<DOC>
Ways and Means Committee Print WMCP:106-14]
[2000 Green Book]
[From the U.S. Government Printing Office Online via GPO Access]

                 PART B SERVICES--COVERAGE AND PAYMENTS

                          Physicians Services

    Medicare pays for physicians services on the basis of a fee 
schedule which went into effect in 1992. The fee schedule 
assigns relative values to services. Relative values reflect 
three factors: physician work (time, skill, and intensity 
involved in the service), practice expenses, and malpractice 
costs. These relative values are adjusted for geographic 
variations in the costs of practicing medicine. Geographically-
adjusted relative values are then converted into a dollar 
payment amount by a dollar figure known as the conversion 
factor. The 2000 conversion factor is $36.61.
    The annual percentage update to the conversion factor 
equals the Medicare economic index (which measures inflation) 
subject to an adjustment to match spending for physicians 
services under the sustainable growth rate system. This 
adjustment sets the conversion factor at a level so that 
projected spending for a year will meet allowed spending by the 
end of the year. Allowed spending for a year is calculated 
using the sustainable growth rate. However, in no case can the 
conversion factor update be more than 3 percentage points 
above, nor more than 7 percentage points below, the Medicare 
economic index.
    For a discussion of how Medicare calculates payments to 
physicians, see appendix D.
    Anesthesiologists are paid under a separate fee schedule 
which uses base and time units. A separate conversion factor 
($17.77 in 2000) applies.
    Medicare payments are made for physicians' services after 
the annual deductible requirement of $100 has been satisfied. 
Payment is set at 80 percent of the fee schedule with 
beneficiaries responsible for the remaining 20 percent, which 
is referred to as coinsurance.
    Medicare payment is made either on an ``assigned'' or 
``unassigned'' basis. By accepting assignment, physicians agree 
to take the Medicare fee schedule amount as payment in full. 
Thus, if assignment is accepted, beneficiaries are not liable 
for any out-of-


                                      TABLE 2-19.--SELECTED MEASURES OF MEDICARE HOSPICE CARE, FISCAL YEARS 1991-98
                                                                   [By claim approved]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Fiscal year
                         Category                          ---------------------------------------------------------------------------------------------
                                                               1991       1992       1993        1994        1995        1996        1997        1998
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cash outlays by provider type:
    Freestanding..........................................     $219.2     $444.2      $620.4      $724.2      $977.1    $1,042.3    $1,123.1    $1,205.7
    Hospital based........................................       92.0      168.0       205.3       226.1       319.3       331.1       345.3       373.4
    Skilled nursing facility based........................        8.6       17.1        22.6        17.7        26.0        24.5        12.9        16.8
    Home health agency based..............................      125.7      224.3       303.7       348.7       508.1       546.1       543.0       575.1
                                                           ---------------------------------------------------------------------------------------------
        Total.............................................      445.4      853.6     1,151.9     1,316.7     1,830.5     1,944.0     2,024.5     2,171.0
                                                           =============================================================================================
Cash outlays by care type:
    Routine home care.....................................      376.6      720.0     1,004.9     1,158.6     1,611.6     1,701.5     1,769.5     1,888.7
    Continuous home care..................................        3.9       10.4        12.2        14.5        25.6        29.2        28.5        32.1
    Inpatient respite care................................        1.3        2.5         2.6         2.7         4.4         4.7         4.8         5.4
    General inpatient care................................       59.7      114.0       125.5       134.1       179.1       197.6       209.5       231.7
    Physician services....................................        3.9        6.7         6.7         6.8         9.8        11.0        12.1        13.1
                                                           ---------------------------------------------------------------------------------------------
        Total.............................................      445.4      853.6     1,151.9     1,316.7     1,830.5     1,944.0     2,024.5     2,170.9
                                                           =============================================================================================
Average dollar amount per beneficiary:
    Freestanding..........................................      4,121      5,668       6,065       6,355       6,451       6,157       5,796       5,689
    Hospital based........................................      4,234      5,296       5,361       5,631       5,740       5,333       5,028       5,129
    Skilled nursing facility based........................      4,198      5,538       5,344       5,428       6,079       5,953       5,079       5,122
    Home health agency based..............................      3,993      5,169       5,239       5,408       5,569       5,313       4,949       5,084
                                                           ---------------------------------------------------------------------------------------------
        Total \1\.........................................      4,108      5,452       5,681       5,935       6,049       5,747       5,402       5,412
                                                           =============================================================================================
Number of beneficiaries:
    Freestanding..........................................     53,184     78,374     102,283     113,959     151,466     169,285     193,765     211,952
    Hospital based........................................     21,717     31,734      38,295      40,156      55,631      62,081      68,688      72,804
    Skilled nursing facility based........................      2,040      3,084       4,221       3,262       4,272       4,124       2,547       3,288
    Home health agency based..............................     31,472     43,391      57,969      64,472      91,239     102,783     109,723     113,096
                                                           ---------------------------------------------------------------------------------------------
        Total.............................................    108,413    156,583     202,768     221,849     302,608     338,273     374,723     401,140
                                                           =============================================================================================
Average number of days a beneficiary elects hospice care:
    Freestanding..........................................       46.2       59.1        62.0        63.7        62.9        58.5        63.4        50.8
    Hospital based........................................       44.2       54.6        53.8        55.4        56.7        51.6        47.9        44.1
    Skilled nursing facility based........................       37.6       44.5        42.7        45.5        49.3        47.7        39.9        41.0
    Home health agency based..............................       42.5       52.6        52.2        53.3        53.8        50.0        45.9        44.0
                                                           ---------------------------------------------------------------------------------------------
        Total \1\.........................................       44.5       56.1        57.2        58.9        58.8        54.5        50.1        47.6
                                                           =============================================================================================
Number of units by care type:
    Routine home care--days...............................  4,667,703  8,564,904  11,324,524  12,699,617  17,257,734  17,862,843  18,189,764  18,454,749
    Continuous home care--hours...........................    199,309    442,968     565,903     654,667   1,129,697   1,193,623   1,190,982   1,303,204
    Inpatient respite care--days..........................     14,867     28,495      27,887      28,769      45,932      47,218      47,790      47,905
    General inpatient care--days..........................    161,211    297,190     303,245     299,823     418,093     451,396     470,593     502,199
    Physicians--procedures................................     53,491    111,716     115,560     110,790     165,066     185,970     200,376     204,624
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Weighted by the number of beneficiaries in each hospice type.

Note.--Totals may not add due to rounding.

Source: Health Care Financing Administration.


pocket costs other than standard deductible and coinsurance 
payments. In contrast, if assignment is not accepted, 
beneficiaries may be liable for charges in excess of the 
Medicare approved charge, subject to limits. This process is 
known as balance billing.
    Medicare's Participating Physician Program was established 
to provide beneficiaries with the opportunity to select 
physicians (designated as ``participating physicians'') who 
have agreed to accept assignment on all services provided 
during a 12-month period. Nonparticipating physicians continue 
to be able to accept or refuse assignment on a claim-by-claim 
basis. There are a number of incentives for physicians to 
become participating physicians, the chief of which is that the 
fee schedule payment amount for nonparticipating physicians is 
only 95 percent of the recognized amount paid to participating 
physicians. Additional incentives include more rapid claims 
payment and widespread distribution of participating physician 
directories.
    Nonparticipating physicians may not charge more than 115 
percent of Medicare's allowed amount for any service. 
Medicare's allowed amount for nonparticipating physicians is 
set at 95 percent of that for participating physicians. Thus, 
nonparticipating physicians are only able to bill 9.25 percent 
(115 percent times 95 percent) over the approved amount for 
participating physicians.

