4
The Medicare Program

In an effort to increase access to health care while reducing the financial burden of care for the aged, Congress enacted the Medicare program, Title XVIII of the Social Security Act, into law on July 30, 1965. Key aspects of this new program included free choice of provider by the beneficiary and no interference by the government with the routine practice of medicine. Although the initial Medicare program was intended solely to benefit elderly persons, the Social Security Amendments of 1972 (P.L. 92–603) expanded benefit coverage to include disabled persons receiving social security benefits and persons with end-stage renal disease (ESRD). The Medicare program is one of our more successful public programs providing broad health care coverage to a very vulnerable population; indeed, many elderly would have greater cost, access, and possibly even quality problems in the absence of such a program (Blumenthal et al., 1988). Table 4.1 summarizes major legislation related to the development of the Medicare program and the genesis of corresponding cost and utilization efforts.1

Before the enactment of Title XVIII, experts predicted that demand for and use of health care services would increase under a publicly funded program of health insurance (Klarman, 1966). The actual increases, however, were far greater than anticipated and resulted from many factors: (1) a rise in wage and price levels within the health care industry; (2) incentives within the payment system for use of hospitals and physicians; (3) increases in the supply of certain services (especially ancillary services); (4) changes in the organization of care (such as growth of intensive care units and long-term-care institutions); (5) development of new and costly technologies; (6) growth of third-party reimbursement systems that removed the patient from the direct cost of care; and (7) rising expectations in the nation with regard to health care services.



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Medicare: A Strategy for Quality Assurance - Volume I 4 The Medicare Program In an effort to increase access to health care while reducing the financial burden of care for the aged, Congress enacted the Medicare program, Title XVIII of the Social Security Act, into law on July 30, 1965. Key aspects of this new program included free choice of provider by the beneficiary and no interference by the government with the routine practice of medicine. Although the initial Medicare program was intended solely to benefit elderly persons, the Social Security Amendments of 1972 (P.L. 92–603) expanded benefit coverage to include disabled persons receiving social security benefits and persons with end-stage renal disease (ESRD). The Medicare program is one of our more successful public programs providing broad health care coverage to a very vulnerable population; indeed, many elderly would have greater cost, access, and possibly even quality problems in the absence of such a program (Blumenthal et al., 1988). Table 4.1 summarizes major legislation related to the development of the Medicare program and the genesis of corresponding cost and utilization efforts.1 Before the enactment of Title XVIII, experts predicted that demand for and use of health care services would increase under a publicly funded program of health insurance (Klarman, 1966). The actual increases, however, were far greater than anticipated and resulted from many factors: (1) a rise in wage and price levels within the health care industry; (2) incentives within the payment system for use of hospitals and physicians; (3) increases in the supply of certain services (especially ancillary services); (4) changes in the organization of care (such as growth of intensive care units and long-term-care institutions); (5) development of new and costly technologies; (6) growth of third-party reimbursement systems that removed the patient from the direct cost of care; and (7) rising expectations in the nation with regard to health care services.

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Medicare: A Strategy for Quality Assurance - Volume I The federal sector responded to the increasing costs of health care by attempting to develop programs to curb expenditures in all arenas of the health care system, with special attention on the Medicare program. The primary goals of such programs were to control duplication of services and the provision of unnecessary services and to reform payment methodologies. These included health planning efforts, the Certificate of Need program, and price freezes for physicians and hospitals as part of the Economic Stabilization Program in 1971 (Luft, 1985). The Social Security Amendments of 1972 mandated several other cost containment measures including the Professional Standards Review Organizations (PSROs), whose charges were to assure that Medicare services were provided in an efficient and cost-effective manner and to eliminate unnecessary hospital utilization. The PSRO program was not successful, however, in curbing spiraling use and costs (Lohr, 1985). In 1982, legislation was adopted that replaced the PSROs with Utilization and Quality Control Peer Review Organizations (PROs), whose emphasis was to include monitoring the quality, as well as utilization, of Medicare services. A series of steps up to 1983 led to the implementation of Medicare’s Prospective Payment System (PPS), which radically restructured hospital payments by introducing prospective payment on the basis of diagnosis-related groups (DRGs). STRUCTURE, ELIGIBILITY, AND BENEFIT COVERAGE OF THE MEDICARE PROGRAM The Medicare program was designed as a national, federally administered program with uniform eligibility and benefits. The program has two distinct parts: Part A, Hospital Insurance (HI) and Part B, Supplementary Medical Insurance (SMI). Hospital Insurance Medicare Part A (HI) provides benefits for inpatient hospital services, care rendered in a skilled nursing facility (SNF), and home health visits, subject to deductible and coinsurance limits. Persons age 65 and older who are eligible for Social Security cash benefits or payments from the Railroad Retirement System are automatically entitled to HI benefits, as are disabled persons eligible for Social Security or Railroad Retirement benefits for 24 months and ESRD patients. In addition, elderly people who are otherwise ineligible for HI benefits may enroll voluntarily by paying a monthly premium equal to the full actuarial cost of coverage (estimated to be $165 per month in 1990). The voluntary HI enrollee must also obtain SMI coverage.

