Medicare Program; Monthly Actuarial Rates and Monthly Supplementary Medical Insurance Premium Rate Beginning January 1, 1997

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

[OACT-052-N]

RIN 0938-AH42

Medicare Program; Monthly Actuarial Rates and Monthly

Supplementary Medical Insurance Premium Rate Beginning January 1, 1997

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Notice.

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SUMMARY: As required by section 1839 of the Social Security Act, this

notice announces the monthly actuarial rates for aged (age 65 or over)

and disabled (under age 65) enrollees in the Medicare Supplementary

Medical Insurance (SMI) program for 1997. It also announces the monthly

SMI premium rate to be paid by all enrollees during 1997. The monthly

actuarial rates for 1997 are $87.50 for aged enrollees and $110.40 for

disabled enrollees. The monthly SMI premium rate for 1997 is $43.80.

EFFECTIVE DATE: January 1, 1997.

Copies: To order copies of the Federal Register containing this

document, send your request to: New Orders, Superintendent of

Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date

of the issue requested and enclose a check or money order payable to

the Superintendent of Documents, or enclose your Visa or Master Card

number and expiration date. Credit card orders can also be placed by

calling the order desk at (202) 512-1800 or by faxing to (202) 512-

2250. The cost for each copy is $8. As an alternative, you can view and

photocopy the Federal Register document at most libraries designated as

Federal Depository Libraries and at many other public and academic

libraries throughout the country that receive the Federal Register.

This Federal Register document is also available from the Federal

Register online database through GPO Access, a service of the U.S.

Government Printing Office. Free public access is available on a Wide

Area Information Server (WAIS) through the Internet and via

asynchronous dial-in. Internet users can access the database by using

the World Wide Web; the Superintendent of Documents home page address

is http://www.access.gpo.gov/su_docs/, by using local WAIS client

software, or by telnet to swais.access.gpo.gov, then login as guest (no

password required). Dial-in users should use communications software

and modem to call (202) 512-1661; type swais, then login as guest (no

password required). For general information about GPO Access, contact

the GPO Access User Support Team by sending Internet e-mail to

help@eids05.;eids gpo.gov; by faxing to (202) 512-1252; or by calling

(202) 512-1530 between 7 a.m. and 5 p.m. Eastern time, Monday through

Friday, except for Federal holidays.

FOR FURTHER INFORMATION CONTACT:

Carter S. Warfield, (410) 786-6396.

SUPPLEMENTARY INFORMATION:

I. Background

The Medicare Supplementary Medical Insurance (SMI) program is the

voluntary Medicare part B program that pays all or part of the costs

for physicians' services, outpatient hospital services, home health

services, services furnished by rural health clinics, ambulatory

surgical centers, comprehensive outpatient rehabilitation facilities,

and certain other medical and health services not covered by hospital

insurance (Medicare Part A). The SMI program is available to

individuals who are entitled to hospital insurance and to U.S.

residents who have attained age 65 and are citizens, or aliens who were

lawfully admitted for permanent residence and have resided in the

United States for 5 consecutive years. This program requires enrollment

and payment of monthly premiums, as provided in 42 CFR part 407,

subpart B, and part 408, respectively. The difference between the

premiums paid by all enrollees and total incurred costs is met from the

general revenues of the Federal government.

The Secretary of Health and Human Services is required by section

1839 of the Social Security Act (the Act) to issue two annual notices

relating to the SMI program.

One notice announces two amounts that, according to actuarial

estimates, will equal respectively, one-half the expected average

monthly cost of SMI for each aged enrollee (age 65 or over) and one-

half the expected average monthly cost of SMI for each disabled

enrollee (under age 65) during the year beginning the following

January. These amounts are called ``monthly actuarial rates.''

The second notice announces the monthly SMI premium rate to be paid

by aged and disabled enrollees for the year beginning the following

January. (Although the costs to the program per disabled enrollee are

different than for the aged, the law provides that they pay the same

premium amount.) Beginning with the passage of section 203 of the

Social Security Amendments of 1972 (Public Law 92-603), enacted on

October 30, 1972, the premium rate, which was determined on a fiscal

year basis, was limited to the lesser of the actuarial rate for aged

enrollees, or the current monthly premium rate increased by the same

percentage as the most recent general increase in monthly title II

social security benefits.

However, the passage of section 124 of the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA) (Public Law 97-248), enacted on

September 3, 1982, suspended this premium determination process.