                 Services of Nonphysician Practitioners

    The physician fee schedule is also used for calculating 
payments made for certain services provided by nonphysician 
practitioners.
Physician assistants and nurse practitioners
    Separate payments are made for physician assistant 
services, when provided under the supervision of a physician. 
Separate payments are also made for nurse practitioner 
services, provided in collaboration with a physician.
    Payment for these services can only be made if no facility 
or other provider charges are paid in connection with the 
service. Payment equals 80 percent of the lesser of either the 
actual charge or 85 percent of the fee schedule amount for the 
same service if provided by a physician. For assistant-at-
surgery services, payment equals 80 percent of the lesser of 
either the actual charge or 85 percent of the amount that would 
have been recognized for a physician serving as an assistant-
at-surgery. The physician assistant may be in an independent 
contractor relationship with the physician.
Certified nurse midwife services
    Certified nurse midwife services are paid at 65 percent of 
the physician fee schedule amount.
Certified registered nurse anesthetists
    Certified registered nurse anesthetists are paid under the 
same fee schedule used for anesthesiologists (see above). 
Payments for services furnished by an anesthesia care team 
composed of an anesthesiologist and a certified registered 
nurse anesthetist are capped at 100 percent of the amount that 
would be paid if the anesthesiologist were practicing alone. 
The payments are evenly split between each practitioner.
Clinical psychologists and clinical social workers
    Diagnostic and therapeutic services provided by clinical 
psychologists are paid under the physician fee schedule. 
Payments for services provided by clinical social workers are 
equal to 75 percent of the amount allowed for clinical 
psychologists. Some services are subject to the psychiatric 
services limitation which limits Medicare payments for some 
services to 50 percent of incurred expenses.
Physical or occupational therapists
    Payments for physical therapy and occupational therapy 
services are made under the physician fee schedule. In 1999, an 
annual $1,500 per-beneficiary limit applied to all outpatient 
physical therapy services (including speech-language pathology 
services), except for those furnished by a hospital outpatient 
department (OPD). A separate $1,500 limit applied to all 
outpatient occupational therapy services except for those 
furnished by hospital OPDs. Therapy services furnished as 
incident to physicians professional services were included in 
these limits.
    The $1,500 limits were to apply each year. However, BBRA 
1999 suspended application of these limits in 2000 and 2001. 
Thus, no limits apply in these 2 years. The limits are slated 
to apply again in 2002.

                      Clinical Laboratory Services

    Medicare provides coverage for diagnostic clinical 
laboratory services. These services may be provided by an 
independent laboratory, a physician's office laboratory, or a 
hospital laboratory to outpatients. Since 1984, Medicare has 
paid for clinical laboratory services on the basis of a fee 
schedule. Fee schedules have been established on a carrier 
service area basis. The law set the initial payment amount for 
services performed in physicians' offices or independent 
laboratories at the 60th percentile of the prevailing charge 
established for the 12-month period beginning July 1, 1984. 
Similarly, the initial fee schedule payment amount for services 
provided by hospital-based laboratories serving hospital 
outpatients was set at the 62d percentile of the prevailing 
charge level. Subsequent amendments to the payment rules 
limited application of the hospital fee schedule to ``qualified 
hospitals.'' A qualified hospital is a sole community hospital 
(as that term is used for payment purposes under Medicare's 
hospital prospective payment system (PPS)) which provides some 
clinical diagnostic tests 24 hours a day in order to serve a 
hospital emergency room which is available to provide services 
24 hours a day, 7 days a week.
    The fee schedule payment amounts have been increased 
periodically since 1984 to account for inflation. The updates 
have generally occurred on January 1 of each year. The Balanced 
Budget Act (BBA) of 1997 eliminated the updates for 1998-2002. 
It also set the national ceiling on payment amounts at 74 
percent of the median for all fee schedules for that test. BBA 
1997 required the Secretary to adopt uniform coverage, 
administration, and payment policies for laboratory tests using 
a negotiated rulemaking process. The policies would be designed 
to eliminate variation among carriers and to simplify 
administrative requirements. A proposed rule was issued March 
10, 2000.
     BBA 1997 also required the Secretary to divide the country 
into no more than five regions and designate a single carrier 
for each region to process laboratory claims (excluding those 
for services provided to inpatients of hospitals and SNFs). The 
allocation of claims to a particular carrier would be based on 
whether the carrier served the geographic area where the 
specimen was collected by another method selected by the 
Secretary. The requirement would not apply to those physicians' 
office laboratories that the Secretary determined would be 
unduly burdened by the application of billing responsibilities 
with respect to more than one carrier. This requirement has not 
been implemented.
    Payment for clinical laboratory services (except for those 
provided by a rural health clinic) may only be made on the 
basis of assignment. The law specifically applies the 
assignment requirement to clinical laboratory services provided 
in physicians' offices. Payment for clinical laboratory 
services equals 100 percent of the fee schedule amount; no 
beneficiary cost sharing is imposed.
    Laboratories must meet the requirements of the Clinical 
Laboratory Improvement Act Amendments of 1988. This 
legislation, which focused on the quality and reliability of 
medical tests, expanded Federal oversight to virtually all 
laboratories in the country, including physician office 
laboratories.

        Durable Medical Equipment and Prosthetics and Orthotics

    Medicare, under part B of the program, covers a wide 
variety of medical supplies if they are medically necessary and 
are prescribed by a physician. Under the program, durable 
medical equipment (DME) includes such items as hospital beds, 
intermittent positive pressure breathing machines, blood 
glucose monitors, and wheelchairs. Guidelines define DME as 
equipment that: (1) can withstand repeated use; (2) is 
primarily and customarily used to serve a medical purpose; (3) 
generally is not useful to a person in the absence of an 
illness or injury; and (4) is appropriate for use in the home. 
All of these requirements must be met before an item can be 
covered. The benefit also includes related supplies, such as 
drugs and biologicals that are necessary for the effective use 
of the product.
    Medicare also covers prosthetic devices. These are defined 
as items that replace all or part of an internal body organ, 
such as colostomy bags, pacemakers, breast prostheses for 
postmastectomy patients, parental and enteral nutrients, and 
intraocular lenses. Prosthetics and orthotics include such 
items as leg, arm, back and neck braces, and artificial legs, 
arms, and eyes.
Reimbursement for durable medical equipment
    Medicare pays for DME on the basis of a fee schedule 
originally established by the Omnibus Budget Reconciliation Act 
of 1987 (OBRA 1987). Under the DME fee schedule, Medicare pays 
the lower of either 80 percent of the item's actual charge or 
the fee schedule amount. For payment purposes, covered DME 
items are classified into five groups: (1) inexpensive or 
routinely purchased DME (defined as equipment that costs less 
than $150, or is purchased at least 75 percent of the time); 
(2) items requiring frequent and substantial servicing; (3) 
customized items (defined as equipment constructed or modified 
substantially to meet the needs of an individual patient); (4) 
other items of DME (frequently referred to as the ``capped 
rental'' category); and (5) oxygen and oxygen equipment. Some 
items that do not meet the definition of DME, such as 
disposable surgical dressings, are also covered under the fee 
schedule.
    In general, the fee schedule payment rates for DME are 
determined locally (on a statewide basis). However, these local 
payments are subject to floor and ceiling limits determined 
nationally. Medicare will not pay less than 85 percent of the 
median of all local payment amounts (floor), and will not pay 
more than 100 percent of this median (ceiling).
    Prosthetics and orthotics are also paid according to a fee 
schedule similar to the DME fee schedule. The payment rates are 
determined regionally and are subject to national limits which 
also have ceilings and floors. The floor is 90 percent of the 
weighted average of all regional payment amounts, and the 
ceiling is 120 percent of this weighted average.
    The fee schedules are generally updated annually by the 
CPI-U. However, BBA 1997 froze payments for DME at the 1997 
level for fiscal years 1998-2002. For oxygen and oxygen 
equipment, BBA 1997 reduced payment limits beginning in fiscal 
year 1999 to 70 percent of 1997 levels. The update for 
prosthetics and orthotics was limited to 1.0 percent through 
fiscal year 2002. The Balanced Budget Refinement Act (BBRA) of 
1999 amended this provision as it related to DME (including 
oxygen), allowing an update for fiscal year 2001 equal to 0.3 
percent over fiscal year 2000 levels; for fiscal year 2002 the 
update is 0.6 percent over fiscal year 2000 levels. Prosthetics 
and orthotics updates were not affected by BBRA 1999.
    Medicare pays for a few items of medical equipment on a 
reasonable cost basis, rather than under the fee schedule. 
These include splints, casts, home dialysis equipment, 
therapeutic shoes, and blood products. BBA 1997 authorized the 
Secretary to establish fee schedules for these items; 
regulations were proposed in July 1999.
    Table 2-20 shows total Medicare spending in calendar year 
1998 for DME, prosthetics and orthotics, and certain other 
items.
    Inherent reasonableness authority.--If the Secretary 
determines that using standard procedures to calculate payment 
for an item under the fee schedule results in an amount which 
is ``grossly excessive or grossly deficient and not inherently 
reasonable,'' the Secretary is authorized to increase or 
decrease the payment amount accordingly. The authority to make 
these adjustments is generally referred to as the inherent 
reasonableness authority. It involves a complex procedure of 
investigation, commentary, and notification.
     BBA 1997 sought to simplify the procedure and widen the 
application of this authority, requiring HCFA to publish 
criteria for determining if a fee schedule charge was 
inherently unreasonable, and the factors to be used in 
determining charges that are realistic and equitable. Using 
these criteria, the Secretary would be permitted to adjust 
payment levels. HCFA published interim final regulations (63 
Federal Register 687, January 7, 1998) naming criteria such as 
competitiveness in a particular marketplace, changes in 
technology or supplier costs, and amounts paid by other 
purchasers in the same area. However, industry voiced concerns 
about how use of this authority might affect prices and 
beneficiary access to services. As a result, in BBRA 1999, 
Congress prohibited use of the inherent reasonableness 
authority until the GAO reports on how the authority is used.

