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For several federal activities, the Congress has recognized that specific increased administrative expenditures are likely to result in overall savings; therefore, the Congress devised methods to facilitate the funding of such expenditures notwithstanding the constraints currently imposed on federal spending. We believe the Congress should consider a similar method to fund increased expenditures for Medicare safeguard activities. The result should be a net reduction in Medicare costs. (See p. 38.)


Medicare payment reforms can reduce program and beneficiary costs. The proposals set out above and summarized on the following page represent ways to enhance the effect of the Medicare reforms already enacted and identify opportunities for further reform. Ensuring that Medicare payments are not excessive or inadequate is especially important because the program serves as a national guide to other health care payers, who often follow Medicare's lead. Consequently, successful implementation of the Medicare reforms can significantly affect the nation's overall health care costs.

As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies to interested parties and will make copies available to others on request. This report was prepared under the direction of Janet L. Shikles, Director, Health Financing and Policy Issues, who can be reached (202) 275-5451. Other major contributors are listed in appendix IV.

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Summary of Key Findings

Rural hospitals. Additional PPS payments are not an appropriate
vehicle for resolving rural hospital problems. (See pp. 19-20.)

Teaching hospitals. PPS payments could be reduced by about a third; this change would save about $840 million annually. (See pp. 20-22.)

Variation in treatment costs within DRGs. HCFA should continue to refine DRGs to reduce wide variations in treatment costs. (See pp. 22-23.)

Physician payment reforms. Funding of Medicare administrative activities needs to be sufficient to assure the successful implementation of physician payment reform. (See pp. 24-26.)

Beneficiary costs for inpatient physician services. Beneficiary outof-pocket costs can be reduced significantly for inpatient physician services, such as those provided by anesthesiologists, radiologists, and pathologists. (See pp. 26-27.)

Payment for anesthesia services. HCFA should eliminate the link between anesthesia time and payment levels; such a change could save Medicare about $50 million annually. (See p. 27.)

Payment for laboratory services. Medicare payments for laboratory services could be reduced; this action would save Medicare approximately $150 million annually. (See pp. 28-29.)

Payment for emerging technology. To reduce Medicare costs, HCFA should consider developing a procedure for redetermining payments as new technologies mature and associated costs fall. (See pp. 29-31.)

Payment for ambulatory surgery. Technical corrections to the payment calculation for ambulatory surgery performed in a hospital outpatient department would reduce Medicare payments and beneficiary outof-pocket costs. (See pp. 31-32.)

Health maintenance organizations. Legislation and administrative changes are needed to correct problems in payment, monitoring quality of care, and compliance with federal regulations. (See pp. 33-38.)

Payment safeguards. Consideration should be given to modifying the budget process to more explicitly recognize that increasing spending for safeguard activities would reduce overall Medicare expenditures. (See pp. 38-44.)

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Appendix I

Medicare: Further Changes Needed to Reduce Program and Beneficiary Costs

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Medicare is a health insurance program that covers most Americans aged 65 and over and certain individuals under 65 who are disabled or have chronic kidney disease. The program, authorized under title XVIII of the Social Security Act, is administered by the Health Care Financing Administration (HCFA) within the Department of Health and Human Services (HHS). Medicare provides coverage under two parts:

⚫ Part A, Hospital Insurance, which is financed primarily by Social
Security payroll taxes, covers inpatient hospital services, posthospital
care in skilled nursing facilities, hospice care, and care provided in
patients' homes. In fiscal year 1990, part A covered 31 million aged and
3 million disabled people, and benefit payments amounted to about
$60.9 billion.

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Part B, Supplementary Medical Insurance, which is a voluntary program financed by enrollee premiums (set at 25 percent of program costs for elderly enrollees in 1990) and federal general revenues, covers physician services and a variety of other health care services, such as laboratory and outpatient hospital services. In fiscal year 1990, part B covered 29.9 million aged and 3 million disabled people, and benefit payments totaled about $44.5 billion.

The composition of Medicare benefit payments by service category is
shown in figure I.1. Two service categories, inpatient hospital and physi-
cian services, accounted for about 82 percent of total Medicare outlays
in fiscal year 1990.

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