History of SSA During the Johnson Administration 1963-1968


Along with the establishment of the administrative organization for the program, the beneficiary rolls, and provider participation, the principles of reimbursement for provider costs were formulated and a nationwide system for the payment of hospitals and other providers was designed and implemented. As with many other aspects of program implementation, the experience of existing public and private programs could be used as a basis for planning. At the same time, there were a number of factors arising from the nature, provisions and the very scope of the Medicare program that created policy and administrative problems requiring unique solutions. The goals sought for the reimbursement system were (1) that the intent of the law be carried out as simply and efficiently as possible, and (2) that reimbursement be equitable for beneficiaries, providers, and the social security contributors and general taxpayers who support the hospital insurance program.

Principles of Reimbursement

The principles of reimbursement for provider costs are designed to assure that the program will meet all of the costs, but only the costs, of providing covered services to Medicare beneficiaries. All necessary and proper provider expenses related to the care furnished beneficiaries are recognized--including educational costs, normal standby costs, bad debts arising from beneficiary failure to meet deductible and coinsurance amounts, interest on borrowed operational funds and capital, straight line or accelerated depreciation on buildings and equipment, an allowance in lieu of costs not otherwise specifically recognized and, in the caseof proprietary institutions, a return on equity capital.{36} The methods for determining the share of allowable costs to be borne by the program are designed to provide a more precise apportionment of costs between beneficiaries and non-beneficiaries than could be obtained by the average per diem cost method commonly used in hospital cost reimbursement. This is in line with the statutory directive that the cost of covered services to beneficiaries not be passed on to non-beneficiaries, nor the cost of services to non-beneficiaries borne by the program.

In developing the Medicare reimbursement principles--which, to a considerable degree, are based on the American Hospital Association principles of payment for hospital care as they existed at the time the law was enacted--the Social Security Administration conducted an intensive program of research and consultation with national organizations and established prepayment organizations which had developed comparable reimbursement principles in the past. Those consulted included the American Hospital Association, the Blue Cross Association, the American Medical Association, the American Association of Hospital Accountants, individual Blue Cross plans, State and Federal agencies which purchase health services, individual hospital directors and comptrollers, and nationally recognized authorities in the field of health care costs. No aspect of the program was more carefully considered by the Administration or by the Health Insurance Benefits Advisory Council, which endorsed the principles ateach stage of development and promulgation. And, in addition, the Senate Committee on Finance reviewed the proposed principles in executivesession in May 1966.

Nonetheless, the principles were the subject of intense controversy throughout their development, promulgation and implementation. On the one hand, the principles were criticized by some as overly liberal in allowing depreciation on assets financed by public funds--an allowance required by statutory direction that Medicare meet the full cost of services to its beneficiaries--and in providing an allowance in lieu of specific recognition of other costs--an allowance considered necessary in view of the lack of precision in hospital cost funding. On the
other hand, the principles were criticized by others on the grounds thatthey make insufficient contribution to the capital needed to replace, expand, and improve health facilities and because they do not contribute to costs of services provided to non-benefieiaries and which are not fully reimbursed.

The Department is concerned by the unanswered questions in hospital financing that are the underlying basis for criticism of the Medicare principles of reimbursement. The problems faced by some hospitals in financing needed improvements in their facilities require solution. The question of how these needs should be met involves the development of public policy regarding the respective roles of the Federal Government, State and local governments, community action, private philanthropy and patient income in hospital financing, and legislation to implement this policy. Federal support may be furnished through giant or loan programs or through programs that pay for patient care, and these alternative approaches must be considered in the context of the need for comprehensive planning to improve and expand our health resources.

The Department is engaged in an intensive effort to find solutions to problems in the delivery and financing of health care services by bringing leading experts in the health care field together to exchange views at a number of general conferences, and to develop specific recommendations through special advisory groups. One example is the National Advisory Commission on Health Facilities, which is studying the problem of meeting and financing the Nation's long and short-range needs for hospitals and other health care facilities.

The Department is, however, especially mindful of the impact that reimbursement under Medicare has on hospital financing, not only because payment for the services of so large a proportion of the patient population is being made under the program, but also through the influence that its principles of reimbursement will have on the reimbursement approaches adopted by other public and private programs. For this reason, the Department is conducting a careful review of all aspects of Medicare's principles of reimbursement in light of the impact of Medicare on the financial condition of hospitals.

At the same time, the Department is giving high priority to the provision of the 1967 amendments authorizing experimentation with various methods of reimbursement with a view to the creation of additional incentives to efficiency and economy while supporting high quality services. The overall objective sought by this review and experimentation is to assure that the health cares paid for under the program will be of high quality, be provided as efficiently and economically as possible, and be paid for in the most equitable way that can be devised.