      TABLE 2-20.--MEDICARE SPENDING FOR DURABLE MEDICAL EQUIPMENT,
   PROSTHETICS, ORTHOTICS, AND CERTAIN OTHER ITEMS, CALENDAR YEAR 1998
                        [In millions of dollars]
------------------------------------------------------------------------
                                                                Medicare
                           Category                             spending
------------------------------------------------------------------------
Inexpensive/routinely purchased \1\..........................     $633.9
Items with frequent maintenance \2\..........................      168.1
Customized items \3\.........................................       43.5
Capped rental \4\............................................    1,102.3
Oxygen \5\...................................................    1,621.3
Prosthetics/orthotics \6\....................................      937.5
Surgical dressings...........................................       54.3
Supplies/accessories.........................................       64.6
Parenteral/enteral nutrients.................................      803.0
Other........................................................        8.0
                                                              ----------
      Total..................................................    5,436.6
------------------------------------------------------------------------
\1\ Inexpensive defined as equipment for which the purchase price does
  not exceed $150. Routinely purchased defined as equipment that is
  acquired 75 percent of the time by purchase. These items include
  commode chairs, electric heat pads, bed rails, and blood glucose
  monitors.
\2\ Paid on a rental basis until medical necessity ends and includes
  such items as ventilators and continuous and intermittent positive
  breathing machines.
\3\ Includes such items as wheelchairs adapted specifically for an
  individual. Payment based on individual determination.
\4\ Items of DME paid on a monthly rental basis not to exceed a period
  of continuous use of 15 months. Includes such items as hospital beds
  and wheelchairs.
\5\ Payment for oxygen and oxygen equipment based on a monthly rate per
  beneficiary. Payment not made for purchased equipment except where
  installment payments continue.
\6\ These items include covered prosthetic and orthotic devices (except
  for items included in the categories ``customized items'' and ``items
  requiring frequent maintenance,'' transcutaneous electrical nerve
  stimulators, parenteral/enteral nutritional supplies and equipment,
  and intraocular lenses).

Source: Health Care Financing Administration, Office of Information
  Services. Data from the Division of Information Distribution.


Administering the DME benefit
    HCFA enters into contracts with insurance companies known 
as carriers under part B of Medicare, to administer the 
program, i.e., to process claims and make payments. In the case 
of DME, administration is centralized in four regional carriers 
(known as DME regional carriers, or DMERCs) who are responsible 
for processing claims for all beneficiaries living within their 
areas. As a result of the consolidation, which occurred in 
1992, variation in coverage policy and utilization patterns has 
been reduced.
    Suppliers provide Medicare beneficiaries with medical 
equipment and bill the regional carrier in their area. Most 
suppliers are small entities located in areas where the demand 
is greatest. Before being issued a Medicare supplier number, 
suppliers must comply with various standards. These include 
maintaining a physical location, filling orders from their own 
inventories or under contract with another company, being 
responsible for deliveries to beneficiaries and honoring all 
product warranties, and providing proof of appropriate 
liability insurance. BBA 1997 required that suppliers provide a 
$50,000 surety bond issued by a company approved by the 
Treasury Department. Although regulations have been proposed 
for this requirement, they have not been finalized.
Competitive bidding
    Investigations have shown that Medicare pays higher prices 
for certain medical supplies than those paid by other health 
care insurers and other government agencies, including the 
Department of Veterans Affairs. In order to lower payments, the 
Secretary currently must initiate the inherent reasonableness 
process or rely on legislation. Many observers suggested 
granting HCFA the authority to engage in a competitive bidding 
arrangement similar to the one used by the Department of 
Veterans Affairs. BBA 1997 provided such authority on a limited 
basis. HCFA was authorized to establish five 3-year competitive 
bidding demonstration projects.
    With the demonstration projects, HCFA intends to test how 
effective competitive bidding is for the Medicare Program. 
Goals for the projects are to maintain beneficiary access to 
services and limit their out-of-pocket expenses while lowering 
Medicare's payment for medical equipment. The projects will 
also prevent Medicare from dealing with suppliers who engage in 
fraudulent business practices.
    The first demonstration project site selected was in Polk 
County, FL. Beginning in 1999, suppliers submitted bids to 
HCFA, competing for the right to supply certain medical 
equipment to the 92,000 Medicare beneficiaries in the area. 
Bids were evaluated on the basis of quality and price. To 
maintain beneficiary access to the medical equipment, HCFA 
named between 4 and 13 companies for each item. HCFA expects 
that savings will average 17 percent on medical equipment 
overall, and will be as high as 30 percent for some products.
    A second demonstration project is expected to begin in 
January 2001 in the San Antonio area of Texas. The project, 
involving about 112,000 Medicare beneficiaries, will be similar 
to the Polk County project, although different products will be 
involved. In 1998, Medicare paid an average of $287 per 
beneficiary in the San Antonio area for medical equipment.

