Government can not exactly be described as an industry segment but it has significant effect on the rest of the industry in every segment. Due to this big effect, we agreed that the two major effects of the government come in the form of Medicare and Medicaid. These two programs effect millions of people and eventually the health industry overall. Analyzing these programs that are very complex and intertwined with each other was a complex job. Even though we tried our best to separate them as two different segments, many problems are similar. We believe this information is essential while analyzing the rest of the industry.



Medicare was enacted in 1965 under Title XVIII of the Social Security Act to help older persons obtain and pay for medical care. In the early 1960s before Medicare, only about half of older Americans had any health insurance, compared to 75 percent of
those under 65. Some people, seeking private coverage, were denied on the basis of age or pre-existing conditions. Others could not afford it. Medicare is divided into two parts: Hospital Insurance (Part A) and Supplementary Medical Insurance (Part B) which represent two of the four Social Security Trust Funds (the others address retirement/survivors and disability income). In 1972, the program was extended to certain people under age 65: those with kidney failure and those receiving Social Security Disability Insurance (DI) benefits for at least two years.
In 1994, Medicare covered 36 million people (32 million aged and 4 million disabled), including:

a) Persons age 65 and over eligible for Social Security benefits (including retired workers, spouses of retired or disabled workers or surviving spouses);

b) Persons under age 65 receiving DI for two-years (including workers and their surviving spouse or adult disabled child);

c) Persons of any age with end-stage renal disease (ESRD) (including workers, spouses, or children); and persons, age 65 or older, who are otherwise not eligible but elect to enroll by paying a monthly premium ($261 in 1995).

As a "social insurance" program, Medicare Part A is an earned benefit for most people and requires no premium upon eligibility. In contrast, participation in Part B is voluntary for a monthly premium ($46.10 in 1995). In 1994, over 98 percent of older and 88 percent of disabled beneficiaries elected Part B.

Medicare is a major payer in the U.S. health care system, accounting for 28% of all hospital and 20% of all physician payments. It also covers 45 percent of health care
spending for the elderly overall, but less for the oldest old, who require more nursing home care.

In 1994, Medicare outlays were $163 billion. Approximately 9 percent of Medicare spending is for disabled beneficiaries, 5 percent for those with end-stage renal disease (ESRD), and the rest for the aged. About five percent of enrollees account for 50 percent of spending. Beneficiaries with ESRD incur the highest costs per person.

Medicare is projected to grow at an average rate of about 10 percent per year and spending is projected to reach over $450 billion in 2005 under current law. Over time, Medicare spending has grown as a percentage of the federal budget and of gross domestic product (GDP). Simultaneously, health care costs have outpaced the incomes of older and disabled persons. What drives these growth figures? In the near term, Medicare projections primarily are based on expected increases in medical prices and the volume and intensity of services and new technologies. These are largely the same factors causing spending growth in the private sector, although Medicare's population is generally in poorer health. Over the long-term powerful forces are projected to push up costs and, thus, expenditures. Technological change is likely to continue being a cost-driver. In combination with technology, our demographics are also changing, i.e., our society is "aging" as a result of the retirement of the baby boom and longer life expectancy. Unless dramatic new ways are found to attain efficiency in Medicare, changes will have to occur in enrollment, benefits, or funding.

Efforts to control Medicare costs have taken many forms, such as fee limits or utilization review to reduce unnecessary services. In the early years, controlling