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).


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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