                Hospital Outpatient Department Services

    Hospital outpatient department (OPD) services for Medicare 
beneficiaries are paid under Medicare part B. Services provided 
in OPDs include: (1) emergency room and clinic services; (2) 
surgery and operating rooms; (3) laboratory and pharmacy 
services; (4) physical therapy and rehabilitation services; (5) 
DME; and (6) chemotherapy and radiation therapy. OPDs also 
provide diagnostic and preventive procedures such as radiology, 
computer axial tomography (CAT) scans, magnetic resonance 
imaging, endoscopies, and colonoscopies.
    Table 2-21 shows the percent distribution of hospital OPD 
charges by type of service provided to Medicare beneficiaries 
in 1998. For example, it shows that, of the $50.6 billion in 
hospital outpatient charges (table 2-22) for Medicare 
beneficiaries, 20.6 percent were for radiology services, 12.8 
percent were for laboratory services, and so forth.

   TABLE 2-21.--PERCENT DISTRIBUTION OF HOSPITAL OUTPATIENT DEPARTMENT
            CHARGES UNDER MEDICARE, BY TYPE OF SERVICE, 1998
------------------------------------------------------------------------
                          Service                            OPD charges
------------------------------------------------------------------------
Radiology..................................................         20.6
Laboratory.................................................         12.8
Operating room.............................................         11.4
End-stage renal disease....................................          6.6
Pharmacy...................................................          6.1
Emergency room.............................................          3.3
Clinic.....................................................          1.6
Rehabilitation.............................................          2.7
Medical/surgical supplies..................................          9.1
All other \1\..............................................         25.9
                                                            ------------
    Total..................................................        100.0
------------------------------------------------------------------------
\1\ Includes computerized axial tomography, durable medical equipment,
  blood, and so forth.

Note.--Total may not add due to rounding.

Source: Health Care Financing Administration.



   TABLE 2-22.--MEDICARE HOSPITAL OUTPATIENT CHARGES AND REIMBURSEMENTS BY TYPE OF ENROLLMENT AND YEAR SERVICE
                                        INCURRED, SELECTED YEARS 1974-98
----------------------------------------------------------------------------------------------------------------
                                                  Number of   Charges for             Program payments
                                                   SMI \1\      covered   --------------------------------------
     Type of enrollment and year of service       enrollees     services                              Percent of
                                                     (in          (in       Amount (in      Per        covered
                                                  thousands)   thousands)   thousands)    enrollee     charges
----------------------------------------------------------------------------------------------------------------
All beneficiaries:

    1974.......................................   23,166,570     $535,296     $323,383          $14         60.4
    1976.......................................   24,614,402      974,708      630,323           26         64.7
    1978.......................................   26,074,085    1,384,067      923,658           35         66.7
    1980.......................................   27,399,658    2,076,396    1,441,986           52         69.4
    1982.......................................   28,412,282    3,164,530    2,203,260           78         69.6
    1983.......................................   28,974,535    3,813,118    2,661,394           92         69.8
    1984.......................................   29,415,397    5,129,210    3,387,146          115         66.0
    1985.......................................   29,988,763    6,480,777    4,082,303          136         63.0
    1986.......................................   30,589,728    8,115,976    4,881,605          160         60.1
    1987.......................................   31,169,960    9,794,832    5,690,786          183         58.2
    1988.......................................   31,617,082   11,833,919    6,371,704          202         53.8
    1989.......................................   32,098,770   14,195,252    7,160,586          223         50.4
    1990.......................................   32,635,800   18,346,471    8,171,088          250         44.5
    1991.......................................   33,239,840   22,016,673    8,612,320          259         39.1
    1992.......................................   33,956,460   26,799,501    9,941,391          293         37.1
    1993.......................................   34,642,500   32,026,576   10,938,545          316         34.2
    1994.......................................   35,178,600   36,323,649   11,813,522          336         32.6
    1995 \2\...................................   31,806,740   40,476,180   12,933,358          407         31.9
    1996.......................................   31,775,280   44,564,665   13,896,048          437         31.2
    1997.......................................   31,022,040   47,888,129   14,382,561          464         30.0
    1998.......................................   30,304,340   50,607,564   14,212,983          469         28.1
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:

    1974-98....................................          1.1         20.9         17.1         15.8           NA
    1974-84....................................          2.4         25.4         26.5         23.4           NA
    1984-98....................................          0.2         17.8         10.8         10.6           NA
================================================================================================================
Aged:

    1974.......................................   21,421,545      394,680      220,742           10         55.9
    1976.......................................   22,445,911      704,569      432,971           19         61.5
    1978.......................................   23,530,893    1,005,467      648,249           28         64.5
    1980.......................................   24,680,432    1,517,183    1,030,896           42         69.9
    1982.......................................   25,706,792    2,402,462    1,645,064           64         68.5
    1983.......................................   26,292,124    2,995,784    2,066,207           79         69.0
    1984.......................................   26,764,150    4,122,859    2,679,571          100         65.0
    1985.......................................   27,310,894    5,210,762    3,211,744          118         61.6
    1986.......................................   27,862,737    6,529,273    3,809,992          137         58.4
    1987.......................................   28,382,203    7,859,038    4,522,841          159         56.4
    1988.......................................   28,780,154    9,790,273    5,098,546          177         52.1
    1989.......................................   29,216,027   11,855,127    5,767,589          197         48.7
    1990.......................................   29,691,180   15,384,510    6,563,454          221         42.7
    1991.......................................   30,183,480   18,460,835    6,842,329          227         37.1
    1992.......................................   30,722,080   22,253,657    7,741,774          252         34.8
    1993.......................................   31,162,480   26,556,415    8,522,089          273         32.1
    1994.......................................   31,443,800   29,768,892    9,116,610          290         30.6
    1995 \2\...................................   28,020,760   33,110,441    9,900,199          353         29.9
    1996.......................................   27,849,640   36,099,678   10,542,937          379         29.2
    1997.......................................   27,046,120   38,728,484   10,861,323          402         28.0
    1998.......................................   26,243,140   41,945,972   10,681,369          407         26.0
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:

    1974-98....................................          0.8         21.5         17.5         16.7           NA
    1974-84....................................          2.3         26.4         28.4         25.9           NA
    1984-98....................................         -0.1         18.0         10.4         10.5           NA
================================================================================================================
Disabled:

    1974.......................................    1,745,019      140,617      102,641           59         73.0
    1976.......................................    2,168,467      270,139      197,352           91         73.1
    1978.......................................    2,543,162      378,600      275,409          108         72.7
    1980.......................................    2,719,226      559,213      411,090          152         73.5
    1982.......................................    2,705,490      762,068      558,195          206         73.2
    1983.......................................    2,682,411      817,335      595,187          222         72.8
    1984.......................................    2,651,247    1,006,351      707,575          267         70.3
    1985.......................................    2,677,869    1,270,015      870,560          325         68.5
    1986.......................................    2,726,991    1,586,703    1,071,613          393         67.5
    1987.......................................    2,787,757    1,773,664    1,167,945          417         65.8
    1988.......................................    2,836,928    2,043,646    1,273,158          449         62.3
    1989.......................................    2,882,743    2,340,124    1,392,897          483         59.5
    1990.......................................    2,944,620    2,961,961    1,607,634          546         54.3
    1991.......................................    3,056,360    3,555,838    1,769,991          579         49.8
    1992.......................................    3,234,380    4,545,843    2,199,617          680         48.4
    1993.......................................    3,480,020    5,470,161    2,416,456          694         44.2
    1994.......................................    3,734,800    6,463,757    2,696,912          722         41.7
    1995 \2\...................................    3,785,980    7,465,739    3,033,158          801         40.6
    1996.......................................    3,925,640    8,464,987    3,353,211          854         39.6
    1997.......................................    3,975,920    9,159,645    3,521,238          886         38.4
    1998.......................................    4,061,200    9,561,592    3,531,614          870         36.9
----------------------------------------------------------------------------------------------------------------
Average annual rate of growth:

    1974-98....................................          3.6         19.2         15.9         11.9           NA
    1974-84....................................          4.6         27.4         26.4         20.9           NA
    1984-98....................................          3.1         17.4         12.2          8.8           NA
----------------------------------------------------------------------------------------------------------------
\1\ 1974 is the first full year of coverage for disabled beneficiaries under Medicare.
\2\ Beginning in 1995, Medicare enrollees in managed care plans are not included in the data.