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Medicare: A Strategy for Quality Assurance - Volume I TABLE 4.1 Major Legislation Relating to the Medicare Program Year Title and Description 1935 SOCIAL SECURITY ACT Extended the federal government’s role in underwriting health care for the elderly by providing monthly cash payments from federal funds for medical expenses. 1965 SOCIAL SECURITY AMENDMENTS Title XVIII, Medicare, established compulsory Hospital Insurance (Part A) and optional Supplementary Medical Insurance (Part B) for persons age 65 and older. Benefits for Part A are financed by a payroll tax through the Social Security System, and Part B benefits are financed through a monthly premium. 1972 SOCIAL SECURITY AMENDMENTS (P.L. 92–603) Extended Medicare benefits to the disabled and end-stage renal disease patients. Voluntary enrollment in Part A through a premium payment was made available to people age 65 and older otherwise not eligible for Part A. Established the Professional Standards Review Organization (PSRO) program to control health care costs and improve quality of care through utilization and quality monitoring. 1981 OMNIBUS BUDGET RECONCILIATION ACT (OBRA) (P.L. 97–35) Eliminated the carryover from the previous year of incurred expenses for meeting the Part B deductible and raised the deductible from $60 to $75 per year. Raised the Part A deductible and coinsurance rate. 1982 TAX EQUITY AND FISCAL RESPONSIBILITY ACT (TEFRA) (P.L. 97–248) Established a cost-per-case basis for reimbursement and placed a limit on the annual rate of increase in hospital revenues. Extended Medicare coverage to all federal employees who previously had not been eligible. Replaced the PSRO program with the Utilization and Quality Control Peer Review Organization (PRO) program for utilization and quality monitoring. 1983 SOCIAL SECURITY AMENDMENTS (P.L. 98–21) Established the Prospective Payment System (PPS) for reimbursement of hospital services. The hospital is paid a single price per discharge based on prices set prospectively for diagnosis-related groups (DRGs).

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Medicare: A Strategy for Quality Assurance - Volume I 1984 DEFICIT REDUCTION ACT (P.L. 98–369) Established PROs as the quality and utilization monitors for the Medicare reimbursement system (PPS and DRGs) established by the Social Security Amendments of 1983. Placed a freeze on Medicare payment levels for physician services. Introduced the concept of “participating physicians” to constrain the rate of growth of Part B expenditures. 1985 COMPREHENSIVE OMNIBUS BUDGET RECONCILIATION ACT (COBRA) (P.L. 99–272) Mandated 100 percent review of certain surgical procedures as a result of several studies on medical practice variation. 1986 OMNIBUS BUDGET RECONCILIATION ACT (OBRA) (P.L. 99–509) Extended PRO review beyond the inpatient setting to include review of ambulatory care, skilled nursing facilities, home health agencies, and health maintenance organizations and competitive medical plans. 1987 OMNIBUS BUDGET RECONCILIATION ACT (OBRA) (P.L. 100–203) Extended PRO contract cycles from two to three years, and allowed a one-time contract extension (for up to two years) for existing contracts to achieve more efficient renewals. Supplementary Medical Insurance (SMI) Enrollment in Medicare Part B (SMI) is voluntary and covers physician services, including visits in the home, office, and hospital. It also covers outpatient services rendered in hospitals and in rural health, community health, and renal dialysis centers, as well as physical and occupational therapy services. Beneficiaries pay a monthly premium for SMI coverage ($27.90 in 1989). During each calendar year, enrollees must exceed the deductible before being reimbursed for additional services. After the deductible is met, Medicare pays 80 percent of the allowable charges for covered services; the beneficiary is responsible for the remainder. Two terms characterize physician payment relationships: assignment and participation. Assignment means that a physician agrees to accept as payment-in-full the amount Medicare reimburses for the service (i.e., 80 percent of the allowable charge) plus the coinsurance for which the beneficiary is liable (20 percent). In this case, the physician receives payment for services directly from Medicare. If the physician does not accept assign-

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Medicare: A Strategy for Quality Assurance - Volume I ment, in addition to the standard 20-percent coinsurance of the allowable charge, the beneficiary is also responsible for the difference between the physician’s charge and the allowable charge. In this case, Medicare reimburses the beneficiary for covered services, who then makes payment directly to the physician. Physicians are either participating or nonparticipating in the Medicare program. Participating physicians voluntarily sign an agreement to accept assignment for all services provided to Medicare beneficiaries; nonparticipating physicians can accept assignment on a claim-by-claim basis. Size of the Medicare-Enrolled Population Today about 96 percent of the nation’s population over 65 years of age have Medicare coverage (CRS, 1988). In 1977, the enrolled population of approximately 23 million represented 10.4 percent of the U.S. population; in 1989, the enrolled population of slightly more than 29 million represented more than 12 percent of the population (Table 4.2). Approximately 99 percent of those people with HI coverage have also enrolled for SMI coverage. In addition to aged enrollees, the Medicare program covered approximately 144,000 ESRD patients and 3 million disabled persons in 1989 (Committee on Ways and Means, 1989). Alternatives to Fee-for-Service Health Care Under the Medicare Program There are several structural and financial alternatives to the traditional fee-for-service system for providing health care to the elderly population under the Medicare program. These alternatives, mainly prepaid health plans, take many forms. They are expected to grow in number and popularity although their effects on quality of care are as yet unknown, mainly because of the small size of their market share relative to fee-for-service. Health Maintenance Organizations and Competitive Medical Plans (HMOs and CMPs) Before the Social Security Amendments of 1972 (P.L. 92–603), prepaid health plans had little incentive to enroll Medicare patients because they were reimbursed for these members on the basis of the cost of services rendered. In 1972, Congress authorized risk contracts for HMOs in which the costs per beneficiary in prepaid plans were compared to the estimated costs per beneficiary in fee-for-service settings, known as the Average Adjusted Per Capita Charge or AAPCC (Langwell and Hadley, 1986). If the actual costs to the HMO per Medicare member were lower than the AAPCC,

