              42               32              1            16            1            7
   Over 400% of poverty             8,270              46               36              0            13            0            4
Eligibility status
   Aged                            31,148              34               33              9            16            1            7
   Disabled                         4,839              16                5             46             7            2           23
   ESRD                               302              27               20             32            12            0            9
Residence
   Urban                           27,532              33               27             13            19            1            8
   Rural                            8,769              30               35             17             2            2           14
Sex
   Male                            16,098              34               26             13            13            2           12
   Female                          20,228              30               31             15            16            1            7
Health status
   Excellent/very good             14,915              34               35              7            15            1            8
   Good/fair                       18,355              31               26             17            15            2           10
   Poor                             2,925              24               17             34            10            2           14
Note:     ESRD (end-stage renal disease). Beneficiaries are assigned to the supplemental coverage where they spent the most
          time in 2004. They could have had coverage in other categories throughout 2004. Medicare managed care includes
          Medicare Advantage, cost, and health care prepayment plans. Other public sector includes federal and state programs
          not included in other categories. In 2004, poverty was defined as $9,060 for people living alone and $11,430 for married
          couples. Urban indicates beneficiaries living in metropolitan statistical areas (MSAs). Rural indicates beneficiaries living
          outside MSAs. Analysis includes beneficiaries living in the community. Number of beneficiaries will differ between
          boldface categories because we exclude beneficiaries with missing values.
Source:   MedPAC analysis of 2004 Medicare Current Beneficiary Survey, Cost and Use file.

•    Beneficiaries most likely to have employer-sponsored supplemental coverage are those who are above age 64,
     higher income (above 200 percent of poverty), eligible due to age or end-stage renal disease (ESRD), urban
     dwelling, and male, and who report better than poor health.
•    Medigap is most common among those who are “older” aged (age 75 or older), middle or high income (above
     125 percent of poverty), eligible due to age, rural dwelling, female, and who report excellent or very good health.
•    Medicaid coverage is most common among those who are under 65, low income (below 125 percent of
     poverty), eligible due to disability or ESRD, rural dwelling, female, and who report poor health.
•    Medicare managed care is most common among those who are age 65 or older, with income between 125 and
     400 percent of poverty, eligible due to age, urban dwelling, female, and who report better than poor health.
•    Lack of supplemental coverage (Medicare coverage only) is most common among beneficiaries who are under
     age 65, with income below 200 percent of poverty, eligible due to disability, rural dwelling, male, and who report
     poor health.


62      Medicare beneficiary and other payer financial liability
Chart 6-3.              Total spending on health care services for
                        noninstitutionalized FFS Medicare beneficiaries,
                        by source of payment, 2004
                                               Per capita total spending = $11,080

                                     Public supplements
                                             12%




             Private supplements
                        18%




                                                                                                 Medicare
                                                                                                  54%

                     Beneficiaries'
                    direct spending
                          16%



Note:     FFS (fee-for-service). Private supplements include employer-sponsored plans and individually purchased coverage.
          Public supplements include Medicaid, Department of Veterans Affairs, and other public coverage. Direct spending is on
          Medicare cost sharing and noncovered services but not supplemental premiums. Analysis includes only FFS beneficiaries
          living in the community.

Source:   MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2004.

•   Among fee-for-service (FFS) beneficiaries living in the community, the total cost of health care
    services (defined as beneficiaries’ direct spending as well as expenditures by Medicare, other
    public-sector sources, and all private-sector sources on all health care goods and services)
    averages $11,080. Medicare is the largest source of payment; it pays 54 percent of the health
    care costs for FFS beneficiaries living in the community, or an average of $5,984 per beneficiary.

•   Private sources of supplemental coverage—primarily employer-sponsored retiree coverage and
    medigap—pay 18 percent of beneficiaries’ costs, or an average of $2,013 per beneficiary.

•   Beneficiaries pay 16 percent of their health care costs out of pocket, or an average of $1,788 of
    spending per beneficiary.

•   Public sources of supplemental coverage—primarily Medicaid—pay 12 percent of beneficiaries’
    health care costs, or an average of $1,295 per beneficiary.

•   The effects of the prescription drug benefit established under the Medicare Prescription Drug,
    Improvement, and Modernization Act of 2003 are not reflected in these results or in Charts 6-4,
    6-5, and 6-6.




                                        A Data Book: Healthcare spending and the Medicare program, June 2007               63
Chart 6-4.                  Per capita total spending on health care services
                            among noninstitutionalized FFS beneficiaries, by
                            source of payment, 2004
          60,000
                          Medicare
                          Supplemental payers                                                                     $52,539
          50,000          Direct spending



          40,000
Dollars




          30,000


          20,000                                                                                $17,535


          10,000                                                              $8,088
                                                            $3,693
                         $258            $1,495
               0
                         < 10             10-25              25-50             50-75             75-90              > 90

                                    Groups of beneficiaries ranked by total spending (percentile ranges)


Note:        FFS (fee-for-service). Analysis includes FFS beneficiaries living in the community. Direct spending is on Medicare cost
             sharing and noncovered services.

Source:      MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2004.



•         Total spending on health care services varies dramatically among fee-for-service (FFS)
          beneficiaries living in the community. Per capita spending for the 10 percent of beneficiaries
          with the highest total spending averages $52,539. Per capita spending for the 10 percent of
          beneficiaries with the lowest total spending averages $258.

•         Among FFS beneficiaries living in the community, Medicare pays a larger percentage as
          total spending increases, and beneficiaries’ direct spending is a smaller percentage as total
          spending increases. For example, Medicare pays 54 percent of total spending for all
          beneficiaries but pays 70 percent of total spending for the 10 percent of beneficiaries with
          the highest total spending. Beneficiaries’ direct spending covers 16 percent of total spending
          for all beneficiaries but only 10 percent of total spending for the 10 percent of beneficiaries
          with the highest total spending.




64         Medicare beneficiary and other payer financial liability
Chart 6-5.                      Variation in and composition of total spending
                                among noninstitutionalized FFS beneficiaries,
                                by type of supplemental coverage, 2004
              16,000


              14,000                                                                   1,247        4
                                                                   350
                                                                                                                               42
              12,000
                             1,648                                                     4,341
                                                                    1,821
              10,000          480
                                                2,158                                                                         1,818
    Dollars




                             3,286                                                                             30
               8,000                             808
                                                                    3,380
                                                1,518                                                                         3,639
               6,000                                                                                       1,858

                                                                                       9,120               1,043
               4,000
                             6,564              6,137               5,759
                                                                                                                              5,081
               2,000                                                                                       3,871


                   0
                          Employer             Medigap           Medigap &           Medicaid                No           Other public
                          sponsored                              employer                               supplemental         sector
                                                                                                          coverage

                             Direct spending            Public supplemental              Private supplemental             Medicare


Note:            FFS (fee-for-service). Beneficiaries are assigned to the supplemental coverage category that applied for the most time in
                 2004. They could have had coverage in other categories throughout 2004. Other public sector includes federal and state
                 programs not included in the other categories. Private supplements include employer-sponsored plans and individually
                 purchased coverage. Public supplements include Medicaid, Department of Veterans Affairs, and other public coverage.
                 Analysis includes only FFS beneficiaries living in the community. It excludes beneficiaries who were not in both Part A and
                 Part B throughout their enrollment in 2004 or had Medicare as a second payer. Direct spending is on Medicare cost
                 sharing and noncovered services but not supplemental premiums.

Source:          MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2004.



•             The level of total spending (defined as beneficiaries’ out-of-pocket spending as well as
              expenditures by Medicare, other public-sector sources, and all private-sector sources on all
              health care goods and services) among fee-for-service beneficiaries living in the community
              varies by the type of supplemental coverage they have. Total spending is much lower for
              those beneficiaries with no supplemental coverage than for those beneficiaries who have
              supplemental coverage. Beneficiaries with Medicaid coverage have the highest level of total
              spending, 116 percent higher than those with no supplemental coverage.

•             Medicare is the largest source of payment for beneficiaries in each supplemental insurance
              category, but the second largest source of payment differs. Among those with supplemental
              coverage, that coverage—public and private combined—is the second largest source of
              payment. However, among those with Medicare only, beneficiaries’ direct spending is the
              second largest source of payment.



                                                 A Data Book: Healthcare spending and the Medicare program, June 2007                    65
Chart 6-6.                       Out-of-pocket spending for premiums and health
                                 services per beneficiary, by insurance and health
                                 status, 2004
              7,000

              6,500

              6,000

              5,500

              5,000

              4,500

              4,000                                                            2,981
                                                             2,835
    Dollars




                                                                                       1,640
                                                                     1,990
              3,500

              3,000

              2,500                       2,079
                                                   1,521
                         2,698
              2,000                                                                                                 2,346
                                                                                                                               1,556
              1,500              1,402                                                 2,899
                                                             2,451   2,614     2,580
              1,000                                                                                  1,734
                                          1,510    1,603
                500       749     817                                                                        707 103 707       853
                                                                                               106
                   0
              Health      -      +           -      +           -     +            -    +                -    +            -     +
              Status
                       Medicare only             ESI           Medigap          Medigap &             Medicaid         Other
                                                                                employer

                                                    Out-of-pocket spending by beneficiaries
                                                    Premiums paid by beneficiaries
                                                  − Beneficiaries who report they are in fair or poor health
                                                  + Beneficiaries who report they are in good, very good, or excellent health

Note:           ESI (employer-sponsored supplemental insurance).

Source:         MedPAC analysis of Medicare Current Beneficiary Survey, Cost and Use file, 2004.

•         This diagram illustrates out-of-pocket spending on services and premiums, by beneficiaries’ supplemental insurance
          and health status. For example, beneficiaries who have only traditional Medicare coverage (Medicare only) and report
          fair or poor health had an average of $749 in out-of-pocket spending on premiums and $2,698 on services. Those who
          have Medicare-only coverage and report good, very good, or excellent health had an average of $817 in out-of-pocket
          spending on premiums and $1,402 on services.
•         Insurance that supplements Medicare does not shield beneficiaries from all out-of-pocket costs. Beneficiaries who
          report being in fair or poor health spend more out of pocket for health services than those reporting good, very good, or
          excellent health, regardless of the type of coverage they have to supplement Medicare.
•         Despite having supplemental coverage, beneficiaries who have employer-sponsored insurance (ESI) or medigap have
          out-of-pocket spending that is comparable to or larger than those who have only coverage under traditional Medicare
          (Medicare only). This likely reflects the fact that beneficiaries who have ESI or medigap have higher incomes and are
          likely to have stronger preferences for health care.
•         In several categories, especially among those in Medicare only, the percentage of out-of-pocket spending that is
          attributable to premiums increased from 2003 to 2004. This reflects a sharp increase in the Part B premium.
•         What beneficiaries actually pay out of pocket varies by type of supplemental coverage. For those with medigap, out-of-
          pocket spending generally reflects the premiums and costs of prescription drugs and other services not covered by
          Medicare. Beneficiaries with ESI usually pay less out of pocket for prescription drugs than those with medigap, but may
          pay more in Medicare deductibles and cost sharing.




66            Medicare beneficiary and other payer financial liability
Web links.       Medicare beneficiary and other payer
                 financial liability

•   Chapter 1 of the MedPAC March 2007 Report to the Congress provides more information on
    Medicare program spending.

    http://www.medpac.gov/chapters/Mar07_ch01.pdf

•   Chapter 1 of the MedPAC March 2006 Report to the Congress provides more information on
    Medicare program spending.

    http://www.medpac.gov/publications/congressional_reports/Mar06_Ch01.pdf

•   Chapter 1 of the MedPAC March 2005 Report to the Congress provides more information on
    Medicare program spending.

    http://www.medpac.gov/publications/congressional_reports/Mar05_Ch01.pdf

•   Appendix B of the MedPAC June 2004 Report to the Congress and Chapter 1 of the
    MedPAC June 2002 Report to the Congress provide more information on Medicare
    beneficiary and other payer financial liability.

    http://www.medpac.gov/publications/congressional_reports/June04_AppB.pdf

    http://www.medpac.gov/publications/congressional_reports/Jun2_Ch1.pdf

•   Chapter 1 of the MedPAC March 2004 Report to the Congress provides more information on
    beneficiary and Medicare program spending as well as information about supplemental
    insurance.

    http://www.medpac.gov/publications/congressional_reports/Mar04_Ch1.pdf

•   Chapter 1 of the MedPAC March 2003 Report to the Congress provides more information on
    beneficiary and program spending.

    http://www.medpac.gov/publications/congressional_reports/Mar03_Ch1.pdf




                             A Data Book: Healthcare spending and the Medicare program, June 2007   67
                     S E C T I O N




Acute inpatient services
      Short-term hospitals
  Specialty psychiatric facilities
Chart 7-1.                                Growth in Medicare’s payments for hospital
                                          inpatient and outpatient services, 1995–2005
                          180
                                        Outpatient
                          160           Inpatient

                                                                                                                                               29
                          140                                                                                                       26
                                                                                                                         23
                                                                                                              21
                          120
                                                                                                   21
    Billions of dollars




                                                         17                   18         18
                          100                16                     16
                                   15

                          80
                                                                                                                                              132
                          60                                                                                            118        124
                                                                                                              114
                                                                                                   105
                                   89        93          94         93        95         96
                          40

                          20

                           0
                                 1995       1996         1997     1998      1999       2000       2001       2002       2003      2004       2005
                                                                                   Calendar year

Notes:                     Analysis includes inpatient services covered by the acute inpatient prospective payment system (IPPS); psychiatric,
                           rehabilitation, long-term care, cancer, and children’s hospitals and units; outpatient services covered by the outpatient
                           PPS; and other outpatient services. Payments include program outlays and beneficiary cost sharing.

Source:                    CMS, Office of the Actuary.


•                 Medicare hospital inpatient spending increased 48 percent (4.0 percent per year) and outpatient
                  spending increased 92 percent (6.8 percent per year) from 1995 to 2005.

•                 A freeze in inpatient payment rates in the Balanced Budget Act of 1997 (BBA), combined with lower
                  Medicare discharges, reduced inpatient spending in 1998. More Medicare discharges, a higher
                  update, case-mix change, and expansion of disproportionate share hospital (DSH) payments
                  increased inpatient spending substantially in 2001 and 2002. In 2003 and 2004, slower Medicare
                  discharge growth, slower case-mix change, and lower outlier spending led to slight moderation in the
                  rate of spending growth. Increases in DSH payments enacted in the Medicare Prescription Drug,
                  Improvement, and Modernization Act of 2003; liberalization of new technology payments; and one-
                  time geographic reclassification led to a larger payment increase in 2005. More rapid case-mix growth
                  and increases in outlier payments also increased payments in 2005.

•                 Outpatient spending fell in 1998, reflecting the BBA’s elimination of inadvertent overpayments.
                  Transitional corridor and new technology payments in the outpatient prospective payment system,
                  along with volume increase, increased outpatient spending in 2001. Payment for certain outpatient
                  drugs on an average wholesale price basis and extension of hold-harmless payments to small rural
                  and sole community hospitals were the key factors in higher growth rates in 2004 and 2005.

•                 Aggregate Medicare inpatient spending was $132 billion and outpatient spending was $29 billion in
                  2005.




                                                              A Data Book: Healthcare spending and the Medicare program, June 2007                     71
Chart 7-2.               Major diagnostic categories with highest volume,
                         fiscal year 2005

MDC                                                 Share of         Share of              Share of
number            MDC name                      all discharges   medical discharges   surgical discharges

     5            Circulatory system                  27%                26%                   31%

     4            Respiratory system                  15                 20                     3

     8            Musculoskeletal                     12                  4                    30
                  system and connective
                  tissue

     6            Digestive system                    11                 11                     9

     1            Nervous system                      8                   9                     5

    11            Kidney and urinary                  6                   7                     4
                  tract

    10            Endocrine, nutritional,             4                   5                     2
                  and metabolic diseases
                  and disorders

    18            Infectious and parasitic            3                   4                     2
                  diseases

     7            Hepatobiliary system                3                   2                     4
                  and pancreas

     9            Skin, subcutaneous                  2                   3                     2
                  tissue and breast

Total                                                 91                 91                    92


Note:      MDC (major diagnostic category).

Source:    MedPAC analysis of MedPAR data from CMS.


•    In fiscal year 2005, 10 major diagnostic categories accounted for 91 percent of discharges
     at hospitals paid under the acute inpatient prospective payment system.

•    Circulatory cases accounted for approximately one-quarter of medical cases and one-third
     of surgical cases.

•    Respiratory cases accounted for 20 percent of medical discharges and musculoskeletal
     cases accounted for 30 percent of surgical discharges.




72       Acute inpatient services
Chart 7-3.                 Number of acute care hospitals and Medicare
                           discharges, by hospital group, 2005
                                                 Hospitals                                      Medicare discharges
                                                                                          Number
Hospital group                         Number             Share of total                (thousands)              Share of total


All PPS and critical                      4,432                  100.0%                      11,912                     100.0%
access hospitals

PPS hospitals                             3,377                   76.2                       11,554                      97.0

    Urban                                 2,395                   54.0                         9,805                     82.3
    Rural                                   982                   22.2                         1,749                     14.7

    Large urban                           1,325                   29.9                         5,358                     45.0
    Other urban                           1,070                   24.1                         4,448                     37.3
    Rural referral                          221                    5.0                           782                      6.6
    Sole community                          330                    7.4                           408                      3.4
    Medicare dependent                      126                    2.8                           141                      1.2
    Other rural <50 beds                    102                    2.3                            70                      0.6
    Other rural >50 beds                    203                    4.6                           349                      2.9

    Voluntary                             2,022                   45.6                         8,347                     70.1
    Proprietary                             769                   17.4                         1,784                     15.0
    Government                              586                   13.2                         1,423                     11.9

    Major teaching                          293                    6.6                         1,834                     15.4
    Other teaching                          769                   17.4                         4,061                     34.1
    Nonteaching                           2,315                   52.2                         5,659                     47.5

 Critical access hospitals                1,055                   23.8                           358                       3.0
Note:       PPS (prospective payment system). Analysis includes all hospitals covered by Medicare’s inpatient prospective payment
            system along with critical access hospitals. Maryland hospitals are excluded. Large urban areas have populations of more
            than 1 million. Major teaching hospitals are defined by a ratio of interns and residents to beds of at least 0.25. Other
            teaching hospitals have a ratio of below 0.25.

Source:     MedPAC analysis of impact file and Medicare cost report data from CMS.


•     In 2005, 3,377 hospitals provided almost 11.6 million discharges under Medicare’s acute
      inpatient prospective payment system (PPS) and 1,055 critical access hospitals provided
      almost 0.4 million discharges.

•     About 15 percent of acute care hospitals (20 percent of PPS hospitals) are covered by three
      special payment provisions intended to help rural facilities that do not become critical access
      hospitals (rural referral, sole community, and small rural Medicare-dependent hospitals);
      these facilities provide about 11 percent of all discharges.

•     See Chart 7-24 for more information about critical access hospitals.




                                           A Data Book: Healthcare spending and the Medicare program, June 2007                  73
Chart 7-4.                     Cumulative change in total admissions and total
                               outpatient visits, 1995–2005
                60
                               Total outpatient visits
                               Total admissions
                50

                                                                                                                                    41.4
                40                                                                                                    37.4
                                                                                                            35.8
                                                                                                 33.7
     Percent




                                                                                       29.3
                30
                                                                             25.7

                                                                 19.4
                20
                                                       14.3                                                                         15.3
                                                                                                                      13.6
                                                                                                 11.3       12.3
                                             8.3                                       9.2
                10                                                           6.7
                                   5.9
                                                                  3.9
                                             1.6        2.1
                        0.0        0.2
                 0
                       1995       1996      1997       1998      1999        2000     2001       2002      2003       2004      2005



Note:            Cumulative change is the total percent increase from 1995 through the year indicated. Data are admissions to and
                 outpatient visits at approximately 5,000 community hospitals, excluding nursing home units.

Source:          American Hospital Association Annual Survey of Hospitals.



•       Hospital outpatient service use has grown much more rapidly than inpatient service use.
        Total hospital outpatient visits increased 41 percent from 1995 to 2005, while total
        admissions grew just 15 percent.

•       There were 594 million outpatient visits and 36 million admissions to community hospitals
        in 2005.




74             Acute inpatient services
Chart 7-5.               Trends in Medicare and total hospital length of stay,
                         1995–2005
          8
                                                                                                                    Medicare
                 6.8                                                                                                Total
          7
                           6.4
                                      6.1
                                                5.9        5.9        5.8
          6                                                                     5.7        5.7       5.6        5.5        5.4

          5      4.7       4.7        4.6       4.6        4.6        4.5       4.5        4.5       4.5        4.5        4.4
Days




          4


          3


          2

          1


          0
               1995       1996      1997       1998      1999       2000       2001      2002       2003      2004       2005

                                                                 Fiscal year



Note:     Length of stay is calculated from discharges and patient days for approximately 3,600 hospitals covered by the acute
          inpatient prospective payment system. Excludes critical access hospitals.

Source:   MedPAC analysis of Medicare cost report data from CMS.



•      Length of stay for all hospital discharges fell 5 percent, from 4.7 days in 1995 to 4.4 days in
       2005, dropping at an average annual rate of 1.3 percent from 1995 to 1997 and 0.6 percent
       from 1997 to 2005.

•      Length of stay for Medicare inpatients fell 21 percent, from 6.8 days in 1995 to 5.4 days in
       2005, dropping at an average annual rate of 5.4 percent from 1995 to 1997 and 1.5 percent
       from 1997 to 2005.




                                         A Data Book: Healthcare spending and the Medicare program, June 2007                    75
 Chart 7-6.                                     Hospital occupancy rates, 1997–2005

                           80


                                                                                                                          68            68             69
                           70                                                                               67
                                                                  64            65            65
                                      62            63
                                                                                                                                        65             66
                           60                                                                               63            64
                                                                  61            61            62
                                      59            59
Occupancy rate (percent)




                           50                                                                                             52            52             53
                                                                                50            51            51
                                      49            49            49

                           40                                                                                                           37             37
                                      33            33            33            33                          33            34
                                                                                              32
                           30


                           20
                                             Urban PPS
                                             Rural PPS
                           10                Critical access
                                             All hospitals

                            0
                                    1997          1998          1999          2000           2001          2002          2003          2004          2005



 Note:                          PPS (prospective payment system). Hospital occupancy rate is measured as total inpatient days as a percent of total
                                available bed days in the hospital over the reporting period. Bed days available are based on beds that are set up and
                                staffed for inpatient service (i.e., the units are open and operating), but the beds may not be staffed for a full patient load
                                in each unit on any given day. Hospitals’ group designations for the entire 1997–2005 period are based on their status at
                                the end of 2005.

 Source:                        MedPAC analysis of data from the American Hospital Association Annual Survey of Hospitals.



 •                         Hospitals’ occupancy rates have been rising, with the aggregate occupancy rate climbing
                           from 59 percent in 1997 to 66 percent in 2005.

 •                         Occupancy rates are higher in urban than rural hospitals covered by the acute inpatient
                           prospective payment system (PPS); in 2005, occupancy rates stood at 69 percent for urban
                           hospitals and 53 percent for rural hospitals, a 16 percentage point difference. The
                           occupancy rate in major teaching hospitals was 78 percent in 2005, the highest of all
                           hospital groups.

 •                         Since 1997, occupancy rates have gone up more for urban than rural hospitals, climbing 7
                           percentage points for urban hospitals and 4 percentage points for rural hospitals.

 •                         Occupancy rates are much lower in critical access hospitals, averaging only 37 percent in
                           2005. Their occupancy rate has risen 4 percentage points since 1999, the same as for rural
                           hospitals covered by PPS.


 76                         Acute inpatient services
Chart 7-7.                               Hospital construction spending, 1999–2006
                      35

                                                                                                                                       30
                      30


                      25                                                                                                23
                                                                                                          21
Billions of dollars




                      20                                                                     19
                                                                            17

                      15                                      14
                                               13
                                12

                      10


                      5


                      0
                               1999          2000           2001           2002          2003r          2004r          2005r          2006



Note:                      Data for 2003 through 2005 are revised. 2006 data are estimated based on seasonally adjusted annual rate through
                           August.

Source:                    Census Bureau. http://census.gov/C30/private.xls. October 2006.




•                     Hospital construction has increased substantially since 1999, expanding almost 30 percent
                      in the last year alone to $30 billion. Over this seven-year period, the cumulative rate of
                      growth in hospital construction costs was about two and half times the growth in overall
                      hospital costs.




                                                         A Data Book: Healthcare spending and the Medicare program, June 2007                 77
 Chart 7-8.                        Cumulative change in Medicare discharges and days
                                   of care per beneficiary, 1994–2004
              25
                                 Number of discharges per beneficiary
              20                 Total days of care per beneficiary


              15

                                                                               9.0                   9.3        9.0
              10                                                                          8.4                              8.4
                                                                                                                                      7.2
                                                         5.4        6.0
               5                   1.5        3.0
                        0.0
    Percent




               0

               -5
                                   -5.5
              -10                                                  -12.9
                                              -9.7
                                                        -11.0                 -11.8
              -15                                                                        -13.6      -13.7      -14.2
                                                                                                                          -15.5
              -20                                                                                                                    -17.6

              -25
                       1994       1995       1996       1997       1998       1999       2000       2001       2002       2003       2004

                                                                          Calendar year


Note:               Cumulative change is the total percent increase from 1994 through the year indicated. Data are short-stay hospital
                    Medicare patient days and discharges. Rate is per beneficiary enrolled in Part A. The statistics do not reflect managed
                    care enrollment.

Source:             MedPAC analysis of claims file and enrollment data from CMS.



•             While discharges per beneficiary have increased, length of stay has fallen faster, so total
              days of care have declined. Medicare discharge rates increased from 1994 to 2004, with 7.2
              percent more hospital discharges per enrollee at the end of the period. However, declining
              length of stay led to 17.6 percent fewer days of inpatient care for each enrollee in 2004
              compared to 1994.

•             There were 359 Medicare hospital discharges and 2,072 patient days per 1,000
              beneficiaries enrolled in Part A in calendar year 2004.