NA--Not applicable.

Source: Health Care Financing Administration, Office of Strategic Planning.


Background
    In the early years of the Medicare Program, Medicare paid 
for both inpatient and outpatient hospital care based on a 
hospital's reasonable costs attributable to caring for Medicare 
beneficiaries. These were retrospective payment systems, 
meaning payment for the costs incurred in providing care was 
determined and made after the service was rendered.
    Payment systems for hospital inpatient care and outpatient 
services were separated in 1983 when a new prospective system 
was implemented for inpatient care. Under that arrangement, a 
hospital receives a fixed payment, known in advance of 
providing care, covering all care and services required by a 
patient during a hospital stay (exclusive of physician fees) 
and determined by the diagnosis-related group (DRG) into which 
the patient is classified at admission. However, outpatient 
services remained under the costs-or-charges retrospective 
payment arrangement.
    Throughout the 1980s, Medicare payments for hospital 
outpatient services grew as the volume of services provided in 
that setting increased. Although growth in the Medicare 
population contributed to increased utilization of outpatient 
care, a substantial share of the growth in the volume of 
outpatient services is attributable to advances in medicine and 
technology that permit procedures formerly restricted to the 
inpatient hospital setting to be provided safely on an 
outpatient basis. Implementation in 1983 of the inpatient PPS, 
which included aggressive management of inpatient utilization, 
also led to a shift in care from hospital inpatient to 
outpatient departments. Currently, on average, outpatient 
services generate about half of all hospital revenues.
    Since the early 1980s, Medicare's payments for OPD services 
have grown for reasons other than increased volume, and that 
growth is often attributed to the lack of incentives for 
efficiency or cost control inherent in the retrospective cost-
based payment system. Congress sought to contain the rate of 
increase in Medicare payments for certain outpatient services 
by requiring implementation of ``fee schedules'' (a form of 
PPS) to pay for those services. For example, Congress required 
HCFA to establish fee schedules for many outpatient diagnostic 
procedures and tests; provision of orthotics, prosthetics, and 
other DME; dialysis for persons with end-stage renal disease 
(ESRD); and surgeries that might also take place in another 
outpatient setting such as ambulatory surgical centers (ASCs). 
These fee schedules save Medicare money because the amounts 
paid are generally less than payments under retrospective cost 
reimbursement systems.
    In the Omnibus Budget Reconciliation Acts of 1986 and 1990, 
Congress directed the Secretary of the U.S. Department of 
Health and Human Services (DHHS) to develop a PPS for all 
hospital OPD care. In addition, to achieve more immediate 
savings, legislation required across-the-board reductions in 
Medicare payments for hospital operating costs and capital 
costs (including those associated with outpatient care) 
starting in 1990.
    Although Medicare currently uses fee schedules for some OPD 
services, payment for other OPD services have remained under 
the retrospective costs-or-charges system, resulting in an 
extremely complex set of payment rules. For instance, payments 
for OPD services such as clinic and emergency room visits have 
been paid based on the lesser of hospital costs or charges. 
Certain surgeries carried out in OPDs, but which are also 
approved by Medicare to be provided in ASCs are paid the lower 
of costs, charges, or a blended payment that incorporates the 
ASC fee schedule amount (again, excluding physician charges). 
Payment for costs for certain radiology services and diagnostic 
procedures are based on a blended payment that includes, in 
part, the Medicare fee schedule for physician services. To add 
to the complexity, blended payment calculations may vary among 
different types of hospitals. Some OPD services are paid for 
exclusively according to a fee schedule (e.g., laboratory 
tests, physical therapy, prosthetics and orthotics, mammography 
screening, and some surgical dressings and supplies). Kidney 
dialysis services, which are often provided in specialized 
dialysis centers to which a PPS applies, are also paid under 
the dialysis PPS if provided in an OPD.
Beneficiary and hospital overpayment issues
    The complex arrangements under which Medicare's payments 
for OPD care have been determined has meant that, often, the 
final Medicare approved payment amount is not known until a 
hospital's annual cost reports are settled with Medicare, which 
might be long after services to any individual beneficiary are 
rendered. However, the Social Security Act permits providers to 
charge Medicare beneficiaries 20 percent of the reasonable and 
customary charges for part B-covered services. In the case of 
OPD services for which payment is based on the blended rate 
formula, the amount Medicare eventually would approve for the 
service might be considerably less than the hospital's charge. 
Thus, hospital OPDs have often billed beneficiaries at the time 
of service for 20 percent of charges rather than 20 percent of 
the amount computed and approved under Medicare's formulas. As 
a result, beneficiaries are ``overcharged,'' sometimes paying 
as much as 50 percent of the Medicare approved amount. The 
Medicare Payment Advisory Commission reported in 1999 that 
beneficiary coinsurance for OPD care represented about 47 
percent of the total Medicare payment hospitals received for 
outpatient services. ``Medigap'' insurance policies, which 
Medicare beneficiaries may purchase to pay Medicare's 
deductibles, copayments and coinsurance, relieve policyholders 
from these high charges, but the insurance industry has noted 
that the prices of their policies reflect such overcharges.
    When Medicare paid for hospital outpatient services under 
the blended rate formula, the program's share of the payment to 
the hospital was computed as if the beneficiary had paid only 
20 percent of the Medicare approved amount, including the 
limited fee schedule payment, instead of 20 percent of the 
hospital's charges, which generally disregarded the limitations 
of a fee schedule. Thus, the Medicare formula that assumed the 
beneficiary had paid a lesser amount resulted in a larger 
Medicare payment, and, consequently, hospitals were 
``overpaid'' by Medicare. This hospital overpayment situation 
was referred to as the ``formula-driven overpayment.''
The Balanced Budget Act (BBA) of 1997
    Despite implementation of certain fee schedules and across-
the-board reductions in payments, Medicare payments to hospital 
OPDs rose at an annual rate of over 12 percent from 1983 to 
1997 and increased from 7 percent to 20 percent as a share of 
all Medicare payments to hospitals. Many saw the patchwork 
payment arrangements for OPD care as fraught with disincentives 
for hospitals to provide care efficiently. Congress responded 
to these cost issues in BBA 1997. In order to end the complex 
and inequitable retrospective cost and charge-based 
reimbursement system, the law directed the Secretary of DHHS to 
implement the OPD PPS in 1999. It eliminated the formula-driven 
overpayment, effective at the start of fiscal year 1998, a move 
that resulted in an almost immediate reduction in Medicare 
payments to hospitals for those OPD services for which Medicare 
payments duplicated beneficiary payments. BBA 1997 also 
extended the across-the-board reductions of 5.8 percent for 
operating costs and 10 percent for capital costs through 1999.
     BBA 1997 established a procedure to bring beneficiary cost 
sharing for OPD services gradually into line at 20 percent of 
Medicare approved amounts by ``freezing'' the dollar amount 
hospitals may charge beneficiaries at 20 percent of the median 
of all hospital outpatient charges per procedure in 1996, 
updated to the time of implementation of the PPS. Thus, over 
time, as Medicare's payments under the new PPS rise according 
to an indexing formula, the ``frozen'' dollar amounts hospitals 
may charge beneficiaries will come to equal 20 percent of 
Medicare's PPS payments, and Medicare's payment will be 80 
percent of the full amount approved under the new system. 
However, for those services for which the spread between the 
median charge and the PPS approved amount is large, it could 
take many years before the beneficiary copayment is 20 percent 
of the amount specified in the PPS. The law allows hospitals 
voluntarily to limit beneficiary copayments to 20 percent and 
to disseminate information regarding their reduced beneficiary 
charges.
    On September 8, 1998, HCFA published proposed OPD PPS 
regulations for comment. Although the new PPS was then 
scheduled for implementation in 1999, HCFA delayed 
implementation until after the start of the year 2000 in order 
to accommodate resolution of ``Y2K'' data processing problems. 
HCFA extended the public comment period on the proposed 
regulations through July 30, 1999, and published final rules on 
April 7, 2000. Implementation began August 1, 2000.
Design and implementation of the outpatient department PPS
    Under the hospital outpatient PPS included in final rules 
published by HCFA, individual OPD services that are similar 
clinically and also in terms of resource utilization are 
arranged into groups according to an ambulatory payment 
classification (APC) system. The system includes 451 payment 
groups. A payment amount is established for each group and is 
the same for each service in the group. The payments cover 
hospital facility and nonphysician personnel costs. The labor 
component of a payment is adjusted to reflect regional 
variations.
    Services delivered in an OPD that are already covered by a 
PPS or fee schedule are excluded from the OPD PPS, but will 
continue to be paid under the existing applicable system. The 
OPD PPS does not apply for outpatient services provided to 
patients receiving services under part A in a skilled nursing 
facility (SNF) when the service is part of a patient's SNF plan 
of care and which is furnished by the hospital under an 
arrangement with the SNF.
    Hospitals excluded from the outpatient PPS altogether 
include certain facilities in Maryland that are paid under a 
special State program and critical access hospitals that are 
paid under a reasonable cost-based system according to rules in 
the Social Security Act.
Balanced Budget Refinement Act (BBRA) of 1999
    The proposed PPS regulations promulgated on September 8, 
1998, raised concerns about the adequacy of the payments under 
that system for certain kinds of services, patients, and 
hospitals. As a result, in BBRA 1999 (Public Law 106-113, 
November 19, 1999), Congress legislated several major changes 
to Medicare payments under the hospital OPD PPS. The BBRA 1999: 
(1) requires the Secretary of DHHS to provide payments (within 
specified limits, and on a budget neutral basis) over and above 
PPS payments for certain high cost (``outlier'') patients; (2) 
as a transition to the PPS, for 2-3 years, on a budget neutral 
basis, requires the Secretary of DHHS to provide ``passthrough 
payments'' to hospital OPDs above and beyond PPS payments for 
costs of certain ``current innovative'' and ``new, high cost'' 
devices, drugs, and biologicals; (3) limits the cost range of 
items or services that are included in any one PPS payment 
category so that the highest median (or mean) cost of an item 
or service in the group cannot be more than two times higher 
than the lowest median (or mean) cost for an item or service 
within the group; (4) requires the Secretary of DHHS to review 
the PPS groups and amounts annually and to update them as 
necessary; (5) as a transition to the PPS, through 2003, 
establishes ``transitional corridors'' which phase in 
reductions in aggregate Medicare payments individual hospitals 
experience due to the PPS; (6) provides special ``hold 
harmless'' payments until January 1, 2004, for small, rural 
hospitals to ensure that they receive no less under the 
outpatient PPS than they would have received in aggregate under 
the ``pre-BBA'' system and provides the same protection 
permanently for cancer hospitals; (7) caps beneficiary 
copayments for OPD care at the amount of the beneficiary 
deductible for inpatient care ($776 in 2000, and indexed for 
subsequent years); (8) requires that the pre-PPS payment base 
used as the budget neutrality benchmark for Medicare spending 
under the PPS include beneficiary coinsurance amounts as paid 
under the pre-PPS system (i.e., 20 percent of hospital 
charges); (9) requires coverage of the cost of implantable 
items; (10) allows the Secretary of DHHS to use either the mean 
or the median of hospital costs when establishing weights that 
determine payment amounts under the PPS; (11) extends across-
the-board reductions to payments for hospital operating costs 
and capital costs until implementation of the PPS; (12) allows 
reclassification of certain hospitals as urban or rural.
    The ``budget neutral'' requirement applicable to some of 
these changes means that the total cost of the Medicare Program 
is to be the same with the change as it would have been without 
the change. Thus, program cost increases would require payment 
adjustments elsewhere to offset those increases.
    According to HCFA data, on average, hospitals would receive 
4.6 percent more in payments under the new outpatient PPS, 
including the BBRA 1999 changes, than under the retrospective 
cost-based system.
    On December 8, 1999, the Congressional Budget Office (CBO) 
estimated that the provisions of BBRA 1999 applicable to 
Medicare OPD payments would add $11.2 billion in payments to 
hospitals over the period fiscal years 2000-2009.
Medicare payments to outpatient departments
    Table 2-22 summarizes the history of Medicare payments for 
hospital outpatient services from 1974 through 1998. (Starting 
in 1995, the data include only beneficiaries enrolled in 
traditional fee-for-service Medicare and exclude those who 
elected to enroll in a managed care plan.) The total number of 
beneficiaries enrolled in part B grew by about 31 percent 
during this time period, at an average annual rate of about 1 
percent, although disability caseload growth rates were higher 
than the rate of increase of elderly beneficiaries. The table 
documents the dramatic increase in hospital outpatient 
utilization and Medicare payments for OPD services since the 
early 1980s. Medicare payments increased 44-fold, from $323 
million in 1974 to $14.2 billion in 1998, with annual rates of 
increase averaging as high as 26.5 percent from 1974 to 1984. 
The substantial rates of increase in OPD payments per part B 
enrollee (from $14 in 1974 to $469 in 1998) reflect the 
increase in the volume of services provided in OPDs as well as 
growth in payments for those services under the retrospective 
cost-based payment system.
    Since 1983, hospital charges for OPD care for Medicare 
beneficiaries increased by 17.8 percent per year, on average. 
Medicare's payments for OPD services increased by 10.8 percent 
per year during that time period (table 2-22). The table shows 
that Medicare's payments as a percent of hospital charges for 
Medicare-covered OPD services has declined from nearly 70 
percent in 1983 to 28.1 percent in 1998. This declining ratio 
reflects primarily the high rates of increase in hospital 
charges and, to a lesser extent, limits on the rate of increase 
in Medicare's payments for OPD services due to fee schedules 
and blended payment formulas. It also reflects the increasing 
share of charges billed to beneficiaries. Payment systems under 
Medicare have included incentives for hospitals to increase 
their OPD charges. For example, since implementation in 1983 of 
the PPS for hospital inpatient care, some hospitals have 
shifted costs and charges from inpatient accounts to OPD 
accounts because they receive higher payments from Medicare 
under the outpatient payment formulas. In addition, because 
hospitals have routinely billed Medicare beneficiaries (or 
their Medigap plan) for 20 percent of charges, higher charges 
generate greater revenues from beneficiaries.