Section 124 of TEFRA changed the premium basis to 50 percent of the

monthly actuarial rate for aged enrollees (that is, 25 percent of

program costs for aged enrollees). Section 606 of the Social Security

Amendments of 1983 (Public Law 98-21), enacted on April 20, 1983;

section 2302 of the Deficit Reduction Act of 1984 (DRA) (Public Law 98-

369), enacted on July 18, 1984; section 9313 of the Consolidated

Omnibus Budget Reconciliation Act of 1985 (COBRA 1985) (Public Law 99-

272), enacted on April 7, 1986; section 4080 of the Omnibus Budget

Reconciliation Act of 1987 (OBRA 1987) (Public Law 100-203), enacted on

December 22, 1987; and section 6301 of the Omnibus Budget

Reconciliation Act of 1989 (OBRA 1989) (Public Law 101-239), enacted on

December 19, 1989, extended the provision that the premium be based on

50 percent of the monthly actuarial rate for aged enrollees (that is,

25 percent of program costs for aged enrollees). This extension expired

at the end of 1990.

The premium rate for 1991 through 1995 was legislated by section

1839(e)(1)(B) of the Act, as added by section 4301 of the Omnibus

Budget

[[Page 55003]]

Reconciliation Act of 1990 (OBRA 1990) (Public Law 101-508), enacted on

November 5, 1990. In January 1996, the premium determination basis

would have reverted to the method established by the 1972 Social

Security Act Amendments. However, section 13571 of the Omnibus Budget

Reconciliation Act of 1993 (OBRA 1993) (Public Law 103-66), enacted on

August 10, 1993, changed the premium basis to 50 percent of the monthly

actuarial rate for aged enrollees (that is, 25 percent of program costs

for aged enrollees) for 1996 through 1998. In January 1999, the premium

determination basis will revert to the method established by the 1972

Social Security Act Amendments.

As determined according to section 1839(a)(3) of the Act, the

premium rate for 1997 is $43.80.

A further provision affecting the calculation of the SMI premium is

section 1839(f) of the Act, as amended by section 211 of the Medicare

Catastrophic Coverage Act of 1988 (Public Law 100-360), enacted on July

1, 1988. (The Medicare Catastrophic Coverage Repeal Act of 1989 (Public

Law 101-234), enacted on December 13, 1989, did not repeal the

revisions to section 1839(f) made by Public Law 100-360.) Section

1839(f) provides that if an individual is entitled to benefits under

section 202 or 223 of the Act (the Old-Age and Survivors Insurance

Benefit and the Disability Insurance Benefit, respectively) and has the

SMI premiums deducted from these benefit payments, the premium increase

will be reduced to avoid causing a decrease in the individual's net

monthly payment. This occurs if the increase in the individual's social

security benefit due to the cost-of-living adjustment under section

215(i) of the Act is less than the increase in the premium.

Specifically, the reduction in the premium amount applies if the

individual is entitled to benefits under section 202 or 223 of the Act

for November and December of a particular year and the individual's SMI

premiums for December and the following January are deducted from the

respective month's section 202 or 223 benefits. (A check for benefits

under section 202 or 223 is received in the month following the month

for which the benefits are due. The SMI premium that is deducted from a

particular check is the SMI payment for the month in which the check is

received. Therefore, a benefit check for November is not received until

December, but has the December's SMI premium deducted from it.) (This

change, in effect, perpetuates former amendments that prohibited SMI

premium increases from reducing an individual's benefits in years in

which the dollar amount of the individual's cost-of-living increase in

benefits was not at least as great as the dollar amount of the

individual's SMI premium increase.)

Generally, if a beneficiary qualifies for this protection (that is,

the beneficiary must have been in current payment status for November

and December of the previous year), the reduced premium for the

individual for that January and for each of the succeeding 11 months

for which he or she is entitled to benefits under section 202 or 223 of

the Act is the greater of the following:

(1) The monthly premium for January reduced as necessary to make

the December monthly benefits, after the deduction of the SMI premium

for January, at least equal to the preceding November's monthly

benefits, after the deduction of the SMI premium for December; or

(2) The monthly premium for that individual for that December.

In determining the premium limitations under section 1839(f) of the

Act, the monthly benefits to which an individual is entitled under

section 202 or 223 do not include retroactive adjustments or payments

and deductions on account of work. Also, once the monthly premium

amount has been established under section 1839(f) of the Act, it will

not be changed during the year even if there are retroactive

adjustments or payments and deductions on account of work that apply to

the individual's monthly benefits.