78             Acute inpatient services
Chart 7-9.              Medicare inpatient payments, by source and hospital
                        group, 2005

                                                Percent of total payments
                                                                                                                   Total
                                                                                       Additional rural          payments
Hospital group                  Base           IME           DSH           Outlier       hospital*               (millions)


 All hospitals                   82.4%         5.3%           8.4%           3.2%             0.5%                $105,472

 Urban                           81.7          5.9            8.7            3.5              0.1                    93,950
 Rural                           88.5          0.7            6.5            1.3              3.0                    11,522

 Large urban                     79.7          7.2            9.3            3.7              0.0                    53,894
 Other urban                     84.3          4.2            7.8            3.2              0.3                    40,056
 Rural referral                  87.5          1.3            7.2            1.7              2.3                     5,788
 Sole community                  87.4          0.1            4.3            0.8              7.5                     2,540
 Medicare dependent              91.5          0.0            5.4            0.6              2.5                       772
 Other rural <50 beds            91.2          0.1            8.0            0.7              0.0                       363
 Other rural >50 beds            91.1          0.2            7.1            1.4              0.3                     2,059

 Voluntary                       83.0          5.7            7.6            3.2              0.4                    77,527
 Proprietary                     85.1          1.9            9.9            2.7              0.3                    14,729
 Government                      76.2          7.1           11.9            4.1              0.7                    13,216

 Major teaching                  66.9         17.0           11.3            4.6              0.1                    24,793
 Other teaching                  84.7          3.8            8.0            3.0              0.3                    37,771
 Nonteaching                     89.4          0.0            7.1            2.6              0.8                    42,909

Note:     IME (indirect medical education), DSH (disproportionate share). Analysis includes all hospitals covered by Medicare’s
          acute inpatient prospective payment system (PPS). Includes both operating and capital payments but excludes graduate
          medical education payments. Simulated payments reflect 2006 payment rules applied to actual number of cases in 2004.
          Actual payments in 2006 will likely be higher than shown due to growth in number of cases.
          *Payments received by sole community and Medicare-dependent hospitals beyond what would have been received
          under PPS. A few sole community hospitals are located in urban areas.

Source:   MedPAC analysis of claims and impact file data from CMS.


•   Medicare payments in 2005 to hospitals covered by the acute inpatient prospective payment
    system totaled about $105 billion. About $94 billion (89 percent) was paid to hospitals
    located in urban areas. The other $11.5 billion went to rural hospitals, although this figure
    does not reflect payments to critical access hospitals.

•   Special payments—which include disproportionate share, indirect medical education, and
    outlier payments, as well as additional payments to rural hospitals through the sole
    community and Medicare-dependent programs—account for about 17 percent of all
    inpatient payments. This proportion is higher for urban than for rural hospitals.

•   Outlier payments were 3.2 percent of total inpatient payments in 2005. The legislative
    mandate for the level of outlier payments uses a different measure—outlier payments as a
    percent of base plus outlier. Measured in this way, CMS’s goal is 5.1 percent and the
    agency reports that outlier payments were 4.0 percent in 2005 and 4.9 percent in 2006.



                                         A Data Book: Healthcare spending and the Medicare program, June 2007               79
Chart 7-10. Payment and cost changes for Medicare inpatient
            services, 1995–2005
                                                           Market                                                Change in
                                                           basket                   Change in                   payments per
Fiscal year                      Update                   forecast                costs per case                   case


1995                                2.00%                     3.6%                       -1.4%                         4.2%
1996                                1.50                      3.5                        -1.2                          5.6
1997                                2.00                      2.5                        -0.6                          2.6
1998                                0                         2.7                         1.1                         -1.4
1999                                0.50                      2.4                         2.6                         -0.2
2000                                1.10                      2.9                         2.4                          0.5
2001                                3.40*                     3.4                         5.1                          3.1
2002                                2.75                      3.3                         8.1                          3.6
2003                                2.95                      3.5                         6.6                          1.9
2004                                3.40                      3.4                         5.6                          3.0
2005                                3.30                      3.3                         5.1                          4.6


Note:     Fiscal year 2001 update equals 2.3 percent (October 1, 2000, to March 31, 2001) and 4.5 percent (April 1, 2001, to
          September 30, 2001).
          *Average value.

Source:   MedPAC analysis of CMS cost report data, IPPS final rules, Global Insights data.




•    Cost per discharge growth accelerated sharply after 2000 to a peak of 8.1 percent in 2002,
     as private sector financial pressure slackened (see Chart 7-22). The rate of cost growth has
     moderated since 2002 but still substantially exceeds inflation in the prices of the goods and
     services hospitals use for patient care as represented by CMS’s hospital market basket.

•    The update equaled the market basket forecast in 2001, 2004, and 2005. Under current law
     the update equaled the market basket forecast for fiscal year 2006 and after.

•    Increased disproportionate share payments, liberalization of new technology payments, one-
     time geographic reclassifications, higher outlier payments, and more rapid growth in case
     mix all contributed to the large growth in payments per case in 2005.




80      Acute inpatient services
Chart 7-11. Medicare acute inpatient PPS margin, 1995–2005
                     30


                     25


                     20
                                                 17.9
                                                           15.8
Margin (percent)




                                      14.7
                     15                                               13.5
                                                                                11.9
                                                                                          10.2
                     10      9.0
                                                                                                      6.9

                      5
                                                                                                                2.0
                                                                                                                          -0.5
                      0
                                                                                                                                    -0.9

                      -5
                            1995      1996      1997       1998      1999       2000      2001       2002      2003      2004       2005

Note:                 PPS (prospective payment system). A margin is calculated as revenue minus costs, divided by revenue. Data are based
                      on Medicare-allowable costs and exclude critical access hospitals. Medicare acute inpatient margin includes services
                      covered by the acute care inpatient PPS.

Source:               MedPAC analysis of Medicare cost report data (September 2006) from CMS.



•                  Medicare’s acute inpatient margin reflects payments and costs for services covered by
                   Medicare’s inpatient hospital prospective payment system (PPS). The inpatient margin may
                   be influenced by how hospitals allocate overhead costs across service lines. Only by
                   combining data for all major services can we estimate Medicare costs without the influence
                   of how overhead costs are allocated (see Chart 7-13).

•                  The Medicare inpatient margin reached a record high of 17.9 percent in 1997. After
                   implementation of the Balanced Budget Act of 1997, however, inpatient margins fell. In
                   2005, the margin was –0.9 percent, the lowest level since 1991.

•                  Medicare inpatient margins vary widely. In 2005, one-quarter of hospitals had Medicare
                   inpatient margins that were 10.2 percent or higher, and another quarter had margins that
                   were –15.0 percent or lower. Between 1997 and 2003, this difference between the top and
                   bottom quarter widened from 19 percent to 25 percent. About 46 percent of hospitals
                   treating 46 percent of Medicare cases had positive inpatient Medicare margins in 2005.




                                                    A Data Book: Healthcare spending and the Medicare program, June 2007                81
Chart 7-12. Medicare acute inpatient PPS margin, by urban and
            rural location, 1995–2005
                     30
                                    Urban
                                    Rural
                     25


                     20                         18.7
                                                           16.6
                                      15.3                           14.4
                     15                                                        12.8
Margin (percent)




                                                                                          11.0
                           9.5
                     10                         11.4
                                                                                                     7.0
                                       9.7
                                                           8.4
                      5                                               6.1                                      2.3
                            4.4                                                 4.2        4.0
                                                                                                                         -0.5       -1.0
                      0                                                                              1.6
                                                                                                               -0.1      -0.4       0.0

                     -5


                    -10
                           1995       1996      1997      1998       1999      2000       2001      2002      2003       2004      2005


Note:                 PPS (prospective payment system). A margin is calculated as revenue minus costs, divided by revenue. Data are based
                      on Medicare-allowable costs and exclude critical access hospitals. Medicare acute inpatient margin includes services
                      covered by the acute care inpatient PPS.

Source:               MedPAC analysis of Medicare cost report data (September 2006) from CMS.



•                  Up until 2004, Medicare inpatient margins have consistently been higher for urban hospitals
                   than for rural hospitals. A large part of this difference in financial performance can be
                   explained by disproportionate share and indirect medical education adjustments that go
                   primarily to urban hospitals.

•                  The gap between urban and rural hospitals’ inpatient margins grew between 1995 and 2000.
                   One factor in this divergence is that urban hospitals had greater success in controlling cost
                   growth, at least partly in response to pressures from managed care. From 2001 through
                   2004, these differences narrowed and in 2004 and 2005 rural hospitals’ inpatient margins
                   were for the first time higher than those of urban hospitals. This change is the result of
                   payment policies targeted at raising rural hospital payments and growth in the number of
                   critical access hospitals, which removed many rural hospitals with low margins from the
                   prospective payment system.




82                  Acute inpatient services
Chart 7-13. Overall Medicare margin, 1997–2005
                      20




                      15

                              11.8
Margin (percent)




                      10
                                             8.4

                                                          6.2
                                                                        5.4           5.3
                       5
                                                                                                   2.4


                       0

                                                                                                                 -1.4
                                                                                                                               -3.1         -3.3
                      -5
                              1997         1998          1999          2000          2001         2002          2003          2004          2005


Note:                 A margin is calculated as revenue minus costs, divided by revenue. Data are based on Medicare-allowable costs and
                      exclude critical access hospitals. Overall Medicare margins cover the costs and payments of acute inpatient, outpatient,
                      inpatient psychiatric and rehabilitation unit, skilled nursing facility, and home health services, as well as graduate medical
                      education and bad debts. Data on overall Medicare margins before 1997 are unavailable.

Source:               MedPAC analysis of Medicare cost report data (September 2006) from CMS.



•                  The overall Medicare margin incorporates payments and costs for acute inpatient,
                   outpatient, skilled nursing, home health, and inpatient psychiatric and rehabilitative services,
                   as well as graduate medical education and bad debts. The overall margin is available only
                   since 1997, but it follows a trend similar to that of the inpatient margin.

•                  The overall Medicare margin peaked in 1997 at 11.8 percent. In fiscal year 2005, it was
                   –3.3 percent.

•                  In 2005, one-quarter of hospitals had overall Medicare margins of 5.6 percent or higher, and
                   another quarter had margins of –14.3 percent or lower. Between 1997 and 2005, the
                   difference in performance between the top and bottom quartile widened from 14 percent to
                   20 percent. About 40 percent of hospitals had positive overall Medicare margins in 2005,
                   accounting for 39 percent of Medicare inpatient discharges.




                                                       A Data Book: Healthcare spending and the Medicare program, June 2007                        83
Chart 7-14. Overall Medicare margin, by urban and rural
            location, 1997–2005
                     20

                                      Urban
                                      Rural
                     15


                             12.5
                     10
Margin (percent)




                                           9.3

                                                         7.2
                      5      6.2                                       6.4          6.1

                                                                                                  3.0
                      0                    1.7
                                                                                    -0.3                                     -3.0
                                                                                                               -1.0                        -3.3
                                                        -1.4
                                                                      -2.1                        -2.2
                                                                                                                                           -3.0
                     -5                                                                                        -4.2          -3.8



                    -10
                            1997          1998          1999          2000         2001          2002          2003         2004          2005

Note:                 A margin is calculated as revenue minus costs, divided by revenue. Data are based on Medicare-allowable costs and
                      exclude critical access hospitals. Overall Medicare margins cover the costs and payments of acute hospital inpatient,
                      outpatient, inpatient psychiatric and rehabilitation unit, skilled nursing facility, and home health services, as well as
                      graduate medical education and bad debts. Data on overall Medicare margins before 1997 are unavailable.

Source:               MedPAC analysis of Medicare cost report data (August 2005) from CMS.



•                  As with inpatient margins, overall Medicare margins have historically been higher for urban
                   hospitals than for rural hospitals.

•                  The difference in margins between the two groups grew between 1997 and 2000 but has
                   since narrowed, with rural hospital margins similar to those of urban hospitals in 2005. In
                   1997, the overall margin for urban hospitals was 12.5 percent, compared with 6.2 percent
                   for rural hospitals. In 2005, the overall margin for urban hospitals was –3.3 percent,
                   compared with –3.0 percent for rural hospitals. Policy changes made in the Medicare
                   Prescription Drug, Improvement, and Modernization Act of 2003 targeted to rural hospitals
                   helped to narrow the difference in overall Medicare margins between urban and rural
                   hospitals.




84                  Acute inpatient services
Chart 7-15. Hospital total margin, 1995–2005
                     15




                     10
Margin (percent)




                                                  6.4
                            5.8        5.9

                                                            4.7                                                                         4.9
                      5                                                                                           4.3        4.3
                                                                                  3.9        3.7       3.7
                                                                       3.6




                      0
                           1995       1996       1997      1998       1999       2000       2001      2002       2003       2004       2005

Note:                 A margin is calculated as revenue minus costs, divided by revenue. Total margin includes all patient care services funded
                      by all payers, plus nonpatient revenue. Analysis excludes critical access hospitals.

Source:               MedPAC analysis of Medicare cost report data (September 2006) from CMS.




•                  The total hospital margin for all payers⎯Medicare, Medicaid, other government and private
                   payers⎯reflects the relationship of all hospital revenues to all hospital costs, including
                   inpatient, outpatient, post-acute, and nonpatient services.

•                  The total hospital margin peaked in 1997 at 6.4 percent, before declining to between 3.6
                   percent and 4.3 percent in the 1999 to 2004 period. In 2005, the total margin climbed to 4.9
                   percent, its highest level in eight years.

•                  The fall in total margins from 1997 to 1999 reflected a drop in both Medicare and private
                   payer margins. Medicare overall margins from 1997 through 2001 were higher than the total
                   margin.

•                  In 2005, 74 percent of hospitals had positive total margins. These hospitals accounted for 81
                   percent of all hospital discharges and 81 percent of Medicare discharges.

•                  The total margin varies much less than the Medicare inpatient or overall Medicare margin. In
                   2005, one-quarter of prospective payment system hospitals had total margins that were 8.4
                   percent or higher, while another quarter had margins that were 0.0 percent or lower, a
                   spread of just 8 percentage points compared to a 20 percentage point spread for overall
                   Medicare margins and a 25 percentage point spread for Medicare inpatient margins.


                                                     A Data Book: Healthcare spending and the Medicare program, June 2007                     85
Chart 7-16. Hospital total margin, by urban and rural location,
            1995–2005
                     15
                                    Rural
                                    Urban




                     10
Margin (percent)




                                                 7.9
                                       7.2
                            6.8

                                                            5.7                                                                         5.8
                                                 6.2                   5.2        5.2                                        5.0
                      5     5.7        5.8                                                   4.6
                                                                                                       4.0        4.2
                                                            4.6                                                                         4.8
                                                                                                                  4.3        4.2
                                                                       3.5        3.7        3.6       3.6




                      0
                           1995       1996      1997       1998       1999       2000       2001      2002       2003       2004       2005

Note:                 A margin is calculated as revenue minus costs, divided by revenue. Total margin includes all patient care services funded
                      by all payers, plus nonpatient revenue. Analysis excludes critical access hospitals.

Source:               MedPAC analysis of Medicare cost report data (September 6) from CMS.



•                  With the exception of 2002 and 2003, total (all payer) margins for rural hospitals have been
                   about 1 percentage point higher than those of urban hospitals.

•                  In 2005, total margins were 5.8 percent for rural and 4.8 percent for urban hospitals, the
                   highest they have been for either group since 1997.




86                  Acute inpatient services
Chart 7-17. Hospital total margin, by teaching status, 1995–2005
                     15
                                   Nonteaching
                                   Other teaching
                                   Major teaching




                     10
Margin (percent)




                            6.8        7.0        6.8
                                                  7.1
                                       6.7
                                                             5.2                                                   5.0                   5.2
                            6.1                                                              4.8
                      5                                                 4.5        4.6                  4.6                   4.6
                                                             5.3                                                                         5.1
                                                  4.9                                                              4.7        4.8
                                                                        4.4        4.3                  4.3                              4.2
                            4.0                                                              4.1
                                       3.4                   3.5
                                                                                                                              3.2
                                                                                                                   2.9
                                                                                   2.3
                                                                        1.5                  1.5        1.6
                      0
                           1995       1996       1997       1998       1999       2000      2001       2002       2003       2004       2005

Note:                 Major teaching hospitals are defined by a ratio of interns and residents to beds of 0.25 or greater, while other teaching
                      hospitals have a ratio of less than 0.25. A margin is calculated as revenue minus costs, divided by revenue. Total margin
                      includes all patient care services funded by all payers, plus nonpatient revenue. Analysis excludes critical access
                      hospitals.

Source:               MedPAC analysis of Medicare cost report data (September 2006) from CMS.



•                  The pattern of total margins by teaching status is the opposite of the pattern for the
                   Medicare inpatient and overall Medicare margins. The total margins of major teaching
                   hospitals have consistently been lower than those for other teaching and nonteaching
                   hospitals. In 2005, the total margin of nonteaching hospitals stood at 5.2 percent compared
                   with 4.2 percent for major teaching hospitals.

•                  The difference in margins between major teaching and nonteaching hospitals narrowed to
                   only 1.0 percentage point in 2005, the smallest difference in over a decade. In 2005, major
                   teaching hospitals’ total margins reached their highest level since 1997.




                                                      A Data Book: Healthcare spending and the Medicare program, June 2007                     87
Chart 7-18. Hospitals with high adjusted overall Medicare
            margins have lower costs and have been under
            more financial pressure than other hospitals
                                                                                      Hospitals with consistently:
Hospital characteristic                                                        Low margins                         High margins


Percent of hospitals                                                                  18%                                 18%

Annual change in length of stay
(1997–2005)
     Medicare                                                                       –2.3                                –3.1
     All payers                                                                     –1.1                                –1.7

Average annual change in inpatient
   cost per case (2002–2005)                                                         6.3                                 5.2

Standardized costs per case (2005)
    Subject hospital                                                             $6,203                              $4,527
    Hospitals within 15 miles                                                     5,742                               5,103

Distance to nearest hospital (in miles)                                                 7                                 12

Non-Medicare ratio of revenues to costs (2005)                                      1.16                                 0.99


Note:     Hospitals with consistently low or high margins had adjusted overall Medicare margins (margins calculated excluding
          indirect medical education and disproportionate share hospital payments over empirically justified amounts) from 2002 to
          2005 that were in the top or bottom third each year. Per case costs are standardized for wages, case mix, severity, outlier
          cases, and teaching intensity. The non-Medicare ratio of revenues to costs includes revenues and costs associated with
          private pay, Medicaid, and self-pay patients as well as nonpatient revenues and costs. Median values shown.

Source:   MedPAC analysis of impact file, MedPAR, and Medicare cost report files from CMS.



•    Hospitals with consistently low adjusted Medicare margins had smaller declines in length of
     stay (–2.3 percent) than hospitals with consistently high margins (–3.1 percent).

•    Hospitals with consistently low Medicare margins also had higher average annual cost
     growth (6.3 percent) than hospitals with consistently high margins (5.2 percent), indicating
     that lower cost growth is an important factor helping hospitals perform well under Medicare.

•    Differences in cost growth and changes in length of stay translate into big differences in
     Medicare costs. The median standardized cost per case in the low-margin group was
     $6,203 compared with only $4,527 in the high-margin group, a 37 percent difference.

•    Hospitals with consistently low Medicare margins are not under as much pressure to control
     costs. In 2005, the ratio of revenue to costs for all sources of revenue except Medicare was
     1.16 for this group. In contrast, this revenue-to-cost ratio for the high-margin group was
     0.99, which means that this group needs to do well under Medicare to perform well overall.



88      Acute inpatient services
Chart 7-19. Hospitals receiving IME and DSH payments, 2005
                                                                            Percent of hospitals receiving:
                                Share of           IME and DSH                  IME              DSH           Neither
Hospital group                  hospitals            payments                 payment          payment        payment

All hospitals                      100%                    23%                    28%             74%           21%

Urban                                69                    31                     38              72            21
Rural                                31                     5                      5              80            19

Major teaching                        8                    91                    100              91             0
Other teaching                       23                    79                    100              79             0
Nonteaching                          69                     0                      0              72            28


Note:     IME (indirect medical education), DSH (disproportionate share).

Source:   MedPAC analysis of 2005 cost report data from CMS.



•   Medicare paid more than $14 billion, or 14 percent of the total inpatient payments made to
    hospitals in the acute inpatient prospective payment system (PPS), in fiscal year 2005
    through the indirect medical education (IME) and disproportionate share (DSH) adjustments.

•   In fiscal year 2005, 28 percent of PPS hospitals received an IME adjustment and 74 percent
    received a DSH payment. Only 21 percent of hospitals received neither of these payments,
    whereas 23 percent received both.

•   A large share of urban hospitals, 38 percent, received IME payments, compared to only 5
    percent of rural hospitals. This difference results from the concentration of residency training
    programs in urban areas.

•   A large share of both urban and rural hospitals receives DSH payments—72 percent and 80
    percent, respectively. More than nine out of ten major teaching hospitals also receive a DSH
    payment.

•   Even though a large number of hospitals receive IME or DSH payments, these payments
    are highly concentrated. Of the $14 billion in total DSH and IME payments made in 2005, 47
    percent went to just 200 hospitals, an average of $34 million per hospital.




                                          A Data Book: Healthcare spending and the Medicare program, June 2007        89
Chart 7-20. Medicare margins by teaching and disproportionate
            share status, 2005
                                                                Share of    Medicare     Overall
                                       Share of                 inpatient   inpatient   Medicare
Hospital group                         hospitals                payments     margin      margin

All hospitals                            100%                     100%        –0.3%      –3.3%

Major teaching                              8                       23        10.7        4.2
Other teaching                             23                       35        –2.2       –3.9
Nonteaching                                69                       42        –6.3       –6.9

Both IME and DSH                           25                       49        4.5         0.4
IME only                                    6                       10       –5.5        –6.1
DSH only                                   51                       30       –3.1        –4.6
Neither IME nor DSH                        18                       11      –14.5       –12.9
Note:     IME (indirect medical education), DSH (disproportionate share).

Source:   MedPAC analysis of 2005 Medicare cost report data from CMS.


•    Major teaching hospitals have the highest Medicare inpatient and overall Medicare margins.
     Their better financial performance is due largely to the additional payments they receive
     from the indirect medical education (IME) and disproportionate share (DSH) adjustments.

•    Hospitals that receive neither IME nor DSH payments have the lowest Medicare margins. In
     2005, the Medicare inpatient margins of these hospitals were more than 25 percentage
     points below those of major teaching hospitals and overall Medicare margins were about 17
     percentage points lower.




90      Acute inpatient services
 Chart 7-21. Relationship between hospitals’ uncompensated
             care costs and disproportionate share payments,
             2003
          45
                40.6                                                                        Hospital group's share of:
          40                                                                                Uncompensated care costs
                                                                                            DSH payments
          35

          30

          25
Percent




          20

          15
                                               11.1                                                                       11.8
                             9.9 9.1     9.8                10.0         10.4         9.8
                       9.5                                                                                    9.5
          10                                          8.5          8.4          7.7               8.1                                  7.6
                                                                                            5.0         4.5
           5                                                                                                        3.9
                                                                                                                                 1.5
           0
                     1           2           3           4           5            6           7           8           9            10
                               Hospitals ranked on uncompensated care costs as a percent of total costs (deciles)



 Note:         DSH (disproportionate share). The first group includes the 10 percent of hospitals with the highest ratio of uncompensated
               care costs to total costs. The last group includes the 10 percent of hospitals with the lowest such ratio.

 Source:       State mandated reporting systems in California, Florida, Georgia, Indiana, and Texas (2002 and 2003 data, N=848) and
               Medicare cost report data from CMS. State-level data compiled by the Government Accountability Office.



 •        The original rationale for the Medicare disproportionate share (DSH) adjustment was that
          poor patients are more costly to treat, so that hospitals with substantial low-income patient
          loads would likely experience higher costs for their Medicare patients than otherwise similar
          institutions. Over the last decade, however, many observers have shifted to arguing that the
          adjustment subsidizes uncompensated care provided to the uninsured and underinsured.

 •        Uncompensated care is highly concentrated. The top 10 percent of hospitals in terms of the
          share of resources they devote to furnishing uncompensated care provided 41 percent of all
          unpaid care. But DSH payments are poorly targeted to hospitals’ uncompensated care. This
          top group of uncompensated care providers receives only about 10 percent of DSH
          payments. The bottom 10 percent, in contrast, provides less than 2 percent of all
          uncompensated care but receives almost 8 percent of DSH payments.




                                                 A Data Book: Healthcare spending and the Medicare program, June 2007                   91
Chart 7-22. Change in Medicare hospital inpatient costs per
            discharge and private payer payment-to-cost ratio,
            1986−2005
                                            12                                                                                                                                   1.35
                                                                                                                                                                                 1.35
Change in cost per discharge (in percent)




                                                                                        1.31
                                                   9.6
                                            10            9.2 9.1 9.4
                                                                            8.6         1.3                                                                                      1.30
                                                                                                                                                     8.1                         1.3
                                                                                                  1.29
                                             8




                                                                                                                                                                                        Payment-to-cost ratio
                                                                     1.27         6.9

                                                                                                         1.24                                                      5.6 1.24      1.25
                                                                                                                                                                                 1.25
                                             6                                           5.3                                                                6.6
                                                              1.22                                1.24                                     5.1                     1.24
                                                                                                                       1.22                                               5.1
                                             4                       1.22                                                                                                        1.20
                                                    1.2                                                                             2.6 2.4                                      1.2
                                                                                                  3.0
                                                                                                                1.18
                                             2                                                                                1.1
                                                                                                                       0.6                    1.16          1.18
                                                                                                        0.8                                                                      1.15
                                                                                                                                                                                 1.15
                                                   1.16
                                             0                                                                                      1.14
                                                                                                                                                     1.13
                                                                                                                   -1.2                    1.13
                                                                                                      -1.4
                                                                                                                                    1.12                                         1.10
                                             -2                                                                                                                                  1.1
                                                          1987       1989         1991         1993      1995          1997         1999      2001          2003          2005

                                                          Change in Medicare acute inpatient costs per discharge
                                                          Private payer payment-to-cost ratio

Note:                                             Data are for community hospitals and cover all hospital services. Imputed values were used for missing data (about one-
                                                  third of observations). Most Medicare and Medicaid managed care patients are included in this private insurer category.