Provider Payment

A major goal of program administration has been to provide interim reimbursement to providers on a current basis to avoid the serious financial problems that providers would face if working capital were tied up in Medicare accounts receivable. Months before the program went into effect, procedures were being designed to assure timely payment to providers. These procedures are continually reviewed and modified in the light of program experience.

Under the procedures in effect from the start of program operations, interim payments approximating a provider's actual costs are made, at least monthly, and in most cases weekly, by intermediaries as bills for covered services are submitted. Intermediaries make appropriate adjustments in the interim rate of payment and lump-sum payments to bring past payments in line with costs during the reporting period. A retroactive adjustment based on the actual costs is made at the end of the provider's reporting period.

In addition to the basic procedure of making interim reimbursement after bills have been submitted, payments may also be made, upon request by the provider, to reimburse currently as services are furnished to beneficiaries prior to the submission of bills. The amount of payment is based on the average costs incurred by the provider in rendering covered services as estimated from data derived from provider and intermediary records and adjusted periodically to reflect the provider's most current experience under the program.

In response to reports that some hospitals were experiencing financial difficulty because Medicare billings were being delayed for various reasons, intermediaries are authorized to make accelerated payments on account if the provider is able to demonstrate that its working capital position is being impaired as a result of hospital billing or intermediary processing delays and that it would have difficulty in meeting current financial obligations. The amount of the payment is a percentage of the cost of covered services rendered to beneficiaries for which billings have not been submitted or are pending in the intermediary's office, less the applicable deductibles and coinsurance amounts.

In addition to the procedures discussed above, the Social Security Administration has made available an entirely new approach to interim reimbursement for hospital services. This new approach will not onlyeliminate the need for itemization of charges on individual bills andassure a steady flow of Medicare funds to hospitals, but may also become a prototype for payment procedures under other large scale hospital and insurance operations. The new interim payment procedure provides fixed periodic interim payments on the basis of the hospital's Medicare cost experience, adjusted for changes in Medicare utilization, price and wage levels, new or expanded services, and other significant factors rather than on the basis of individual bills. Interim payments under this procedure are generally on a weekly basis and are made without regard to Medicare utilization during the particular payment period. The hospital is required to submit the necessary utilization information and interim payments are, of course, subject to adjustment based on actual costs during the reporting period.

Claims Experience

During the first two years of Medicare, over $6.2 billion was paid out under the hospital insurance program. The $6.2 billion represents amounts drawn from the Federal Hospital Insurance Trust Fund for hospital insurance benefit payments in fiscal years 1967 and 1968, and does not include amounts withdrawn later for services rendered through that date.

The gradual increase in monthly benefit payments in fiscal year 1967--from a low of $263.6 million in July 1967, to $310.2 in January 1968, and $332.1million in June 1968--is shown in the following chart.{37}


Total hospital insurance benefit payments during fiscal year 1967 ($2.508 billion) {38} exceeded by $170 million the $2.338 billion benefits estimated for the first year of operation. This 7 percent difference was caused
primarily by a more rapid increase in hospital costs than had beenanticipated in the original estimates. However, net contribution income of $2.689 billion was $304 million more than estimated (due to increases in earnings greater than had been assumed). As a result, the excess of contributions over benefits was $134 million more than expected. The trust fund ended the year with a balance of $1.3 billion.

Of the 11.8 million claims approved for payment under the hospital insurance program and recorded in the Social. Security Administration's records for fiscal years 1967 and 1968, 79 percent were for inpatient hospital care, 8 percent were for outpatient hospital diagnostic services, 9 percent we for extended care services (which had been in effect only for the last half of the fiscal year) and 4 percent were for post-hospital home health care. {39} Average reimbursement per claim was also greatest for hospital inpatient claims, averaging $521 per claim, compared to $312 per claim for post-hospital
extended care services, $67 per home health claim, and $12 per outpatient hospital diagnostic claim. {40}

Inpatient Hospital Services

There were over 10.6 million covered hospital admissions under Medicare from July 1, 1966, through June 30, 1968. An estimated two million of these admissions represent second or subsequent admissions so that about 4 million Medicare beneficiaries--or about 1 out of every 5 beneficiaries--received covered hospital services during that year. There were 263 admissions to either short or long-term hospitals for every 1,000 people covered. The distribution of hospital admissions by State showed considerable variation, ranging from a low of 196 per 1,000 people covered in three States--Delaware, Maryland, and New Jersey--to a high of 398 per 1,000 in North Dakota. Admissions were lowest in the Middle Atlantic States and highest in the Northwest. {41}