Individuals who have enrolled in the SMI program late or have

reenrolled after the termination of a coverage period are subject to an

increased premium under section 1839(b) of the Act. That increase is a

percentage of the premium and is based on the new premium rate before

any reductions under section 1839(f) are made.

II. Notice of Monthly Actuarial Rates and Monthly Premium Rate

The monthly actuarial rates applicable for 1997 are $87.60 for

enrollees age 65 and over, and $110.40 for disabled enrollees under age

65. Section III of this notice gives the actuarial assumptions and

bases from which these rates are derived. The monthly premium rate will

be $43.80 during 1997.

III. Statement of Actuarial Assumptions and Bases Employed in

Determining the Monthly Actuarial Rates and the Monthly Premium Rate

for the Supplementary Medical Insurance Program Beginning January 1997

A. Actuarial Status of the Supplementary Medical Insurance Trust Fund

Under the law, the starting point for determining the monthly

premium is the amount that would be necessary to finance the SMI

program on an incurred basis; that is, the amount of income that would

be sufficient to pay for services furnished during that year (including

associated administrative costs) even though payment for some of these

services will not be made until after the close of the year. The

portion of income required to cover benefits not paid until after the

close of the year is added to the trust fund and used when needed.

The rates are established prospectively and are, therefore, subject

to projection error. Additionally, legislation enacted after the

financing has been established but, effective for the period for which

the financing has been set, may affect program costs. As a result, the

income to the program may not equal incurred costs. Therefore, trust

fund assets should be maintained at a level that is adequate to cover a

moderate degree of variation between actual and projected costs in

addition to the amount of incurred but unpaid expenses. An appropriate

level for assets to cover a moderate degree of variation between actual

and projected costs depends on numerous factors. The most important of

these factors are: (1) The difference from prior years between the

actual performance of the program and estimates made at the time

financing was established, and (2) the expected relationship between

incurred and cash expenditures. Ongoing analysis is made of the former

as the trends in the differences vary over time.

Table 1 summarizes the estimated actuarial status of the trust fund

as of the end of the financing period for 1995 and 1996.

[[Page 55004]]

Table 1.--Estimated Actuarial Status of the Supplementary Medical

Insurance Trust Fund as of the End of the Financing Period

[In billions of dollars]

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Assets less

Financing period ending Assets Liabilities liabilities

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Dec. 31, 1995...................... $20.023 $2.726 $17.297

Dec. 31, 1996...................... 25.078 3.596 21.482

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B. Monthly Actuarial Rate for Enrollees Age 65 and Older

The monthly actuarial rate for enrollees age 65 and older is one-

half of the monthly projected cost of benefits and administrative

expenses for each enrollee age 65 and older, adjusted to allow for

interest earnings on assets in the trust fund and a contingency margin.

The contingency margin is an amount appropriate to provide for a

moderate degree of variation between actual and projected costs and to

amortize any surplus or unfunded liabilities.

The monthly actuarial rate for enrollees age 65 and older for 1997

was determined by first establishing per-enrollee cost by type of

service from program data through 1994 and then projecting these costs

for subsequent years. Although the actuarial rates are now applicable

for calendar years, projections of per-enrollee costs were determined

on a July to June period, consistent with the July annual fee screen

update used for benefits before the passage of section 2306(b) of

Public Law 98-369.

Accordingly, the values for the 12-month period ending June 30,

1994 were established from program data, and subsequent periods were

projected using a combination of program data and data from external

sources. The projection factors used are shown in Table 2. Those per-

enrollee values are then adjusted to apply to a calendar year period.

The projected values for financing periods from January 1, 1994,

through December 31, 1997, are shown in Table 3.

The projected monthly rate required to pay for one-half of the

total of benefits and administrative costs for enrollees age 65 and

over for 1997 is $89.27. The monthly actuarial rate of $87.60 provides

an adjustment of -$1.54 for interest earnings and -$0.13 for a

contingency margin. Based on current estimates, it appears that the

assets are more than sufficient to cover the amount of incurred but

unpaid expenses and to provide for a moderate degree of variation

between actual and projected costs. Thus, a negative contingency margin

is needed to reduce assets to a more appropriate level.