Source:                                           MedPAC analysis of Medicare Cost Report files from CMS and CMS’s rules for the acute inpatient prospective payment
                                                  system, and American Hospital Association Annual Survey of Hospitals.

•                                           The pattern of growth in Medicare costs per discharge makes it clear that hospitals have
                                            responded strongly to the incentives posed by the rise and fall of financial pressure from
                                            private payers over three periods.

•                                           During the first period, 1986 through 1992, private payers’ payments rose much faster than
                                            the cost of treating their patients (seen in the chart as a steep increase in the payment-to-cost
                                            ratio). This suggests an almost complete lack of pressure from private payers. Medicare costs
                                            per discharge rose 8.3 percent per year through these years, more than 3 percentage points a
                                            year above the increase in Medicare’s market basket index.

•                                           As HMOs and other private insurers exerted more pressure during the second period, 1993
                                            through 1999, the private payer payment-to-cost ratio dropped substantially. The rate of cost
                                            growth plummeted to only 0.8 percent per year, which was more than 2 percentage points
                                            below the average increase in the market basket.

•                                           As pressure from private payers waned after 1999, the private payer payment-to-cost ratio has
                                            again risen sharply, and hospital cost growth has once again exceeded growth in the market
                                            basket by 2 percentage points a year. In 2005, we see the trend in private payer profit margins
                                            beginning to level off and cost growth getting somewhat closer to market basket.


92                                           Acute inpatient services
Chart 7-23. Markup of charges over costs for all patient care
            services, 1995–2005
               200


               175                                                                                               173.4
                                                                                                         163.8
                                                                                                 154.5
               150
                                                                                         136.9
                                                                                 123.6
               125
                                                                         112.6
    Percent




                                                              103.3
               100                                    97.0
                                           90.2
                                 85.3
                      79.2
                75


                50


                25


                 0
                      1995      1996       1997       1998     1999      2000    2001    2002    2003    2004    2005



Note:            Analysis includes all community hospitals.

Source:          American Hospital Association Annual Survey of Hospitals.



•             From 1995 through 2005, hospitals’ patient care costs (covering all services and all payers)
              increased 6.0 percent per year but their charges went up by 10.4 percent per year, over 70
              percent more. Consequently, the markup of charges over costs rose from about 79 percent
              in 1995 to about 173 percent in 2005. Charges are now more than two and a half times
              costs. In 2002 and 2003, the growth in markup—about 15 percentage points per year—was
              the largest since Medicare’s acute inpatient payment system was implemented. The markup
              grew by about 9 percentage points in 2004 and 2005.

•             Since few patients pay full charges, hospitals’ increasing their charges more than their costs
              may not have had much impact on their financial performance. Some are concerned,
              however, that uninsured individuals may be asked to pay full charges and may have
              collection proceedings applied against them. Charges growing faster than costs may reflect
              hospitals’ attempting to maximize revenue from private payers (who often structure their
              payments as a discount off charges), and the unusually large increases in charges in 2002
              and 2003 may have resulted from some hospitals manipulating Medicare outlier payments.
              In 2003, Medicare revised its outlier policy in an attempt to curb hospitals’ opportunity to
              increase their outlier payments through excessive increases in their charges.




                                                A Data Book: Healthcare spending and the Medicare program, June 2007     93
Chart 7-24. Number of critical access hospitals, 1999–2007
                     1,400
                                                                                                                          1,280        1,283

                     1,200
                                                                                                             1,055
                     1,000
                                                                                                 875
    Number of CAHs




                      800
                                                                                    722


                      600                                              563


                      400                                 341


                      200                   139
                                41
                        0
                               1999         2000         2001         2002         2003         2004         2005         2006          2007




Note:                   CAH (critical access hospital). Number of CAHs is as of January 1 of each year.

Source:                 The Rural Hospital Flexibility Tracking Project. Third-Year Findings, February 2003, and additional data from CMS.


•                    The increase in critical access hospitals (CAHs) is in part due to a series of legislative
                     changes that made conversion to CAH status easier and expanded the services that qualify
                     for cost-based reimbursement. Currently, CAHs are paid their Medicare costs plus 1 percent
                     for inpatient services, outpatient services (including laboratory and therapy services), and
                     post-acute services in swing beds.

•                    The number of CAHs has grown steadily over the last eight years, from 41 in 1999 to 1,283
                     at the beginning of 2007.

•                    Prior to 2006, hospitals could convert to CAH status if they were (1) 35 miles by primary
                     road or 15 miles by secondary road from the nearest hospital, or (2) their state waived the
                     distance requirement by declaring the hospital a “necessary provider.” Starting in 2006,
                     states can no longer waive the distance requirement. While most existing CAHs fail the
                     distance test, they are grandfathered into the program. Among small rural hospitals that
                     have not converted, most would not meet the distance requirement. Therefore, we expect
                     the number of CAHs to remain fairly constant.




94                    Acute inpatient services
Chart 7-25. Medicare payments to inpatient psychiatric facilities
            (in billions), 1998–2006
                            4.5
                                                                                                                             4.0
                            4.0                                                                                    3.9
                                                                                                        3.8
                                                                                             3.6
                                                                                  3.5
                            3.5                                         3.4
                                     3.3
                                                    3.2      3.2

                            3.0
    Dollars (in billions)




                            2.5

                            2.0

                            1.5

                            1.0

                            0.5

                            0.0
                                    1998         1999       2000       2001       2002      2003       2004      2005*      2006*



Note:                        *Estimated spending.

Source:                      CMS, Office of the Actuary.



•                  Medicare program spending for beneficiaries’ care in inpatient psychiatric facilities grew an
                   estimated 2.4 percent per year between 1998 and 2006.

•                  The inpatient psychiatric facility payment system started January 1, 2005.




                                                           A Data Book: Healthcare spending and the Medicare program, June 2007    95
Chart 7-26. Inpatient psychiatric facilities, 2000–2006

                                    2000           2001           2002        2003    2004    2005    2006

Freestanding hospitals                491            477            473        466     463     477     481
Hospital-based units
    PPS hospital units              1,883         1,806          1,779        1,753   1,716   1,675   1,646
    CAH units                           1             3              6            9      26      68      72

Total                               2,375         2,286          2,258        2,228   2,205   2,220   2,199

Note:     PPS (prospective payment system), CAH (critical access hospital).
Source:   CASPER from CMS, as of December of each year.



•    Inpatient psychiatric facilities⎯both freestanding and hospital-based facilities⎯provide
     acute hospital care to beneficiaries with mental illnesses or alcohol- and drug-related
     problems.

•    In recent years, the number of critical access hospitals with Medicare-certified psychiatric
     units has grown substantially because of new authority to do so granted in the Medicare
     Prescription Drug, Improvement, and Modernization Act of 2003. The number of psychiatric
     units in hospitals covered by the acute inpatient prospective payment system has declined,
     however, as has the number of freestanding facilities. Overall, the total number of certified
     psychiatric facilities has fallen 7.4 percent since 2000.




96      Acute inpatient services
Web links. Acute inpatient services
Short-term hospitals

•   Chapter 2A of the MedPAC March 2007 Report to the Congress provides additional detailed
    information on hospital margins.

    http://www.medpac.gov/chapters/Mar07_Ch02a.pdf

•   MedPAC provides basic information about the acute inpatient prospective payment system
    in its Payment Basics series.

    http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_
    hospital.pdf

•   MedPAC provides information on the outlier payment issue in Medicare Hospital Outlier
    Payment Policy.

    http://www.medpac.gov/publications/other_reports/outlier%20memo.pdf

•   CMS provides information on the hospital market basket.

    http://www.cms.hhs.gov/MedicareProgramRatesStats/downloads/info.pdf

•   CMS published the proposed acute inpatient PPS rule in the May 3, 2007 Federal Register.

    http://www.access.gpo.gov/su_docs/fedreg/a070503c.html


Specialty psychiatric facilities

•   MedPAC provides basic information about the inpatient psychiatric facility (IPF) prospective
    payment system in its Payment Basics series.

    http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_briefs_psych.pdf

•   CMS provides information on the inpatient psychiatric facility prospective payment system.

    http://cms.hhs.gov/inpatientpsychfacilPPS/

•   CMS describes updates to the inpatient psychiatric facility prospective payment system for
    the rate year beginning July 1, 2007 in the May 4, 2007 Federal Register.

    http://www.access.gpo.gov/su_docs/fedreg/a070504c.html




                               A Data Book: Healthcare spending and the Medicare program, June 2007   97
                 S E C T I O N




 Ambulatory care
         Physicians
Hospital outpatient services
Ambulatory surgical centers
     Imaging services
Chart 8-1.                                                       FFS Medicare spending and payment updates
                                                                 for physician services, 1997–2011
                                           70                                                                                                                   1.6
                                                            Medicare spending                                Historical                     Projected
                                                            Cumulative updates
                                                                                                                                                                1.4
                                           60
 Medicare spending (dollars in billions)




                                                                                 1.16                 1.14     1.15   1.16   1.16
                                                                                               1.12                                                             1.2
                                           50                            1.10           1.10
                                                                 1.05                                                               1.04




                                                                                                                                                                        Cumulative updates (index)
                                                   1.00   1.02
                                                                                                                                           0.99
                                                                                                                                                  0.94          1.0
                                                                                                                                                         0.89
                                           40

                                                                                                                                                                0.8

                                           30                                                                  57.7   58.4   59.6   59.1   58.2   57.2   56.3
                                                                                                      54.1                                                      0.6
                                                                                               48.3
                                                                                        44.8
                                                                                 42.0
                                           20
                                                                         37.0
                                                          32.4   33.4                                                                                           0.4
                                                   31.9

                                           10
                                                                                                                                                                0.2


                                             0                                                                                                                  0.0
                                                   1997   1998   1999    2000    2001   2002   2003   2004     2005   2006   2007   2008   2009   2010   2011


Note:                                            FFS (fee-for-service). Dollars are Medicare spending only and do not include beneficiary coinsurance. The cumulative
                                                 updates are presented as an index, starting from 1997 with an assigned value of 1.0.

Source:                                          2007 annual report of the Boards of Trustees of the Medicare trust funds.



•                                          Between 1997 and 1999, total Medicare spending on physician fee schedule services was
                                           relatively flat. More rapid growth occurred between 1999 and 2005—averaging almost 10
                                           percent annually.

•                                          The sustainable growth rate (SGR) system requires that future payment increases for
                                           physician services be adjusted for past actual physician spending relative to a target
                                           spending level. To avoid reductions in physician fee schedule rates due to the SGR, the
                                           Medicare Prescription Drug, Improvement, and Modernization Act of 2003 established
                                           minimum payment updates for physician services of 1.5 percent for 2004 and 2005. For
                                           2006, the Deficit Reduction Act froze the physician fee schedule conversion factor. This
                                           freeze, combined with refinements to the relative value units, results in an update of 0.2
                                           percent for 2006. Most recently, the Tax Relief and Health Care Act effectively held 2007
                                           payments at 2006 levels through a conversion factor bonus.

•                                          The SGR formula continues to call for payment rate cuts in 2008 through 2016.




                                                                                A Data Book: Healthcare spending and the Medicare program, June 2007                  101
Chart 8-2.                                                 Medicare spending per FFS beneficiary on physician
                                                           services, 1997–2015
                                          2,500
                                                                                             Historical          Projected




                                          2,000                                                             $1,885
                                                                                                                        $1,832
                                                                                                $1,730                           $1,754
                                                                                                                                             $1,669
    Spending per beneficiary (dollars)




                                                                                                                                                      $1,593
                                                                                     $1,485
                                          1,500                           $1,374


                                                              $1,134
                                                   $1,038
                                          1,000




                                            500




                                              0
                                                    1997       1999        2001       2003        2005       2007       2009       2011       2013    2015


Note:                                       FFS (fee-for-service). Dollars are Medicare spending only and do not include beneficiary coinsurance.

Source:                                     2007 annual report of the Boards of Trustees of the Medicare trust funds.



•                                        Historical calculations show that fee-for-service (FFS) physician spending per beneficiary
                                         has increased annually.

•                                        Under current law, FFS Medicare payments for physician services per beneficiary are
                                         projected to decline beginning in 2008 because of scheduled negative payment updates.
                                         The volume of physician services per beneficiary, however, is expected to continue to grow.




102                                         Ambulatory care
Chart 8-3.               Number of physicians billing Medicare is increasing
                         steadily, 2000–2005

                                                             Number of Medicare patients in caseload
                                               ≥1               ≥15                  ≥50              ≥100              ≥200

Number of physicians
   2000                                    514,419           444,187              398.905           351,012           274,059
   2001                                    535,834           457,292              411,424           364,023           286,862
   2002                                    544,615           466,299              419,269           370,144           291,593
   2003                                    544,922           470,213              424,684           374,721           292,183
   2004                                    561,514           483,945              440,462           393,730           315,398
   2005                                    566,629           492,131              449,524           402,451           322,643

    Percent growth, 2000–2005                   10.1%             10.8%               12.7%             14.7%             17.7%

Physicians per 1,000 beneficiaries
   2000                                         13.8                   11.9           10.7               9.4               7.3
   2001                                         14.2                   12.1           10.9               9.7               7.6
   2002                                         14.3                   12.3           11.0               9.7               7.7
   2003                                         14.1                   12.2           11.0               9.7               7.6
   2004                                         14.4                   12.4           11.3              10.1               8.1
   2005                                         14.3                   12.4           11.4              10.2               8.1

Note:     Calculations include physicians (allopathic and osteopathic). Nurse practitioners, physician assistants, psychologists, and
          other health care professionals are not included in these calculations. Medicare enrollment includes beneficiaries in fee-
          for-service Medicare and Medicare Advantage, on the assumption that physicians are providing services to both types of
          beneficiaries. Physicians are identified by their Unique Physician Identification Number (UPIN). UPINs with extraordinarily
          large caseload sizes (in the top 1 percent) are excluded because they may represent multiple providers billing under the
          same UPIN.

Source:   MedPAC analysis of Health Care Information System, CMS.



•   The number of physicians providing services to beneficiaries has more than kept pace with
    growth in the beneficiary population. From 2000 to 2005, the number of physicians who
    billed Medicare grew faster than Medicare Part B enrollment. During this time Part B
    enrollment grew 6.0 percent, while the number of physicians with at least 15 Medicare
    patients grew by 10.8 percent.

•   Overall, the number of physicians per 1,000 beneficiaries grew from 13.8 to 14.3. The
    number of physicians with 200 or more Medicare patients grew even faster at 17.7 percent.




                                        A Data Book: Healthcare spending and the Medicare program, June 2007                     103
Chart 8-4.                                     Continued growth in the use of physician services
                                               per beneficiary, 2000–2005
                                70
                                              Imaging
                                              Tests
                                60            Other procedures
                                              All physician services
                                              Major procedure
    Cumulative percent change




                                50            Evaluation & management


                                40


                                30


                                20


                                10


                                 0
                                          2000              2001              2002              2003           2004   2005

Note:                           Includes only services paid under the physician fee schedule.

Source:                         Analysis of physician claims data for 100 percent of Medicare beneficiaries.



•                   Between 2000 and 2005, cumulative volume in physician fee schedule services grew about
                    30 percent per beneficiary. Imaging and tests grew the most, at 61 and 46 percent
                    respectively.

•                   Across all services, volume grew 5.5 percent per beneficiary between 2004 and 2005. This
                    growth rate matches the average annual volume growth seen between 2000 and 2004. Per
                    capita volume for imaging grew the most. From 2004 to 2005, the imaging volume growth
                    rate was 8.7 percent. Growth in major procedures and evaluation and management services
                    was slower.

•                   Overall volume increases translate directly to growth in Part B spending and are largely
                    responsible for the negative updates required by the SGR formula.




104                             Ambulatory care
Chart 8-5.                  Quarterly changes in professional liability insurance
                            premiums, 1993–2005
              35


              30


              25


              20


              15
    Percent




              10


               5


               0


               -5


              -10
                    93    94      95      96       97      98    99     00     01      02     03      04     05

Source:        MedPAC analysis of unpublished data from CMS.



•       Historically, the professional liability insurance (PLI) component of the Medicare Economic
        Index followed a strong cyclical pattern, illustrated by the changes in PLI premiums from
        1993 to 2001. The cycle was generally characterized by periods of low premiums, perhaps
        when insurers were building market share, and high premiums, perhaps when insurers were
        building reserves.

•       Since 2001, changes in PLI premiums have departed from this cyclical pattern. The increase
        in the fourth quarter of 2003, estimated at 30.3 percent, was the highest in over a decade.
        Since then, change in PLI premiums has slowed, falling to 11.7 percent in the third quarter of
        2005, but still remains greater than in the pre-2001 period.




                                          A Data Book: Healthcare spending and the Medicare program, June 2007    105
Chart 8-6.                 Medicare episode costs vary by severity stage

                                                                Percentage of episode costs, by type of service

Selected           Severity      Average                               Post-acute
episode            stage         costs         Inpatient     E&M         care     Procedures Imaging Tests Other


Coronary artery
disease               1           $1,037          32%         20%           5%            8%          19%          7%        9%
                      2            5,361          67           8            1            10            6           2         5
                      3            8,450          76           7            3             7            3           1         4
                   Total           3,079          64          10            3             8            8           3         4

Essential
hypertension          1              273           8          68            4             2            5          13         1
                      2              426          12          60            3             2           10          11         2
                      3            1,292          60          24            4             2            4           4         3
                   Total             423          28          50            4             2            4           9         2


Type 1 diabetes       1              377          12          52          23              3             1          9         1
                      2            1,140          55          21           8              9             1          4         3
                      3            3,213          73          12           7              4             0          2         2
                   Total             833          48          27          12              6             1          5         2


Sinusitis             1              153           4          64            0            15            9           5         3
                      2              402           5          34            0            34           13           5         9
                      3              428          15          36            0            26           15           4         4
                   Total             158           4          62            0            16           10           5         3


Note:      E&M (evaluation and management). Outlier episodes—those with total payments greater than the 99th percentile or less
           than the 1st percentile—have been removed. The Other type of service category includes services such as supplies,
           durable medical equipment, and ambulance. Analyzing claims data from 2001 through 2003 results in information for 2002
           episodes.

Source:    MedPAC analysis of 5 percent sample of 2001 through 2003 Medicare claims using Medstat Episode Group grouper.


•       Episode groupers use clinical logic to assign claims to clinically distinct episodes of care—a
        series of clinically related health care claims over a defined time period, such as all claims
        related to a patient’s diabetes. Episodes can be further divided into stages to adjust for
        disease severity. For example, average costs for Stage 1 coronary artery disease (CAD)
        (the least severe) were $1,037 and those for Stage 3 CAD (the most severe) were $8,450.

•       A physician’s resource use for selected episodes can be compared with the average
        resource use for similar episodes by similar physicians.

•       Episodes include all types of services. The service mix influences total costs per episode.
        For example, 64 percent of total costs for CAD (a high-cost service) are for inpatient
        services, but only 28 percent of total costs for essential hypertension (a lower cost service)
        are for inpatient services.


106       Ambulatory care
Chart 8-7.              Relative resource use ratios for selected MSAs, 2002
                                                                     Type 1         Type 2
                                         CHF          CAD           Diabetes       Diabetes       Hypertension        Pneumonia


National average
episode costs                          $1,394       $3,079             $833            $526            $423            $4,427

MSA

    Boston                                1.00         0.86             0.99            0.95            0.96              0.96
    Chicago                               1.05         1.04             1.13            1.17            1.14              1.11
    Denver                                0.91         1.03             1.04            0.96            0.92              1.04
    Detroit                               0.90         0.79             1.07            1.08            1.15              0.91
    Greenville                            0.91         1.24             1.21            0.91            0.87              0.80
    Houston                               1.16         1.04             1.13            1.16            1.20              1.11
    Kansas City                           1.31         0.98             0.96            0.99            1.13              0.96
    Miami                                 0.99         0.66             1.06            1.28            1.20              1.16
    Minneapolis                           1.00         1.28             0.72            0.88            0.87              0.76
    New York                              0.86         0.65             1.41            1.11            1.13              1.12
    Orange County                         1.01         0.76             1.17            1.31            1.00              1.03
    Philadelphia                          1.11         0.78             1.09            1.07            1.05              1.08
    Phoenix                               0.81         0.91             0.95            1.05            0.94              0.78

Note:     MSA (metropolitan statistical area), CHF (congestive heart failure), CAD (coronary artery disease). Relative resource use
          ratios for individual MSAs are calculated by dividing the MSA’s average for a given episode by the national average for
          that episode. A ratio of more than 1.0 indicates higher-than-average episode costs and a ratio of less than 1.0 indicates
          lower-than-average episode costs. Analyzing claims data from 2001 through 2003 results in information for 2002
          episodes.

Source:   MedPAC analysis of 5 percent sample of 2001 through 2003 Medicare claims using Medstat Episode Group grouper.


•    Using a national sample of claims, relative resource use ratios—costs relative to national
     average costs—can be calculated by geographic region.

•    In this table we report relative resource use ratios for 6 episodes (congestive heart failure,
     coronary artery disease, type 1 diabetes, type 2 diabetes, hypertension, and pneumonia) in
     13 MSAs relative to the overall national average.

•    A relative resource use ratio of 1.0 (e.g., congestive heart failure in the Boston metropolitan
     statistical area (MSA)) would indicate that the MSA’s resource use for that episode was right
     at the national average.

•    Resource use ratios vary widely by MSA for any given episode. For example, resource use
     ratios for type 2 diabetes range from a low of 0.88 in the Minneapolis MSA to a high of 1.31
     in the Orange County MSA.



                                        A Data Book: Healthcare spending and the Medicare program, June 2007                  107
Chart 8-8.               Hypertension episode resource use by type
                         of service
                                           Total       E&M         Procedures          Imaging         Tests        Other

Stage 1 hypertension
Selected Boston cardiologist                $623        $359              $4               $50          $118         $92

All Boston cardiologists                     357          206              6                32             85         28

Selected Boston cardiologist’s
 relative resource use ratio                 1.74        1.74           0.67              1.56           1.39         3.29

Note:     E&M (evaluation and management). Stage indicates the progression of the disease, with 1 being the mildest form. The
          relative resource use ratio measures the cardiologist’s resource use compared to the average for cardiologists in Boston.
          The Other type of service category includes services such as supplies, durable medical equipment, and ambulance.
          Analyzing claims data from 2001 through 2003 results in information for 2002 episodes.

Source:   MedPAC analysis of 5 percent sample of 2001 through 2003 Medicare claims using Medstat Episode Group grouper.




•   Episode-based analyses can be linked back to individual claims to provide physicians with
    the specific drivers of their episode costs.

•   In this example, a selected Boston cardiologist is more resource intensive than his peers in
    his treatment of hypertension, even after we adjust for differences in patient severity.

•   For example, this cardiologist’s overall resource use ratio for stage 1 hypertension is 1.74.

•   This is primarily driven by his greater use of evaluation and management relative to other
    cardiologists in Boston ($359 vs. $206).

•   With this type of information the cardiologist can see why his resource use is greater than
    his peers.




108       Ambulatory care
Chart 8-9.                                  Spending on all hospital outpatient services,
                                            1996–2006
                        35
                                          Beneficiary cost sharing
                                          Program payments
                        30

                                                                                                                                      10.2
                        25
                                                                                                                            9.0
                                                                                                                  8.5
Dollars (in billions)




                        20
                                                                                                        7.9
                                                                                    8.1       8.2
                        15
                                           7.7                  8.9      8.7
                                 7.2                  7.9
                                                                                                                                      21.4
                        10                                                                                                  19.6
                                                                                                                 17.7
                                                                                                       15.3
                                                                                   12.8      13.3
                         5       9.1       9.4                  9.0      9.3
                                                      8.6


                         0
                                1996      1997       1998      1999     2000       2001      2002      2003      2004      2005      2006*

Note:                        Spending amounts are for services covered by the Medicare outpatient prospective payment system and those paid on
                             separate fee schedules (e.g., ambulance services or durable medical equipment) or those paid on a cost basis (e.g.,
                             organ acquisition or flu vaccines). They do not include payments for clinical laboratory services.
                             * Estimate.

Source:                      CMS, Office of the Actuary.

•                       Overall spending by Medicare and beneficiaries on hospital outpatient services (excluding
                        clinical laboratory services) almost doubled from calendar year 1996 to 2006, reaching $31.6
                        billion. The Office of the Actuary projects continued growth in total spending, averaging 10.4
                        percent per year from 2003 to 2008.

•                       A prospective payment system (PPS) for hospital outpatient services was implemented in
                        August 2000. Services paid under the outpatient PPS represent about 90 percent of
                        spending on all hospital outpatient services.

•                       In 2001, the first full year of the outpatient PPS, spending under the PPS was $19.2 billion,
                        including $11.4 billion by the program and $7.7 billion in beneficiary cost sharing. The
                        spending in the outpatient PPS represented 92 percent of the $20.9 billion in spending on
                        hospital outpatient services in 2001. By 2006, spending under the outpatient PPS is
                        expected to rise to $28.7 billion ($19.3 billion program spending; $9.4 billion beneficiary
                        copayments). The outpatient PPS accounted for about 5 percent of total Medicare spending
                        by the program in 2006.

•                       Beneficiary cost sharing under the outpatient PPS is generally higher than for other sectors,
                        about 33 percent in 2006. Chart 8-13 provides more detail on coinsurance.


                                                            A Data Book: Healthcare spending and the Medicare program, June 2007             109
Chart 8-10. Most hospitals provide outpatient services
                                                                       Percent offering
                                              Outpatient                   Outpatient                 Emergency
Year               Hospitals                   services                     surgery                    services

1991                 5,191                        92%                         79%                         91%
1997                 4,976                        93                          81                          92
2001                 4,347                        94                          84                          93
2002                 4,210                        94                          84                          93
2003                 4,079                        94                          86                          93
2004                 3,882                        94                          86                          92
2006                 3,651                        94                          86                          91

Note:     Includes services provided or arranged by short-term hospitals. Excludes long-term, Christian Science, psychiatric,
          rehabilitation, children’s, critical access, and alcohol/drug hospitals.

Source:   Medicare Provider of Services files from CMS.



•   The number of hospitals that furnish services under Medicare’s outpatient prospective
    payment system has declined, largely due to growth in the number of hospitals converting to
    critical access hospital status, which allows payment on a cost basis. However, the percent
    of hospitals providing outpatient services and emergency services has remained stable, and
    the percent providing outpatient surgery has increased.