Ninety-eight percent of the approved inpatient hospital claims, 95 percent of the covered days of inpatient care, and 98 percent of the amount reimbursed for inpatient hospital care were for the care of beneficiaries in short-term hospitals. Covered days of hospital care per recorded claim averaged 13.4 days in all hospitals, 13.0 days inshort-term hospitals, and 36.1 days in long-term hospitals.{42}

Payment to hospitals fox inpatient care is being made on a currentbasis. During the first year of the program, hospitals were paid over $4.8 billion for inpatient hospital services. {43} The average daily hospital charge for total recorded approved claims for the first two years was $48: $50 in short-term hospitals and $20 in long-term hospitals. {44} These charges do not, of course, represent the amounts paid by the program since hospitals are reimbursed for the reasonable cost of services they provide, less deductible and coinsurance amounts.

Data from a number of sources indicate that the aged are now receiving more inpatient hospital services than they did before Medicare. Although the amount of this increase cannot be estimated precisely, the Administration's projection before the program began of a maximum increase of 20 percent in the use of inpatient hospital services by beneficiaries appears to have been fairly close. There have been isolated instances of hospital crowding, but this also occurred before Medicare. There has been some decline in the use of hospitals previously devoted to indigent patients and a compensating increase in the use of other hospitals.

Outpatient Hospital Diagnostic Services

While outpatient hospital therapeutic services are covered under the medical insurance part of the program, outpatient hospital diagnostic services were originally covered under the hospital. insurance part of the program.{45} The program paid 80 percent of the reasonable cost of the services after application of a $20 deductible for each 20-day diagnostic study period. The small average Medicare payment ($12) for the 38,000 recorded bills {46} probably would have been even less if some hospitals had not felt that, for small bills, the difficulty in separating charges for the two parts of the program and billing the program was not warranted by the reimbursement they would receive. Of course, the $12 figure does not reflect the total protection given by this benefit since amounts not paid under the hospital insurance program were credited to the medical insurance deductible and were reimbursable if that deductible had been satisfied for the year.

Extended Care Services

For the 18-month period beginning January 1, 1967, when coverage of extended care services began, 647,000 extended care facility admission notices were received for beneficiaries. {47} The total of 1,055,000 claims received for extended care services during the 18-month period included many partial payments for patients whose stays were continuing. Admission rates ranged from lows of 3.4 per 1,000 people covered in Wyoming and 3.8 per 1,000 in South Dakota and Mississippi to a highof 26.7 per 1,000 people covered in the State of Washington.{48} The availability of beds in participating facilities is clearly a major factor in extended care facility admission rates. In Washington, there were over 32 beds for every 1,000 people covered by the program compared with 5 beds per 1,000 for South Dakota, less than 4 per 1,000 in Mississippi, and 11 beds per 1,000 in Wyoming, in July 1967.

Home Health Services

The Social Security Administration received about 486,000 home health start of care notices by June 30, 1968, under both the hospital andmedical insurance programs.{49} These represented about 12 notices per 1,000 people covered at the end of the fiscal year. There was con-siderable variation among the States, ranging from just over three notices per 1,000 in four States (Kentucky, North Carolina, North
Dakota, and South Carolina) to about 36 in Rhode Island. {50}

Fiscal Intermediary Performance in Processing Hospital Insurance Bills

As was expected, the receipt.of Medicare hospital bills began slowly inJuly 1966, when only 109,300 bills were received, but rose steadily and sharply throughout the fiscal year. During January 1967, intermediaries received 939,000 bills. In June 1967, the number had risen to 1,212,800--almost 1.3 times as many as were received in January and more than 11 times the number received during the first month of the program.

On the whole, intermediary processing of hospital insurance bills kept pace with the increase in receipts. Until December 1966, the number of bills cleared lagged behind the number received, though not by any substantial amount. In January 1967, however, the processing rate exceeded receipts for the first time and remained ahead or close to the break-even point for the rest of the fiscal year. During June 1967, 1,285,300 bills were cleared compared to 1,212,800 received. The result of the improved processing rate during the second half of the year was a gradual reduction of the number of pending bills (that is, bills received but not yet cleared), so that by the fiscal year's end, only 352,800 bills were pending, representing approximately 1.2 weeks of work.

