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PRESIDENT’S PLAN TO STRENGTHEN AND MODERNIZE MEDICARE
FOR THE 21st CENTURY
4. Constraining Out-Year Medicare Spending Growth
Overview. This plan builds on the fiscal discipline that the Balanced Budget Act of 1997 brought to Medicare
for 1998 through 2002 by including moderated policies to constrain Medicare spending growth beginning in 2003 through
2009 (the end of the budget window). The BBA would reduce Medicare spending per beneficiary to about 3.8 percent
between 1998 and 2002, but after that, from 2002-2009, spending growth per beneficiary rises to 4.9 percent on
average. The policies outlined below, along with the other policies in the proposal (excluding the drug benefit)
would reduce Medicare spending per beneficiary to 4.3 percent over the 2002-2009 period. Payment rates for many
Medicare services are determined by statutory formulas (e.g., fee schedules, prospective payment systems) that have
annual updates to account for health care inflation. The growth in a "market basket" index of health care
prices or the general consumer price index (CPI) are used for most services. Historically, Congress has reduced
various update indices in many years to adjust for factors such as efficiencies gained by providers that are not
reflected in their update factor. For example, over the past 15 years, the inpatient hospital market basket update has
been reduced by – 1.7 percentage points on average. This plan would adjust the annual update rates for some Medicare
services using the same or lower reductions in updates as in the BBA. Recognizing concerns about excessive cost
growth constraints, the proposal does not extend BBA policies for reducing growth in outpatient departments,
disproportionate share hospitals, nursing homes, and home health.
a. Hospitals
Policy: The plan would make several adjustments to hospital payment policy.
Urban hospital inpatient payment update. The plan would update inpatient urban hospital payments by the
hospital market basket minus 1.1 percentage point from fiscal year 2003 through 2009. While hospital payments are
updated annually by a market basket index, the Medicare Payment Advisory Commission has projected hospitals’ Medicare
margins to continue to be at historically high rates. The BBA reduced the market basket update for all hospitals by
2.8 percentage points in 1998, 1.9 percentage points in 1999, 1.8 percentage points in 2000, and 1.1 percentage points
in 2001 and 2002.
Rural hospital inpatient payment update. Rural hospitals serve an important role in areas where the next nearest
hospital is often hours away. Recognizing this, the plan would update inpatient rural hospital payments by the
hospital market basket minus 0.5 percentage points in fiscal 2003, and increasing the percentage point reduction by
an additional 0.1 percentage point each year until the same update applies for rural and urban hospitals. As a result
of their lower volume, however, they typically do not have as high Medicare margins as urban hospitals. The BBA
reductions to the update did not differentiate between urban and rural hospitals.
Hospital capital payments. The plan would reduce reimbursement for prospective payment system (PPS) hospital
capital costs by 2.1 percent from fiscal year 2003 through 2009. This is the same reduction as in the BBA.
PPS-exempt hospitals. When created in 1984, the inpatient PPS excluded certain specialty hospitals (e.g.,
psychiatric, cancer, children’s and rehabilitation hospitals) because the PPS was thought to be a poor predictor of
resource use in these hospitals. Their reimbursement formula is specified in the Tax Equity and Fiscal Responsibility
Act of 1982 (TEFRA). The BBA changed this formula by creating national cost limits and reducing rate increases.
Specifically, it moderated rate increases for PPS-exempt hospitals based on the relationship between a hospital’s
operating cost and its target amount. The plan would extend this reduction from fiscal year 2003 through 2009. It
also would extend the BBA’s 15 percent reduction in reimbursement for PPS-exempt hospital capital costs from fiscal
year 2003 through 2009.
b. Ambulance, prosthetics and orthotics, and hospice services
Policy: The following payment update adjustments are continuations of the BBA policies.
Ambulance: The plan would increase ambulance payments at the rate of growth in the CPI minus 1 percentage
point from 2003 through 2009.
Prosthetics and orthotics: The plan would increase payments for prosthetics and orthotics at the rate of
growth in the CPI minus 1 percentage point from 2003 through 2009.
Hospice: The plan would increase hospice payments at the rate of growth in the hospital market basket minus
1 percentage point from fiscal year 2003 through 2009.
c. Ambulatory surgical centers
Policy: The BBA includes an update for payments for ambulatory surgical centers of the rate of growth
in the CPI minus 2 percentage points in fiscal year 2002. The plan would increase payments for ambulatory surgical
centers at the rate of growth in the CPI minus 1 percentage point from fiscal year 2003 through 2009. This would be
an increase over the BBA, and would bring payment growth in line with most other Part B services.
d. Clinical laboratory services, durable medical equipment & parenteral & enteral
items
Policy: The BBA includes a freeze on payments for clinical lab services, durable medical equipment, and
parenteral and enteral nutrients supplies and equipment for 1998 through 2002. This plan would increase payments for
these services at the rate of growth in the CPI minus 1 percentage point from 2003 through 2009. This would be
an increase over the BBA, and would bring payment growth in line with most other Part B services.
Background/rationale: To ensure that program growth does not significantly increase after most of the
Medicare provisions of the BBA expire in 2003, this package of proposal described above includes out-year policies
that protect against a return to excessive growth rates but are more moderate than those included in the BBA. These
proposals, in combination with the modernization of traditional Medicare and competition, would reduce average annual
Medicare spending growth from 4.9 percent to 4.3 percent per beneficiary between 2002 and 2009 – over 10 percent
higher than the BBA spending growth per beneficiary for 2002-2009.
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