•   Almost all hospitals in 2006 provide outpatient (94 percent) and emergency (91 percent)
    services. The vast majority (86 percent) provide outpatient surgery.

•   The share of hospitals providing outpatient services did not change after the introduction of
    the outpatient prospective payment system.




110       Ambulatory care
Chart 8-11. Payments and volume of services under the
            Medicare hospital outpatient PPS, by type of
            service, 2005

                       Payments                                                                Volume
                                    Tests
                                     4%
                                            Pass-through
          Separately paid drugs/                                                                           Tests
                                               drugs
             blood products                                          Separately paid drugs/                13%
                                                1%
                  11%                                                   blood products
                                                                             29%                                      Pass-through
                                                                                                                         drugs
                                                                                                                          4%
    Evaluation &
    management
       14%

                                                           Procedures                                                     Procedures
                                                              47%                                                            18%


                   Imaging                                                 Evaluation &
                     23%                                                   management                     Imaging
                                                                              16%                           19%




Note:      PPS (prospective payment system). Payments include both program spending and beneficiary cost sharing but do not
           include transitional corridor payments (see Chart 8-14 for further information regarding transitional corridor payments).
           Services are grouped into evaluation and management, procedures, imaging, and tests, according to the Berenson-
           Eggers Type of Service classification developed by CMS. Pass-through drugs and separately paid drugs and blood
           products are classified by their payment status indicator. Percentages may not sum to 100 percent due to rounding.

Source:    MedPAC analysis of the 100 percent special analytic file of outpatient PPS claims for 2005 from CMS.



•     The payments for services are distributed differently than volume. For example, procedures
      account for 47 percent of the payments, but 18 percent of the volume.

•     Hospitals provide many different types of services in their outpatient departments, including
      emergency and clinic visits, imaging and other diagnostic services, laboratory tests, and
      ambulatory surgery.

•     Procedures (e.g., endoscopies, surgeries, skin and musculoskeletal procedures) account
      for the greatest share of payments on services (47 percent), followed by imaging services
      (23 percent), and evaluation and management (14 percent).

•     In 2005, separately paid drugs and blood products accounted for 11 percent of payments.




                                         A Data Book: Healthcare spending and the Medicare program, June 2007                     111
Chart 8-12. Hospital outpatient services with the highest
            Medicare expenditures, 2005
                                                                                     Share of           Volume            Payment
APC title                                                                            payments           (1,000s)            rate

Total                                                                                      47%

All emergency visits                                                                         7            11,510            $156
All clinic visits                                                                            4            15,501               60
Cataract procedures with IOL insert                                                          4                691          1,329
Computerized axial tomography with contrast material                                         4              3,398            271
Diagnostic cardiac catheterization                                                           3                414          2,067
Level I plain film except teeth                                                              3            16,812               44
Lower gastrointestinal endoscopy                                                             3              1,486            490
Computerized axial tomography and computerized
 angiography without contrast material                                                       3              3,593            193
MRI and magnetic resonance angiography without
 contrast material followed by contrast material                                             2                847            523
MRI and magnetic resonance angiography without contrast material                             2              1,221            360
Level II radiation therapy                                                                   2              3,012            124
Level I upper gastrointestinal procedures                                                    1                942            460
Insertion of cardioverter-defibrillator*                                                     1                  19       17,964
Level III angiography and venography except extremity                                        1                298          1,150
Infusion therapy except chemotherapy                                                         1              3,096            112
Group psychotherapy                                                                          1              3,373              84
Computerized axial tomography and computerized angiography
 without contrast material followed by contrast material                                     1                896            320
Insertion/replacement/repair of cardioverter-defibrillator leads*                            1                  11       24,122
Level II laparoscopy                                                                         1                111          2,436
IMRT treatment delivery*                                                                     1                770            309
Level III nerve injections*                                                                  1                797            332
Level III cardiac imaging                                                                    1                640            402
Average APC                                                                                                   276            122

Note:     APC (ambulatory payment classification), IOL (intraocular lens), IMRT (intensity-modulated radiation therapy). The
          payment rates for “All emergency visits” and “All clinic visits” are weighted averages of payment rates from three APCs.
          The share of payments in the APCs does not add to the total because of rounding.
          * Did not appear on the list for 2004.

Source:   MedPAC analysis of 100 percent analytic file of outpatient prospective payment system claims for calendar year 2005.


•    Although the outpatient prospective payment system covers thousands of services,
     expenditures are concentrated in a handful of categories that have high volume, high
     payment rates, or both.



112       Ambulatory care
Chart 8-13. Medicare coinsurance rates, by type of hospital
            outpatient service, 2005
                   60



                   50

                                                  42

                   40                                                                    36
Coinsurance rate




                                                                                                                                        32
                                                                    29
                   30
                               23
                                                                                                          20                20
                   20



                   10



                   0
                         Evaluation and        Imaging          Procedures           Tests          Pass-through     Separately paid
                         management                                                                    drugs          drugs/blood
                                                                       Type of service                                  products


Note:                   Services were grouped into categories of evaluation and management, imaging, procedures, and tests according to the
                        Berenson-Eggers Type of Service classification developed by CMS. Pass-through drugs and separately paid drugs and
                        blood products are classified by their payment status indicators.

Source:                 MedPAC analysis of 100 percent special analytic file of 2005 outpatient prospective payment system claims and payment
                        rates.



•                  Historically, beneficiary coinsurance payments for hospital outpatient services were based
                   on hospital charges, while Medicare payments were based on hospital costs. As hospital
                   charges grew faster than costs, coinsurance represented a large share of total payment over
                   time.

•                  In adopting the outpatient prospective payment system, the Congress froze the dollar
                   amounts for coinsurance. Consequently, beneficiaries’ share of total payments will decline
                   over time.

•                  The coinsurance rate is different for each service. Some services, such as imaging, have
                   very high rates of coinsurance—42 percent. Other services, such as evaluation and
                   management, have coinsurance rates of 23 percent.

•                  In 2005, the overall coinsurance rate was about 32 percent.




                                                     A Data Book: Healthcare spending and the Medicare program, June 2007               113
Chart 8-14. Transitional corridor payments as a share of
            Medicare hospital outpatient payments, 2003–2005
                                    2003                                    2004                               2005
                                            Share of                               Share of                             Share of
                                           payments                               payments                             payments
                                              from              Number               from             Number              from
                        Number of         transitional             of            transitional            of           transitional
Hospital group          hospitals           corridors           hospitals          corridors          hospitals         corridors


All hospitals               3,647               2.3%               3,470                0.9%            3,421               0.5%

Urban                       2,438               1.8                2,398                0.4             2,439               0.1
Rural ≤ 100 beds              940               7.7                  811                5.5               713               4.8
Rural >100 beds               269               1.5                  260                0.6               267               0.6

Major teaching                295               3.4                  289                0.8               291               0.0
Other teaching                771               1.5                  762                0.3               771               0.1
Nonteaching                 2,581               2.5                2,418                1.3             2,358               1.0

Note:     A small number of hospitals could not be classified due to missing data. Transitional corridor payments for most hospitals
          expired on December 31, 2003.

Source:   MedPAC analysis of Medicare Cost Report files from CMS.



•   When Medicare implemented the hospital outpatient prospective payment system (PPS) in
    2000, Medicare moved from paying hospitals based on their costs to a fee schedule based
    on average (median) costs for all hospitals.

•   Recognizing that some hospitals might receive lower payments under the outpatient PPS
    than they had under the earlier system, the Congress included a transition mechanism,
    called transitional corridor payments. The corridors were designed to make up part of the
    difference between payments that hospitals would have received under the old payment
    system and those under the new outpatient PPS. To provide incentives for efficiency,
    Medicare did not compensate the full difference, except for rural hospitals with 100 or fewer
    beds, cancer hospitals, and children’s hospitals.

•   Transitional corridor payments represented 2.3 percent of total outpatient PPS payments in
    2003, declining to 0.9 percent in 2004, then to 0.5 percent in 2005. The decline from 2003 to
    2004 is due to the expiration of transitional corridor payments for most hospitals on
    December 31, 2003. However, the payments continued for two more years—through
    December 31, 2005—for rural sole community hospitals and other rural hospitals with 100 or
    fewer beds. The Deficit Reduction Act of 2005 extended most of the transitional corridor
    payments for rural hospitals with 100 or fewer beds through December 31, 2008.

•   In 2005, rural hospitals with 100 or fewer beds received 4.8 percent of their payments from
    transitional corridor payments.




114       Ambulatory care
Chart 8-15. Medicare hospital outpatient, inpatient, and
            overall Medicare margins, 1999–2005
                    20


                    15          13.5
                                                 11.9
                                                                 10.2
                    10
                                 6.2                                               6.4
                                                  5.4             5.3
                     5
Margin (percent)




                                                                                   2.4             2.0
                                                                                                                   -0.5             -0.9
                     0                                                                             -1.4
                                                                                                                   -3.1
                                                                                                                                        -3.3
                     -5                                           -6.9
                                                                                  -8.3
                                                                                                                                    -9.4
                   -10                                                                                             -10.8
                                                -13.9                                             -11.6

                                -15.6                                                                         Inpatient margin
                   -15
                                                                                                              Overall Medicare margin
                                                                                                              Outpatient margin
                   -20
                                1999             2000            2001             2002            2003             2004            2005

Note:                    A margin is calculated as revenue minus costs, divided by revenue. Data are based on Medicare-allowable costs. Analysis
                         excludes critical access hospitals. Overall Medicare margins cover the costs and payments of hospital inpatient,
                         outpatient, psychiatric and rehabilitation (not paid under the prospective payment system), skilled nursing facilities, and
                         home health services, as well as graduate medical education.

Source:                  MedPAC analysis of Medicare cost report data from CMS.



•                  Hospital outpatient margins vary. In 2005, while the aggregate margin was –9.4 percent, 25
                   percent of hospitals had margins of –19.7 percent or lower, and 25 percent had margins of
                   –0.5 percent or higher.

•                  Given hospital accounting practices, margins for hospital outpatient services must be
                   considered in the context of Medicare payments and hospital costs for the full range of
                   services provided to Medicare beneficiaries. Hospitals allocate overhead to all services, so
                   we generally consider costs and payments overall.

•                  The improvement in outpatient margins from 1999 to 2001 is consistent with policies
                   implemented under the outpatient prospective payment system that increased payments.
                   Margins declined somewhat from 2001 to 2003. This may reflect the decline in the number of
                   drugs and devices eligible for pass-through payments. The margin improved in 2004 and
                   2005, which was fueled, at least in part, by many drugs becoming specified covered
                   outpatient drugs. In 2004 and 2005, these drugs were paid on the basis of average
                   wholesale price, which increased their payment rates. These additional payments were not
                   budget neutral, so aggregate outpatient payments increased.


                                                        A Data Book: Healthcare spending and the Medicare program, June 2007                   115
Chart 8-16. Number of Medicare-certified ASCs increased over
            50 percent, 2000–2006
                                                          2000     2001      2002      2003      2004     2005      2006

Medicare payments (billions of dollars)                   $1.4     $1.6      $1.9      $2.2      $2.5     $2.7      $2.9

Number of centers                                       3,028     3,371     3,597     3,887     4,136    4,506     4,707
 New centers                                              295       446       309       365       315      467       261
 Exiting centers                                           53       103        83        75        66       97        44

Net percent growth from previous year                      8.7% 11.3%          6.7%      8.1%     6.4%      8.9%      4.5%

Percent of all centers that are:
 For profit                                                 94        94        95       95        96        96        96
 Nonprofit                                                   6         5         5        5         4         4         4

    Urban                                                   88        88        87       87        87        87       88
    Rural                                                   12        12        13       13        13        13       12

Note:     ASC (ambulatory surgical center). Medicare payments include program spending and beneficiary cost sharing for ASC
          facility services. Payments for 2006 are preliminary and subject to change. Totals may not sum to 100 percent due
          to rounding.

Source:   MedPAC analysis of provider of services files from CMS, 2000–2006. Payment data from CMS, Office of the Actuary.



•    Ambulatory surgical centers (ASCs) are entities that only furnish outpatient surgical services
     not requiring an overnight stay. To receive payments from Medicare, ASCs must meet
     Medicare’s conditions of coverage, which specify minimum facility standards.

•    Medicare uses a simple fee schedule to pay for ASC services. The fee schedule divides
     procedures into nine payment groups. CMS has proposed a new payment system to be
     implemented on January 1, 2008, which would be linked to the hospital outpatient
     prospective payment system.

•    Total Medicare payments for ASC services are growing rapidly. Payments increased by 13.3
     percent per year, on average, from 2000 through 2006.

•    The number of Medicare-certified ASCs grew at an average annual rate of 7.6 percent from
     2000 through 2006. The growth rate slowed recently, from 8.9 percent in 2005 to 4.5 percent
     in 2006. Each year from 2000 through 2006, an average of 351 new Medicare-certified
     facilities entered the market, while an average of 74 closed or merged with other facilities.

•    Most Medicare-certified ASCs are for-profit facilities and are located in urban areas.




116       Ambulatory care
Chart 8-17. Medicare spending for imaging services, by type of
            service, 2005


                                 Imaging procedure,
                                        5%
                                                                              MRI, 19%
                     Other echography
                     (ultrasound), 12%




             Echocardiography,
                   14%

                                                                                          Standard, 18%




                       Nuclear medicine,
                             14%
                                                                     CT, 17%




Note:     CT (computed tomography), MRI (magnetic resonance imaging). Imaging procedure includes cardiac catheterization and
          angiography. Medicare payments include program spending and beneficiary cost sharing for physician fee schedule
          imaging services. Totals may not sum to 100 percent due to rounding.

Source:   MedPAC analysis of 100 percent physician/supplier procedure summary file from CMS, 2005.



•   More than one-third of Medicare spending for imaging under the physician fee schedule is
    for computed tomography (CT) and magnetic resonance imaging (MRI) studies. Ultrasound
    services (echocardiography and other echography) account for one-quarter of imaging
    spending.

•   Medicare spending for imaging services under the physician fee schedule nearly doubled
    between 2000 and 2005, from $6.4 billion to $12.0 billion. Spending for MRI,
    echocardiography, nuclear medicine, and CT has grown faster than for other imaging
    services. Thus, these categories represent an increasing share of total imaging spending.




                                      A Data Book: Healthcare spending and the Medicare program, June 2007             117
Chart 8-18. Radiologists received about 40 percent of Medicare
            payments for imaging services, 2005

                                   Other medical, 5%
                          Other specialty, 5%
                     Internal medicine,
                             6%


                           IDTF, 8%
                                                                                           Radiology, 43%


             Surgical specialties,
                     9%




                                   Cardiology, 25%




Note:     IDTF (independent diagnostic testing facility). Medicare payments include program spending and beneficiary cost sharing
          for physician fee schedule imaging services. Total fee schedule imaging spending was $12 billion in 2005. IDTFs are
          independent of a hospital and physician’s office and provide only outpatient diagnostic services. Other medical includes
          family practice, general practice, neurology, rheumatology, pulmonary disease, hematology/oncology, and endocrinology.
          Other specialty includes otolaryngology, pain management, osteopathic, physical medicine, nephrology, podiatry, cardiac
          surgery, oncology, and portable X-ray suppliers.

Source:   MedPAC analysis of 100 percent physician/supplier procedure summary file from CMS, 2005.



•   Imaging services paid under the physician fee schedule involve two parts: the technical
    component, which covers the cost of the equipment, supplies, and nonphysician staff, and
    the professional component, which covers the physician’s work in interpreting the study and
    writing a report. A physician who both performs and interprets the study submits a global bill,
    which includes the technical and professional components.

•   Although radiologists account for the largest share of Medicare payments for imaging, their
    share of payments declined by 2.8 percent per year from 2003 to 2005. During the same
    time frame, independent diagnostic testing facilities’ share of imaging payments increased
    by 6.0 percent per year, other medical’s share by 4.7 percent per year, and other specialty’s
    share by 4.3 percent per year.




118       Ambulatory care
Web links. Ambulatory care

Physicians

•   For more information on Medicare’s payment system for physician services, see MedPAC’s
    Payment Basics series.

    http://medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_Physician.pdf

•   Chapter 2B of the MedPAC March 2007 Report to the Congress and Appendix A of the
    June 2007 Report to the Congress provide additional information on physician services.

    http://www.medpac.gov/chapters/Mar07_Ch02b.pdf
    http://www.medpac.gov/chapters/Jun07_AppA.pdf

•   MedPAC’s congressionally mandated report, Assessing Alternatives to the Sustainable
    Growth Rate (SGR) System, examines the SGR and analyzes alternative mechanisms
    for controlling physician expenditures under Medicare.

    http://www.medpac.gov/documents/Mar07_SGR_mandated_report.pdf

•   Congressional testimony by the Chairman and Executive Director of MedPAC on
    February 10, 2005, March 17, 2005, November 17, 2005, and July 18, 2006 discusses
    payment for physician services in the Medicare program, including imaging.

    http://www.medpac.gov/documents/051507_WandM_Testimony_MedPAC_FFS.pdf

    http://www.medpac.gov/documents/051007_Testimony_MedPAC_physician_payment.pdf

    http://www.medpac.gov/documents/030607_W_M_testimony_SGR.pdf

    http://www.medpac.gov/documents/030607_E_C_testimony_SGR.pdf

    http://www.medpac.gov/documents/030107_Finance_testimony_SGR.pdf

    http://medpac.gov/publications/congressional_testimony/071806_Testimony_imaging.pdf

    http://www.medpac.gov/publications/congressional_testimony/072506_Testimony_physician.pdf


•   The 2007Annual Report of the Boards of Trustees of the Hospital Insurance and
    Supplementary Medical Insurance Trust Funds provides details on historical and projected
    spending on physician services.

    http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2007.pdf




                             A Data Book: Healthcare spending and the Medicare program, June 2007   119
Hospital outpatient services

•   For more information on Medicare’s payment system for hospital outpatient services, see
    MedPAC’s Payment Basics series.

    http://www.medpac.gov/publications/other_reports/Sept06_medpac_payment_basics_opd.pdf

•   Section 2A of the MedPAC 2007 Report to the Congress provides information on the status
    of hospital outpatient departments including supply, volume, profitability, and cost growth.

    http://www.medpac.gov/chapters/Mar07_Ch02a.pdf

•   Section 2A of the MedPAC 2006 Report to the Congress provides information on the current
    status of “hold-harmless” payments and other special payments for rural hospitals.

    http://www.medpac.gov/publications/congressional_reports/Mar06_Ch02a.pdf

•   Chapter 3A of the MedPAC March 2004 Report to the Congress provides additional
    information on hospital outpatient services, including outlier and transitional corridor
    payments.

    http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3A.pdf

•   More information on new technology and pass-through payments can be found in Chapter 4
    of the MedPAC March 2003 Report to the Congress.

    http://www.medpac.gov/publications/congressional_reports/Mar03_Ch4.pdf



Ambulatory surgical centers

•   For more information on Medicare’s payment system for ambulatory surgical centers, see
    MedPAC’s Payment Basics series.

    http://medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_ASC.pdf

•   Chapter 3F of the MedPAC March 2004 Report to the Congress provides additional
    information on ambulatory surgical centers.

    http://www.medpac.gov/publications/congressional_reports/Mar04_Ch3F.pdf




120    Ambulatory care
                 S E C T I O N




    Post-acute care
    Skilled nursing facilities
     Home health agencies
   Long-term care hospitals
Inpatient rehabilitation facilities
Chart 9-1.               Growth in post-acute care providers has moderated,
                         but home health agencies continue to increase
                             2000            2001            2002           2003            2004           2005            2006

Home health
agencies                    6,817           6,689          6,807            7,151           7,633          8,140         8,813

Long-term care
hospitals                     263             278             298             335             366            392            394
Inpatient
rehabilitation
facilities                  1,102           1,144          1,181            1,207           1,221          1,235         1,225

Skilled nursing
facilities                14,776          14,712          14,791          14,875          14,934         15,000         15,025
Note:     Does not include swing beds.

Source:   For inpatient rehabilitation facilities: MedPAC analysis of CMS provider of services files, 2000–2006. Other provider types:
          CMS Office of Survey and Certification Providing Data Quickly System, accessed June 1, 2007.



•   Growth in the number of all PAC provider types has moderated in 2005–2006; in all cases
    except home health, the increase between 2005 and 2006 is lower than the recent average
    annual rate of growth.

•   Since 2000, the number of home health agencies has grown nearly 4.5 percent per year;
    between 2005 and 2006, the number of agencies climbed more than 8 percent.

•   The number of long-term care hospitals has increased, on average, 7 percent per year since
    2000, although growth has slowed in recent years.

•   The number of inpatient rehabilitation facilities (both rehabilitation hospitals and
    rehabilitation units) grew by just under 2 percent annually between 2000 and 2006 but
    declined slightly in the last year.

•   The total supply of skilled nursing facilities has remained relatively constant since 2000,
    growing at an average of 0.3 percent per year. The number of hospital-based units
    declined nearly 6 percent per year on average, while freestanding facilities grew annually
    about 1 percent.




                                         A Data Book: Healthcare spending and the Medicare program, June 2007                   123
Chart 9-2.                                   Spending for post-acute care has risen in each
                                             setting, 1999–2005
                            50
                                         All post-acute care
                                         Skilled nursing facility
                                         Home health
                                         Inpatient rehabilitation                                                            42.1
                                         Long-term care hospitals                                                 38.9
                            40

                                                                                                     34.1
                                                                                         32.9
    Dollars (in billions)




                            30                                          28.0
                                      25.0             25.4


                            20                                                                                            18.5
                                                                                                                  17.2
                                                                                         15.2        14.7
                                                                        13.2
                                                                                                                          12.3
                                                                                                                  11.3
                                                   10.8                                  9.9          9.9
                                  10.9                                  8.7
                            10                             8.8
                                   8.4                                                                6.4          6.6     6.7
                                                                                         5.3
                                                        4.1             4.2
                                   4.0                                                                                       4.6
                                                           1.7             1.9                                     3.8
                                   1.7                                                   2.5          3.1
                            0
                                      1999             2000            2001             2002         2003*        2004*   2005*


Note:                        These numbers are program spending only and do not include beneficiary copayments.
                             *Estimated by CMS.

Source:                      Centers for Medicare & Medicaid Services, Office of the Actuary.



•                     Medicare has prospective payment systems (PPSs) for the four post-acute care settings.
                      CMS implemented these PPSs at the following times: skilled nursing facilities, July 1998;
                      home health agencies, October 2000; inpatient rehabilitation facilities, January 2002; and
                      long-term care hospitals, October 2002. Although CMS intended to use these payment
                      systems to control Medicare spending for post-acute care, spending has increased an
                      average of 7 percent per year since 1999.

•                     From 1999 through 2005, Medicare spending for long-term care hospitals has increased the
                      fastest⎯at 18 percent per year. During the same period, spending for both skilled nursing
                      facilities and inpatient rehabilitation facilities increased 9 percent per year, and spending for
                      home health agencies increased 7 percent per year. For 2005, CMS estimated that total
                      spending for post-acute care was about $42 billion.

•                     Post-acute care currently makes up about 13 percent of Medicare’s total spending.




124                         Post-acute care
Chart 9-3.               Most common diagnoses among Medicare SNF
                         patients accounted for more than a third of patients
                         in 2004
Diagnosis code                                                                                                   Share of SNF
from hospital stay          Diagnosis                                                                            admissions

        209                 Major joint and limb reattachment of lower extremity                                       7.1%
        127                 Heart failure and shock                                                                    5.1
        089                 Simple pneumonia and pleurisy age >17 w CC                                                 5.1
        210                 Hip and femur procedures except major joint age >17 w CC                                   4.1
        014                 Intracranial hemorrhage and stroke with infarction                                         3.4
        320                 Kidney and urinary tract infections age >17 w CC                                           3.1
        416                 Septicemia age >17                                                                         3.1
        296                 Nutritional and miscellaneous metabolic disorders age >17 w CC                             2.8
        079                 Respiratory infections and inflammations age >17 w CC                                      2.5
        088                 Chronic obstructive pulmonary disease                                                      2.0

                            Total                                                                                     38.3

Note:     SNF (skilled nursing facility), CC (complication or comorbidity). The diagnosis code from hospital stay is the discharge
          diagnosis.

Source:   MedPAC analysis of DataPRO files from CMS, 2004.



•   The most common diagnosis for a skilled nursing facility (SNF) admission in 2004 was a
    major joint and limb reattachment procedure of the lower extremity, typically a hip or knee
    replacement.

•   Ten conditions accounted for about 38 percent of all admissions to SNFs in 2004.

•   Hospital-based and freestanding facilities and nonprofit and for-profit facilities had the same
    top 10 diagnoses in the same rank order.




                                         A Data Book: Healthcare spending and the Medicare program, June 2007                   125
Chart 9-4.                The number of Medicare admissions and covered
                          days of SNF care is growing and stays are
                          getting longer
                                                                                      Percent        Average annual
                                                                                       change        percent change
                                     2002     2003          2004          2005       2004–2005         2002–2005


Admissions (in millions)              2.2       2.4           2.4           2.5           5%              5%

Covered days
 (in thousands)                  54,674     59,416        62,364        65,905            6               6

Average days per
 admission                           24.6     24.9           25.8          25.9         0.4               2

Note:     SNF (skilled nursing facility).

Source:   SNF calendar year MedPAR data from CMS, Office of Research, Development and Information.



•   Between 2004 and 2005, the volume of SNF services increased. Admissions grew by 5
    percent to about 2.5 million. This translates to 70 admissions per 1,000 fee-for-service
    enrollees in 2005, compared with 67 the year before.

•   Covered days grew slightly faster than admissions, resulting in a small increase in the
    average length of stay.




126       Post-acute care
Chart 9-5.               Share of facilities, stays, and payments varies by
                         type of SNF
                                       Facilities               Medicare-covered stays                   Medicare payments
Type of SNF                     2004            2005           2004                    2005              2004         2005


Freestanding                      91%               92%          85%                    87%               92%         93%
Hospital based                     9                 8           15                     13                 8           7

Urban                             67                67            79                    79                81          81
Rural                             33                33            21                    21                19          19

For profit                        67                68            65                    66                71          72
Nonprofit                         28                28            31                    30                25          25
Government                         5                 5             4                     4                 3           3

Note:     SNF (skilled nursing facility). Totals may not sum to 100 due to rounding.

