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Article #3: What is Medicare

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Medicare is the name given to a health premium schema has been introduced for
insurance program administered by the 2007, where Part B premiums will be
United States government, covering people higher for beneficiary's whose income
who are either age 65 and over, or who exceeds $80,000 for individuals, or
meet other special criteria. It was $160,000 for married couples. Depending
originally signed into law on July 30, on the extent to which their income
1965 by President Lyndon B. Johnson as exceeds this base amount, the
amendments to Social Security income-related Part B premiums for 2007
legislation. At the bill-signing ceremony will be $105.80, $124.40, $142.90, or
President Johnson enrolled former $161.40. The highest premium rates will
President Harry S. Truman as the first be paid by beneficiaries whose incomes
Medicare beneficiary and presented him are over $200,000, or $400,000 for a
with the first Medicare card.[1] married couple.
Administration It is common for the Medicare Part B
The Centers for Medicare and Medicaid premium to be automatically deducted from
Services (CMS), a component of the a beneficiaries monthly Social Security
Department of Health and Human Services check.
(HHS), administers Medicare, Medicaid, Part C and D plans may or may not charge
the State Children's Health Insurance a premium, at their discretion.
Program (SCHIP), and the Clinical Deductible and Coinsurance
Laboratory Improvement Amendments (CLIA). Part A — For each benefit period, a
Along with the Departments of Labor and beneficiary will pay:
Treasury, CMS also implements the A Part A deductible of $992 (in 2007) for
insurance reform provisions of the Health a hospital stay of 1-60 days.
Insurance Portability and Accountability $248 per day co-pay (in 2007) for days
Act of 1996 (HIPAA). The Social Security 61-90 of a hospital stay.
Administration is responsible for A $496 per day co-pay (in 2007) for days
determining Medicare eligibility and 91-150 of a hospital stay, as part of
processing premium payments for the their limited Lifetime Reserve Days.
Medicare program. All costs for each day beyond 150 days
Taxes imposed to finance Medicare Coinsurance for a Skilled Nursing
Medicare is partially financed by payroll Facility is $124.00 per day (in 2007) for
taxes imposed by the Federal Insurance days 21 through 100 for each benefit
Contributions Act (FICA) and the period.
Self-Employment Contributions Act of Part B — After a beneficiary meets the
1954. In the case of employees, the tax yearly deductible of $131.00 (in 2007),
is equal to 2.9% (1.45% withheld from the they will be required to pay a
worker and a matching 1.45% paid by the co-insurance of 20% of the
employer) of the wages, salaries and Medicare-approved amount for all services
other compensation in connection with covered by Part B.
employment. Until December 31, 1993, the The deductibles and coinsurance charges
law provided a maximum amount of wages, for Part C and D plans vary from plan to
etc., on which the Medicare tax could be plan.
imposed each year. Beginning January 1, Payment for services
1994, the compensation limit was removed. Medicare contracts with regional
In the case of self-employed individuals, insurance companies who process over one
the tax is 2.9% of net earnings from billion fee-for-service claims per year.
self-employment, and the entire amount is In 2003, Medicare accounted for almost
paid by the self-employed individual. 13% of the entire Federal Budget. Based
Cost on the CMS projections, 33 cents of every
According to the 2004 "Green Book" of the dollar spent on health care in the U.S.
House Ways and Means Committee, Medicare is paid by Medicare and Medicaid
expenditures from the American government (including State funding). Looked at from
were $256.8 billion in fiscal year 2002. three different perspectives, 61 cents of
Beneficiary premiums are highly every dollar spent on nursing homes, 47
subsidized, and net outlays for the cents of every dollar received by U.S.
program, accounting for the premiums paid hospitals, and 27 cents of every dollar
by subscribers, were $230.9 billion. spent on physician services is funded by
Eligibility Medicare or Medicaid.