                  Ambulatory Surgical Center Services

    Services provided in an ambulatory surgical center (ASC) 
are paid under Medicare part B. An ASC is a facility where 
surgeries that do not require an inpatient hospital admission 
are performed. ASCs treat only patients who have already seen a 
health care provider and for whom surgery has been selected as 
an appropriate treatment. All ASCs must have at least one 
dedicated operating room and the equipment needed to perform 
surgery safely and to provide for recovery from anesthesia. 
Patients electing to have surgery in an ASC arrive for a 
scheduled appointment on the day of the procedure, have the 
surgery in an operating room, and recover under the care of the 
nursing staff before leaving for home.
    Medicare began covering ASC services in 1982 as a way to 
reduce costs for surgeries generally carried out on a hospital 
inpatient basis but that could be performed safely in a less 
costly outpatient setting. ASCs must meet certain conditions 
specified by Medicare in order to participate in the program. 
Some ASCs limit services to one type of surgery, such as 
ophthalmology, and others provide a variety of procedures, 
including gastroenterological, orthopedic, pain block, urology, 
podiatry, and ear, nose, and throat procedures. About half of 
all ASC procedures provided under Medicare in 1999 were related 
to cataracts or other types of eye surgery.
    Currently, over 2,500 procedures are included on the 
Medicare-approved list of ASC procedures. HCFA determines which 
procedures will constitute the ASC list on the basis of certain 
criteria related to the safety, appropriateness, and 
effectiveness of performing the procedure in an ASC setting.
    Table 2-23 shows the procedures most often carried out for 
Medicare beneficiaries in ASCs in 1999, the volume of those 
procedures for Medicare beneficiaries, and Medicare's total 
payments per procedure in that year.