Source:   MedPAC analysis of the Provider of Services and Medicare Provider Analysis and Review files.



•   Skilled nursing facilities (SNFs) may be freestanding or hospital based. In 2005, 92 percent
    of SNFs were freestanding and 87 percent of stays were in freestanding facilities.

•   In 2005, urban facilities made up 67 percent of SNFs but accounted for 79 percent of
    Medicare-covered SNF stays and 81 percent of Medicare SNF payments.

•   In 2005, 68 percent of SNFs were for-profit. The majority of Medicare-covered stays were in
    for-profit SNFs and 72 percent of Medicare payments went to for-profit SNFs.




                                         A Data Book: Healthcare spending and the Medicare program, June 2007         127
Chart 9-6.                               A greater share of SNF patients was categorized into
                                         rehabilitation case-mix groups and received higher
                                         intensity rehabilitation
                          35%
                                       2002
                                       2003
                          30%          2004
                                       2005

                          25%
    Percent of SNF days




                          20%


                          15%


                          10%


                          5%


                          0%
                                     ultra high         very high              high              medium               low           nonrehabilitation
                                                                                                                                    RUG categories

                                                                         Rehabilitation RUG categories


Note:                     SNF (skilled nursing facility), RUG (resource utilization group). Days are for freestanding SNFs with valid cost report data.

Source:                   MedPAC analysis of freestanding SNF cost reports.




•         Beneficiaries’ use of skilled nursing facilities (SNFs) continued to be increasingly
          concentrated in the rehabilitation resource utilization groups (RUGs).

•         Two categories of RUGs, ultra-high rehabilitation and very high rehabilitation, grew as a
          share of all freestanding Medicare-covered SNF days, while the share of days in other
          rehabilitation and nonrehabilitation RUGs declined.

•         Among the rehabilitation groups, patients shifted toward the highest payment RUGs with the
          most therapy minutes. The three ultra-high rehabilitation RUGs and the three very high
          rehabilitation RUGs accounted for 42 percent of SNF days in 2005, an increase of 14
          percentage points from three years earlier.




128                       Post-acute care
Chart 9-7.                          Growth in freestanding SNFs’ costs per day is
                                    accelerating, but nonprofits’ growth is steadier
                     7
                                                                                                                     2002
                                                                                                                     2003
                     6
                                                                                                                     2004
                                                                                                                     2005
                     5
    Percent change




                     4


                     3


                     2


                     1


                     0
                                   All freestanding                           For profit                Nonprofit

Note:                SNF (skilled nursing facility). Costs per day are unadjusted for case mix.

Source:              MedPAC analysis of freestanding SNF cost reports, August 2006 file.



•       Among freestanding skilled nursing facilities (SNFs), cost growth accelerated from 2004 to
        2005.

•       The cost growth may reflect a shift toward higher rehabilitation resource utilization groups
        (RUGs). Average ancillary growth was higher than routine cost growth, consistent with the
        shift toward higher payment therapy case-mix groups.

•       For-profit and nonprofit SNFs experienced different trends in cost growth. Growth in for-profit
        SNFs’ costs accelerated between 2002 and 2005, while nonprofit SNFs’ costs climbed at a
        steady rate of about 3 percent per year. Nonprofit SNFs also have considerably lower per
        day costs than for-profit SNFs.




                                                    A Data Book: Healthcare spending and the Medicare program, June 2007   129
Chart 9-8.               Freestanding SNF Medicare margins

Type of SNF                          2001                  2002                 2003                2004                2005


All                                  17.6%                  17.4%                10.8%                13.7%              12.9%

Urban                                17.4                   16.8                 10.0                 13.0               12.3
Rural                                18.4                   20.0                 14.1                 16.5               15.4

For profit                           20.0                   20.1                 14.0                 16.7               15.5
Nonprofit                            10.2                    8.9                  1.3                  4.0                4.5
Government                            4.5                    3.1                 –6.8                 –3.6               –5.4
Note:     SNF (skilled nursing facility). Margins are calculated as payments minus costs, divided by payments for each group;
          margins are based on Medicare-allowable costs.

Source:   MedPAC analysis of freestanding SNF cost reports, August 2006 file.



•     The aggregate Medicare margin for freestanding SNFs in 2005 was 12.9 percent. Over the
      past five years, the margin has fluctuated from a high of 17.6 percent in 2001 to 10.8 in
      2003. In part, changes in the margin reflect the expiration of temporary payment add-ons.

•     There was considerable variation in the financial performance of freestanding SNFs. One-
      quarter of all freestanding SNFs had margins at or below 4.7 percent, but half of the facilities
      had margins of at least 15.5 percent, and one-quarter had Medicare margins of nearly 25
      percent.

•     There were also large differences in Medicare margins between for-profit and nonprofit
      freestanding facilities. In 2005, for-profit SNFs reported Medicare margins of 15.5 percent
      compared with 4.5 percent for nonprofit SNFs. The margins reported for government
      facilities may not be as reliable as those reported for other ownership types.




130       Post-acute care
Chart 9-9.                Differences between hospital-based and
                          freestanding skilled nursing facilities
Characteristic                                        Hospital-based SNFs                          Freestanding SNFs

Facility
    Beds                                                           26                                           98
    Medicare patient share                                      73%                                          12%
    Average length of stay                                  13 days                                      27 days
    Staffing per bed                                     1.00 FTEs                                    0.82 FTEs
Medicare patient
    Average age                                               78.8                                           80.4
    Percent SOI 3 or 4                                        42.1%                                          46.6%
    Share of inpatient days in ICU                            27.0                                           23.4
    Percent in MDC8 (musculoskeletal)                         27.0                                           18.3
    Percent nursing home residents                              2.4                                           5.2

Note:      SNF (skilled nursing facility), FTE (full-time equivalent) SOI (severity of illness), ICU (intensive care unit), MDC (major
           diagnostic category). SOI is measured using all patient refined diagnosis related groups from 3M; values range from 1 to
           4, with 4 being the most severely ill. Median values shown for facility characteristics; patient-level averages shown for
           patient-level characteristics.

Source:    MedPAC analysis of 2004 SNF cost reports and claims files from CMS.


•     Hospital-based and freestanding skilled nursing facilities (SNFs) differ in size and payer mix.
      Hospital-based SNFs are generally much smaller; the median hospital-based facility has 26 beds
      whereas the median freestanding facility has 98 beds. Medicare accounts for 73 percent of
      patients in hospital-based SNFs, compared with 12 percent in freestanding SNFs. Hospital-
      based facilities also have more full-time staff per bed than freestanding facilities.

•     The average length of stay in a hospital-based SNF is about half the length of stay in a
      freestanding SNF. This difference can be observed across inpatient diagnosis related groups
      (DRGs).

•     Inpatients that go on to use freestanding SNFs after being discharged from the hospital tend to
      be slightly older than patients who use hospital-based SNFs. In addition, the share of patients
      that were nursing home residents before their admission to the hospitals was also higher in
      freestanding SNFs (5.2 percent) than in hospital-based SNFs (2.4 percent).

•     The severity level of patients as measured by all patient refined DRGs for the inpatient care
      preceding the SNF stay is higher for patients using freestanding SNFs. However, the share of
      inpatient days spent in an intensive care unit before the SNF stay is higher for patients
      discharged to hospital-based SNFs.

•     Hospital-based SNFs see a higher proportion of patients that had been treated in the hospital for
      musculoskeletal conditions, such as hip and knee replacements, compared with freestanding
      SNFs. Differences in the types of patients seen between hospital-based and freestanding SNFs
      may reflect the hospitals’ ability to select certain patients.



                                          A Data Book: Healthcare spending and the Medicare program, June 2007                    131
Chart 9-10. Costs per day are higher in hospital-based SNFs
               500

                                                                                                                Hospital based
                                                                                                                Freestanding
                           $395
               400




               300
Cost per day




               200
                                        $176




               100                                        $78             $80
                                                                                       $48                           $53
                                                                                                     $38
                                                                                                                                   $13
                0
                                Routine                         Therapy                      Drugs                         Other

                                                                            Type of cost


Note:                SNF (skilled nursing facility) Costs include associated overhead and capital expenses. Costs were not standardized for
                     wages or case-mix differences.

Source:              Analysis of 2004 Medicare Provider Analysis and Review file and cost report data from CMS.

•              Costs per day differ substantially between hospital-based and freestanding skilled nursing
               facilities (SNFs). Routine costs—which include room, board, and nursing costs—are more
               than twice as high in hospital-based SNFs ($395) than in freestanding SNFs ($176). Part of
               the difference in routine costs may be due to the higher staffing ratios and greater use of
               registered nurses and licensed practical nurses in hospital-based facilities.

•              The average daily costs of therapy services, which are the second biggest category of SNF
               costs, are similar between hospital-based and freestanding facilities.

•              Per diem drug costs are 26 percent higher in hospital-based SNFs ($48) than in
               freestanding SNFs ($38). This difference may be attributable to differences in patient mix,
               particularly for patients that might require high-cost intravenous medications.

•              The average daily costs for other nontherapy ancillary services (supplies, lab, respiratory
               therapy, and other ancillary services) in total are 4 times as high in hospital-based SNFs
               ($53) as in freestanding SNFs ($13). The higher costs for the other nontherapy ancillary
               services may be due to differences in the complexity of some patients but also are likely due
               to easier access to these services and practice pattern differences in the hospital-based
               setting.




132                  Post-acute care
Chart 9-11. Percent of SNF cases discharged to different post-
            acute care settings
                                     30
                                                                                                                            Discharged from:
                                                           25.4                                                             Hospital-based SNF
                                                                                                                            Freestanding SNF
                                     25
    Percent of discharges from SNF




                                     20



                                     15
                                                                  12.3

                                     10     9.0
                                                                                                                                                   7.3
                                                                                                                                             5.2
                                     5
                                                  1.7                       1.8                                             1.8 1.4
                                                                                  0.2       0.2 0.0         0.4 0.2
                                     0
                                          Other SNF      Home health   Inpatient     Long-term             Psychiatric      Hospice          Nursing
                                                            care     rehabilitation care hospital          hospital or                        home
                                                                         facility                             unit

Note:                                SNF (skilled nursing facility). Subsequent use of a second post-acute care provider is determined using matched claims
                                     files for the different post-acute care services. Discharge to a nursing home is based on a different source. It is
                                     determined based on the discharge destination field on the claim and not on a matched claim. Total percent of cases
                                     discharged from hospital-based SNFs to other post-acute care settings was 43.8 percent; total percent of cases
                                     discharged from freestanding SNFs to other post-acute care settings was 23.1 percent. Patient-level averages are shown.

Source:                              MedPAC analysis of 2004 claims files from CMS.



•                  Patients using hospital-based skilled nursing facilities (SNFs) are more likely to use another
                   post-acute care provider after discharge from the SNF than patients using freestanding SNFs.
                   Overall, 9 percent of patients discharged from a hospital-based SNF are discharged to another
                   SNF compared with fewer than 2 percent of patients using freestanding SNFs. Twenty-five
                   percent of patients from hospital-based SNFs are discharged to home health care, compared
                   with 12 percent of patients discharged from freestanding SNFs.

•                  Compared to hospital-based SNFs, freestanding SNFs discharge more patients back to the
                   hospital. Twenty-three percent of patients discharged to a freestanding SNF are readmitted to
                   the hospital within 30 days, compared with 19 percent of inpatients discharged to a hospital-
                   based SNF (not shown).

•                  In total, 41 percent of hospital-based SNF patients are discharged directly home without any
                   additional acute or post-acute care compared with 48 percent of patients discharged from
                   freestanding SNFs. Some of these differences may reflect differences in patient selection rather
                   than differences in practice patterns.


                                                                   A Data Book: Healthcare spending and the Medicare program, June 2007                  133
Chart 9-12. Spending for home health care, 1993–2006
                        20

                                                                 17.9
                        18                            17.4

                        16                     15.7


                        14
                                      12.9                              12.8                                                    13.1
                                                                                                                         12.5
Dollars (in billions)




                        12                                                                                        11.3

                               9.7                                                                    9.9   9.9
                        10
                                                                                       8.8     8.7
                                                                               8.4
                         8

                         6

                         4

                         2

                         0
                              1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Note:                        In 2004, the payment system changed from fiscal year to calendar year.

Source:                      CMS, Office of the Actuary, 2007.



•                       Medicare home health care spending grew at an average annual rate of 20 percent from
                        1993 to 1997. During that period, the payment system was cost based. Eligibility had been
                        loosened just before this period, and enforcing the program’s standards became more
                        difficult.

•                       Spending began to fall in 1997, concurrent with the introduction of the interim payment
                        system (IPS) based upon costs with limits, tighter eligibility, and increased scrutiny from the
                        Office of Inspector General.

•                       In 2000, the prospective payment system replaced the IPS. At the same time, eligibility for
                        the benefit was broadened slightly. Enforcement of the Medicare program’s integrity
                        standards continues at the regional home health intermediaries and survey and certification
                        units.




134                          Post-acute care
Chart 9-13. Trends in the provision of home health care
                                                                                                Average annual
                                                                                                percent change
                                             2002                  2003    2004        2005       2002–2005

Beneficiaries (in millions)                   2.4                  2.6      2.7         2.9            5.6%

Number of episodes*
 (in millions)                                3.9                  4.2      4.5         4.9            8.1

Average visits per
 episode                                    21.4               21.1        20.9       20.8           –0.9

Average payment per
 episode* (in dollars)                    2,325              2,267        2,371      2,479             2.1

Note:     *Includes low utilization payment adjustment episodes.

Source:   MedPAC analysis of home health Standard Analytic file.



•   Since the advent of the prospective payment system (PPS) for home health in 2000, the
    number of beneficiaries using the benefit has grown. The number of episodes has grown as
    well, while the number of visits provided in an average episode has declined.

•   Payments per episode have increased since 2002 by an annual average rate of 2.1 percent.
    Average payments per episode briefly fell in 2003 because of a budget neutrality adjustment
    to PPS payments required by statute. Though payments per episode fell, aggregate
    payments for home health remained level in 2003 (see Chart 9-12), as the number of
    beneficiaries served increased. Average payments increased after this adjustment.




                                        A Data Book: Healthcare spending and the Medicare program, June 2007   135
Chart 9-14. The home health product changed after the
            prospective payment system started

                                                            1997                2003
Average visits per episode                                    36                 20
Average minutes per episode                                1,500                931
Percent therapy visits                                          9%               26%

Note:     The prospective payment system (PPS) began in October 2000.

Source:   Pre-PPS CMS data link file analysis of the National Claims History.



•   The types and quantity of home health care services that beneficiaries receive are changing.
    In 1997, before the prospective payment system, the average number of visits per episode
    was 36. By 2003, that had fallen to 20 visits. The average length of stay fell from 106 days in
    1997 to 56 days in 2002.

•   The mix of visits (therapy, aide, or skilled visits as a percent of total visits provided during an
    episode) has shifted toward therapy (physical therapy, occupational therapy, and speech
    pathology) and away from home health aide services. The home health payment system
    rewards the provision of these therapy services: Meeting the therapy threshold for a
    payment episode produces substantially higher payments for otherwise similar patients.




136       Post-acute care
Chart 9-15. Margins for freestanding home health agencies
                                                                                                   Percent of
                                                                                                   agencies
                           2003                        2004                        2005              2005


All                        13.6%                       16.0%                       16.7%             100%

Geography
      Urban               14.1                         15.9                        16.5                  62
      Rural               13.2                         11.8                        13.7                  12
      Mixed               10.6                         17.0                        17.7                  25

Type of control
      Nonprofit            10.6                        12.4                        13.3                  16
      For profit           15.8                        18.1                        18.2                  77
      Government            5.0                         8.1                        10.7                   7

Volume quintile
      First               10.6                         13.1                        16.3                  20
      Second              10.1                         10.5                        12.0                  20
      Third               10.9                         12.9                        12.5                  20
      Fourth              15.5                         15.9                        17.2                  20
      Fifth               14.1                         17.5                        17.9                  20

Note:     Analysis includes 4,049 agencies for 2004 and 4,535 agencies for 2005.

Source:   MedPAC analysis of 2004–2005 Cost Report files.




•     In 2005, about 80 percent of agencies had positive margins. These estimated margins
      indicate that Medicare’s payments are above the costs of providing services to Medicare
      beneficiaries, for both rural and urban home health agencies (HHAs).

•     These margins are for freestanding HHAs, which composed about 85 percent of all HHAs in
      2006. HHAs are also based in hospitals and other facilities.




                                       A Data Book: Healthcare spending and the Medicare program, June 2007   137
Chart 9-16. The top 15 LTC–DRGs in 2005 made up more than 60
            percent of LTCH discharges

LTC–DRG            Description                                                             Discharges       Percentage

    475            Respiratory system diagnosis with ventilator support                     15,699              11.7%
    271            Skin ulcers                                                               6,470               4.8
     87            Pulmonary edema and respiratory failure                                   5,900               4.4
     79            Respiratory infections and inflammation                                   5,813               4.3
     88            Chronic obstructive pulmonary disease                                     5,366               4.0
    249            Aftercare, musculoskeletal system and connective tissue                   5,339               4.0
     89            Simple pneumonia                                                          5,206               3.9
     12            Degenerative system disorders                                             5,138               3.8
    466            Aftercare, without history of malignancy                                  4,976               3.7
    462            Rehabilitation                                                            4,832               3.6
    416            Septicemia                                                                4,678               3.5
    127            Chronic heart failure                                                     4,023               3.0
    263            Skin graft and/or debridement for skin ulcer                              3,946               2.9
    316            Renal failure                                                             2,558               1.9
    430            Psychoses                                                                 2,398               1.8

                   Top 15 LTC–DRGs                                                          82,342              61.3

                   Total                                                                   134,003            100.0

Note:     LTC–DRG (long-term care diagnosis related group), LTCH (long-term care hospital). LTC–DRGs is the case-mix system
          for these facilities.

Source:   MedPAC analysis of MedPAR data from CMS.



•    Long-term care hospitals (LTCHs) treat beneficiaries with diverse diagnoses. Five of the top
     15 diagnoses in LTCHs are related to respiratory conditions.

•    The most frequent diagnosis for LTCHs is for patients on ventilator support. These
     beneficiaries make up almost 12 percent of all Medicare LTCH patients.




138       Post-acute care
Chart 9-17. Medicare cases and Medicare spending have
            increased under the LTCH PPS

                                                                                                                   Average
                                    TEFRA                                                 PPS                       annual
                                                         Change                                                   change
                             2001          2002         2001–2002            2003         2004        2005       2003–2005


Number of cases           85,229         98,896              16.0%        110,396      121,955      134,003          10.2%

Medicare spending
 (in billions)               $1.9           $2.2             15.8             $2.7         $3.7         $4.5         29.1

Payment per case         $22,009       $22,486                2.2         $24,758      $30,059      $33,658          16.6

Length of stay (in days) 31.3               30.7             –1.9             28.8         28.5         28.2         –1.0

Note:     LTCH (long-term care hospital), PPS (prospective payment system), TEFRA (Tax Equity and Fiscal Responsibility Act of
          1982).

Source:   MedPAC analysis of MedPAR data from CMS.



•   The number of beneficiaries discharged from long-term care hospitals (LTCHs) has
    increased about 10 percent annually since the implementation of a prospective payment
    system.

•   From 2003 to 2005, Medicare spending for LTCHs increased about 29 percent per year.

•   From 2003 to 2005, Medicare’s payment per case increased more than 16 percent annually,
    while length of stay—usually positively associated with costs per case—decreased 1
    percent.




                                       A Data Book: Healthcare spending and the Medicare program, June 2007               139
Chart 9-18. Since the PPS, LTCHs’ payments have risen faster
            than their costs
                                40
                                               Payment per case                            TEFRA        PPS
                                35             Costs per case

                                30

                                25
    Cumulative percent change




                                20

                                15

                                10

                                 5

                                 0

                                 -5

                                -10
                                          1999            2000            2001             2002            2003            2004            2005



Note:                            PPS (prospective payment system), LTCH (long-term care hospital), TEFRA (Tax Equity and Fiscal Responsibility Act of
                                 1982). Data are from consistent two-year cohorts of LTCHs.

Source:                          MedPAC analysis of cost reports from CMS.



•               Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and before the
                prospective payment system (PPS) was implemented in fiscal year 2003, long-term care
                hospitals’ (LTCHs’) Medicare per case costs and payments increased at similar rates. Since
                the PPS, LTCHs’ Medicare per case payments have increased much faster than their per
                case costs.

•               These similarities and differences are reflected in LTCHs’ Medicare margins, shown in Chart
                9-19.




140                             Post-acute care
Chart 9-19. LTCHs’ Medicare margins have increased under PPS
                                                TEFRA                                                     PPS
Type of LTCH                         2001                  2002                    2003               2004               2005


All LTCHs                           –1.6%                   0.4%                    5.3%               8.9%             11.8%

Freestanding*                       –1.2                   0.0                      5.4                7.9                10.9
Hospital within hospital*           –2.1                  –0.5                      5.1                9.7                12.8

Urban*                              –1.6                  –0.2                      5.4                9.0                11.8
Rural*                              –3.2                  –3.1                      1.3                5.1                12.5

Nonprofit                           –1.5                   0.2                      2.1                6.4                 9.3
For profit                          –1.5                  –0.2                      6.4               10.1                13.1
Government**                        –4.8                  –3.0                      0.5               –4.9                –1.5

Note:     LTCH (long-term care hospital), PPS (prospective payment system), TEFRA (Tax Equity and Fiscal Responsibility Act of
          1982).
          *These numbers have been updated since the printed version of this data book was published.
          **Margins reported for government facilities may not be as reliable as those reported for other ownership types.

Source:   MedPAC analysis of cost report data from CMS.



•   Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and before the long-term
    care hospital (LTCH) prospective payment system (PPS) was implemented, these facilities’
    Medicare margins were close to zero, ranging from –1.7 percent to 0.4 percent. Under PPS,
    margins have increased rapidly, from 5.3 percent in 2003 to 11.8 percent in 2005.

•   In 2005, urban, rural, freestanding, hospital-within-hospital, and for-profit LTCHs all had
    double-digit margins.




                                       A Data Book: Healthcare spending and the Medicare program, June 2007               141
Chart 9-20. Distribution of cases in inpatient rehabilitation
            facilities, 2006

                                        Cardiac
                                         4.0%
                                Spinal cord         Other
                                                    9.0%                   Stroke
                                  injury
                                                                           20.3%
                                   4.6%
                                  Other
                               orthopedic
                                  5.0%
                             Brain injury                                          Major joint
                                5.8%                                              replacement
                              Neurological                                           18.4%
                                 6.7%
                                            Burns
                                                                  Hip fracture
                                            10.2%
                                                                    16.0%




Note:     Other includes conditions such as amputation, pain syndrome, and pulmonary.

Source:   MedPAC analysis of Inpatient Rehabilitation Facility–Patient Assessment Instrument data from CMS.




•   In 2006, the most frequent diagnosis for Medicare patients in inpatient rehabilitation facilities
    (IRFs) was stroke, representing about 20 percent of cases, a significant change from 2004,
    when stroke represented just over 16 percent of cases.

•   The second most common diagnosis, major joint replacement, represented just over 18
    percent of IRF admissions, down from 24.6 percent of cases in 2004, when major joint
    replacement was the most common IRF Medicare case type.




142       Post-acute care
Chart 9-21. The number of IRFs remained stable from 2004
            to 2005
                                                                                                   Average annual
                              TEFRA                                   PPS                              change     Change
Type of IRF              2000     2001                2002       2003    2004             2005       2002–2004 2004–2005

All IRFs                1,117        1,157          1,188       1,211       1,227        1,231             1.6%              0.0%

Urban                     950          971             988      1,001       1,009        1,000             1.1             –0.9
Rural                     167          186             200        210         218          231             4.4              6.0

Freestanding              195          214             215         215        217          217             0.5               0.0
Hospital based            922          943             973         996      1,010        1,014             1.9               0.4

Nonprofit                 731          733             755         765         772          765            1.1             –0.9
For profit                240          271             277         290         294          305            3.0              3.7
Government                146          153             156         156         161          161            1.6              0.0

Note:      IRF (inpatient rehabilitation facility), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective payment
           system).

Source:    MedPAC analysis of Provider of Service files from CMS.



•   The number of inpatient rehabilitation facilities (IRFs) in 2005 remained almost unchanged
    from the prior year.

•   The number of rural IRFs grew at a higher rate than other types, perhaps fueled by the 20
    percent rural payment adjustment under the PPS.

•   Increases in the number of rural IRFs and for-profit IRFs slightly more than offset small
    declines in the number of urban and nonprofit facilities.




                                          A Data Book: Healthcare spending and the Medicare program, June 2007                  143
Chart 9-22. Prior trend in volume of IRF cases reversed
            between 2004 and 2005
                                                                                   Average annual
                                                                                       change       Change
                                     2002              2003      2004      2005      2002–2004    2004–2005

Number of cases                  439,631             478,723   496,695   449,321        6.4%         –9.5%

Medicare spending
 (in billions)                        $4.9              $6.2      $6.6      $6.4       15.5          –3.0

Payment per case                 $11,152             $12,952   $13,275   $14,248        9.1           7.3

Average length of stay
 (in days)                            13.3              12.8      12.7      13.1       –2.4           3.1

Note:     IRF (inpatient rehabilitation facility).

Source:   MedPAC analysis of MedPAR data from CMS.


•   The number of Medicare inpatient rehabilitation facility (IRF) admissions decreased by
    nearly 10 percent between 2004 and 2005.

•   Medicare payments per discharge increased by over 7 percent over this period, following
    average annual increases of about 9 percent between 2002 and 2004.

•   Overall Medicare spending on IRF services decreased slightly from 2004 to 2005.

•   Theses trends are not inconsistent with expectations under the more rigorously enforced
    75% rule.