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Medicare: A Strategy for Quality Assurance - Volume I TABLE 4.2 Medicare Eligible Enrollees and Beneficiaries, Age 65 and Older (in thousands) Year Eligible Enrollees Beneficiariesb Average Benefit per Enrollee Part A 1977 22,941 5,370 $575 1980 24,571 6,940 853 1986 27,831 6,370 1,558 1989a 29,423 6,740 1,727 1990a 29,966 6,950 1,866 Part B 1977 22,737 13,256 $220 1980 24,422 16,119 347 1986 27,607 21,119 799 1989a 29,204 23,604 1,184 1990a 29,758 24,208 1,389 aEstimated bBeneficiaries receiving reimbursed services. SOURCE: Committee on Ways and Means, 1989, citing data from HCFA, Division of Budget. the HMO could share in the savings up to 10 percent of the AAPCC. If actual costs were greater than the AAPCC, however, the HMO absorbed all the excess costs, with no maximums. Given this one-sided encouragement, the incentives to enroll Medicare beneficiaries in prepaid health plans were low. The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 (P.L. 97–248) changed the incentives to enroll Medicare beneficiaries in prepaid health plans by authorizing prospective reimbursement under risk contracts with HMOs and other organizations at a rate of 95 percent of the AAPCC. This allowed HMOs with costs below 95 percent of the AAPCC to use these savings to reduce copayments or enhance benefits. TEFRA regulations issued in 1985 also expanded the option of risk contracts beyond the traditional HMO setting to include CMPs. CMPs are federally certified organizations that do not meet the strict requirements applied to federally qualified HMOs but are still capable of providing serv-

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Medicare: A Strategy for Quality Assurance - Volume I ices to Medicare beneficiaries on a prepaid basis. In 1985, Medicare beneficiary enrollment in HMOs and CMPs reached 1.1 million, or almost 4 percent of all Medicare enrollees (Gornick et al., 1985). As of March 1989, one million Medicare beneficiaries were enrolled in 133 risk-contract HMOs (HCFA, 1989). Medicare Insured Groups Another means of financing health care for the elderly is the Medicare Insured Group (MIG). MIG demonstration projects were authorized in OBRA 1987 (P.L. 100–203) and allow risk contracting directly with sponsors, such as employers and unions, for health care coverage to elderly beneficiaries, usually retired employees. The MIG receives payment directly from the government based to a certain extent on the utilization experience of the group. The MIG can then contract with other health care providers including HMOs and CMPs to provide care for its enrollees. OBRA 1987 authorized up to $600 million each year for a maximum of three MIG projects (ProPAC, 1988). Two MIG projects are currently in the developmental phase, one with the American Life Insurance Corporation and another with Southern California Edison. ADMINISTRATION AND FINANCING OF THE MEDICARE PROGRAM Administration Responsibility for the Medicare program has been delegated from the Secretary of the Department of Health and Human Services (DHHS) to the Administrator of the Health Care Financing Administration (HCFA). Operational activities of the program, including determination of reasonable costs for covered benefits, claims review, monitoring, and payment are performed by fiscal intermediaries (FIs) for Part A services and carriers for Part B services. National, state, public, or private agencies serve as FIs between hospitals and the federal government. Insurance organizations, contracted by the Secretary of DHHS, serve as carriers. Administrative costs of the FIs and carriers are estimated to be approximately 2.5 percent of Medicare outlays (Committee on Ways and Means, 1989). The Medicare Statistical System (MSS) (see Appendix B), which is part of the Medicare/Medicaid Decision Support System, provides data for analyzing and evaluating the program’s effectiveness (HCFA, 1988). It also enables HCFA to conduct a wide variety of research based on the use and reimbursement of Medicare services.

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Medicare: A Strategy for Quality Assurance - Volume I TABLE 4.3 Sources of Revenue for the Hospital Insurance and Supplemental Medical Insurance Trust Funds: Selected Years       Fiscal Year Source of Revenuea 1975 1980 1985 1989 1990b Hospital Insurance (HI)   Payroll tax 11,291 23,244 46,490 64,733 68,776     Transfers from railroad retirement 132 244 371 337 319   Reimbursement for uninsured persons 481 697 766 515 411   Premiums from voluntary enrollees 6 17 38 55 58   Payments for military wage credits 48 141 86 94 95   Interest income 609 1,072 3,182 6,404 7,742   Subtotal HI 12,567 25,415 50,933 72,138 77,401 Supplementary Medical Insurance (SMI)   Premiums 1,887 2,928 5,524 10,341 11,095   General revenues 2,330 6,932 17,898 31,137 34,242   Interest 105 415 1,155 735 908   SMI catastrophic premiums       1,165     Subtotal SMI 4,322 10,275 24,577 43,378 46,245 Grand total 16,889 35,690 75,510 115,516 123,646 aIn millions of dollars bEstimated NOTE: Columns may not sum to subtotals or total due to rounding. SOURCE: Committee on Ways and Means, 1989. Financing As previously mentioned, Medicare Part A (HI) is financed mainly through a payroll tax on earnings covered under the Social Security Act (Table 4.3). In 1989, the tax rate was 1.45 percent of earnings up to $48,000 per employee (Committee on Ways and Means, 1989). Other sources of revenue include transfers from the Railroad Retirement account, general revenues