In general, individuals are eligible for Reimbursement for Part A services
Medicare if they (or their spouse) worked For institutional care such as hospital
for at least 10 years in Medicare-covered and nursing home care, Medicare uses
employment and are at least 65 years old prospective payment systems. A
and are a citizen or permanent resident prospective payment system is one in
of the United States of America. which the health care institution
Individuals who are under 65 years old receives a set amount of money for each
can also be eligible if they are disabled episode of care provided to a patient,
or have end stage renal disease. People regardless of the actual amount of care
under 65 and disabled must be receiving used. The actual allotment of funds is
disability benefits from either Social based on a list of diagnosis-related
Security or the Railroad Retirement Board groups (DRG). The actual amount depends
for at least 24 months before automatic on the kind of diagnosis made at the
enrollment occurs. hospital. There are some issues
In 2005, Medicare provided health care surrounding Medicare's use of DRGs
coverage for 42.6 million Americans. because if the patient uses less care,
Enrollment is expected to reach 77 the hospital gets to keep the remainder.
million by 2031, when the baby boom This, in theory, should balance the costs
generation is fully enrolled. for the hospital. However, if the patient
Benefits uses more care, then the hospital has to
The "Original Medicare" program has two cover its own losses. This results in the
parts: Part A (Hospital Insurance), and issue of "upcoding," when a physician
Part B (Medical Insurance). Only a few makes a more severe diagnosis to hedge
special cases exist where prescription against accidental costs.
drugs are covered by Original Medicare, Reimbursement for Part B services
but as of January 2006, Medicare Part D Payment for physician services under
provides more comprehensive drug Medicare has evolved since the program
coverage. Medicare Advantage plans are was created in 1965. Initially, Medicare
another way for beneficiaries to receive compensated physicians based on the
their Part A, B and D benefits. physician's charges, and allowed
Part A: Hospital Insurance physicians to bill Medicare beneficiaries
Part A covers hospital stays. It will pay the amount in excess of Medicare's
for nursing home stays as well if certain reimbursement. In 1975, annual increases
criteria are met: in physician fees were limited by the
1. The hospital stay must be of at least Medicare Economic Index (MEI). The MEI
72 hours with the count starting at the was designed to measure changes in costs
first midnight after admission and not of physician's time and operating
counting any hours of the discharge date. expenses, adjusted for changes in
2. The nursing home stay must be for physician productivity. From 1984 to
something diagnosed during the hospital 1991, the yearly change in fees was
stay or for the main cause of hospital determined by legislation. This was done
stay. For instance, hospital stay for because physician fees were rising faster
broken hip and then nursing home stay for than projected.
physical therapy would be covered. The Omnibus Budget Reconciliation Act of
3. If the patient is not receiving 1989 made several changes to physician
rehabilitation but has some other ailment payments under Medicare. Firstly, it
that requires skilled nursing supervision introduced the Medicare Fee Schedule,
then the nursing home stay would be which took effect in 1992. Secondly, it
covered. limited the amount Medicare non-providers
4. The care being rendered by the nursing could balance bill Medicare
home must be skilled. Medicare part A beneficiaries. Thirdly, it introduced the
does not pay for custodial, non-skilled, Medicare Volume Performance Standards
or long-term care activities, including (MVPS) as a way to control costs.
activities of daily living (ADLs) such as On January 1, 1992, Medicare introduced
personal hygiene, cooking, cleaning, etc. the Medicare Fee Schedule (MFS). The MFS
The maximum length of stay that Medicare assigned Relative Value Units (RVUs) for
Part A will cover in a skilled nursing each procedure from the Resource-Based
facility per ailment is 100 days. The Relative Value Scale (RBRVS). The
first 20 of those days would be paid for Medicare reimbursement for a physician
in full by Medicare with the remaining 80 was the product of the RVU for the
days requiring a co-payment (as of 2007, procedure, a Geographic Adjustment Factor
$124.00 per day). Many insurance (GAF) for geographic variations in
companies will have a provision for payments, and a global Conversion Factor
skilled nursing care in the policies they (CF) which converts RBRVS units to
sell. dollars.
