SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Hospital Fair Competition Act of 
2005''.

SEC. 2. HOSPITAL PAYMENT IMPROVEMENTS.

    (a) Use of Estimated Costs Rather Than Average Charges in 
Establishing Weighting Factors for Diagnosis-Related Groups Under the 
Inpatient Hospital Prospective Payment System.--
            (1) In general.--Section 1886(d)(4)(B) of the Social 
        Security Act (42 U.S.C. 1395ww(d)(4)(B)) is amended--
                    (A) by inserting ``(i)'' after ``(B)''; and
                    (B) by adding at the end the following new clause:
    ``(ii) For fiscal years beginning after fiscal year 2006, in 
establishing the weighting factors under clause (i), the Secretary 
shall ensure (to the extent feasible) that such factors reflect the 
estimated costs of furnishing care in each diagnosis-related group.''.
            (2) No requirement for annual adjustment for changes in 
        costs.--Section 1886(d)(4)(C)(i) of the Social Security Act (42 
        U.S.C. 1395ww(d)(4)(C)(i)) is amended by adding at the end the 
        following new sentence: ``Notwithstanding the preceding 
        sentence, the Secretary may adjust the weighting factors 
        established under subparagraph (B) less frequently than 
        annually (but in no case less frequently than once every 5 
        years) in carrying out the requirement under clause (ii) of 
        such subparagraph.''.
    (b) Calculation of Weighting Factors at Hospital Level Under the 
Inpatient Hospital Prospective Payment System.--Section 1886(d)(4)(B) 
of the Social Security Act (42 U.S.C. 1395ww(d)(4)(B)), as amended by 
subsection (a)(1), is amended by adding at the end the following new 
clause:
    ``(iii) For fiscal years beginning after fiscal year 2006, in 
establishing the weighting factors under clause (i), the Secretary 
shall calculate such factors at a hospital level and then aggregate 
such factors to a national level.''.
    (c) Adjustment of Weighting Factors for Diagnosis-Related Groups 
Under the Inpatient Hospital Prospective Payment System To Finance 
High-Cost Outlier Cases and To Account for Changes in the Distribution 
of Such Cases.--
            (1) PPS hospitals.--
                    (A) In general.--Section 1886(d)(3)(B) of the 
                Social Security Act (42 U.S.C. 1395ww(d)(3)(B)) is 
                amended to read as follows:
            ``(B) Reducing for value of outlier payments.--
                    ``(i) Reduction of average standardized amounts.--
                The Secretary shall, for discharges occurring before 
                fiscal year 2007, reduce each of the average 
                standardized amounts determined under subparagraph (A) 
                by a factor equal to the proportion of payments under 
                this subsection (as estimated by the Secretary) based 
                on DRG prospective payment amounts which are additional 
                payments described in paragraph (5)(A) (relating to 
                outlier payments).
                    ``(ii) Reduction of weighting factors.--The 
                Secretary shall, for discharges occurring after fiscal 
                year 2006, reduce each of the weighting factors 
                determined under paragraph (4)(B) by a factor equal to 
                the proportion of payments in the diagnosis-related 
                group under this subsection (as estimated by the 
                Secretary) based on DRG prospective payment amounts 
                which are additional payments described in paragraph 
                (5)(A) (relating to outlier payments).''.
                    (B) Annual adjustment to account for projected 
                changes in the distribution of outlier payments within 
                diagnosis-related groups.--Section 1886(d)(4)(C)(i) of 
                the Social Security Act (42 U.S.C. 1395ww(d)(4)(C)(i)), 
                as amended by subsection (a)(2), is amended by 
                inserting ``, including, for discharges occurring after 
                fiscal year 2006, projected changes in the distribution 
                of additional payments described in paragraph (5)(A) 
                within diagnosis-related groups'' before the period at 
                the end of the first sentence.
                    (C) Conforming amendments.--Section 1886(d)(3)(D) 
                of the Social Security Act (42 U.S.C. 1395ww(d)(3)(D)) 
                is amended--
                            (i) in clauses (i)(I), (ii)(I), and 
                        (iii)(I), by striking ``reduced under 
                        subparagraph (B)'' and inserting ``reduced 
                        under subparagraph (B)(i)''; and
                            (ii) in clause (iii)(II), by inserting ``, 
                        and, in the case of a fiscal year beginning 
                        after 2006, reduced under subparagraph 
                        (B)(ii)'' before the period at the end.
            (2) Puerto rico hospitals.--
                    (A) Computing puerto rico drg-specific rates.--
                Section 1886(d)(9)(C)(ii) of the Social Security Act 
                (42 U.S.C. 1395ww(d)(9)(C)(ii)) is amended--
                            (i) by inserting ``, for discharges 
                        occurring before fiscal year 2007,'' after 
                        ``The Secretary shall''; and
                            (ii) by striking ``fiscal year 2004 and 
                        thereafter'' and inserting ``fiscal years 2004, 
                        2005, and 2006''.
                    (B) Conforming amendments.--Section 
                1886(d)(9)(C)(iii)(II) of the Social Security Act (42 
                U.S.C. 1395ww(d)(9)(C)(iii)(II)) is amended by 
                inserting ``and reduced under paragraph (3)(B)(ii)'' 
                after ``paragraph (4)(B)''.
    (d) Ensuring That Diagnostic-Related Groups Appropriately Capture 
the Difference in Severity of Illness of Patients.--Section 
1886(d)(4)(A) of the Social Security Act (42 U.S.C. 1395ww(d)(4)(A)) is 
amended by adding at the end the following new sentence: ``In 
establishing the classification of inpatient discharges by diagnosis-
related groups under the preceding sentence, the Secretary shall ensure 
that such groups appropriately capture the difference in severity of 
illness of patients.''.
    (e) Phase-In of Changes to the Inpatient Hospital Prospective 
Payment System.--Section 1886(d) of the Social Security Act (42 U.S.C. 
1395ww(d)) is amended by adding at the end the following new paragraph:
    ``(14) Notwithstanding the preceding provisions of this subsection, 
the Secretary shall phase in the application of the amendments made by 
subsections (a), (b), (c), and (d) of section 2 of the Hospital Fair 
Competition Act of 2005 over a 3-fiscal year period beginning with 
fiscal year 2007. In implementing the phase-in under the preceding 
sentence, the Secretary shall take into account the negative impact 
that the phase-in may have on certain hospitals.''.