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Medicare: A Strategy for Quality Assurance - Volume I for uninsured persons and military wage credits, premiums from voluntary enrollees, and interest on investments. These monies are deposited into the HI Trust Fund from which reimbursement for benefits and administrative expenses is made. Medicare Part B (SMI) funds come mainly from premiums paid by or on behalf of SMI enrollees as well as funds provided by the federal government (Table 4.3). These premiums are based on projected program costs for the coming year and at present are intended to cover 25 percent of the expected outpatient outlays. Other sources of Part B revenues include general revenues and interest on investments. These monies are deposited into the SMI Trust Fund. Beneficiaries have always been required to share in the costs of the program through deductibles and coinsurance. The Part A inpatient deductible, equal to the average cost of one day of inpatient care, has increased from $40 at the start of the Medicare program in 1966 to $560 in 1988;2 it is projected to rise to $684 by 1993 (Committee on Ways and Means, 1989). The Part B deductible and premium have also increased since the beginning of the program. For instance, monthly premiums for Medicare Part B increased from $3.00 in 1966 to $24.80 in 1988, or about 725 percent. Approximately 65 percent of Medicare enrollees have private insurance (usually referred to as Medigap insurance) to cover Medicare deductible and copayment costs, and another 15 percent of the aged are dually eligible for Medicare and Medicaid coverage (CRS, 1988). For those enrollees with Medigap coverage, out-of-pocket costs (namely, copayments and deductibles) are lower, but total insurance premium costs are higher compared to those without Medigap coverage. EXPENDITURES OF THE MEDICARE PROGRAM National Health Care Expenditures In 1965, health care spending by the total U.S. population amounted to almost $42 billion, or 5.9 percent of Gross National Product (GNP) (Table 4.4). By contrast, in 1987 national spending for health care amounted to more than $500 billion or 11.1 percent of GNP (Letsch et al., 1988). Health care spending will total an estimated $647 billion in 1990 and $1.5 trillion in the year 2000, more than 12 percent and 15 percent of GNP, respectively (HCFA, 1987a). Spending for health care continues to escalate despite recent cost-containment efforts. For example, health care spending increased 8.1 percent from 1985 to 1986, and 8.4 percent from 1986 to 1987 (ProPAC, 1988). Of the $500 billion spent on health care in 1987, almost 89 percent, or $443 billion, was for personal health care (Table 4.4). These are total

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Medicare: A Strategy for Quality Assurance - Volume I TABLE 4.4 National Health Expenditures: Selected Years Category of Expenditurea 1965 1970 1980 1985 1987 Health services and supplies $38.4 $69.6 $236.2 $403.4 $483.2   Personal health care 35.9 65.4 219.7 368.3 442.6     Hospital care 14.0 28.0 101.6 166.7 194.7     Physician services 8.5 14.3 46.8 81.4 102.7     Drugs and medical supplies 5.2 8.0 18.8 28.5 34.0     Nursing home care 2.1 4.7 20.4 34.7 40.6     Otherb 6.1 10.3 32.1 57.1 70.5   Program administration and cost of health insurance 1.7 2.8 9.2 22.6 25.9   Government public health activities 0.8 1.4 7.3 12.5 14.7 Research and construction of medical facilities 3.5 5.4 11.9 15.6 17.1 Total 41.9 75.0 248.1 419.0 500.3 aIn billions of dollars bIncludes: dental services, other professional services, eyeglasses and appliances, and other health services. NOTE: Columns may not sum to subtotals or total due to rounding. SOURCES: HCFA, 1987a; Letsch et al., 1988. health care expenditures minus the costs of research, government public-health activities, and administration; components include hospital care, physician services, nursing home care, dental services, drugs and medical supplies, and other personal health care services. Although persons age 65 and older make up 12 percent of the total population, they account for more than 36 percent (or $162 billion) of all personal health care expenditures. Medicare Expenditures Total Medicare expenditures reached almost $88 billion in 1988 (Table 4.5)—up from almost $3.4 billion in 1967. They are estimated to be nearly $114 billion in 1990. Medicare is one of the fastest-growing components of the federal budget, rising from 3.9 percent in 1975 to 7.6 percent of the total budget in 1989 (CRS, 1989). By themselves, Medicare expenditures represented 1.8 percent of GNP in 1989. From 1978 to 1983, total Medicare spending has increased 128 percent from over $25 billion to almost $57 billion (Table 4.5). Between 1983 (when PPS was enacted) and 1988, however, the percentage increase of

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Medicare: A Strategy for Quality Assurance - Volume I TABLE 4.5 Medicare Benefit Payments and Percent Change, 1978–1988   Part A Part B   Year Dollarsa Percent Increaseb Dollarsa Percent Increaseb Total Dollars 1967 2,597 — 799 — 3,396 1978 17,862 17.5 7,356 16.0 25,218 1979 20,343 13.9 8,814 19.8 29,157 1980 24,288 19.4 10,737 21.8 35,025 1981 29,260 20.5 13,228 23.2 42,488 1982 34,864 19.2 15,560 17.6 50,424 1983 38,624 10.8 18,311 17.7 56,935 1984 42,108 9.0 20,372 11.3 62,480 1985 48,654 15.5 22,730 11.6 71,384 1986 49,685 2.1 26,217 15.3 75,902 1987 50,803 2.3 30,837 17.6 81,640 1988 52,730 3.8 34,947 13.3 87,677 CBOc estimates 1989 58,777 11.5 39,753 13.8 98,530 1990 66,266 12.7 47,671 19.9 113,980 aIn millions bPercent increase over prior year cCongressional Budget Office SOURCE: Committee on Ways and Means, 1989 total Medicare expenditures was only about 54 percent, from $57 billion to almost $88 billion. An examination of the 10 year period from 1978 to 1988 shows fairly constant percentage increases for Parts A and B in the earlier part of the decade (Table 4.5). However, during the later part of that 10 year period, trends in expenditures for Parts A and B have been quite different. Especially since 1985, the rate of growth for Part B expenditures has been far greater than that for Part A (Guterman et al., 1988; ProPAC, 1988; Committee on Ways and Means, 1989), and the annual percentage increases in Part B outlays have continued nearly unabated. By contrast, the rate of growth for Part A expenditures slowed significantly between 1983 and 1987, although recent trends indicate that Part A costs are again beginning to rise.