Part B: Medical Insurance From 1992 to 1997, adjustments to
Part B medical insurance helps pay for physician payments were adjusted using
some services and products not covered by the MEI and the MVPS, which essentially
Part A, generally on an outpatient basis. tried to compensate for the increasing
Part B is optional and may be deferred if volume of services provided by physicians
the beneficiary or their spouse is still by decreasing their reimbursement per
actively working. There is a lifetime service.
penalty (10% per year) imposed for not In 1998, Congress replaced the VPS with
taking Part B if not actively working. the Sustainable Growth Rate (SGR). This
Part B coverage includes physician and was done because of highly variable
nursing services, x-rays, laboratory and payment rates under the MVPS. The SGR
diagnostic tests, influenza and pneumonia attempts to control spending by setting
vaccinations, blood transfusions, renal yearly and cumulative spending targets.
dialysis, outpatient hospital procedures, If actual spending for a given year
limited ambulance transportation, exceeds the spending target for that
Immunosuppressive drugs for organ year, reimbursement rates are adjusted
transplant recipients, chemotherapy, downward by decreasing the Conversion
hormonal treatments such as lupron, and Factor (CF) for RBRVS RVUs.
other outpatient medical treatments Since 2002, actual Medicare Part B
administered in a doctor's office. expenditures have exceeded projections.
Medication administration is covered In 2002, payment rates were cut by 4.8%.
under Part B only if it is administered In 2003, payment rates were scheduled to
by the physician during an office visit. be reduced by 4.4%. However, Congress
Part B also helps with durable medical boosted the cumulative SGR target in the
equipment (DME), including canes, Consolidated Appropriation Resolution of
walkers, wheelchairs, and mobility 2003 (P.L. 108-7), allowing payments for
scooters for those with mobility physician services to rise 1.6%. In 2004
impairments. Prosthetic devices such as and 2005, payment rates were again
artificial limbs and breast prosthesis scheduled to be reduced. The Medicare
following mastectomy, as well as one pair Modernization Act (P.L. 108-173)
of eyeglasses following cataract surgery, increased payments 1.5% for those two
and oxygen for home use is also years.
covered.[3] In 2006, the SGR mechanism was scheduled
As with all Medicare benefits, Part B to decrease physician payments by 4.4%.
coverage is subject to medical necessity. (This number results from a 7% decrease
Complex rules are used to manage the in physician payments times a 2.8%
benefit, and advisories are periodically inflation adjustment increase.) Congress
issued which describe coverage criteria. overrode this decrease in the Deficit
On the national level these advisories Reduction Act (P.L. 109-362), and held
are issued by CMS, and are known as physician payments in 2006 at their 2005
National Coverage Determinations (NCD). levels. Without further continuing
Local Coverage Determinations (LCD) only congressional intervention, the SGR is
apply within the multi-state area managed expected to decrease physician payments
by a specific regional Medicare Part B from 25% to 35% over the next several
contractor, and Local Medical Review years.
Policies (LMRP) were superseded by LCDs MFS has been criticized for not paying
in 2003. doctors enough because of the low
Part C: Medicare Advantage plans conversion factor. By adjustments to the
With the passage of the Balanced Budget MFS conversion factor, it is possible to
Act of 1997, Medicare beneficiaries were pay all doctors more or less depending on
given the option to receive their how much money the person paying (CMS in
Medicare benefits through private health this case) is willing to pay.
insurance plans, instead of through the Office medication reimbursement
Original Medicare plan (Parts A and B). Chemotherapy and other medications
These programs were known as dispensed in a physician's office are
"Medicare+Choice" or "Part C" plans. reimbursed according to the Average Sales
Pursuant to the Medicare Prescription Price, a number computed by taking the
Drug, Improvement, and Modernization Act total dollar sales of a drug as the
of 2003, the compensation and business numerator and the number of units sold
practices changed for insurers that offer nationwide as the denominator. The
these plans, and "Medicare+Choice" plans current reimbursement formula is known as
became known as "Medicare Advantage" (MA) "ASP+6" since it reimburses physicians at
plans. In addition to offering comparable 106% of the ASP of drugs. Pharmaceutical
coverage to Part A and Part B, Medicare company discounts and rebates are
Advantage plans may also offer Part D included in the calculation of ASP, and
coverage. tend to reduce it. ASP+6 superseded
Part D: Prescription Drug plans Average Wholesale Price in 2005, after a
Medicare Part D went into effect on 2004 front-page New York Times article
January 1, 2006. Anyone with Part A or B drew attention to the inaccuracies of
is eligible for Part D. It was made Average Wholesale Price calculations.
