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No data is available beyond 1972 pertaining to increases in costs due to changes in services and how provided. The overall rate of increase in hospital costs appears to have declined moderately from 13.5% in 1972 to around 12.5% in 1973. This slightly tower rate of increase is attributable primarily to change in services.

(b) Assumptions as to increases in the cost per capita of skilled nursing facility benefits.

The number of days of care per capita in skilled nursing facilities covered by the program dropped very sharply in 1970 and continued to decline through 1972. This is the result of strict enforcement of regulations separating skilled nursing from custodial care. The 1972 amendments extended benefits to persons who require skilled rehabilitative services regardless of their need for skilled nursing services (the former prerequisite for benefits). This change has resulted in a significant increase in services rendered in 1973 (the first effective year of the provision), with more gradual increases anticipated thereafter.

Increases in the average cost per day in skilled nursing facilities under the program are caused principally by (i) the higher cost of nurses and other skilled labor required and (ii) the addition to covered facilities of new, better equipped, and more expensive facilities. Nurses have been in particularly short supply since the beginning of the hospital insurance program, and consequently their wages have been increasing more rapidly than earnings in general. This trend may be expected to continue for the foreseeable future due to (i) the continued rapid increase in demand for nursing services and (ii) the opening of a wide variety of occupations to women, forcing employers of nurses to be more competitive in wages and working conditions.

The average cost per day of skilled nursing facility services covered by the program increased by approximately 5% in 1972 over 1971, the lowest rate since the beginning of the program and less than half of the 12.8% increase for 1971 over 1970. It is assumed that the rate of increase will stabilize at a level of about 7% in the near future and then will decrease to a level slightly higher than the annual rate of increase in general wages by 1985. The resulting increases in the cost per capita of skilled nursing facility services are shown in table A6.

The long run assumption that increases in the cost per day of care in skilled Bursing facilities will be only slightly higher than the increases in average earnings after 1985 requires increases in productivity to offset the higher than average increases in earnings anticipated for nurses and any tendency to upgrade the quality of services. As in the case of hospitals, public pressure to contain these costs will be required.

(c) Assumptions as to home health service benefits.

Reconstruction of the historical cost per capita of home health services is complicated by the substantial delay in bill processing. There have also been changes in administrative policy affecting the amount of interim reimbursement allowed on bills although the program has always ultimately paid the lower of the agencies' charges or reasonable cost. A modest increase in days per capita is projected for the next several years. It is anticipated that cost per service will increase at a rate close to the rate of increase in general wages. The assumptions used in the cost estimates are shown in table A6.

TABLE A6.-PROJECTED INCREASES IN HI COST PER CAPITA FOR SKILLED NURSING FACILITIES AND HOME HEALTH AGENCIES! [In percent]

(d) Cost estimates by type of beneficiary.

Estimates for the new groups of beneficiaries eligible beginning in fiscal year 1974 are necessarily less reliable than those for the aged. The methodology used to estimate the costs was improvised to make the best use of such information as was available in proportion to judgments as to its reliability. Estimates of the

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short range expenditures by type of beneficiary are summarized in table A7, and the long range estimates as a percent of payroll are shown in table A8.

(c) Administrative expenses.

The short range projections of administrative expenses are based on estimates of workloads and approved budgets for carriers and the Social Security Administration. The long range administrative expenses per capita are assumed to increase at 4% each year-that is, 1% less than the increase in average earnings. Historical data showing the relationship between administrative expenses and benefits is shown in table A9 together with projections through 1976.

(f) Interest rate.

It has been assumed that trust fund investments will earn an average of 6% interest per annum. The actual rate earned on the hospital insurance trust fund during fiscal 1973 was 6.4%.

TABLE A7.-PROJECTION OF HOSPITAL INSURANCE BENEFIT OUTLAYS, BY TYPE OF BENEFICIARY, CALENDER YEARS 1974-76 [In inillions]

TABLE A8-PROJECTION OF EXPENDITURES OF THE HOSPITAL INSURANCE PROGRAM, BY TYPE OF BENEFICIARY, AS A PERCENT OF TAXABLE PAYROLL

1 Benefits and administrative expenses.

? Excludes expenditures for uninsured beneficiaries which are reimbursed from general revenues. TABLE A9.-RATIO OF ADMINISTRATIVE EXPENSES TO BENEFIT PAYMENTS

(g) Population.

The population projections used in this report are based on unpublished revisions to those in Actuarial Study Number 62, Social Security Administration.