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Medicare: A Strategy for Quality Assurance - Volume I age 65 were dropping, but admissions for patients over age 65 were still rising; the decline in admissions for the elderly did not occur until after the implementation of PPS. During the first three years of PPS, admissions per Medicare enrollee fell by 15.9 percent (Guterman et al., 1988). This decline was not an anticipated result of PPS; instead, admissions had been expected to increase either generally or in certain types because of the limits on reimbursement from each individual admission. The substitution of outpatient care was a response to changes in medical technology, higher payments for certain outpatient services than for inpatient services, and programs to deny authorization for hospitalization for certain procedures. Finally, an examination of the sources and uses of total health care dollars reveals a contrast between those of the total population and the elderly population. For instance, in 1987, for the total population, private sources paid for 48 percent of hospital care, 69 percent of physician services, and 51 percent of nursing home care; public sources paid for the remainder in each category. As seen in Figure 4.1 by contrast, public sources paid for the majority of hospital and physician services for the elderly population. For example, public sources (both Medicare and Medicaid) paid for approximately 85 percent of hospital care, 64 percent of physician services, and 40 percent of nursing home care (Waldo et al., 1989). THE PROSPECTIVE PAYMENT SYSTEM (PPS) The PPS, established by the Social Security Amendments of 1983 (P.L. 98–21), was probably the most revolutionary change in the method of financing health care since the beginning of the Medicare program. It changed the economic incentives that motivate hospital behavior, moving from a cost-based retrospective reimbursement system for the hospital to a diagnosis-based prospective reimbursement system. The PPS went into effect for most acute hospitals beginning October 1, 1983, and involved a three-year transition period to phase in a national payment rate for hospital care based on DRGs. Payment rates are determined by classifying the patient at discharge into one of nearly 500 DRGs. A weight is assigned to each DRG, based on data that reflect the relative resource consumption of the DRG. Actual payment for each DRG is determined by multiplying a standardized payment rate by the DRG weight with adjustments for urban and rural cost differentials, area wage rates, and institutions with certain characteristics such as sole community hospitals, teaching hospitals, and disproportionate share hospitals. This pricing system applies to all inpatient acute care, with adjustments for extremely long lengths of stay and extremely high costs per case. Institutions currently exempt from the PPS system include psychiatric, children’s, long-term-care, and rehabilitation hospitals.

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Medicare: A Strategy for Quality Assurance - Volume I FIGURE 4.1 Personal Health Care Expenditures For People Age 65+, by Source of Funds and Type of Service, 1987 PPS was developed in an effort to contain rising health care costs while maintaining access to quality care and providing incentives for efficiency, flexibility, innovation, planning, and control (ProPAC, 1989). Before PPS, there was general concern about the effects this new payment system might have on the medical-care delivery system and on the quality of care. These concerns included the possibility of shorter lengths of stay, which was viewed at the time as having negative consequences for the elderly population, increases in admissions of certain types (those cases expected to be at or below the DRG cost), readmissions for medically unrelated problems that could have been handled in the first admission, and fewer support staff per patient (Lohr et al., 1985). To date, no concrete evidence has been amassed to document that quality of care for Medicare patients has declined as a result of PPS (HCFA, 1987; Guterman et al., 1988; ProPAC, 1988). Medicare-Related Commissions Concerned about the need to monitor and update the PPS system, Congress established the Prospective Payment Assessment Commission (ProPAC) in 1983. The 17 members of ProPAC are appointed by the director of the congressional Office of Technology Assessment (OTA) for a 3-year term. The Commission has two major responsibilities; first, it recommends annual

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Medicare: A Strategy for Quality Assurance - Volume I changes in the hospital payment rates to the Secretary of DHHS and second, it recommends changes in the DRG classifications. It has discharged this responsibility through regular Commission meetings, which are generally open to the public, and detailed annual reports and technical documents. The statute limits the number of staff to 26, and the annual budget for the ProPAC activities approaches $4 million. Physician payment under Medicare has come under close scrutiny in recent years. Concern is being heard among physicians, beneficiaries, and government officials about the tremendous growth of physician expenditures over the last several years, the increasing fiscal burden on beneficiaries and taxpayers, and diminished access to quality care for Medicare enrollees who, under the constraints of limited financial resources, avoid seeking services that may not be reimbursed. As a result, Congress established the Physician Payment Review Commission (PPRC) in 1986 (P.L. 99–272) to advise on reforms to the physician payment system under the Medicare program (PPRC, 1988, 1989). The PPRC is modeled on ProPAC and members include physicians, other health professionals, experts from other disciplines, and representatives of consumers and the elderly. This Commission has four major roles (PPRC, 1988). First, it provides advice to the Secretary of DHHS. Second, it seeks the views of physicians, beneficiaries, and others concerning its recommendations. The conduct of analyses on which to base policy decisions is the third role of the Commission. Finally, it undertakes the work necessary to implement the recommended policy changes. PPRC has initiated several research projects to develop a Medicare fee schedule for physician payment based on the relative value of resources used by the physicians to produce the services rendered to the patient (see Hsiao et al., 1988). It has also called for practice guidelines to help physicians understand better when services, especially procedures, are appropriate and when they are not. QUALITY ASSURANCE IN MEDICARE The Utilization and Quality Control Peer Review Organization Program (PRO) In addition to managing Medicare outlays, HCFA is charged with ensuring the quality of care rendered to Medicare beneficiaries. Thus, the PRO program, implemented as part of TEFRA 1982 (P.L. 97–248) and administered by HCFA, is intended to ensure quality of care within the Medicare program while reducing unnecessary and inappropriate utilization of services covered by Medicare. (Refer to Chapter 6 and Volume II, Chapter 8 for a broader description of the PRO program.)