 TABLE 2-23.--AMBULATORY SURGICAL CENTER UTILIZATION BY MEDICARE BENEFICIARIES IN 1999: INCIDENCE OF HIGH VOLUME
                                        PROCEDURES AND MEDICARE PAYMENTS
----------------------------------------------------------------------------------------------------------------
                                                                                                     Medicare
      Current procedural terminology code               Short descriptor             Volume of     payments (in
                                                                                  Medicare cases    thousands)
----------------------------------------------------------------------------------------------------------------
66984.........................................  Remove cataract, insert lens....         688,700        $689,700
66821.........................................  After cataract laser surgery....         208,342         208,342
43239.........................................  Upper GI endoscopy, biopsy......         133,783          39,791
45378.........................................  Diagnostic colonoscopy..........         114,330          37,283
45385.........................................  Colonoscopy, lesion removal.....          74,883          24,210
45380.........................................  Colonoscopy and biopsy..........          58,143          18,321
45384.........................................  Colonoscopy.....................          41,948          12,985
52000.........................................  Cystourethroscopy...............          35,359           8,348
43235.........................................  Upper GI endoscopy, diagnosis...          33,685           7,057
43248.........................................  Upper GI endoscopy, guidewire...          16,029           4,824
----------------------------------------------------------------------------------------------------------------
Note.--Data for calendar year 1999 are preliminary and are about 95 percent complete.

Source: Health Care Financing Administration.


Payment for ambulatory surgical centers
    From the start of Medicare coverage of ASC services, 
Medicare-based payments on a prospective payment fee schedule. 
This system was one of the first applications of a fee schedule 
for outpatient, or ambulatory, care.
    The two primary cost components of a surgical procedure are 
the physician's (or practitioner's) professional fees for 
performing the procedure and the costs associated with services 
furnished by the facility where the surgery is performed. 
Medicare pays ASCs for facility and nonphysician personnel 
costs incurred in connection with performing specific surgical 
procedures. Payments are based on ``reasonable overhead 
allowances.'' For example, items included among those covered 
by the allowances are nursing and technician services; 
supplies; drugs and biologicals; surgical dressings; 
housekeeping services; and use of the facility. As with other 
Medicare services, physician and certain practitioner fees are 
paid under a separate system.
    The Medicare-approved ASC procedures (about 2,500 
procedures) are consolidated into 8 payment groupings, each of 
which has 1 payment amount; that amount is adjusted for 
different geographic regions using the hospital wage index. 
After a beneficiary meets the part B annual deductible, 
Medicare pays ASCs 80 percent of the prospectively determined 
rate, and the beneficiary is responsible for 20 percent. In 
addition, Medicare and the beneficiary pay the physician or 
surgeon separately, with Medicare paying 80 percent of the 
approved amount under the physician fee schedule and the 
beneficiary being responsible for 20 percent.
Growth in services
    At the end of 1983, 1 year after Medicare began coverage of 
ASC care, 239 ASCs were approved to provide services for 
beneficiaries. Use of ASCs grew rapidly, and, at the end of 
1998, over 2,300 facilities participated in Medicare. From 1993 
through 1998, the volume of Medicare-covered ASC services 
provided grew from 1.06 million to 1.9 million. Medicare 
payments to ASCs increased at an average of 12.8 percent per 
year, from $495 million in 1993 to $902 million in 1998. Table 
2-24 shows the annual volume of ASC services and Medicare 
payments since 1993. Note that calendar year 1999 data do not 
include a full year of payments.

   TABLE 2-24.--AMBULATORY SURGICAL CENTERS: UTILIZATION AND MEDICARE
                            PAYMENTS, 1993-99
------------------------------------------------------------------------
                                          Number of    Medicare payments
                 Year                     services          to ASCs
------------------------------------------------------------------------
1993.................................       1,059,644       $495,313,388
1994.................................       1,298,740        572,001,981
1995.................................       1,499,866        664,437,432
1996.................................       1,655,538        743,098,264
1997.................................       1,827,410        832,846,641
1998.................................       2,012,271        902,920,576
1999.................................       1,921,356        898,137,203
------------------------------------------------------------------------
Average annual increase 1993-98......                       12.8 percent
------------------------------------------------------------------------
Note.--Calendar year 1999 data are preliminary and are about 95 percent
  complete.

Source: Health Care Financing Administration.


    Starting January 1, 1995, the Secretary of DHHS has been 
required to update ASC rates every 5 years based on a survey of 
the actual audited costs incurred by a representative sample of 
ASCs for a representative sample of procedures, and to increase 
annual payments in the intervening years by the Consumer Price 
Index for All Urban Consumers (CPI-U). However, for fiscal 
years 1998-2002, BBA 1997 reduced the annual update to the CPI-
U increase minus 2 percentage points. Because the fiscal year 
1999 adjustment would have been very small, HCFA made no 
adjustment for that year.
    Effective October 1, 1999 (for fiscal year 2000), payments 
for the eight categories into which all ASC procedures are 
grouped were updated by the CPI-U increase minus 2 percentage 
points. The increase was 0.8 percent. As of October 1, 1999, 
the base rates (prior to geographic adjustments) are:


----------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------
Group 1..............................       $317    Group 5.................  683
Group 2..............................        425    Group 6.................  644 + 150 for an intraocular lens
Group 3..............................        486    Group 7.................  949
Group 4..............................        600    Group 8.................  784 + 150 for an intraocular lens
Group 5..............................        683
----------------------------------------------------------------------------------------------------------------


Proposed changes to ASC Medicare payments
    On June 12, 1998, HCFA issued proposed rules which would 
make major changes in Medicare payments to ASCs. The major 
changes include replacing the eight payment groupings with an 
APC system comprised of 105 payment groups; updating underlying 
cost data using 1994 survey data updated to the present; and 
making additions to and deletions from the list of Medicare 
covered ASC procedures. Payments would range from $53 to $2,107 
and would be updated by the CPI-U annually on a calendar year 
basis. As of this writing, HCFA had received extensive comments 
on the proposed new APC groups and payments and estimates that 
final rules will be published in November 2000 for 
implementation in April 2001.
    Some surgical procedures approved for ASCs are also 
performed in hospital outpatient departments (OPDs). In 
designing the new OPD prospective payment system (PPS) and the 
new APC groups for ASC procedures, HCFA aimed to keep the 
grouping of surgical procedures comparable.
    BBRA 1999 did not address ASC payment rates, the APC 
system, or update procedures. However, it requires that, if the 
Secretary implements new rates based on the 1994 data (or any 
rates based on pre-99 Medicare cost survey data), those new 
rates must be phased in by basing payments one-third on the new 
rates in the first year, two-thirds in the second year, and 
fully in the third year.