The building up, peaking and relative stabilization of fiscal intermediary workloads is reflected in the following table:

Hospital Insurance Intermediary Workloads

(July 1966--June 1968)

Month Bills
  FY 1967 FY 1968 FY 1967 Fy 1968 FY 1967 FY 1968
July 109,300 1,740,600 60,000 1,088,300 49,300 339,100
August 532,100 1,215,900 417,200 1,212,500 164,200 342,500
September 638,400 1,104,400 551,400 1,135,000 251,200 311,900
October 745,200 1,270,600 693,400 1,290,900 303,000 291,600
November 784,900 1,201,900 746,900 1,180,300 341,000 313,200
December 845,500 1,091,300 808,500 1,097,500 378,000 306,900
January 939,600 1,262,900 941,500 1,222,600 376,100 347,100
February 973,000 1,264,800 945,400 1,230,400 403,700 381,500
March 1,164,800 1,278,400 1,172,200 1,259,400 396,300 400,500
April 1,144,000 1,369,200 1,120,700 1,340,700 419,600 429,100
May 1,274,500 1,428,700 1,268,800 1,414,000 425,300 443,700
June 1,212,800 1,284,600 1,285,300 1,303,900 352,800 424,300
TOTALS 10,364,100 14,874,300 10,011,300 14,775,600    

The following table depicts three additional indices of intermediary performance in fiscal years 1967 and 1968: (1) ratio of bills cleared during the month to bills received during the month; (2) the number of weeks of work pending at the end of each month; and (3) the percentage of total bills pending which were pending over 30 days at the end of each month.

Performance Indicators for Hospital Insurance Intermediaries
(July 1966--June 1968)

Month Ratio of clearances
to receipts
Weeks of work pending Percentage of pending
bills pending over
30 days
  FY 1967 FY 1968 FY 1967 Fy 1968 FY 1967 FY 1968
July 54.9% 101.3% 3.3 1.2 ----- 15.1
August 78.4 99.7 1.8 1.3 5.9% 12.1
September 86.4 102.8 1.9 1.1 17.2 14.6
October 93.0 101.6 1.7 1.0 18.2 14.4
November 95.2 98.2 1.9 1.1 24.0 16.5
December 95.6 100.6 2.0 1.1 27.7 14.7
January 100.2 96.8 1.7 1.2 23.8 11.5
February 97.2 97.3 1.6 1.3 24.8 11.9
March 100.6 98.5 1.6 1.3 19.4 12.3
April 98.0 97.9 1.5 1.4 20.0 12.1
May 99.6 99.0 1.4 1.4 14.2 17. 4
June 106.0 101.5 1.2 1.3 12.3 23.1

This table shows that almost from the beginning fiscal intermediaries were able to handle their workloads without too much difficulty. From the second month of the program's operation they had two weeks of work or less on hand. The ratio of clearances to receipts was closely in balance after the third month, and remained close to 100 percent for the rest of the year.

Since billings involving inpatient radiologists' and pathologists' services and outpatient hospital services have represented a substantial proportion of bills pending over 30 days, the percentage of bills pending over 30 days should diminish as a result of the simplifications made possible by the 1967 amendments.{51}

Delays in submitting bills and delays in receiving payments from some intermediaries resulted in a shortage of operating capital for some providers early in the program. Accelerated payments on account (discussed earlier) were quickly made and alleviated much of this problem. In addition, action was taken so that intermediaries made interim payments at more frequent intervals than they had prior to Medicare.

Overall, there have been relatively few problems in the query-response part of the electronic data processing system; i.e., the system through which providers obtain information on the extent to which individual patients are eligible to receive services covered under Medicare. Therehave been few mechanical malfunctions and clerical errors. Intermediaries undertook continuous educational efforts with providers' billing staffs in an effort to reduce errors in submitting queries, and these efforts were very effective.

In summation, following minor operating adjustments, fiscal intermediaries have been handling their Medicare workload quite well. Many have shown considerable skill in early detection of problems and have worked well with providers and the Government to find and implement solutions.

Administrative Costs of Intermediary Operations

Data derived from intermediary cost reports reveal that, during the first year of program operations, the ratio of intermediary administrative costs to benefit payments was reasonable, despite the high first-year expenses incurred in recruiting and training new employees, refining procedures to meet Medicare requirements, and the other one-tine costs incident to establishment of the claims process. By December 31, 1966, intermediary administrative costs were 1.5% of intermediary benefit payments and, for the entire fiscal year, intermediary administrative costs were 1.3% of benefit payments.

There were, to be sure, substantial variations in the ratio of administrative costs to benefit payments among intermediaries. Some of the reasons far these variations were differences in local wage scales andthe technical sophistication of the organizations' Medicare operations. Experience to date indicates that greater use of sophisticated data processing equipment generally produces a lower ratio of administrative costs to benefit payments. Also, the type of bills processed affects the ratio; e.g., the ratio of administrative costs to benefit payments was generally higher for intermediaries with relatively large extended care facility workloads and for those servicing areas which include large outpatient centers.