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Medicare: A Strategy for Quality Assurance - Volume I Conditions of Participation The oldest form of quality assurance for Medicare is based on “structural” properties of organizations wishing to be eligible for reimbursement for services rendered to Medicare enrollees. Specifically, such organizations must meet certain “Medicare Conditions of Participation.” Hospitals can meet these conditions by being accredited mainly by the Joint Commission on Accreditation of Healthcare Organizations (and hence be accorded “deemed status”) or by being certified by state agencies. (Refer to Chapter 5 and Volume II, Chapter 7 for a broader discussion of the Medicare Conditions of Participation.) Utilization Management Another outgrowth of cost-containment pressure is the development of utilization management. This refers to a set of tools designed to monitor both the appropriateness of a given treatment and the treatment site to control unnecessary use of health care services by prior review and authorization for services (especially procedures and hospital admission). Integrating utilization management with other strategies for balancing cost, quality, and access may improve the effectiveness and efficiency of the health care system as a whole (Gray and Field, 1989). The private sector has been more aggressive about implementing utilization management into health care plans for the nonelderly than the government has been with respect to Medicare and the elderly, although this is changing as government decision makers look to the private sector for ideas and models to help shape Medicare policy (PPRC, 1988). SUMMARY Central to any discussion of national health policy in general, or the Medicare program in particular, are the issues of cost, access, and quality. Of major concern to the public and to policymakers are the rising costs of health care and the rising expenditures of the Medicare program, at a rate well beyond that for general goods and services. High-quality health care costs money. What has not been determined, however, is whether allocating additional amounts of money to the health care system necessarily guarantees better quality of care or improved health. Similarly, it is not known whether providing fewer, or different, resources in the health care system necessarily means poorer quality and worse health outcomes. These issues have special significance for Medicare in light of the revolution that has occurred in the organization and financing of health services

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Medicare: A Strategy for Quality Assurance - Volume I in the last decade. Major shifts have occurred in the settings in which care is delivered. Payment modes have changed for hospital services and are expected to change for physician services. New, capitated alternatives to fee-for-service care are emerging. We do not know, and may never know, the full impact of these and other changes on the quality of health care. The basic purpose of this study has been to develop a quality assurance program, and a strategy for implementing that program, that will permit rapid identification of any threats to the quality of care for the elderly, and, indeed, will be able continuously to improve the quality of that care. NOTES 1.   Appendix A briefly describes the Medicare Catastrophic Coverage Act of 1988 (MCCA) (P.L. 100–360), which was enacted in July of that year and represented the most significant expansion of Medicare benefits since the inception of the program in 1965. The MCCA was repealed in November 1989 as a result of pressure from the elderly concerning the financing of the new benefits. 2.   By comparison, the Consumer Price Index, a general measure of inflation, has increased from a base of 100 in 1967 to 340.4 in 1987. Similarly, the Medical Care Price Index rose from 100 in 1967 to 462.2 in 1987 (NCHS, 1989). REFERENCES Blumenthal, D., Schlesinger, M., and Drumheller, P.B. Renewing the Promise: Medicare and Its Reform. New York: Oxford University Press, 1988. Christensen, S. and Kasten, M. Covering Catastrophic Expenses Under Medicare. Health Affairs 7:79–93, Winter 1988. Committee on Ways and Means, U.S. Congress, House of Representatives. Background Material on Programs Within the Jurisdiction of the Committee on Ways and Means. Washington, D.C.: U.S. Government Printing Office, March 1989. CRS (Congressional Research Service, U.S. Library of Congress). Catastrophic Health Insurance: Medicare. CRS IB-87–106. Washington, D.C.: U.S. Government Printing Office, June 1988. CRS. Medicare: Its Use, Funding, and Economic Dimensions. 89–143 EPW. Washington, D.C.: U.S. Government Printing Office, March 1989. Division of National Cost Estimates, Office of the Actuary, Health Care Financing Administration. National Health Expenditures, 1986–2000. Health Care Financing Review 8:1–36, Summer 1987. GAO (General Accounting Office). Medicare Catastrophic Act. Options for Changing Financing and Benefits. GAO/HRD-89–156. Washington, D.C.: General Accounting Office, September 1989. Gornick, M., Greenberg, J.N., Eggers, P.W., et al. Twenty Years of Medicare and Medicaid: Covered Populations, Use of Benefits, and Program Expenditures. Health Care Financing Review (Annual Supplement): 13–58, 1985.