144       Post-acute care
Chart 9-23. Per case payments for IRFs have risen faster than
            costs, post-PPS
                                25

                                                Payment per case
                                                                                    TEFRA            PPS                                        23.0
                                                Cost per case
                                20



                                15                                                                                                              13.1
    Cumulative percent change




                                                                                                                               15.4

                                                                                                              12.3
                                10



                                 5
                                                                                                                                2.7


                                 0         -1.6                                               1.1              -2.1
                                                            -3.2                              -3.5
                                                                             -3.9

                                 -5        -3.4
                                                            -4.8             -5.2

                                -10
                                          1999             2000             2001             2002             2003             2004             2005



Note:                            IRF (inpatient rehabilitation facility), PPS (prospective payment system), TEFRA (Tax Equity and Fiscal Responsibility Act
                                 of 1982). Data are from consistent two-year cohorts of IRFs.

Source:                          MedPAC analysis of cost report data from CMS.



•                    Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and before the
                     prospective payment system (PPS) was implemented in 2002, inpatient rehabilitation facilities’
                     (IRFs’) Medicare per case costs and payments changed at similar rates. Under PPS, IRFs’
                     Medicare per case payments have increased much faster than their per case costs.




                                                               A Data Book: Healthcare spending and the Medicare program, June 2007                    145
Chart 9-24. Inpatient rehabilitation facilities’ Medicare margin by
            type, 1998–2005
                                                   TEFRA                                                  PPS
Type of IRF                     1998         1999          2000        2001          2002          2003         2004         2005*

All IRFs                        2.8            1.1           1.3         1.5         11.0          17.8         16.2          13.0

Hospital based                  2.6            1.1           1.3         1.4          6.1          14.9         12.0           8.5
Freestanding                    3.3            1.2           1.2         1.5         18.5          23.0         24.3          20.9

Urban                           2.9            1.2           1.3         1.5         11.5          18.6         16.8          13.5
Rural                           2.4            0.8           0.9         1.1          4.7          10.0         10.5           8.4

Nonprofit                       2.8            1.2           1.5         1.6          6.5          14.3         12.4           9.6
For profit                      3.1            1.0           0.9         1.3         19.1          24.5         24.5          20.0
Government                      2.5            0.8           1.3         1.6          2.5          10.8          9.0           5.0**

Note:       IRF (inpatient rehabilitation facility), TEFRA (Tax Equity and Fiscal Responsibility Act of 1982), PPS (prospective
           payment system).
           * 2005 data include imputed margins.
           ** Margins reported for government providers may not be as reliable as those reported for other provider types.
Source:    MedPAC analysis of cost report data from CMS.



•   From 2002 to 2003, the aggregate Medicare margin increased rapidly, from 11 percent to
    almost 18 percent, and then declined slightly to about 16 percent in 2004. MedPAC
    estimates a 13 percent margin for 2005. Margins declined for all inpatient rehabilitation
    facility (IRF) types in 2005.

•   Freestanding and for-profit IRFs had more than double the margins of hospital-based and
    nonprofit IRFs, continuing a trend that began with implementation of the IRF prospective
    payment system.




146       Post-acute care
Web links. Post-acute care
•   Chapter 3 of MedPAC’s March 2007 Report to the Congress provides information on post-
    acute care providers.

    http://www.medpac.gov/chapters/Mar07_Ch03.pdf

Skilled nursing facilities

•   Chapter 8 of MedPAC’s March 2007 Report to the Congress and Chapter 3A of MedPAC’s
    March 2007 Report to the Congress provide information on Medicare margins for skilled
    nursing facilities.

    http://www.medpac.gov/chapters/Jun07_Ch08.pdf
    http://www.medpac.gov/chapters/Mar07_Ch03a.pdf

•   The official Medicare website provides information on the prospective payment system and
    other related issues.

    http://www.cms.hhs.gov/center/snf.asp

Home health services

•   Chapter 4 of MedPAC’s June 2007 Report to the Congress, Chapter 3B of MedPAC’s March
    2007 Report to the Congress, and Chapter 5 of MedPAC’s June 2006 Report to the
    Congress provide information on home health services.

    http://www.medpac.gov/chapters/Jun07_Ch04.pdf
    http://www.medpac.gov/chapters/Mar07_Ch03b.pdf
    http://www.medpac.gov/publications/congressional_reports/Jun06_Ch05.pdf

•   The official Medicare website provides information on the quality of home health care, and
    additional information on new policies, statistics, and research, as well as information on
    home health spending and use of services.

    http://www.cms.hhs.gov/center/hha.asp

Long-term care hospitals

•   Chapter 3D of MedPAC’s March 2007 Report to the Congress provides information on long-
    term care hospitals.

    http://www.medpac.gov/chapters/Mar07_Ch03d.pdf

•   CMS also provides information on long-term care hospitals, including the long-term care
    hospital prospective payment system.

    http://www.cms.hhs.gov/LongTermCareHospitalPPS/01_overview.asp




                              A Data Book: Healthcare spending and the Medicare program, June 2007   147
Inpatient rehabilitation facilities

•   Chapter 3C of MedPAC’s March 2007 Report to the Congress provides information on
    inpatient rehabilitation facilities.

    http://www.medpac.gov/chapters/Mar07_Ch03c.pdf

•   CMS provides information on the inpatient rehabilitation facility prospective payment system.

    http://www.cms.hhs.gov/InpatientRehabFacPPS/01_overview.asp




148    Post-acute care
       S E C T I O N




Medicare Advantage
Chart 10-1. Access to MA plans available to all Medicare
            beneficiaries
                              CCPs
                HMO                                                                   Any               Average plan
               or local        Regional           Any                                 MA                offerings per
                PPO             PPO               CCP             PFFS                plan               county

2005               67%            N/A             67%                45%                84%                    5

2006              80              87              98                 80               100                    12

2007              82              87              99               100                100                    20


Note:     MA (Medicare Advantage), CCP (coordinated care plan), HMO (health maintenance organization), PPO (preferred
          provider organization), PFFS (private fee-for-service).

Source:   MedPAC analysis of plan finder data from CMS.


•   Local coordinated care plans (CCPs) are local preferred provider organizations (PPOs) and
    health maintenance organizations (HMOs), which have comprehensive provider networks
    and limit or discourage use of out-of-network providers. Local CCPs may choose which
    individual counties to serve. Regional CCPs (regional plans are required by statute to be
    PPOs) cover entire state-based regions and have networks that may be looser than the
    ones required of local PPOs. Regional PPOs were only available beginning in 2006. Another
    type of Medicare Advantage (MA) plan is a private fee-for-service (PFFS) plan. PFFS plans
    are not required to have networks and members may go to any willing Medicare provider.

•   Local CCPs are available to 82 percent of Medicare beneficiaries in 2007—up from 67
    percent in 2005. Regional PPOs are available to 87 percent of beneficiaries. Virtually all
    beneficiaries live in a county where MA PFFS plans are available in 2007—up from 45
    percent in 2005. In both 2006 and 2007, 100 percent of Medicare beneficiaries have MA
    plans available, up from 84 percent in 2005.

•   The number of plans from which beneficiaries may choose has increased. In 2007,
    beneficiaries can choose from an average of 20 plans operating in their counties, up from a
    choice of 12 plans in 2006 and 5 plans in 2005.

•   These data do not include plans that have restricted enrollment or are not paid based on the
    MA plan bidding process. That is, special needs plans, cost-based plans, employer-only
    plans, and certain other demonstration plans are excluded.




                                       A Data Book: Healthcare spending and the Medicare program, June 2007             151
Chart 10-2. Access to zero-premium plans with MA drug
            coverage, 2006 and 2007
                             100

                                                2006          2007
                                  90                                                                                                    86

                                  80
                                                                                                                               73
    Percentage of beneficiaries




                                  70
                                                     60
                                  60                                                          55

                                          48
                                  50

                                  40

                                  30                                                 25                            25
                                                                           19
                                  20                                                                      15
                                                                11
                                  10

                                  0
                                               HMO                   PPO               PFFS             Regional PPO          Any MA plan


Note:                              MA (Medicare Advantage), HMO (health maintenance organization), PPO (preferred provider organization), PFFS (private
                                   fee-for-service).

Source:                            MedPAC analysis of bid and plan finder data from CMS.


•         Across all plan types, in 2007 there is increased availability of “zero-premium” plans—plans
          with no premium payments other than the Medicare Part B premium. More beneficiaries can
          obtain an MA plan with Part D drug coverage (an MA–PD plan) for which the enrollee pays
          no premium for either the drug coverage or the coverage of Medicare Part A and Part B
          services. In 2007, 86 percent of Medicare beneficiaries have access to at least one MA–PD
          plan with no premium (beyond the Medicare Part B premium) for the combined coverage
          (and no premium for any non-Medicare-covered benefits included in the benefit package),
          compared with 73 percent in 2006.

•         Sixty percent of beneficiaries have zero-premium MA–PD HMOs available, while MA–PD
          PPOs without premiums are much less widely available. Particularly noteworthy is the
          increased availability of PFFS plans offering zero premiums. In 2006, 25 percent of
          beneficiaries had access to a PFFS plan with no plan premium for Part C and Part D
          coverage—a figure that grew to 55 percent in 2007.

•         In most cases, enrollees of MA plans continue paying their Medicare Part B premium, but
          some MA–PD plans use rebate dollars to reduce or eliminate their enrollees’ Part B
          premium obligation.



152                               Medicare Advantage
Chart 10-3. Enrollment in MA plans, 1994–2007

                              10



                                                                                                                                  8.1
                              8

                                                                                                                            6.9
Beneficiaries (in millions)




                                                                           6.4    6.3
                                                                    6.1
                              6
                                                                                         5.5
                                                              5.2
                                                                                                4.9                   4.9
                                                                                                       4.6      4.7
                                                   4.1
                              4
                                            3.1

                                    2.3
                              2




                              0
                                   1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Note:                              MA (Medicare Advantage).

Source:                            Medicare Managed Care Contract (MMCC) Plans, Monthly Summary Reports, CMS.



•                             Medicare enrollment in private health plans paid on an at-risk capitated basis is at an all-
                              time high at 8.1 million enrollees (19 percent of all Medicare beneficiaries). Enrollment rose
                              rapidly throughout the 1990s, peaking at 6.4 million enrollees in 1999, and declined steadily
                              to a low of 4.6 million enrollees in 2003.




                                                                A Data Book: Healthcare spending and the Medicare program, June 2007    153
Chart 10-4. Enrollment in PFFS plans grew faster than in other
            major plan types
                                                 Total enrollees
                                                 (in thousands)

                                           July                     February                       Percentage
Plan type                                  2006                       2007                          change

Local CCPs                                5,480                      6,065                                11%

PFFS                                        774                      1,328                                72

Regional PPOs                                 82                        121                               48


Note:       PFFS (private fee-for-service), CCP (coordinated care plan), PPO (preferred provider organization). CCPs include
            health maintenance organizations and local PPOs.

Source:     CMS health plan monthly summary reports.



•   Enrollment in private fee-for-service (PFFS) has been growing rapidly. While local
    coordinated care plans grew about 11 percent between July 2006 and February 2007,
    enrollment in PFFS plans accounted for nearly half the growth in Medicare Advantage, rising
    from about 774,000 to 1.3 million—a 72 percent increase.




154       Medicare Advantage
Chart 10-5. Enrollment in types of plans, 2007
                  Medicare eligibles      Distribution (in percent) of MA enrollees by plan type
State              (in thousands)         HMO         Local PPO        Regional PPO        PFFS           Cost                Total
Alaska                     55                0%            0%             0%               0%              0%                     1%
Alabama                   782              11              1              0                2               0                    15
Arkansas                  489               2              0              0                7               0                     9
Arizona                   819              30              1              0                4               0                    35
California              4,386              32              0              1                1               0                    33
Colorado                  541              22              1              0                3               5                    31
Connecticut               541               9              0              0                1               0                    10
District of Columbia       78               1              0              0                1               6                     8
Delaware                  132               0              0              0                1               0                     2
Florida                 3,130              21              0              2                2               0                    25
Georgia                 1,077               2              1              0                7               0                    10
Hawaii                    189              12              2              1                1              20                    36
Iowa                      503               1              0              1                6               3                    11
Idaho                     199               8              2              0                9               2                    21
Illinois                1,749               4              1              0                2               1                     8
Indiana                   935               0              1              0                6               2                     9
Kansas                    410               2              1              0                3               1                     8
Kentucky                  705               3              1              0                7               1                    11
Louisiana                 643              13              0              0                3               0                    17
Massachusetts           1,007              14              1              0                2               0                    17
Maryland                  718               2              1              0                0               2                     6
Maine                     243               0              0              0                1               0                     2
Michigan                1,538               3              0              0               11               0                    14
Minnesota                 722              10              0              1                8              10                    30
Missouri                  943              11              1              0                3               0                    16
Mississippi               472               1              0              0                6               0                     7
Montana                   153               0              1              0               11               0                    12
North Carolina          1,319               6              0              0                7               0                    14
North Dakota              106               0              0              0                5               1                     6
Nebraska                  268               3              0              1                5               1                     9
New Hampshire             194               0              0              0                2               0                     2
New Jersey              1,270               8              1              0                0               0                     9
New Mexico                278              16              3              0                3               0                    22
Nevada                    309              28              0              1                1               0                    31
New York                2,879              20              1              0                1               0                    23
Ohio                    1,812              11              1              0                3               1                    17
Oklahoma                  560               9              0              0                3               0                    12
Oregon                    558              23              8              0                3               5                    39
Pennsylvania            2,189              26              3              0                2               0                    32
Puerto Rico               620              52              4              0                0               0                    56
Rhode Island              178              33              1              0                1               0                    34
South Carolina            674               0              0              1                8               0                     9
South Dakota              955              13              0              0                4               0                    17
Texas                   2,641              10              1              0                3               1                    15
Utah                      245               2              6              0               13               1                    22
Virginia                1,022               1              0              0                7               1                     9
Vermont                   100               0              0              0                1               0                     1
Washington                852              14              1              0                4               0                    20
Wisconsin                 855               5              1              0               11               1                    19
West Virginia             367               1              2              0                3               4                    11
Wyoming                    74               0              0              0                3               1                     5
U.S. Total            43,597               14              1              0                4               1                    19

Note:       MA (Medicare Advantage), HMO (health maintenance organization), PPO (preferred provider organization), PFFS (private fee-for-
            service). Totals may not sum due to rounding.

Source:     CMS enrollment data, May 2007.


•       Medicare private plans attract more beneficiaries in some areas than in others. At the state level, private plans
        attract only 1 percent of beneficiaries in Alaska and Vermont. The highest penetration of Medicare private plans is in
        Oregon and Puerto Rico, with 39 percent and 56 percent of beneficiaries, respectively, enrolled in plans.
•       The popularity of different types of plans varies as well. For example, some states have all their plan enrollment in
        private fee-for-service (PFFS) plans, while other states have none of their enrollment in PFFS plans.



                                          A Data Book: Healthcare spending and the Medicare program, June 2007                     155
Chart 10-6. Different requirements and provisions apply to
            different types of MA plans
                                                                         HMO/Local        Regional
                                                  PFFS        MSA          PPO              PPO            SNP

Must build networks of providers

Must report quality measures

Must have CMS review and
approve bids

Must return to the Trust Funds
25 percent of the difference
between bid and benchmark

Must offer individual MA plan
if offering employer group plan*

Must offer Part D coverage

Must have an out-of-pocket limit
on enrollee expenditures

Can limit enrollment to targeted
beneficiaries

Note:     MA (Medicare Advantage), PFFS (private fee-for-service), MSA (medical savings account), HMO (health maintenance
          organization), PPO (preferred provider organization), SNP (special needs plan).
          *Effective as of 2008 contract year; requirement does not apply to PFFS and MSA plans.

Source:   MedPAC analysis of MA statutory and regulatory requirements.


•   Different requirements apply to different plan types in Medicare Advantage (MA). Private fee-for-
    service (PFFS) plans and medical savings account (MSA) plans are exempt from many
    requirements that apply to coordinated care plans (CCPs). PFFS and MSA plans are not
    required to build networks, report on all CCP-required quality measures, offer the Part D drug
    benefit, or have the level of their bids approved by CMS. Also, beginning in 2008, non-network
    PFFS plans and MSA plans will not be subject to the requirement that they offer nongroup MA
    plans if they offer employer group MA plans.

•   MSA plans have a payment advantage over other types of MA plans (though currently only three
    MSA plans are in operation). When an MSA plan bids below the benchmark, its enrollees retain
    the full difference in their accounts, while non-MSA plans receive only 75 percent of the
    difference between the bid and benchmark to provide extra benefits to their enrollees. In non-
    MSA plans, the Medicare program retains the other 25 percent of the difference.

•   Only regional preferred provider organizations and MSA plans are required to have benefit
    structures that include an out-of-pocket limit on enrollee expenditures. The plans are allowed to
    determine their own level of the out-of-pocket limits. Special needs plans are allowed to limit their
    enrollment to one of three special populations: Medicare/Medicaid dual eligibles, institutionalized
    beneficiaries, and beneficiaries with chronic or disabling conditions.



156       Medicare Advantage
Chart 10-7. Special needs plans have grown quickly

                                550

                                500                                                                                  476

                                450

                                400
Number of special needs plans




                                350

                                300                                                         276

                                250

                                200

                                150                                 125

                                100

                                 50
                                              11
                                  0
                                             2004                  2005                     2006                    2007


Source: CMS special needs plans fact sheet and data summary, February 14, 2006, and CMS special needs plans comprehensive
        report, March 21, 2007.



•                               The Congress created special needs plans (SNPs) as a new Medicare Advantage (MA) plan
                                type in the 2003 Medicare Prescription Drug, Improvement, and Modernization Act to
                                provide a common framework for the existing plans serving special needs beneficiaries and
                                to expand beneficiaries’ access to and choice among MA plans.

•                               In 2007, 476 SNPs are approved to operate.

•                               SNPs were authorized for only five years. Absent congressional action, SNP authority will
                                expire at the end of 2008.




                                                         A Data Book: Healthcare spending and the Medicare program, June 2007   157
  Chart 10-8. The number of SNPs and SNP enrollment
              increased from 2006 to 2007
                 600                                                                                       900
                            Dual eligible                                                                                     843,000
                            Institutional
                            Chronic or disabling condition                                                 800
                 500                                            476




                                                                           SNP enrollment (in thousands)
                                                                                                           700

                 400                                                                                       600
Number of SNPs




                                                                                                                  532,000
                                                                                                           500
                 300              276
                                                                                                           400

                 200                                                                                       300

                                                                                                           200
                 100
                                                                                                           100

                  0                                                                                         0
                              July 2006                      March 2007                                          July 2006   March 2007


  Note:                SNP (special needs plan).

  Source:              CMS special needs plans fact sheet and data summary, February 14, 2006; CMS special needs plans comprehensive
                       report, March 21, 2007; and CMS annual report by plan, July 26, 2006.



  •              In 2007, most special needs plans (SNPs) (67 percent) are for dual-eligible beneficiaries,
                 while 15 percent are for beneficiaries with chronic conditions, and 18 percent are for
                 beneficiaries who reside in institutions (or reside in the community but have a similar level of
                 need).

  •              This is a change from 2006 when 82 percent of SNPs were for dual eligibles.

  •              Enrollment in SNPs has grown quickly from 532,000 in July 2006 to 843,000 in March 2007.

  •              The rate of enrollment growth was especially rapid for dual-eligible SNPs (42 percent) and
                 institutional SNPs (530 percent). The institutional SNP enrollment growth is largely
                 accounted for by the re-designation of the SCAN demonstration Social-HMO as an
                 institutional SNP. This change added nearly 90,000 enrollees, 76 percent of institutional
                 SNP enrollment growth. (For more information, see Chapter 3 of MedPAC’s June 2007
                 Report to the Congress at http://medpac.gov/chapters/Jun07_Ch03.pdf.)




  158                  Medicare Advantage
Web links. Medicare Advantage

•   Chapter 3 of MedPAC’s June 2007 Report to the Congress provides information on
    Medicare Advantage plans.

    http://medpac.gov/chapters/Jun07_Ch03.pdf

•   Chapter 4 of MedPAC’s March 2007 Report to the Congress provides information on
    Medicare Advantage plans.

    http://medpac.gov/chapters/Mar07_Ch04.pdf

•   More information on the Medicare Advantage program payment system can be found in
    MedPAC’s Medicare Payment Basics series.

    http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_MA.pdf

•   CMS provides information on Medicare Advantage and other Medicare managed care plans.

    http://www.cms.hhs.gov/HealthPlansGenInfo/

•   The official Medicare website provides information on plans available in specific areas and
    the benefits they offer.

    http://www.medicare.gov/Default.asp




                             A Data Book: Healthcare spending and the Medicare program, June 2007   159
 S E C T I O N




Drugs
Chart 11-1. Medicare spending for Part B drugs
                                          20
                                                       Medicare spending
Medicare spending (dollars in billions)




                                          15


                                                                                                                       10.9
                                                                                                             10.3                10.1
                                          10
                                                                                                   8.5

                                                                                         6.4
                                                                               5.1
                                           5                         4.1
                                                 2.8        3.2



                                           0
                                                1997       1998     1999      2000      2001      2002      2003       2004      2005

Source: MedPAC analysis of unpublished CMS data.



•                                         MedPAC estimates that spending for Part B drugs totaled $10.1 billion in 2005.

•                                         Medicare spending on Part B drugs increased at an average rate of 25 percent per year
                                          from 1997 to 2003. Since then the rate has moderated. In 2005, spending declined by 7.8
                                          percent compared to 2004.

•                                         This total does not include drugs provided through outpatient departments of hospitals or to
                                          patients with end-stage renal disease in dialysis facilities. MedPAC estimates that payments
                                          for separately billed drugs provided in hospital outpatient departments equaled about $2
                                          billion in 2005. We estimate that freestanding and hospital-based dialysis facilities billed
                                          Medicare an additional $2.9 billion for drugs.

•                                         The primary reason for the decline in Part B drug expenditures is the change in the
                                          Medicare payment rate from one based on the average wholesale price to 106 percent of
                                          the average sales price. The volume of drugs provided to Medicare beneficiaries continued
                                          to rise.




                                                                     A Data Book: Healthcare spending and the Medicare program, June 2007   163
Chart 11-2. Top 10 drugs covered by Medicare Part B, by share
            of expenditures, 2005
                                                                                       FDA         Percent of
Drug name                         Clinical indications             Competition     approval date   spending

Darbepoetin alfa                    Anemia                         Sole source         2001           8.4%

Non-ESRD erythropoietin             Anemia                         Multisource         1989           7.7
                                                                   biological

Rituximab                           Non-Hodgkin’s                  Sole source         1997           7.6
                                    lymphoma

Infliximab                          Rheumatoid arthritis,          Sole source         1999           5.3
                                    Crohn’s disease                biological

Pegfilgrastim                       Cancer                         Sole source         2002           5.2

Bevacizumab                         Cancer                         Sole source         2004           2.8

Albuterol                           Asthma and other               Generic             1982           2.8
                                    lung conditions

Docetaxel                           Cancer                         Sole source         1996           2.8

Oxaliplatin                         Cancer                         Sole source         2004           2.8

Zoledronic acid                     Cancer related                 Sole source         2001           2.6

Note:     FDA (Food and Drug Administration), ESRD (end-stage renal disease).

Source:   MedPAC analysis of 2005 Medicare claims data from CMS and unpublished FDA data.



•   Medicare covers about 550 outpatient drugs under Part B, but spending is very
    concentrated. The top 10 drugs account for about 48 percent of all Part B drug spending.

•   Spending for new drugs dominates the list. Of the top 10 drugs covered by Medicare in
    2005, eight received Food and Drug Administration approval in 1996 or later.

•   Treatment for cancer dominates the list—8 out of the top 10 drugs treat cancer or the side
    effects associated with chemotherapy. This is because most cancer drugs must be
    administered by physicians, a requirement for coverage of most Part B drugs.




164       Drugs
Chart 11-3. Part D enrollment and other sources of drug
            coverage
                                                                                                                  Percent of total
                                                                                      Millions as of                Medicare
                                                                                    January 16, 2007               beneficiaries

Enrollment that leads to Medicare program spending:
  Voluntary enrollees in stand-alone PDPs                                                    10.98                           25%
  Enrollees in MA–PDs (including some duals)                                                  6.65                           15
  Individuals dually eligible for Medicare and Medicaid
    auto-enrolled in Part D plans                                                             6.27                           14
  Individuals covered by Medicare RDS                                                         6.94                           16
     Subtotal                                                                                30.84                           71

Enrollment that does not lead to Medicare program spending:
  Estimated federal retirees in FEHB and Tricare                                              3.33                             8

     Total                                                                                   34.17                           79

    Additional sources of creditable coverage*                                                4.86                           11
Note:        PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]), RDS (retiree drug subsidy),
             FEHB (Federal Employees Health Benefits program). TRICARE is the health program for military retirees and their
             dependents. Columns do not sum to 100 percent because the remaining share of beneficiaries either have no drug
             coverage or have coverage of less value than Part D benefits.
             * Drug coverage of equal or greater value to Part D benefits through the Department of Veterans Affairs, Indian Health
             Service, former employers that do not receive Medicare’s RDS, current employers, or state pharmaceutical assistance
             programs.

Source:      Presentation by Cynthia Tudor, Director, Medicare Drug Benefit Group, at the National Health Policy Forum, Feb. 22, 2007.


•     As of January 2007, CMS estimated that 30.8 million of the 43 million Medicare beneficiaries
      (71 percent) were either signed up for Part D plans or had prescription drug coverage
      through employer-sponsored coverage under Medicare’s retiree drug subsidy (RDS). (If an
      employer agrees to provide primary drug coverage to its retirees with an average benefit
      value that is equal or greater in value to Part D (called creditable coverage), Medicare
      provides the employer with a tax-free subsidy for 28 percent of each eligible individual’s
      drug costs that fall within a specified range of spending.)

•     Voluntary enrollees in stand-alone drug plans numbered 11.0 million, or 25 percent of all
      Medicare beneficiaries. Individuals who are enrollees in Medicare Advantage–Prescription
      Drug plans and those dually eligible for Medicare and Medicaid and numbered 6.7 million
      and 6.3 million, or 15 percent and 14 percent, respectively, of all beneficiaries. Individuals
      whose employers received Medicare’s RDS numbered 6.9 million, or 16 percent. Those four
      groups of beneficiaries directly affect Medicare program spending.