Providers Dealing with the Social Security Administration

Hospitals and other providers of services which do not wish to be served by a fiscal intermediary may deal directly with the Social Security Administration. Although the vast majority of providers chose to use intermediaries, a significant number chose to deal directly with the Government. As of June 30, 1968, 235 hospitals with 180,017 beds, 36 extended care facilities, 298 home health agencies, and 27 group practice prepayment plans had elected to do so; in subsequent months, 29 additional hospitals were added to the roster of direct-dealing institutions. The intermediary functions for all direct-dealing providers are performed by a component of the Bureau of Health Insurance.

During the first year of operations, notices of admission from direct-dealing hospitals and extended care facilities and start-of-care notices from home health agencies averaged about 3,000 per week. The number of bills submitted by these providers increased steadily during the year, from an average of 1,000 per week in September 1966 to 5,700 during the months of May and June 1967. By June 30, 1967, payments of approximately $39.9 million covering approximately 116,000 bills had been made to direct-dealing providers. Current financing payments totaling $1.9 million were made during the same period to 23 providers, and approximately $285,000was paid to 12 providers as accelerated payments on account. In addition,
under the medical insurance program, the 27 direct-dealing group practice
prepayment plans received $13.7 million in interim payments for estimated
costs through June 1967.

Reimbursement for Emergency Services

Generally, hospital. benefits are paid only for care furnished to patients by hospitals participating in the program. However, the law also provides for the payment of benefits, subject to the applicable deductible and coinsurance amounts, for inpatient hospital services and outpatient hospital diagnostic services furnished to patients who are brought to a nonparticipating hospital in an emergency. {52} To qualify for payment for emergency services, a nonparticipating hospital. is required to meetcertain standards specified in the law concerning clinical records, medical staff bylaws, and nursing services. {53} In addition, the hospital's claim for payment must be accompanied by the attending physician's statement describing the nature of the emergency, furnishing relevant clinical information about the patient's condition, and certifying that the services rendered were required as emergency services. Claims for payment for emergency services furnished by non-participating hospitals are reviewed in the Social Security Administration regional offices, with necessary professional consultation provided by Public Health Service regional medical consultants. These claims are submitted to and paid by an intermediary designated to handle emergency claims by the Social Security Administration. In the second year of operations, therewere 25,835 emergency admissions to non-participating hospitals. {54} Of the 25,106 bills submitted and processed for these services, 20,783 were allowed, 1,132 were denied in part; and 3,191 denied entirely.

Footnotes (Footnote numbers not same as in the printed version)

{36} The law was amended. to provide for a return on equity capital for proprietary institutions by section 7 of Public Law 89-713, enacted November 2, 1966.

{37} A distribution of total hospital insurance benefit payments, by State, in the year ending June 30, 1968, appears in Appendix D, Exhibit 1.

{38} Excludes $17 million of intermediary, benefit payments in fiscal year 1967, which had not cleared through the Treasury before July 1, 1967.

{39} See Appendix D, Exhibit 2.

{40} Data on admissions were determined from the inquiries made to central office records regarding the entitlement of people found to be covered. The number of claims exceed the number of admissions because more then one claim (for instance, for interim payments) sometime results from an admission. Files on reimbursement are limited to amounts paid to providers on an interim basis. Final figures cannot be determined until post audit and adjustment have been made and recorded.

{41} See Appendix D, Exhibit 4

{42} See Appendix D, Exhibit 3

{43} See Appendix D, Exhibit 2

{44} See Appendix D, Exhibit 3

{45} Beginning April 1, 1968, outpatient hospital diagnostic services are covered under the medical insurance, rather than hospital insurance, part of the program.

{46} See Appendix D, Exhibit 2.

{47} Extended Care Facilities fiscal year 1968 admission notices were 448,000.

{48} See Appendix D, Exhibit 4.

{49} Fiscal year 1968 Home Health Agencies start of care notices were 258,000.

{50} See Appendix D, Exhibit 4.

{51} Discussed in Chapter I.

{52} Emergency services are outpatient hospital diagnostic services and inpatient hospital services which are necessary to prevent the death or serious impairment of the health of the individual and which, because of the threat to the life or health of the individual, necessitate the use of the most accessible hospital available which is equipped to furnish such services.

{53} For changes in the law with respect to payment, for services in nonparticipating hospitals, see Appendix E.

{54} State-by-State emergency admission figures and claims data are inAppendix D, Exhibit 5.