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Medicare: A Strategy for Quality Assurance - Volume I Gray, B.H. and Field, M.J., eds. Controlling Costs and Changing Patient Care? The Role of Utilization Management. Washington, D.C.: National Academy Press, 1989. Guterman, S., Eggers, P.W., Riley, G., et al. The First Three Years of Medicare Prospective Payment: An Overview. Health Care Financing Review 9:76–77, Spring 1988. HCFA (Health Care Financing Administration). Office of Research and Demonstrations. Impact of the Medicare Hospital Prospective Payment System, 1985 Annual Report to Congress. HCFA-03251. Washington, D.C.: U.S. Government Printing Office, August 1987. HCFA. Bureau of Data Management and Strategy. Medicare Statistical Files Manual. HCFA Publication No. 03272. Baltimore, Md.: U.S. Department of Health and Human Services, Health Care Financing Administration, July 1988. HCFA. Enrollment in TEFRA Risk HMOs/CMPs. Unpublished monthly compila-tions, March 1989. Hsiao, W.C., Braun, P., Yntema, D., et al. Estimating Physicians’ Work for a Resource-Based Relative Value Scale. New England Journal of Medicine 319:835–841, 1988. Klarman, H. Policies and Local Planning for Health Services. Milbank Memorial Fund Quarterly 54:1–28, Winter 1966. Langwell, K.M. and Hadley, J.P. Capitation and the Medicare Program: History, Issues, and Evidence. Health Care Financing Review (Annual Supplement):9–20, 1986. Letsch, S.W., Levit, K.R., and Waldo, D.R. National Health Expenditures: 1987. Health Care Financing Review 10:109–122, Winter 1988. Lohr, K.N. Peer Review Organizations: Quality Assurance in Medicare. P-7125. Santa Monica, Calif.: The RAND Corporation, July 1985. Lohr, K.N., Brook, R.H., Goldberg, G.A., et al. Impact of Medicare Prospective Payment on the Quality of Medical Care. A Research Agenda. R-3242-HCFA. Santa Monica, Calif.: The RAND Corporation, March 1985. Luft, H.S. Competition and Regulation. Medical Care 23:383–400, 1985. NCHS (National Center For Health Statistics). Health United States, 1988. DHHS Pub No. (PHS) 89–1232. Public Health Service. Washington, D.C.: U.S. Government Printing Office, March 1989. PPRC (Physician Payment Review Commission). Annual Report to Congress. Washington, D.C.: Physician Payment Review Commission, 1988. PPRC. Annual Report to Congress. Washington, D.C.: Physician Payment Review Commission, 1989. ProPAC (Prospective Payment Assessment Commission). Medicare Prospective Payment System and the American Health Care System: Report to Congress. Washington, D.C.: Prospective Payment Assessment Commission, June 1988. ProPAC. Report and Recommendations to the Secretary, U.S. Department of Health and Human Services. Washington, D.C.: Prospective Payment Assessment Commission, March 1, 1989.

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Medicare: A Strategy for Quality Assurance - Volume I APPENDIX A THE MEDICARE CATASTROPHIC COVERAGE ACT OF 1988 Despite concerns with escalating Medicare costs and utilization extending over nearly two decades, Congress enacted The Medicare Catastrophic Coverage Act of 1988 (MCCA) (P.L. 100–360) in July of that year. This Act substantially increased protection for beneficiaries who incur large health care expenses by limiting the amount of out-of-pocket costs for covered services. It was the largest benefit expansion in the history of the program. It also significantly affected Medicaid coverage for low-income elderly, disabled persons, pregnant women, and children. However, 16 months after its passage, Congress repealed all the Medicare provisions of the Act. It did so in response to considerable dissent among the elderly and lobbying efforts on their behalf concerning the increased premiums (an income-related surtax) they faced to finance these expanded benefits. The Medicaid benefits are the only provisions remaining from the original legislation. Benefits of the Medicare Catastrophic Coverage Act The MCCA changed the benefit and copayment levels for both parts of the program (Part A, hospital insurance, and Part B, supplementary medical insurance) (refer to Table A.1) and added a third distinct component known as catastrophic drug insurance (GDI). Provisions of the law became effective on January 1, 1989 when Part A benefits began, and implementation was to extend through 1993 when the prescription drug benefits and Medicaid benefits were to be completely phased-in. Financing As described in Chapter 4, Part A (Hospital Insurance) of the Medicare program is funded primarily as social insurance through a payroll tax levied equally on employers and employees (that is, people pay into the system while they are working and become eligible for benefits when they retire or become disabled). Part B (Supplementary Medical Insurance) is funded partially through premiums paid by the beneficiaries (25 percent) with the remainder (75 percent) being funded by the federal government. The MCCA included three new premiums (Committee on Ways and Means, 1989; GAO, 1989). The first was to be paid by all beneficiaries and was referred to as the catastrophic coverage premium. This premium was $4.00 per month in 1989 and was expected to increase to $7.18 per month in 1993. The second, referred to as the prescription drug premium, was to be required of all beneficiaries upon complete phase-in of the program in 1993.

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Medicare: A Strategy for Quality Assurance - Volume I TABLE A.1 Comparison of Medicare Benefit Structure Before and After Implementation of the Medicare Catastrophic Coverage Act of 1988 Before Catastrophic Coverage After Catastrophic Coverage HOSPITAL INSURANCE (PART A) Coverage   Hospital inpatient care Short-term skilled nursing care Intermittent home health care Hospice care for terminally ill Same, with changes noted below Limits   Hospital stays limited to 90 days per benefit period with lifetime reserve of 60 days No limit on covered inpatient days Skilled nursing facility stays limited to 100 days per benefit period. Three-day prior hospitalization required   Skilled nursing facility limits changed to 150 days per year, no prior hospitalization required Consecutive days of home health care limited to 21   Consecutive days of home health care limited to 38 Hospice limit of 210 days   Hospice benefits extended beyond 210 days with physician certification of terminal illness Deductibles   Inpatient deductible for first stay in each benefit period Deductible for first stay each year Blood deductible up to three units each benefit period   Blood deductible up to three units each year Coinsurance   Hospital coinsurance required for days 61 to 90 (25% of deductible) and lifetime reserve days (50% of deductible) No hospital coinsurance SNF coinsurance for days 21 to 100 (12.5%) SNF coinsurance for days 1 to 8 each year (20% of daily cost) SUPPLEMENTARY MEDICAL INSURANCE (PART B) Coverage   Physician’s services Hospital outpatient department Ambulatory surgicenters Laboratory services Supplementary Medical Insurance (SMI) program expanded to cover screening mammography and respite care