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4. Sensitivity testing of long term cost estimates

During the four-year period preceding the Economic Stabilization Program, hospital reimbursement per capita under the Hospital Insurance program increased at an average annual rate of approximately 15%; during the following two years the average annual rate of increase was reduced to a level of between 91⁄2% and 10%. The wide difference in cost increase experience between these two periods raises significant questions concerning the implications for the future. On one side of the spectrum is the thesis that the 92% to 10% increases represent a temporary and artificial condition, created solely by the application of cost controls to medicare reimbursement: upon removal of direct controls, reimbursable cost increases would be expected to return to a considerably higher level, possibly including a period of excessively high increase rates in order to compensate for the period of depressed increase allowances under controls. On the other side of the spectrum is the argument that cost controls had virtually no effect on Medicare reimbursement and that the 92% to 10% increases represent a natural and permanent cooling of cost increases in the hospital sector: removal of direct controls will have no significant impact on anticipated rates of increase. The assumptions underlying the projections in this report take an intermediate position: removal of direct controls will result in cost increases close to the pre-control level in the immediate future but that ultimately more modest increases will be experienced. Table A10 compares the cost of the program as projected in this report with two alternative projections, based on different assumptions as to the rate of increase in hospital costs. The first alternative shows the current cost ratios that would occur if the rates of hospital cost increase in the short range were to revert to a level consistent with, but lower than, the corresponding rates experienced under Medicare prior to cost controls and in the long range were to decrease to the level of 9% per year. The second alternative shows corresponding figures that would occur if the rates of increase in the short range were to remain at a level consistent with those experienced under medicare during the period of cost controls and in the long range were to decrease to the level of 7.5% per year. TABLE A10.-SUMMARY OF ALTERNATIVE PROJECTIONS OF THE COST OF THE HI PROGRAM

APPENDIX B.-SUMMARY OF PRINCIPAL PROVISIONS

Public Law 89-97, approved July 30, 1965, amended the Social Security Act and related provisions of the Internal Revenue Code by establishing the hospital insurance program. A summary of its provisions, as amended, is as follows:

1. COVERAGE PROVISIONS (FOR CONTRIBUTION PURPOSES)

(a) All workers covered by the old-age, survivors, and disability insurance system.

(b) All railroad workers (covered directly by the system, and not through the financial interchange provisions, if the railroad retirement taxable wage base is not the same as the hospital insurance base; if the bases are the same, the railroad retirement system collects contributions and transfers them to the hospital insurance trust fund through the financial interchange provisions).1

II. PERSONS PROTECTED (FOR BENEFIT PURPOSES)

(a) Insured persons--all individuals aged 65 or over who are eligible for any type of old-age, survivors, and disability insurance or railroad retirement monthly benefit (i.c., as insured workers, dependents, or survivors), without regard to whether retired (i.e., no earnings test).

(b) Noninsured persons transitionally eligible without charge-all other individuals aged 65 or over before 1968 who are citizens or aliens lawfully admitted for permanent residence with at least 5 consecutive years of residence and who are not retired Federal employees (or dependents of such individuals) covered under the Federal Employees Health Benefits Act of 1959 (including certain individuals who could have been covered if they had so elected). Those individuals in this category attaining age 65 after 1967 must have certain amounts of OASDI (or railroad retirement) coverage to be eligible for HI benefits-namely, 3 quarters of coverage for each year after 1966 and before age 65, so that the provision becomes ineffective after 1975, since then the "regular" OASDI insured status conditions are as easy to meet.

(c) Other noninsured persons aged 65 or over-beginning July 1973, other persons over age 65 who meet the residence and citizenship requirements for transitional eligibility can elect to enroll in HI under the same conditions applicable to SMI. Continued coverage depends on payment of the standard monthly premium rate and on continued enrollment in the SMI program.

(d) Disabled beneficiaries under age 65 who have been entitled to disability insurance benefits for 24 months or longer-benefits for such individuals continue through the month after recovery.

(c) Persons under age 65 with chronic kidney disease, requiring dialysis or renal transplant-such individuals (if fully or currently insured, or spouse of dependent child of such insured person, or a monthly beneficiary) are covered under HI, beginning with the 3rd month after month in which course of treatment began and ending with 12th month after month of transplant (or after dialysis terminated).