                         Other Part B Services

Preventive services
    Screening mammograms.--Medicare covers an annual screening 
mammography for all women over age 40. Payment for a mammogram 
is based on the lesser of the actual charge, the amount 
established for the global procedure under Medicare's fee 
schedule, or the payment limit established for the procedure. 
The 2000 limit is $67.81.
    Screening Pap smears; pelvic exams.--Medicare authorizes 
coverage for a screening Pap smear and a screening pelvic exam 
once every 3 years; annual coverage is authorized for women at 
high risk. Payment is based on the clinical diagnostic 
laboratory fee schedule (see above). BBRA 1999 requires a 
minimum payment of $14.60 for Pap tests furnished in 2000.
     Prostate cancer screening tests.--BBA 1997 authorized 
coverage, beginning January 1, 2000, for an annual prostate 
cancer screening test for men over age 50. The test could 
consist of any (or all) of the following procedures: (1) a 
digital rectal exam; (2) a prostate-specific antigen blood 
test; and (3) after 2002, such other procedures as the 
Secretary finds appropriate for the purpose of early detection 
of prostate cancer.
    Colorectal screening.--BBA 1997 authorized coverage of and 
established frequency limits for colorectal cancer screening 
tests, effective January 1, 1998. A covered test is any of the 
following procedures furnished for the purpose of early 
detection of colorectal cancer: (1) screening fecal-occult 
blood test (for persons over 50, no more than annually); (2) 
screening flexible sigmoidoscopy (for persons over 50, no more 
than one every 4 years); (3) screening colonoscopy for high-
risk individuals (limited to one every 2 years); and (4) such 
other procedures as the Secretary finds appropriate for the 
purpose of early detection of colorectal cancer. Payment limits 
are established for the tests.
     BBA 1997 required the Secretary, within 90 days of 
enactment, to publish a determination on the coverage of 
screening barium enema. The Secretary determined that barium 
enema tests, as an alternative to either a screening flexible 
sigmoidoscopy or a screening colonoscopy, are to be covered in 
accordance with the same screening parameters specified for 
those tests.
    Diabetes screening tests.--Medicare's covered benefits 
include diabetes outpatient self-management training services. 
These services are defined as including educational and 
training services furnished to an individual with diabetes by a 
certified provider in an outpatient setting. They are covered 
only if the physician who is managing the individual's diabetic 
condition certifies that the services are needed under a 
comprehensive plan of care to ensure therapy compliance or to 
provide the individual with necessary skills and knowledge 
(including skills related to the self-administration of 
injectable drugs) to participate in the management of their own 
condition. Certified providers for these purposes are defined 
as physicians or other individuals or entities that, in 
addition to providing diabetes outpatient self-management 
training services, provide other items or services reimbursed 
by Medicare. Providers must meet quality standards established 
by the Secretary. They are deemed to meet the Secretary's 
standards if they meet standards originally established by the 
National Diabetes Advisory Board and subsequently revised by 
organizations that participated in the establishment of 
standards of the Board, or if they are recognized by an 
organization representing persons with diabetes as meeting 
standards for furnishing such services.
    In addition, Medicare covers blood glucose monitors and 
testing strips for type I or type II diabetics (without regard 
to a person's use of insulin, as determined under standards 
established by the Secretary in consultation with appropriate 
organizations). The national payment limit for testing strips 
was reduced by 10 percent beginning in 1998.
    Bone mass measurements.--Bone mass measurement is covered 
for the following high risk persons: an estrogen-deficient 
woman at clinical risk for osteoporosis; an individual with 
vertebral abnormalities; an individual receiving long-term 
glucocorticoid steroid therapy; an individual with primary 
hyperparathyroidism; or an individual being monitored to assess 
osteoporosis drug therapy. The Secretary is required to 
establish frequency limits.
Drugs/vaccines
    Medicare generally does not cover outpatient prescription 
drugs. Despite the general limitation, Medicare law 
specifically authorizes coverage for the following drugs:
  --Erythropoietin (EPO).--EPO for the treatment of anemia for 
        persons with chronic kidney failure.
  --Osteoporosis drugs.--Injectable drugs approved for the 
        treatment of postmenopausal osteoporosis provided to an 
        individual by a home health agency (HHA). A physician 
        must certify that the individual suffered a bone 
        fracture related to postmenopausal osteoporosis and 
        that the individual is unable to self-administer the 
        drug.
  --Oral cancer drugs.--Oral drugs used in cancer chemotherapy 
        when identical to drugs which would be covered if not 
        self-administered. Also covered are oral antinausea 
        drugs used as part of an anticancer chemotherapeutic 
        regimen, subject to specified conditions.
    Medicare also covers immunosuppressive drugs (such as 
cyclosporin) for 36 months following a covered organ 
transplant. BBRA 1999 provides for a temporary extension of the 
36-month limit on immunosuppressive drugs for persons otherwise 
exhausting their coverage in 2000-2004. In each calendar year, 
there will be an extension specified by the Secretary (as the 
number of months or partial months), applicable to persons who 
exhaust their benefits in that calendar year. The increase for 
persons exhausting their benefits in 2000 is 8 months. The 
minimum increase for persons exhausting their benefits in 2001 
is 8 months.
    By May 1, 2001, the Secretary may increase the number of 
months for the cohort exhausting their benefits in 2001. At the 
same time, the Secretary is also required to announce the 
additional months of benefits that will be available for the 
cohort exhausting their benefits in 2002. Similarly by May 1, 
2002 and 2003, the Secretary is required to announce the number 
of months that will apply to the cohort exhausting their 
benefits in the following year. Total expenditures over the 5-
year period are limited to $150 million.
    Medicare payment for drugs (not made on a cost or 
prospective payment basis) equals 95 percent of the average 
wholesale price. The Secretary is authorized to pay a 
dispensing fee to pharmacies. A special payment limit ($10 per 
1,000 units) applies for EPO.
    Medicare also pays for influenza virus vaccines (flu 
shots), pneumococcal pneumonia vaccine, and hepatitis B vaccine 
for persons at risk of contracting hepatitis B. Cost-sharing 
charges do not apply for pneumococcal pneumonia or influenza 
virus vaccines; cost-sharing charges do apply for hepatitis B 
vaccines.
Ambulance services
    Medicare pays for ambulance services provided certain 
conditions are met. The services must be medically necessary 
and other methods of transportation must be contraindicated. 
Ambulance services are currently paid on the basis of 
reasonable costs when such services are provided by a hospital; 
otherwise the payment is based on reasonable charge screens 
developed by individual carriers based on local billings (which 
may take a variety of forms). Based on these local billing 
methods, carriers develop screens for one or more of the 
following four main billing methods: (1) a single all inclusive 
charge reflecting all services, supplies, and mileage; (2) one 
charge reflecting all services and supplies, with separate 
charge for mileage; (3) one charge for all services and 
mileage, with separate charges for supplies; and (4) separate 
charges for services, mileage, and supplies. Within each broad 
payment method, additional distinctions are made based on 
whether the service is basic life support service or advanced 
life support, whether emergency or nonemergency transport was 
used, and whether specialized advanced life services were 
rendered.
    The Balanced Budget Act (BBA) of 1997 specified that the 
reasonable cost and charge limits would apply through 1999, 
with annual increases equal to the Consumer Price Index (CPI) 
minus 1.0 percentage point. A fee schedule was to be 
implemented in 2000. The aggregate amount of payments in 2000 
could not exceed what would be paid if the interim reductions 
remained in effect in that year. Annual increases in subsequent 
years would equal the CPI increase, except that in 2001 and 
2002 there would be a 1.0-percentage point reduction. 
Implementation of the fee schedule has been delayed until at 
least 2001.