C. Monthly Actuarial Rate for Disabled Enrollees

Disabled enrollees are those persons enrolled in SMI because of

entitlement (before age 65) to disability benefits for more than 24

months or because of entitlement to Medicare under the end-stage renal

disease program. Projected monthly costs for disabled enrollees (other

than those suffering from end-stage renal disease) are prepared in a

fashion exactly parallel to the projection for the aged, using

appropriate actuarial assumptions (see Table 2). Costs for the end-

stage renal disease program are projected differently because of the

different nature of services offered by the program. The combined

results for all disabled enrollees are shown in Table 4.

The projected monthly rate required to pay for one-half of the

total of benefits and administrative costs for disabled enrollees for

1997 is $110.28. The monthly actuarial rate of $110.40 provides an

adjustment of -$0.82 for interest earnings and $0.94 for a contingency

margin. Based on current estimates, it appears that assets alone are

not sufficient to cover the amount of incurred but unpaid expenses and

to provide for a moderate degree of variation between actual and

projected costs. Thus, a positive contingency margin is needed to build

assets to more appropriate levels.

D. Sensitivity Testing

Several factors contribute to uncertainty about future trends in

medical care costs. In view of this, it is appropriate to test the

adequacy of the rates announced here using alternative assumptions. The

most unpredictable factors that contribute significantly to future

costs are outpatient hospital costs, physician residual (as defined in

Table 2), and increases in physician fees as governed by the program's

physician fee schedule that began implementation January 1, 1992. Two

alternative sets of assumptions and the results of those assumptions

are shown in Table 5. One set represents increases that are lower and

is, therefore, more optimistic than the current estimate. The other set

represents increases that are higher and is, therefore, more

pessimistic than the current version. The values for the alternative

assumptions were determined by studying the average historical

variation between actual and projected increases in the respective

increase factors. All assumptions not shown in Table 5 are the same as

in Table 2.

Table 5 indicates that, under the assumptions used in preparing

this report, the monthly actuarial rates would result in an excess of

assets over liabilities of $21.453 billion by the end of December 1997.

This amounts to 24.2 percent of the estimated total incurred

expenditures for the following year. Assumptions that are somewhat more

pessimistic (and, therefore, test the adequacy of the assets to

accommodate projection errors) produce a surplus of $7.538 billion by

the end of December 1997, which amounts to 7.7 percent of the estimated

total incurred expenditures for the following year. Under fairly

optimistic assumptions, the monthly actuarial rates would result in a

surplus of $34.382 billion by the end of December 1997, which amounts

to 42.7 percent of the estimated total incurred expenditures for the

following year.

E. Premium Rate

As determined by section 1839(a)(3) of the Act, the monthly premium

rate for 1997, for both aged and disabled enrollees, is $43.80.

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IV. Waiver of Notice of Proposed Rulemaking

The Medicare statute, as discussed previously, requires publication

of the monthly actuarial rates and the Part B premium amount in

September. The amounts are determined according to the statute. As has

been our custom, we use general notices, rather than formal notice and

comment rulemaking procedures, to make such announcements. In doing so,

we acknowledge that, under the Administrative Procedure Act,

interpretive rules, general statements of policy, and rules of agency

organization, procedure or practice are excepted from the requirements

of notice and comment rulemaking.

We considered publishing a proposed notice to provide a period for

public comment. However, we may waive that procedure if we find good

cause that prior notice and comment are impracticable, unnecessary, or

contrary to the public interest. We find that the procedure for notice

and comment is unnecessary because the formula used to calculate the

SMI premium is statutorily directed, and we can exercise no discretion

in following that formula. Moreover, the statute establishes the time

period for which the premium rates will apply and delaying publication

of the SMI premium rate would be contrary to the public interest.

Therefore, we find good cause to waive publication of a proposed notice

and solicitation of public comments.

In accordance with the provisions of Executive Order 12866, this

notice was reviewed by the Office of Management and Budget.

(Section 1839 of the Social Security Act; 42 U.S.C. 1395r)

(Catalog of Federal Domestic Assistance Program No. 93.774,

Medicare--Supplementary Medical Insurance)

Dated: September 26, 1996.

Bruce C. Vladeck,

Administrator, Health Care Financing Administration.

Dated: October 2, 1996.

Donna E. Shalala,

Secretary.

[FR Doc. 96-27290 Filed 10-21-96; 12:15 pm]

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