III. BENEFITS PROVIDED

(a) Hospital benefits-the full cost of all hospital services (i.e., including room and board; operating room; laboratory tests and X-rays; drugs; dressings; general nursing services; and services of interns and residents in training) for semi-private accommodations for up to 90 days in a "spell of illness" (a period beginning with the first day of hospitalization and ending after the person has been out of a hospital or skilled nursing facility for 60 consecutive days) is provided, after payment of the inpatient deductible ($84 in 1974), the cost of the first 3 pints of blood, and copayments of one-fourth of the inpatient deductible ($21 in 1974) per day for the 61st through the 90th day. A lifetime reserve of 60 days with copayments of

Public Law 89-212, approved September 20, 1965, provided that the railroad retirement wage base will, in the future, be automatically adjusted so as to be the same as the earnings base under the hospital insurance system.

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one-half of the inpatient deductible ($42 in 1974) is available for each eligible individual in addition to the days of coverage otherwise available (90 days per spell of illness). There is a lifetime maximum of 190 days for psychiatric hospital care. The inpatient deductible is automatically adjusted each year to reflect changes in hospital costs (see Appendix C for the inpatient deductible promulgated for 1974).

(b) Skilled nursing facility (skilled nursing home or convalescent wing of hospital-formerly called "extended care facility") benefits-following at least 3 days of hospitalization and beginning within 14 days of leaving the hospital (under certain conditions, an additional 14-day extension may be granted), such care, which is needed on a daily basis and which can only be provided by such a facility on an inpatient basis, is provided for a period of up to 100 days in a spell of illness, with copayments of one-eighth of the inpatient deductible ($10.50 in 1974) per day for all days after the 20th.

(c) Home health services benefits-following at least 3 days of hospitalization and beginning within 14 days of leaving the hospital or skilled nursing facility, such care is provided for an amount of up to 100 visits in the next 365 days and before the beginning of the next spell of illness; these services are essentially for homebound persons and include visiting nurse services and various types of therapy treatment, including outpatient hospital services when equipment cannot be brought to the home.

(d) Services not covered-services obtained outside the United States (except for emergency services for an illness occurring in the United States or in transit in Canada between Alaska and another state, and except for illness of a person treated in a hospital which is nearer his residence than any in the U.S.), elective "luxury" services (such as private room or television), custodial care, hospitalization for services not necessary for the treatment of illness or injury (such as elective cosmetic surgery), services performed in a Federal institution (such as a Veterans Administration hospital), and cases eligible under workmen's compensation.

(e) Administration-by the Department of Health, Education, and Welfare, through fiscal intermediaries (such as Blue Cross, other health insurance organizations, or state agencies) who are able to assist the providers of services in applying safeguards against over-utilization of services. Each provider of services can nominate a fiscal intermediary or can deal directly with the Department. The providers of services are reimbursed on a "reasonable cost" basis, and the fiscal intermediaries are reimbursed for their reasonable costs of administration. Establishment of utilization review committees is required for hospitals and skilled nursing facilities, and the latter must develop transfer agreements with hospitals. Special reimbursement provisions apply to Health Maintenance Organizations which elect and are offered at-risk contracts which may reward them financially for more favorable operating experience.

IV. FINANCING

(a) Insured persons-on a long range self-supporting basis (the same as for OASDI) through a separate schedule of increasing tax rates on covered workers, with the same maximum taxable earnings base as scheduled for OASDI; the same rate applies to employees, employers, and self-employed (unlike OASDI).

(b) Noninsured persons transitionally eligible-from general revenues, through the HI Trust Fund.

(c) Other noninsured who enroll-through a standard monthly premium rate which is approximately self-supporting. The rate is $36 in fiscal year 1975 and will be increased thereafter at the rate of increase in the inpatient deductible (sec Appendix D for the premium promulgated for fiscal year 1975).

(d) Reimbursement from general revenues for expenditures resulting from noncontributory wage credits granted to persons who served in the armed forces. The Secretary of Health, Education, and Welfare must determine the level annual appropriations to the trust fund necessary to amortize the estimated total additional costs arising from these payments.

APPENDIX C.-DETERMINATION AND ANNOUNCEMENT OF "INPATIENT HOSPITAL DEDUCTIBLE FOR 1974" 1

Section 1813(b)(2) of the Social Security Act (42 U.S.C. 1 395(b) (2)), as amended, requires that the dollar amount for the inpatient hospital deductible, be set on the basis of the average daily cost of hospital care under the hospital insurance program. For purposes of section 1813(a) of the Act, as amended, there

1 This statement was published in the Federal Register for October 11,1973 (Vol. 38, No. 196, pp. 28102-3).