•     Other Medicare beneficiaries have creditable drug coverage, but that coverage does not
      affect Medicare program spending. For example, 3.3 million beneficiaries (8 percent) were
      federal retirees who receive drug coverage through the Federal Employees Health Benefits
      program or TRICARE. Approximately 4.9 million (11 percent) had prescription drug
      coverage through the Department of Veterans Affairs, Indian Health Service, other former
      employers that are not a part of Medicare’s RDS, current employers because the individual
      is still an active worker, or state pharmaceutical assistance programs.


                                           A Data Book: Healthcare spending and the Medicare program, June 2007                    165
Chart 11-4. Defined standard benefit parameters increase
            over time
                                                                                      2006                     2007

Deductible                                                                        $250.00                  $265.00
Initial coverage limit                                                            2,250.00                 2,400.00
True out-of-pocket spending limit                                                 3,600.00                 3,850.00
Total covered drug spending at true out-of-pocket limit                           5,100.00                 5,451.25
Minimum cost sharing above true out-of-pocket limit
  Copay for generic/preferred multisource drug prescription                             2.00                     2.15
  Copay for other prescription drugs                                                    5.00                     5.35

Source:   CMS, Office of the Actuary, 2006. Medicare Part D benefit parameters for standard benefit: Annual adjustments for 2007
          (May 22).




•   The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 specified a
    defined standard benefit structure for 2006 that included a $250 deductible, 25 percent
    coinsurance on covered drugs until the enrollee reaches $2,250 in total covered drug
    spending, and then a coverage gap in which the enrollee is responsible for the full
    discounted price of covered drugs until their true out-of-pocket spending reaches $3,600.
    (“True out of pocket” refers to the fact that cost sharing paid by many sources of
    supplemental coverage does not count toward this $3,600 out-of-pocket spending limit.) A
    person with no other source of drug coverage that supplements Part D would reach this
    $3,600 true out-of-pocket limit at $5,100 in total drug spending (i.e., the combination of the
    enrollee’s spending plus spending that the Part D plan covered). Enrollees with drug
    spending even higher than that amount would pay just $2 to $5 per prescription.

•   The parameters of this defined standard benefit structure increase over time at the same
    rate as the annual increase in average total drug expenses of Medicare beneficiaries.
    Benefit parameters for 2006 and 2007 are shown in the table above.

•   Within certain limits, sponsoring organizations may offer Part D plans that have the same
    actuarial value as the defined standard benefit, but a different benefit structure. For
    example, a plan may use tiered copayments rather than 25 percent coinsurance. Or a plan
    may have no deductible but use cost-sharing requirements that are equivalent to a rate
    higher than 25 percent. Both defined standard benefit plans and plans that are actuarially
    equivalent to the defined standard benefit are known as “basic benefits.”

•   Once a sponsoring organization offers at least one plan with basic benefits within a
    prescription drug plan region, it may also offer a plan with enhanced benefits—basic and
    supplemental coverage combined.




166       Drugs
Chart 11-5. Characteristics of Medicare PDPs
                                                       2006                                                2007
                                                                             a
                                      Plans                      Enrollees                                 Plans
                                                           Number
                            Number        Percent        (in millions)           Percent           Number          Percent


Total                         1,429         100%              15.5                100%                1,866           100%

Type of organization
    National b                  886           62               8.3                 54                 1,507            80
    Near national c             339           24               4.0                 26                   159             8
    Other                       204           14               3.1                 20                   200            11


Type of benefit
    Defined standard         132               9               3.4                 22                   219            12
    Actuarially equivalent d 689              48               9.5                 61                   760            41
    Enhanced                 608              43               2.6                 17                   887            48


Type of deductible
    Zero                        834           58               8.7                 56                 1,127            60
    Reduced                     112            8               0.3                  2                   157             8
    Defined standard            483           34               6.5                 42                   582            31

Note:     PDP (prescription drug plan). The PDPs and enrollment described here exclude employer-only plans and plans offered in
          U.S. territories. Numbers may not add to totals due to rounding.
          a
            Number of enrollees as of July 2006.
          b
            Reflects total numbers of plans for organizations with at least one PDP in all 34 PDP regions.
          c
            Totals for organizations offering 30 or more PDPs across the country, but without one in each PDP region.
          d
            Benefits labeled actuarially equivalent to Part D’s standard benefit include what CMS calls “actuarially equivalent
          standard” and “basic alternative” benefits.

Source:   MedPAC analysis of CMS landscape, bid, and enrollment data.


•    Part D drew even more stand-alone prescription drug plans (PDPs) into the field for 2007
     than it did in 2006. Plan sponsors are offering 1,866 PDPs in 2007 compared with 1,429 in
     2006—about 30 percent more.

•    In 2007, 80 percent of all PDPs were offered by sponsoring organizations that had at least
     one PDP in each of the 34 PDP regions across the country.

•    Sponsors are offering larger proportions of PDPs with the defined standard benefit structure
     or enhanced benefits (basic plus supplemental coverage) for 2007 and a smaller proportion
     of benefits with the same average value as the standard benefit but with alternative benefit
     designs (called actuarially equivalent benefits).




                                       A Data Book: Healthcare spending and the Medicare program, June 2007               167
 Chart 11-6. Benefits in the coverage gap among PDPs
                                                               2006                                                      2007
                                                                            Enrollees
                                 Plans                         Total                      With LIS                     Plans
                                                     Number                       Number          Percent
                        Number       Percent       (in millions)    Percent     (in millions)     of total     Number Percent


Total                     1,429        100%           15.48            100%          8.02            52%        1,866       100%

Drugs covered in the gap
  Generic only          187              13            0.44             3            0.05            10            511          27
  Generic and
   brand name*           33               2            0.47             3            0.03             6            27            1
 None                 1,209              85           14.56            94            7.95            55         1,328           71

Note:     PDP (prescription drug plan), LIS (low-income subsidy). LIS enrollees receive extra help to cover some or all premiums
          and cost sharing. Their benefit effectively has no gap in coverage. The PDPs and enrollment described here exclude
          employer-only plans and plans offered in U.S. territories. Gap coverage refers to benefits provided within the range of
          beneficiary drug spending above the standard benefit’s initial coverage limit and below its out-of-pocket threshold. Part
          D’s defined standard benefit requires the enrollee to pay 100 percent coinsurance in this coverage gap. Number of total
          enrollees and number of enrollees with LIS are not available for 2007. Sums of percentages may not add to totals due to
          rounding.
          *Not all brand name drugs are necessarily covered. Most plans cover preferred brand name drugs in the coverage gap
          and only two plans cover all branded drugs on the plan’s formulary.


Source:   MedPAC analysis of CMS landscape, bid, and enrollment data.



•   More prescription drug plans (PDPs) include some benefits in the coverage gap for 2007
    than for 2006. Nearly all cover only generic drugs in the gap─27 percent offer generics only
    while 1 percent of plans offer generics and brand name drugs. Among those plans that
    provide coverage for brand name drugs, most limit the benefit to drugs on the preferred tier
    of the plan’s formulary.

•   In 2006, 94 percent of PDP enrollees were in plans that offered no additional benefits in the
    coverage gap: 55 percent of the 94 were beneficiaries who receive Part D’s low-income
    subsidies (LISs) and thus do not face a coverage gap. In addition, many enrollees were
    unlikely to exceed the initial coverage limit for drug spending. Estimates suggest that 3
    million to 4 million individuals (or between 25 percent and 40 percent of plan enrollees who
    did not receive LISs) had spending in the coverage gap in 2006. Those numbers made up
    between 13 percent and 18 percent of all Part D enrollees in 2006.




168       Drugs
Chart 11-7. Average Part D premiums
                                                     2006                                              2007
                                     Unweighted              Weighted by                           Unweighted
                                     plan offers            2006 enrollment                        plan offers

All plans
   Basic coverage                       $29.01                   $23.49                                 $25.86
   Enhanced coverage                     27.80                    20.64                                  29.16
   Any coverage                          28.38                    22.61                                  27.85

PDPs
 Basic coverage                          33.11                     24.16                                 28.79
 Enhanced coverage                       43.27                     35.34                                 45.66
 Any coverage                            37.43                     26.03                                 36.81

MA–PDs*
 Basic coverage                          21.88                     16.84                                 18.79
 Enhanced coverage                       16.47                     10.42                                 17.14
 Any coverage                            18.43                     12.08                                 17.24

Note:     PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). The PDPs and enrollment
          described here exclude employer-only plans and plans offered in U.S. territories. The MA–PDs and enrollment described
          here exclude employer-only plans and plans offered in U.S. territories, 1876 cost plans, special needs plans,
          demonstrations, and Part B-only plans.
           *MA–PD premiums reflect rebate dollars (75 percent of the difference between a plan’s payment benchmark and its bid
          for providing Part A and Part B services) that plans chose to use to offset Part D premium costs.

Source:   MedPAC analysis of CMS landscape, bid, and enrollment data.



•   In 2006, the average (unweighted) premium offered for basic or enhanced Part D plans was
    $28.38 per month. However, beneficiaries tended to enroll in lower premium plans. On
    average, enrollees paid about $22.61 per month in 2006.

•   Medicare Advantage–Prescription Drug plans (MA–PDs) can lower the part of their monthly
    premium attributable to Part D using rebate dollars─75 percent of the difference between
    the plan’s payment benchmark and its bid for providing Part A and Part B services. MA–PDs
    may also enhance their Part D benefit with rebate dollars. Many MA–PDs use rebate dollars
    in these ways, resulting in more enhanced offerings and lower average premiums compared
    with PDPs.

•   Part D basic plans that had premiums at the higher end of the distribution in 2006 tended to
    lower their bids for 2007, while those with the lowest bids tended to raise them. In 2007, the
    average premium offered for basic plans—not weighted by enrollment—was lower ($25.86
    versus $29.01). However, the average (unweighted) premium for plans offering enhanced
    coverage was higher ($29.16 versus $27.80).




                                       A Data Book: Healthcare spending and the Medicare program, June 2007                169
Chart 11-8. Characteristics of MA–PDs
                                                       2006                                               2007
                                                                             a
                                      Plans                      Enrollees                                Plans
                                                           Number
                            Number        Percent        (in millions)     Percent              Number            Percent

Total                         1,303           100%            5.0            100%                1,622             100%

Type of organization
   Local HMO                    856             66            4.1                82                 947              58
   Local PPO                    275             21            0.2                 4                 274              17
   PFFS                         124             10            0.6                12                 367              23
   Regional PPO                  48              4            0.1                 1                  34               2

Type of benefit
   Defined standard          96                  7            0.1                 3                 84                5
   Actuarially equivalent b 376                 29            1.1                23                321               20
   Enhanced                 831                 64            3.7                74              1,217               75

Type of deductible
   Zero                       1,045             80            4.5                90              1,461               90
  Reduced                        41              3            0.1                 2                 38                2
  Defined standard              217             17            0.4                 8                123                8

Note:     MA–PD (Medicare Advantage–Prescription Drug [plan]), HMO (health maintenance organization), PPO (preferred
          provider organization), PFFS (private fee-for-service). The MA–PDs and enrollment described here exclude employer-only
          plans, plans offered in U.S. territories, 1876 cost plans, special needs plans, demonstrations, and Part B-only plans.
          Numbers may not add to totals due to rounding.
          a
           Number of enrollees as of July 2006.
          b
           Benefits labeled actuarially equivalent to Part D’s standard benefit include what CMS calls “actuarially equivalent
          standard” and “basic alternative” benefits.

Source:   MedPAC analysis of CMS landscape, bid, and enrollment data.


•   As with stand-alone prescription drug plans (PDPs), there were more Medicare Advantage–
    Prescription Drug plans (MA–PDs) for 2007 than for 2006. Sponsors are offering 1,622 MA–
    PDs around the country, compared with 1,303 the year before (about 25 percent more).
    Although local HMOs offer the most MA–PD plans, there was a sizable increase in the
    number of drug plans offered by private fee-for-service plans—growing from 10 percent of
    all (unweighted) offerings in 2006 to 23 percent in 2007.

•   A larger share of MA–PDs than PDPs offer enhanced benefits. In 2006, 43 percent of all
    PDPs had enhanced benefits (see Chart 11-5) compared with 64 percent of MA–PDs. In
    2007, 48 percent of PDPs were enhanced compared with 75 percent of MA–PDs. In 2006,
    enhanced MA–PDs attracted 74 percent of total MA-PD enrollment.

•   Most MA–PD plans have no deductible: 80 percent of MA–PD offerings in 2006 and 90
    percent in 2007. MA–PDs with no deductible attracted about 90 percent of total MA–PD
    enrollment in 2006.




170       Drugs
Chart 11-9. Benefits in the coverage gap among MA–PDs
                                                            2006                                                   2007
                                                                     Enrollees
                                Plans                      Total                    With LIS                      Plans
                                        Number                 Number Percent
                       Number Percent (in millions) Percent (in millions) of total                        Number            Percent


Total                    1,303       100%           5.02           100%         0.75           15%         1,622             100%

Drugs covered in the gap
  Generic only       300               23           1.21            24          0.18           15            448               28
  Generic and
   brand name*        60                5           0.19             4          0.03           14             78                5
 None                943               72           3.62            72          0.55           15          1,096               68

Note:     MA–PD (Medicare Advantage–Prescription Drug [plan]), LIS (low-income subsidy). LIS enrollees receive extra help to
          cover some or all premiums and cost sharing. Their benefit effectively has no gap in coverage. The PDPs and enrollment
          described here exclude employer-only plans and plans offered in U.S. territories. Gap coverage refers to benefits provided
          within the range of beneficiary drug spending above the standard benefit’s initial coverage limit and below its out-of-pocket
          threshold. Part D’s defined standard benefit requires the enrollee to pay 100 percent coinsurance in this coverage gap.
          The MA–PDs and enrollment described here exclude employer-only plans, plans offered in U.S. territories, 1876 cost
          plans, special needs plans, demonstrations, and Part B-only plans. Numbers may not add to totals due to rounding.
          *Not all brand name drugs are necessarily covered. Most plans cover preferred brand name drugs in the coverage gap
          and only two plans cover all branded drugs on the plan’s formulary.

Source:   MedPAC analysis of CMS landscape, bid, and enrollment data.



•   Medicare Advantage–Prescription Drug plans (MA–PDs) are more likely than prescription
    drug plans (PDPs) to provide some additional benefits in the coverage gap, although mostly
    for generics. In 2006, 28 percent of MA–PDs included some gap coverage─23 percent had
    generic drugs only and 5 percent had both generic and brand name drug coverage. Those
    plans accounted for 28 percent of MA–PD enrollment.

•   Among MA–PD enrollees with no gap coverage, 15 percent of the 72 percent were
    beneficiaries who received low-income subsidies.

•   For 2007, 33 percent of MA–PDs provide some gap coverage (28 percent generics only and
    5 percent generic and brand names).




                                        A Data Book: Healthcare spending and the Medicare program, June 2007                     171
Chart 11-10. Geographic distribution of PDPs in 2007




              59 to 66                 55 to 59                    51 to 55                      45 to 51



Note:     PDP (prescription drug plan). The PDPs shown here exclude employer-only plans and plans offered in U.S. territories.

Source:   MedPAC analysis of CMS plan benefit package and landscape data.




•   New stand-alone prescription drug plans (PDPs) emerged in every region of the country,
    and the median number of plans offered in each region rose from 43 in 2006 to 55 in 2007.

•   Alaska and Hawaii had the fewest stand-alone plans with 45 and 46 PDPs, respectively.
    The Pennsylvania–West Virginia PDP region had the most, with 66 PDPs.




172       Drugs
Chart 11-11. Distribution of Part D enrollees by organization

    PDP enrollment = 15.5 million                                            MA-PD enrollment = 5.0 million
                                                United and
                                                PacifiCare                                                United and
                   Other                           29%                                                    PacifiCare
                   26%                                                                                       21%




                                                                 Other
                                                                 47%


        Coventry
          4%
                                                                                                                   Humana
        WellCare 6%                                                                                                 18%

          Member Health                            Humana
              6%                                    22%
                                                                                         Tufts         Kaiser Permanente
                            Wellpoint
                                                                                      Associated              10%
                              7%
                                                                                     Health plans
                                                                                          4%



Note:      PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Data are as of July 2006.

Source:    MedPAC analysis of 2006 CMS enrollment data.



•     As of July 2006, Part D enrollment was concentrated among plans offered by a small
      number of parent organizations. Several of those organizations offer both stand-alone
      prescription drug plans (PDPs) and Medicare Advantage–Prescription Drug plans (MA–
      PDs). For example, United and PacifiCare (which merged in 2006) had 29 percent of the
      15.5 million enrollees in PDPs and 21 percent of the 5.0 million enrollees in MA–PDs.
      Similarly, Humana had a considerable portion of both markets: 22 percent of PDP enrollees
      and 18 percent of MA–PD enrollees.




                                        A Data Book: Healthcare spending and the Medicare program, June 2007                173
Chart 11-12. In 2006, most Part D enrollees were in plans that
             distinguished between preferred and nonpreferred
             brands and include specialty tiers
                                                                                 Generic/preferred brand/
                                                    Generic/brand                  nonpreferred brand
                                25%             Without          With              Without          With
                            coinsurance,       specialty       specialty          specialty       specialty
Plan characteristics           all tiers         tier            tier               tier            tier          Other        Total

All Part D plans                 17%                6%            14%                13%              50%           1%        100%
All PDPs                        22                 2               17                13               46             1         100
  National, near national       16                 1               12                10               40             0          79
  Non-national                   6              <0.5                5                 3                6             1          21

    Auto-enrollment             21                  1              15                  7              33            1           78
    No auto-enrollment        <0.5                  1               1                  7              13         <0.5           22

    Basic                       22                  1              16                  9              35             1          83
    Enhanced                     0                  1               1                  4              11             0          17

All MA–PDs                       2                20               5                 13               60         <0.5          100
  Local HMO                      2                18               4                 10               47            1           82
  Local PPO                   <0.5                 1            <0.5                  1                1         <0.5            4
  Regional PPO                <0.5              <0.5            <0.5               <0.5                1            0            1
  PFFS                        <0.5              <0.5            <0.5                  0               12            0           12

    Basic                        2                  9               1                  3              10             1          26
    Enhanced                  <0.5                 10               3                  8              52             1          74

Note:     PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]), HMO (health maintenance
          organization), PPO (preferred provider organization), PFFS (private fee-for-service). Enrollment numbers are as of July 1,
          2006. The group of PDPs analyzed here excludes employer-only plans, plans offered in U.S. territories, and plans with no
          enrollment. The group of MA–PDs excludes employer-only plans, demonstration programs, 1876 cost plans, plans offered
          in U.S. territories, and plans with no enrollment. Auto-enrollment refers to PDPs that were eligible for automatically
          enrolled beneficiaries based on low-income status. Cost-sharing structures are for before the initial coverage limit of Part
          D. A specialty tier generally includes expensive products and unique drugs and biologicals, such as biotechnology drugs,
          for which enrollees may not appeal for lower cost-sharing amounts. Benefits labeled basic include Part D’s standard
          benefit design as well as benefits that are actuarially equivalent to standard benefits. Enhanced plans include
          supplemental coverage. Numbers may not sum to 100 percent due to rounding.
Source:   National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for
          January 1, 2006.

•     In 2006, nearly 65 percent of Part D enrollees were in plans with formularies that distinguished between
      preferred and nonpreferred brands (13 percent without a specialty tier plus 50 percent with a specialty tier).
      Twenty percent of enrollees were in plans that distinguished only between brand name and generic drugs
      (6 percent without a specialty tier plus 14 percent with a specialty tier). About 17 percent of enrollees face
      25 percent cost sharing for all covered drugs.
•     Almost 60 percent of enrollees in stand-alone prescription drug plans (PDPs) (13 percent without a
      specialty tier and 46 percent with one) and nearly 75 percent of enrollees in Medicare-Advantage
      Prescription Drug (plans) (MA–PDs) (13 percent without a specialty tier and 60 percent with one) were in
      plans with the generic, preferred, and nonpreferred brand structure.
•     Enrollees in PDPs that used flat, 25 percent cost sharing were more likely to be in plans offered nationally
      or near nationally, providing basic coverage, and qualified to receive auto-assigned enrollees. Enrollees in
      enhanced plans almost never faced this structure.



174       Drugs
Chart 11-13. In 2006, the median PDP enrollee was in a plan that
             listed more than 1,300 drugs
                                   All PDPs (N=1429)
                                                                                                                             Generic
                                                                                                                             Brand
                    National, near-national (N=1222)

                                Non-national (N=207)


                             Auto-enrollment (N=409)
 Plan type
                        No auto-enrollment (N=1020)



                                       Basic (N=821)

                                  Enhanced (N=608)



                          25% Coinsurance (N=128)
                                         G/B (N=108)
Tier structure                         G/B/S (N=314)

                                  G/PB/NPB (N=332)

                                G/PB/NPB/S (N=538)

                                                        0                 500                 1000                1500                   2000
                                                                                Median number of drugs listed


Note:     PDP (prescription drug plan), G (generic), B (brand), PB (preferred brand), NPB (nonpreferred brand), S (specialty).
          Occasionally, plans list some generic drugs on brand tiers and vice versa. Plans with “other” tier structures are not
          displayed. The PDPs described here exclude employer-only plans offered in U.S. territories. Cost-sharing structures are
          for before the initial coverage limit of Part D. A specialty tier generally includes expensive products and unique drugs and
          biologicals for which enrollees may not appeal for lower cost sharing.

Source:   National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for
          January 1, 2006.


•   In 2006, enrollees in stand-alone prescription drug plans (PDPs) generally had a formulary that listed
    more than 1,300 drugs. About 60 percent of those listings were brand-name drugs while the
    remaining 40 percent were generic.

•   The median enrollee in a national or near-national PDP generally had slightly more drugs listed on
    their plan’s formulary than the median enrollee in a non-national plan. Enrollees in plans that qualified
    for auto-enrollees tended to have fewer drugs listed on their plans’ formularies than plans that did not
    qualify for auto-enrollees.

•   Enrollees in plans that used a flat, 25 percent coinsurance structure tended to have the most drugs
    listed on their plans’ formularies. Enrollees in plans with only one brand-name tier typically had fewer
    drugs listed on their plans’ formularies than enrollees in plans that distinguished between preferred
    and nonpreferred brand-name drugs.

•   The number of drugs on a plan’s formulary does not necessarily represent beneficiary access to
    medications. Beneficiaries may access coverage for unlisted drugs through the plan’s nonformulary
    exceptions process and may be denied coverage for listed drugs through prior authorization approval
    requirements.


                                        A Data Book: Healthcare spending and the Medicare program, June 2007                     175
Chart 11-14. In 2006, the median MA–PD enrollee was in a plan
             that listed more than 1,200 drugs

                       All MA-PDs (N=1,302)
                                                                                                                      Generic
                                                                                                                      Brand
                          Local HMO (N=855)
                          Local PPO (N=275)
                        Regional PPO (N=48)

    Plan type                   PFFS (N=124)


                               Basic (N=471)
                           Enhanced (N=831)


                     25% Coinsurance (N=92)
                                  G/B (N=206)
Tie structure                    G/B/S (N=83)
                          G/PB/NPB (N=193)
                        G/PB/NPB/S (N=696)

                                                0                  500                 1000                1500                 2000
                                                                         Median number of drugs listed


Note:     MA–PD (Medicare Advantage–Prescription Drug [plan]), HMO (health maintenance organization), PPO (preferred
          provider organization), PFFS (private fee-for-service), G (generic), B (brand), PB (preferred brand), NPB (nonpreferred
          brand), S (specialty). Occasionally, plans list some generic drugs on brand tiers and vice versa. Plans with “other” tier
          structures are not displayed. The MA–PDs described here exclude demonstration programs, 1876 cost plans, and plans
          offered in U.S. territories. Cost-sharing structures are for before the initial coverage limit of Part D. A specialty tier
          generally includes expensive products and unique drugs and biologicals for which enrollees may not appeal for lower cost
          sharing.

Source:   National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for
          January 1, 2006.


•     In 2006, enrollees in Medicare Advantage–Prescription Drug plans (MA–PDs) generally had a
      formulary that listed more than 1,200 drugs. About 55 percent of those listings were brand-name
      drugs while the remaining 45 percent were generic.

•     The median enrollee in private fee-for-service MA–PDs tended to have a larger number of drugs
      listed on their plan’s formularies than did the median enrollee in preferred provider organizations and
      local HMOs.

•     Enrollees in plans that distinguished between preferred and nonpreferred brand-name drugs tended
      to have more drugs listed on their plans’ formularies than did enrollees in plans with only one brand-
      name tier or plans that used flat, 25 percent coinsurance.

•     The number of drugs on a plan’s formulary does not necessarily represent beneficiary access to
      medications. Beneficiaries may access coverage for unlisted drugs through the plan’s nonformulary
      exceptions process and may be denied coverage for listed drugs through prior authorization approval
      requirements.


176       Drugs
Chart 11-15. The number of drugs listed in a therapeutic category
             available to the median enrollee depends on
             therapeutic class size and regulation
                             For the median enrollee, the percent of drugs listed by selected therapeutic class
                              Cholinesterase                                             Opioid         Atypical
                                inhibitors                 Dyslipidemics               analgesics nonphenothiazines*
                              (antidementia               (anticholesterol           (narcotic pain    (atypical
Plan type                        agents)                      agents)                   relievers)  antipsychotics)

Total drugs in class:                 4                            20                       61                      6

Plan type:
   PDPs                            100%                            80%                      69%                  100%
   MA–PDs                           75                             80                       59                   100
Note:     PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Occasionally plans list some
          generic drugs on brand tiers and vice versa. The population of MA–PDs described here excludes demonstration
          programs, 1876 cost plans, employer-group plans, and plans offered in U.S. territories.
          *Under CMS regulation, plans are required to list all drugs in the atypical antipsychotic category.

Source:   National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for
          January 1, 2006.


•   For the median enrollee, the number of drugs listed within a therapeutic class of their plan’s
    formulary can vary widely. That number depends on both regulatory coverage rules as well
    as the size of the class of drugs available within the marketplace.

•   In classes with fewer drugs available, plans typically list a larger share of them. Conversely,
    when there are more drugs available in a given class, plans are able to negotiate better
    prices by listing only selected drugs on their formulary, particularly when there are
    overlapping products.