possible by the passage of the Medicare Average Wholesale Price (AWP)
Prescription Drug, Improvement, and reimbursement tended to be more favorable
Modernization Act. In order to receive for physicians, since it was an arbitrary
this benefit, a person with Medicare must number provided by the pharmaceutical
enroll in a stand-alone Prescription Drug company to CMS. Since the change, some
Plan (PDP) or Medicare Advantage plan outpatient chemotherapy drugs are
with prescription drug coverage (MA-PD). "underwater," since the wholesale price
These plans are approved and regulated by from drug distributors may be higher than
the Medicare program, but are actually ASP+6 for some drugs.[citation needed]
designed and administered by private Stakeholders are involved in active
health insurance companies. Unlike discussions with Congress to address this
Original Medicare (Part A and B), Part D issue.[citation needed]
coverage is not standardized. Plans Criticism
choose which drugs (or even classes of Medicare faces continuing financial
drugs) they wish to cover, at what level issues. In its 2006 annual report to
(or tier) they wish to cover it, and are Congress, the Medicare Board of Trustees
free to choose not to cover some drugs at reported that the program's hospital
all. The exception to this is drugs that insurance trust fund could run out of
Medicare specifically excludes from money by 2018. The trustees have made
coverage, including but not limited to such projections in the past, but this
benzodiazepines, cough suppressants and one was bleaker than the outlook reported
barbiturates. Plans that cover excluded just last year.
drugs are not allowed to pass on those The fundamental problem is that the ratio
costs to Medicare, and plans are required of workers paying Medicare taxes to
to repay CMS if they are found to have retirees drawing benefits is shrinking at
billed Medicare in these cases. the same time that the price of health
Out-of-pocket costs care services per person is increasing.
Neither Part A nor Part B pays for all of Currently there are 3.9 workers paying
a covered person's medical costs. The taxes into Medicare for every older
program contains premiums, deductibles American receiving services. By 2030, as
and co-pays, which the covered individual the baby boom generation retires, that
must pay out-of-pocket. Some people may will drop to 2.4 workers for each
qualify to have other governmental beneficiary. Medicare spending is
programs (such as Medicaid) pay premiums expected to grow by about 7 percent per
and some or all of the costs associated year for the next 10 years.
with Medicare. Part of the cost of Medicare is fraud,
Some people elect to purchase a type of which government auditors estimate costs
supplemental coverage, called a Medigap Medicare billions of dollars a year. The
plan, to help fill the holes in Original Government Accountability Office lists
Medicare (Part A and B). These Medigap Medicare as a "high-risk" government
insurance policies are standardized by program in need of reform, in part
CMS, but are sold and administered by because of its vulnerability to fraud and
private companies. There is currently no partly because of its long-term financial
CMS approved supplemental coverage problems.
available to fill the Donut Hole, a Popular opinion surveys show that the
coverage gap built into Medicare's Part D public views Medicare’s problems as
benefit. serious, but not as urgent as other
Premiums concerns. In January 2006, the Pew
Most people do not pay a monthly Part A Research Center found 62 percent of the
premium, because they (or a spouse) have public said addressing Medicare’s
had 40 or more quarters where they paid financial problems should be a high
FICA taxes. For Medicare eligible priority for the government, but that
beneficiaries who do not have 40 or more still put it behind other priorities.
quarters of Medicare-covered employment, Surveys suggest that there’s no public
Part A may be purchased for a monthly consensus behind any specific strategy to
premium of: keep the program solvent.
$226.00 per month (in 2007) for people A study by the Government Accountability
having 30-39 quarters of Medicare-covered Office evaluated the quality of responses
employment. given by Medicare contractor customer
$410.00 per month (in 2007) for people service representatives to provider
who are not otherwise eligible for (physician) questions. The evaluators
premium-free hospital insurance and have assembled a list of questions, which they
less than 30 quarters of Medicare-covered asked during a random sampling of calls
employment. to Medicare contractors. The rate of
Everyone with Medicare Part B pays an complete, accurate information provided
insurance premium for this coverage; the by Medicare customer service
standard Part B premium for 2007 is representatives was 15%
$93.50 per month. A new income-based






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