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Medicare: A Strategy for Quality Assurance - Volume I Before Catastrophic Coverage After Catastrophic Coverage Intermittent home health care New Part B drug program introduced to cover prescription drugs, insulin, and drugs for transplant patients Limits   Preventive services generally not covered Reimbursement limit of $1,100 per year for outpatient psychiatric services Respite care limited to 80 hours per year and available only to those who exceed SMI copayment cap or drug deductible in the previous 12 months Deductibles   Annual SMI deductible of $75 Same, plus separate drug deductible set to affect 16.8% of enrollees Coinsurance   Coinsurance of 20% of reasonable charges above deductible amount (50% for outpatient psychiatry) Same, subject to SMI copayment cap Copayment Cap   No copayment cap SMI copayment cap set to affect 7% of enrollees No drug copayment cap   SOURCE: Christensen and Kasten, 1988. The premium was to be $1.94 per month in 1991, increasing to $3.02 per month in 1993. The third new premium was related to beneficiary income and was referred to as the supplemental Medicare premium. The amount of this premium depended on federal tax liability; those beneficiaries with less than $150 of tax liability in a year would pay no supplemental premium. An estimated 40 percent of the beneficiaries would be required to pay the premium in 1989. The maximum supplemental premium in 1989 was $800 and was slated to increase to $1,050 in 1993. Repeal of Catastrophic Coverage One title of The Deficit Reduction Act of 1989, The Medicare Catastrophic Coverage Reform Amendments of 1989, repealed all of the benefits provided by the MCCA except the provisions related to the Medicaid

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Medicare: A Strategy for Quality Assurance - Volume I program. The repealed benefits include: (1) unlimited hospital coverage after payment of the annual deductible; (2) the out-of-pocket cap on expenses under Part B; (3) coverage of outpatient prescription drugs; (4) expanded coverage of home health, hospice, and skilled nursing care as well as the respite benefit; and (5) coverage for screening mammography. APPENDIX B THE MEDICARE DECISION SUPPORT SYSTEM HCFA develops its “basic records groups” of the Medicare/Medicaid Decision Support System (M/MDSS) from several different sources including the Social Security Administration, insurance claims, and records of providers eligible for Medicare reimbursement. The Medicare Statistical System (MSS), which is part of the M/MDSS, has as its main objective the provision of data necessary to measure and evaluate the effectiveness of the Medicare program and to improve the decision-making process. Extensive, systematic, and continuous information about the amount and kind of hospital and medical care services used by beneficiaries and the related costs of such services are derived from the benefit payment operation. The M/MDSS has five basic record groups. First, the Health Insurance Master File (HIM) contains demographic information (such as name, sex, date of birth and death, geographic location) on the entire Medicare enrolled population—approximately 29 million elderly and 3 million disabled. This file also includes the dates of enrollment in HMOs and state buy-in programs. Second, the Provider of Service Record (POS) contains information on all institutional Medicare providers such as hospitals, skilled nursing facilities (SNFs), home health agencies, independent laboratories, ambulatory surgery centers, and other Medicare providers. Each is assigned a unique provider number. Approximately 6,700 hospitals, 6,100 SNFs, 5,200 home health agencies, 3,900 independent laboratories, and 1,600 other types of facilities are included in this file. Third, the Utilization Record contains Medicare Part A (Hospital Insurance) and B (Supplementary Medical Insurance) billing information including days of care, diagnoses, procedures, physician visits, charges, and payments. Approximately 11 million inpatient hospital, 800,000 SNF, 42 million outpatient, 5 million home health agency, and 360 million physician and supplier payment records are processed annually. Fourth, Provider Cost Report Records contain data from institutional providers about costs, accounting information, and general provider characteristics. Fifth, Special Program Data are collected on specific programs within Medicare (e.g., end-stage renal disease). Within the basic records groups are four major record files. First, the

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Medicare: A Strategy for Quality Assurance - Volume I Medicare Provider Analysis and Review (MEDPAR) file includes information on 100 percent of Part A inpatient discharges (1986 to present). This file contains person-level data with unique identifiers (to allow linkage with other files), demographic data, clinical data, and information on days of care, charges, and provider of service. The diagnoses and procedures in this file are coded with ICD-9-CM codes (International Classification of Diseases, Ninth Revision, Clinical Modification). The MEDPAR file contains approximately 10 million records per year and is updated quarterly. Second, the Medicare Automated Data Retrieval System (MADRS) contains 100 percent of Part A and B files, linked together. This file also contains person-level data with unique identifiers, demographic data, information on all institutional services, Part B payment records (summary level only), and limited medical information. MADRS is triggered by the inpatient admission, contains 250 million records, and is updated monthly. Third, the Health Insurance Master Accretion (HIMA) contains 100 percent information on all Medicare enrollees (approximately 32 million). This file contains person-level data with unique identifiers, demographic data, name and address of the beneficiary, and dates of entitlement. HIMA is updated daily. Finally, the Part B Medicare Annual Data (BMAD) file contains a 5-percent sample of beneficiaries and includes over 21 million records. The data are on a person level with unique identifiers. They include physician and supplier Part B claims for services and expense information (dates, place, and type of services rendered). The procedures in this file are coded with the HCFA Common Procedure Coding System (HCPCS), which is based on the CPT-4 (Current Procedure Terminology) system. BMAD is updated annually.