•   In classes for which CMS requires that plans cover all or substantially all drugs, enrollees’
    plans predictably list a larger share of drugs.




                                       A Data Book: Healthcare spending and the Medicare program, June 2007                 177
Chart 11-16. Most enrollees are in Part D plans that target prior
             authorization to selected categories
                                                                 For the median enrollee, the percent of listed drugs
                                                                           subject to prior authorization,
                                                                      among plans ever using prior authorization
Therapeutic category                                                 PDPs                                           MA–PDs
All drugs                                                                7%                                            8%

Atypical antipsychotics*                                               33                                             20
Dyslipidemics                                                          15                                             17
Immune suppressants*                                                   86                                             86
Metabolic bone disease agents                                          17                                             17
Molecular target inhibitors*                                           50                                             50
Opioid analgesics                                                       9                                             10
Oral hypoglycemics                                                      5                                              8
Proton pump inhibitors                                                 50                                             67
Renin-angiotensins                                                      4                                              4
Reuptake inhibitors*                                                    5                                              5

Note:     PDP (prescription drug plan), MA–PD (Medicare Advantage–Prescription Drug [plan]). Atypical antipsychotics (antipsychotics,
          nonphenothiazines); dyslipidemics (anticholesterol agents); immune suppressants (includes rheumatoid arthritis agents);
          metabolic bone disease agents (bone-loss inhibitors); molecular target inhibitors (selected anticancer drugs); opioid
          analgesics (narcotic pain relievers); oral hypoglycemics (blood sugar level); proton pump inhibitors (stomach acid reducers);
          renin-angiotensins (selected hypertension drugs); reuptake inhibitors (selected anti-depressants). The population of PDPs
          described here excludes those offered in U.S. territories. The population of MA–PDs described here excludes demonstration
          programs, 1876 cost plans, employer-group plans, and plans offered in U.S. territories.
          *Plans are able to apply prior authorization to new-start enrollees—those not already taking a drug in these categories.

Source:   National Opinion Research Center/Georgetown University analysis for MedPAC of formularies submitted to CMS for January
          1, 2006.


•   Most Part D enrollees are in plans that apply utilization management tools to selected drugs. These
    tools include prior authorization (plans require preapproval before coverage), step therapy (enrollees
    must try specified drugs before moving to other drugs), and quantity limits (plans limit the number of
    doses of a particular drug covered in a given time period).

•   Plans use these tools for drugs that are expensive, potentially risky, subject to abuse, misuse, or
    experimental use, or to encourage use of lower-cost therapies.

•   All prescription drug plans (PDPs) and almost all Medicare Advantage–Prescription Drug plans (MA–
    PDs) (98 percent) use prior authorization for at least one drug on their formularies. The median
    enrollee is in a plan that applies prior authorization to 7 percent to 8 percent of the drugs on its
    formulary. Step therapy is less commonly used among Part D plans and those that use it do so for a
    smaller proportion of drugs.

•   In the class of proton pump inhibitors (PPIs), which have low-cost and over-the-counter drugs among
    the choices, the median enrollee is in a plan that typically applies prior authorization to half (PDPs)
    and two-thirds (MA–PDs) of its listed PPIs.

•   PDPs and MA–PDs that use prior authorization typically require it for most of the drugs in the immune
    suppressant category that includes expensive rheumatoid arthritis drugs. Plans are likely applying
    prior authorization restrictions in this category (and several other categories) to assist in determining
    whether the drugs should be covered under Part B instead of Part D.




178       Drugs
    Web links. Drugs

•    Chapters in several of MedPAC’s Reports to the Congress provide information on
     the Medicare Part D program, as does MedPAC’s Payment Basics series.

     http://www.medpac.gov/chapters/Jun07_Ch07.pdf
     http://www.medpac.gov/chapters/Mar07_Ch04.pdf
     http://www.medpac.gov/publications%5Ccongressional_reports%5CJun06_Ch07.pdf
     http://www.medpac.gov/publications%5Ccongressional_reports%5CJun06_Ch08.pdf
     http://www.medpac.gov/publications%5Ccongressional_reports%5CJune05_ch1.pdf
     http://www.medpac.gov/publications%5Ccongressional_reports%5CJune04_ch1.pdf
     http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_PartD.pdf

•    Analysis of Medicare spending on Part B drugs can be found in MedPAC’s January 2007
     and January 2006 reports to the Congress.

     http://www.medpac.gov/documents/Jan07_PartB_mandated_report.pdf
     http://www.medpac.gov/publications/congressional_reports/Jan06_Oncology_mandated_report.pdf


•    A Kaiser Family Foundation fact sheet, last updated in November 2006, provides information
     on the Medicare Part D benefit.

     http://www.kff.org/medicare/7044.cfm


•    A Kaiser Family Foundation analysis of formularies and other features of Medicare Part D plans.

     http://www.kff.org/medicare/7589.cfm


•    A Kaiser Family Foundation fact sheet on low-income assistance under the Medicare Part D
     benefit.

     http://www.kff.org/medicare/med062804oth.cfm


•    CMS information on Part D enrollment.

     http://www.cms.hhs.gov/PrescriptionDrugCovGenIn/02_EnrollmentData.asp#TopOfPage




                               A Data Book: Healthcare spending and the Medicare program, June 2007   179
        S E C T I O N




Other services
      Dialysis
      Hospice
Clinical laboratory
Chart 12-1. Number of dialysis facilities is growing and share of
            for-profit and freestanding dialysis providers is
            increasing

                                                                                                          Average annual
                                                        1996                      2006                    percent change

Total number of
 Dialysis facilities                                  2,721                     4,594                           5%
 Hemodialysis stations                               40,578                    80,383                           6

Mean number of
 Hemodialysis stations                                    15                         17                         1

Percent of all facilities:
 Nonchain                                                N/A                        23%                        N/A
 Affiliated with any chain                               N/A                        77                         N/A
 Affiliated with largest two chains                      N/A                        60                         N/A

    Hospital based                                        26%                       13                         –2
    Freestanding                                          74                        87                          6

    Rural                                                 23                        25                          6
    Urban                                                 77                        75                          5

    For profit                                            65                        79                          7
    Nonprofit                                             35                        21                         <1

Note:       N/A (not available). Nonprofit includes facilities designated as either nonprofit or government.

Source:     Compiled by MedPAC from the CMS facility survey file.



•     Between 1995 and 2006, the number of freestanding and for-profit facilities increased, while
      hospital-based and nonprofit facilities decreased. Freestanding facilities increased from
      74 percent to 87 percent of all facilities, and for-profit facilities increased from 65 percent to
      79 percent of all facilities.

•     Two national for-profit chains own about 60 percent of all facilities and 70 percent of all
      freestanding facilities.

•     Between 1995 and 2006, the proportion of facilities located in rural areas has remained
      relatively constant.

•     The number of facilities has increased 5 percent per year since 1995. The size of a facility
      has remained about the same, as evidenced by the mean number of hemodialysis stations
      per facility, which increased from 15 in 1995 to 17 in 2006.




                                           A Data Book: Healthcare spending and the Medicare program, June 2007            183
Chart 12-2. Medicare spending for outpatient dialysis services
            furnished by freestanding dialysis facilities,
            1996 and 2005
                              7

                                               Drugs
                                               Composite rate services
                              6
                                                                                                                       2.5

                              5
    Dollars (in billions)




                              4



                              3
                                                              1.0
                                                                                                                       4.4
                              2



                              1                               2.1



                              0
                                                             1996                                                      2005


Source:                           Compiled by MedPAC from the 1996 and 2004 institutional outpatient files from CMS.



•                           Between 1996 and 2005, Medicare spending for both dialysis treatments (for which
                            providers are paid a predetermined rate) and for injectable drugs administered during
                            treatments (for which providers are paid on a per unit basis) increased by 11 percent per
                            year.

•                           Two factors contributing to spending growth are the increasing size of the dialysis population
                            and the growing use of injectable drugs, such as erythropoietin, iron supplements, and
                            vitamin D analogues.

•                           The number of dialysis patients increased by 6 percent annually between 1996 and 2005.
                            This growth is linked to a number of factors, including improvements in survival and
                            increases in the number of people with diabetes, a risk factor for end-stage renal disease.

•                           Between 1996 and 2005, estimated spending for injectable drugs increased by 11 percent
                            annually; in contrast, spending for dialysis increased by 8 percent annually during this time
                            period.




184                            Other services
Chart 12-3. Dialysis facilities’ capacity increased between 1995
            and 2006
                          5,000                                                                                                100
                                                                                                           4,594               95
                          4,500                                                                                                90




                                                                                                                                     Hemodialysis stations (in thousands)
                                                                                                           80.4                85
                          4,000                                                                                                80
                                                                                                                               75
    Dialysis facilities




                          3,500                                                                                                70
                                                                                                                               65
                          3,000                                                                                                60
                                             2,721
                                                                                                                               55
                          2,500                                                                                                50

                                             40.6                                                                              45
                          2,000                                                                                                40
                                                                                                                               35
                          1,500                                                                                                30
                                             1995                                                          2006

Source:                    Compiled by MedPAC from the 1995 Facility Survey file from CMS and the 2006 Dialysis compare database from CMS.




•               Providers have met the demand for furnishing care to an increasing number of dialysis
                patients by opening new facilities. In 2006, a facility had about 17 hemodialysis stations.

•               Between 1995 and 2006, the total number of dialysis facilities grew by about 5 percent
                annually, and the number of hemodialysis stations grew by 7 percent annually.




                                                      A Data Book: Healthcare spending and the Medicare program, June 2007                                    185
Chart 12-4. Characteristics of dialysis patients, by type of
            facility, 2005
                                  60
                                                                                                                                 LDOs
                                                                                                                                 Not LDOs
                                  50                                                                                             Freestanding
                                                                                                                                 Hospital based
    Percent of patients treated




                                  40


                                  30


                                  20


                                  10


                                   0
                                       Elderly (age       Female          African      Hispanic     Medicaid               CHF        Diabetes
                                       75+ years)                        American
                                                                                Patient characteristics
Note:                              LDO (large dialysis organization), CHF (congestive heart failure).

Source:                            MedPAC analysis of dialysis claims files, denominator files, and the REMIS file from CMS.




•                    Across the different provider types, the proportion of patients who are elderly, female,
                     African American, Hispanic, dually eligible for Medicaid, have congestive heart failure, and
                     have diabetes does not differ by more than 1 percentage point between 2004 and 2005
                     (data not shown for 2004).

•                    This analysis suggests that providers have not changed the mix of patients they care for in
                     2004 and 2005, including the large dialysis organizations, which account for 60 percent of all
                     facilities.

•                    In 2004 and 2005, freestanding facilities were more likely than hospital-based facilities to
                     treat African Americans and dual eligibles. Freestanding facilities account for more than 85
                     percent of all dialysis facilities.




186                               Other services
Chart 12-5. The ESRD population is growing, and most ESRD
            patients undergo dialysis
                                           1994                             1999                              2004
                                 Patients                          Patients                           Patients
                               (thousands)         Percent       (thousands)        Percent         (thousands)   Percent


Total                               272.4          100%             377.3           100%              472.1       100%
Dialysis                            200.3           74              275.2             73              336.0          71
 In-center hemodialysis             164.6           60              245.0             65              307.3          65
 Home hemodialysis                    3.8            1                2.4              1                2.0          <1
 Peritoneal dialysis                 29.5           11               26.0              7               25.8           5
 Unknown                              2.4            1                1.8             <1                0.9          <1

Functioning graft and
  kidney transplants                  72.1          26              102.1             27              136.1          29


Note:     ESRD (end-stage renal disease). Totals may not equal sum of components due to rounding.

Source:   Compiled by MedPAC from the United States Renal Data System.



•   Persons with end-stage renal disease (ESRD) require either dialysis or a kidney transplant
    to maintain life. The total number of ESRD patients increased by 6 percent annually
    between 1994 and 2004.

•   In hemodialysis, a patient’s blood flows through a machine with a special filter that removes
    wastes and extra fluids. In peritoneal dialysis, the patient’s blood is cleaned by using the
    lining of his or her abdomen as a filter. Peritoneal dialysis is usually performed in a
    patient’s home.

•   Most ESRD patients undergo hemodialysis administered in dialysis facilities three times a
    week. Hemodialysis use is growing, while use of the two types of dialysis administered in
    patients’ homes—peritoneal dialysis and home hemodialysis—is declining.

•   Functioning graft patients are patients who have had a successful kidney transplant.
    Patients undergoing kidney transplant may receive either a living or a cadaveric kidney
    donation. In 2004, about 40 percent of the kidneys were from living donors and 60 percent
    were from cadaver donors.

•   Medicare is the primary payer for about 88 percent of all dialysis patients and for about half
    of all kidney transplant patients.




                                      A Data Book: Healthcare spending and the Medicare program, June 2007            187
Chart 12-6. Diabetics, the elderly, Asians, and Hispanics are
            among the fastest growing segments of the ESRD
            population

                                                        Percent                                             Annual
                                                         of total                                       percent change
                                                        in 2004                                          1996–2004

Total (n = 452,957)                                       100%                                               5%

Age
 0–19                                                        2                                               3
 20–44                                                      20                                               2
 45–64                                                      43                                               7
 65–74                                                      20                                               5
 75+                                                        16                                               8

Sex
 Male                                                       56                                               6
 Female                                                     44                                               5

Race/Ethnicity
 White                                                      61                                               5
 African American                                           32                                               5
 Native American                                             1                                               6
 Asian                                                       4                                               8
 Hispanic                                                   14                                               9
 Non-Hispanic                                               86                                               5

Underlying cause of ESRD
 Diabetes                                                   37                                               7
 Hypertension                                               24                                               5
 Glomerulonephritis                                         16                                               3
 Other causes                                               23                                               5

Note:     ESRD (end-stage renal disease). Totals may not equal sum of the components due to rounding.

Source:   Compiled by MedPAC from the United States Renal Data System.



•   Among end-stage renal disease (ESRD) patients, about 35 percent are over age 65. About
    60 percent are white.

•   Diabetes is the most common cause of renal failure.

•   The number of ESRD patients increased by 5 percent annually between 1996 and 2004.
    Among the fastest growing groups of patients are those who are over age 75 and those with
    diabetes as the cause of kidney failure.




188       Other services
Chart 12-7. Aggregate margins vary by type of freestanding
            dialysis facility, 2005

                                                  Percentage of spending
Type of facility                                  by freestanding facilities                                Aggregate margin

All facilities                                              100%                                                 8.4%

Urban                                                         83                                                 8.5
Rural                                                         17                                                 7.9

Large dialysis organizations                                  72                                                10.7
Non large dialysis organizations                              28                                                 2.6

Note:     LDO (Large dialysis organization). Margins include payments and costs for composite rate services and injectable drugs.
          Margins are adjusted to reflect MedPAC’s analysis of audited cost reports, which found that the ratio of allowable to
          reported cost per treatment for composite rate services is 95.5 percent.

Source:   Compiled by MedPAC from the 2001 and 2003 cost reports and the 2003 institutional outpatient file from CMS.


•    For 2005, the aggregate Medicare margin for composite rate services and injectable drugs
     was 8.4 percent.

•    Aggregate margins vary based on a facility’s affiliation with the large dialysis organizations
     (LDOs). Our analysis indicates that total cost per treatment was 6 percent lower for the
     LDOs than their counterparts after adjusting for patient case mix and other facility-level
     characteristics. Lower costs drive the higher margins.

•    Since 2003, aggregate margins for composite rate services and dialysis drugs have trended
     upward (from 2 percent in 2003 to 8.4 percent in 2005). Changes in total payment and cost
     per treatment can explain the direction. Between 2003 and 2005, the total payment per
     treatment grew by 4 percent each year because of increasing drug use and the legislated
     increase in the composite rate by 1.6 percent in 2005. The total cost per treatment rose by 3
     percent between 2003 and 2004 but fell by 5 percent in 2005.




                                       A Data Book: Healthcare spending and the Medicare program, June 2007                  189
Chart 12-8. Use of hospice among Medicare beneficiaries
            increased from 2000 to 2005
                                                                                              Average annual
                                                                                              percent change
                                          2000                        2005                      2000–2005

Beneficiaries in hospice                513,840                   869,201                           11.1%

Payment (in billions)                       $2.9                      $8.2                          23.0

Days of care (in millions)                  24.2                      55.4                          18.0

Note:     Data include Puerto Rico.

Source:   Beneficiaries, payment, and days of care from http://www.cms.hhs.gov/ProspMedicareFeeSvcPmtGen/downloads/
          FY05update_hospice_expenditures_and_units_of_care.pdf. Accessed May 1, 2007.



•   Medicare spending on hospice increased 182 percent to about $8.2 billion between 2000
    and 2005, an average annual increase of 23 percent. The CMS Office of the Actuary
    estimates that spending on hospice will grow to $9.8 billion by 2006.

•   With the increase in the share of decedents electing hospice before they die, the total
    number of hospice users has increased. Between 2000 and 2005, the number of hospice
    users increased nearly 70 percent, or about 11 percent per year, on average, and the total
    number of covered days increased by nearly 130 percent in that same period.




190       Other services
Chart 12-9.                Average length of stay in hospice by state, 2005


                    WA                                                                                                          ME
                                                        ND                                                                             VT
                                         MT                                                                                          NH
                 OR                                                   MN                                                              MA
                                                                                 WI                                  NY
                              ID                                                            MI                             CT         RI
                                                         SD
                                              WY                                                              PA          NJ
                                                                       IA                                                      DE
                                                          NE                                      OH                           MD
                                                                                           IN
                      NV           UT                                                 IL                 WV                    DC
                                               CO                                                               VA
               CA                                             KS            MO                   KY
                                                                                                              NC
                                                                                            TN
                                                                 OK                                        SC
                               AZ                                            AR
                                              NM                                                      GA
                                                                                      MS    AL

                                                         TX                  LA
                    AK
                                                                                                              FL



                                                         HI

                    Length of stay in days:
                           40-53            54-58        59-64              65-72               73-122


Source: MedPAC analysis of CMS data from Medicare Hospice Utilization by State, CY 2005.
        http://www.cms.hhs.gov/MedicareFeeforSvcPartsAB/Downloads/HOSPICE05.pdf. Accessed May 1, 2007



•   Mean hospice lengths of stay were 67 days in 2005, an increase of 2 days over 2004.

•   Mean lengths of stay in hospice varied widely by state, from a low of 40 days in Connecticut
    to a high of 122 days in Mississippi in 2005.

•   States in the South and the Southwest had the highest numbers of days per patient in 2005.

•   Wyoming had the largest increase in hospice length of stay, going from 61 days per patient
    in 2004, to 97 days per patient in 2005.

•   Oregon had the largest decrease in hospice length of stay, going from 85 days per patient in
    2004, to 59 days per patient in 2005.




                                        A Data Book: Healthcare spending and the Medicare program, June 2007                         191
Chart 12-10. The number of proprietary hospices has increased,
             while the number of nonprofits has declined
                          1600


                          1400


                          1200
    Number of providers




                          1000


                          800


                          600


                          400


                          200


                             0
                                    2000          2001     2002   2003      2004        2005        2006

                                    Voluntary        Government
                                    Proprietary      Other

Source: MedPAC analysis of 2000–2006 Provider of Services files from CMS.



•                There was a small increase in the total number of hospices participating in Medicare in
                 2006; in that year, 3,036 hospices participated, up 5 percent from 2005.

•                There have been substantial changes in the type of ownership of Medicare-participating
                 hospices over time.

•                Between 2000 and 2006, the number of voluntary (nonprofit) hospices declined by 9
                 percent. Over that same time, the number of proprietary (for-profit) hospices increased by
                 nearly 140 percent.

•                For-profit hospices now account for 48 percent of hospices participating in Medicare.




192                        Other services
    Chart 12-11. Growth in freestanding hospices continues
                      2,000
                                      Freestanding
                                                                                                                                                1,810
                      1,800           Home health agency
                                      Hospital based
                                                                                                                             1,660
                                      Skilled nursing facility
                      1,600

                                                                                                          1,390
                      1,400
Number of providers




                                                                                       1,180
                      1,200
                                                                    1,048
                      1,000                       975
                                908

                       800         749
                                                    699                672                                                      671
                                                                                          648                648                                   651
                       600             553               549                553                556                557                543                561


                       400


                       200
                                             20                20                 17                 16                 14                 13                 14
                         0
                                      2000              2001            2002               2003               2004               2005               2006


    Source:                   MedPAC analysis of CMS Provider of Services (POS) file for December 2006.



    •                  The number of hospices participating in Medicare grew by 36 percent between 2000 and
                       2006.

    •                  During this time, the number of provider-based hospices declined by 7 percent, with the
                       most precipitous drop in this category represented by hospices based in skilled nursing
                       facilities, which declined by 30 percent.

    •                  At the same time, the number of freestanding hospices doubled.




                                                           A Data Book: Healthcare spending and the Medicare program, June 2007                           193
Chart 12-12. Medicare spending for clinical laboratory
             services, in billions, FY 1996–2006
                             8
                                              Hospital based
                                              Independent and physician office                                                              6.9
                             7
                                                                                                                                 6.4
                                                                                                                        5.9
                             6
                                                                                                             5.4
                                                                                                  4.8                                       3.2
                             5
    Dollars (in billions)




                                                                                                                                 2.9
                                                                                        4.3                            2.7
                                      4.0
                                                  3.9                         3.9
                             4                            3.7      3.7                                       2.4
                                                                                                  2.2
                                     1.4                                                1.9
                                               1.5                            1.7
                             3                           1.5        1.6


                             2
                                                                                                                                 3.5        3.7
                                                                                                                       3.2
                                     2.7                                                          2.7        2.9
                                               2.4       2.2                  2.2       2.4
                             1                                      2.1


                             0
                                    1996      1997      1998       1999      2000      2001      2002       2003      2004      2005       2006



Note:                            Spending is for services paid under the clinical laboratory fee schedule. Hospital-based services are furnished to
                                 outpatients in labs owned or operated by hospitals. Total spending appears on top of each bar. The segments of each bar
                                 may not sum to the totals on top of each bar due to rounding.

Source:                          CMS, Office of the Actuary.




•                           Repeated reductions in Medicare’s payment rates for clinical laboratory services contributed
                            to declining spending during the 1990s for services furnished in independent and physician
                            office labs. Since 1999, however, growth in volume has caused Medicare expenditures for
                            all lab services to climb an average of 9 percent per year.

•                           In 2006, Medicare spent $6.9 billion (2 percent of total program spending) on clinical lab
                            services.

•                           Hospital-based labs’ share of total clinical lab spending increased from 34 percent in 1996 to
                            46 percent in 2006.




194                              Other services
Web links. Other services

Dialysis

•   More information on Medicare’s payment system for outpatient dialysis services can be found in
    MedPAC’s Payment Basics series.
    http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_
    dialysis.pdf

•   The US Renal Data System provides information about the incidence and prevalence of patients
    with renal disease, their demographic and clinical characteristics, and their spending patterns.
    http://www.usrds.org

•   The National Institute of Diabetes & Digestive & Kidney Diseases and the National Kidney
    Foundation provide health information about kidney disease for consumers.
    http://www.niddk.nih.gov/
    http://www.kidney.org/

•   CMS provides specific information about each dialysis facility.
    http://www.medicare.gov/Dialysis/Home.asp

•   Chapter 2C of the MedPAC March 2007 Report to the Congress provides information about
    the financial performance of dialysis facilities.
    http://www.medpac.gov/chapters/Mar07_Ch02C.pdf

•   MedPAC’s June 2005 Report to the Congress recommends changes to how Medicare pays
    for composite rate services and injectable drugs.
    http://www.medpac.gov/publications%5Ccongressional_reports%5CJune05_ch4.pdf

•   MedPAC’s October 2003 report describes how Medicare could modernize the outpatient
    dialysis payment system.
    http://www.medpac.gov/publications/congressional_reports/oct2003_Dialysis.pdf

•   MedPAC’s comment on revisions to payment policies under the physician fee schedule for
    calendar year 2004 includes changes in how to pay for services furnished by nephrologists.
    http://www.medpac.gov/publications/other_reports/100603_RevPhysFeeSched_CB_
    comment.pdf

•   MedPAC’s comment on revisions to payment policies under the physician fee schedule for
    calendar year 2005 includes changes in how to pay for dialysis drugs.
    http://www.medpac.gov/publications/other_reports/093005_physicianpayment_comment.pdf

•   MedPAC’s comment on revisions to payment policies under the physician fee schedule for
    calendar year 2006 on payment for composite rate services.
    http://www.medpac.gov/publications/other_reports/101106_PartB_comment_AW.pdf




                              A Data Book: Healthcare spending and the Medicare program, June 2007   195
Hospice

•   More information on Medicare’s payment system for hospice services can be found in
    MedPAC’s Payment Basics series.
    http://www.medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_
    hospice.pdf

•   Additional information and analysis related to the Medicare hospice benefit can be found in
    Chapter 3 of MedPAC’s June 2006 Report to the Congress, available at
    http://www.medpac.gov/publications/congressional_reports/Jun06_ch03.pdf

•   Chapter 6 of MedPAC’s June 2004 Report to the Congress reviews trends and policy issues for
    the Medicare hospice benefit.
    http://www.medpac.gov/publications/congressional_reports/June04_ch6.pdf

•   The MedPAC May 2002 Report to the Congress: Medicare beneficiaries’ access to hospice
    provides information on beneficiaries’ access to hospice care.
    http://www.medpac.gov/publications/congressional_reports/may2002_HospiceAccess.pdf

•   CMS maintains a variety of information related to the hospice benefit.
    http://www.cms.hhs.gov/center/hospice.asp


Clinical laboratory

•   More information on Medicare’s payment system for clinical lab services can be found in
    MedPAC’s Payment Basics series.
    http://medpac.gov/publications/other_reports/Sept06_MedPAC_Payment_Basics_clinical_lab.pdf

•   Information about CMS’s regulation of clinical laboratories, including the number and type of
    certified labs in the U.S., can be found on the CMS website.

    http://www.cms.hhs.gov/CLIA




196    Other services
601 New Jersey Avenue, NW • Suite 9000 • Washington, DC 20001
(202) 220-3700 • Fax: (202) 220-3759 • www.medpac.gov

								
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