SEC. 3. PROHIBITION ON CERTAIN PHYSICIAN SELF REFERRALS.

    (a) Prohibition.--Section 1877(d) of the Social Security Act (42 
U.S.C. 1395nn(d)) is amended in each of paragraphs (2)(B) and (3)(B) by 
striking ``effective for the 18-month period beginning on the date of 
enactment of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003'' and inserting ``on and after December 8, 
2003''.
    (b) Revisions to the Requirements to Qualify for the Exception to 
the Definition of Specialty Hospital.--Section 1877(h)(7)(B) of the 
Social Security Act (42 U.S.C. 1395nn(h)(7)(B)) is amended--
            (1) by redesignating clauses (iii), (iv), and (v) as 
        clauses (vi), (vii), and (viii), respectively;
            (2) by inserting after clause (ii) the following new 
        clauses:
                            ``(iii) for which the percent of investment 
                        in the hospital by physician investors at any 
                        time on or after June 8, 2005, is no greater 
                        than the percent of such investment by 
                        physician investors as of such date;
                            ``(iv) for which the percent of investment 
                        in the hospital by any physician investor at 
                        any time on or after June 8, 2005, is no 
                        greater than the percent of such investment by 
                        such physician as of such date;
                            ``(v) for which the number of operating 
                        rooms at the hospital at any time on or after 
                        June 8, 2005, is no greater than the number of 
                        such rooms as of such date;''; and
            (3) by striking clause (vii), as so redesignated, and 
        inserting the following:
                            ``(vii) for which--
                                    ``(I) during the period beginning 
                                on December 8, 2003, and ending on June 
                                7, 2005, any increase in the number of 
                                beds occurs only in the facilities on 
                                the main campus of the hospital and 
                                does not exceed 50 percent of the 
                                number of beds in the hospital as of 
                                November 18, 2003, or 5 beds, whichever 
                                is greater; and
                                    ``(II) the number of beds at the 
                                hospital at any time on or after June 
                                8, 2005, is no greater than the number 
                                of such beds as of such date; and''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on June 8, 2005.

SEC. 4. PERMISSIBLE COORDINATED CARE INCENTIVE ARRANGEMENTS BETWEEN 
              HOSPITALS AND PHYSICIANS.

    (a) Establishment of Requirements for Arrangements and Exemption 
From Imposition of Civil Monetary Penalties.--Section 1128A of the 
Social Security Act (42 U.S.C. 1320a-7a) is amended by adding at the 
end the following new subsection:
    ``(o) Arrangements Between Hospitals and Physicians.--
            ``(1) In general.--Subsection (b) shall not apply to an 
        arrangement that meets the requirements under paragraph (2).
            ``(2) Requirements.--
                    ``(A) Establishment.--The Secretary shall establish 
                requirements for arrangements between hospitals or 
                critical access hospitals and physicians in which 
                physicians share in the savings experienced by the 
                hospital or critical access hospital by reason of cost-
                reduction efforts that involve the physicians.
                    ``(B) Protections.--In establishing the 
                requirements under subparagraph (A), the Secretary 
                shall ensure that--
                            ``(i) the quality of care provided to 
                        individuals is protected under the arrangement; 
                        and
                            ``(ii) financial incentives that could 
                        affect physician referrals are minimized.
                    ``(C) Monitor.--The Secretary shall establish 
                procedures to monitor arrangements described in 
                subparagraph (A) to ensure that such agreements meet 
                the requirements under such subparagraph.''.
    (b) Exemption From Criminal Penalties.--Section 1128B(b)(3) of the 
Social Security Act (42 U.S.C. 1320a-7b(b)(3)) is amended--
            (1) in subparagraph (G), by striking ``and'' at the end;
            (2) in subparagraph (H), as added by section 237(d) of the 
        Medicare Prescription Drug, Improvement, and Modernization Act 
        of 2003 (Public Law 108-173; 117 Stat. 2213)--
                    (A) by moving such subparagraph 2 ems to the left; 
                and
                    (B) by striking the period at the end and inserting 
                a semicolon;
            (3) by redesignating subparagraph (H), as added by section 
        431(a) of the Medicare Prescription Drug, Improvement, and 
        Modernization Act of 2003 (Public Law 108-173; 117 Stat. 2287), 
        as subparagraph (I);
            (4) in subparagraph (I), as so redesignated--
                    (A) by moving such subparagraph 2 ems to the left; 
                and
                    (B) by striking the period at the end and inserting 
                ``; and''; and
            (5) by adding at the end the following new subparagraph:
            ``(J) an arrangement that meets the requirements 
        established under section 1128A(o).''.
    (c) Exemption From Limitation on Certain Physician Referrals.--
Section 1877(e) of the Social Security Act (42 U.S.C. 1395nn(e)) is 
amended by adding at the end the following new paragraph:
            ``(9) Arrangements between hospitals and physicians.--An 
        arrangement that meets the requirements established under 
        section 1128A(o).''.
Hospital Fair Competition Act of 2005 - Amends title XVIII (Medicare) of the Social Security Act with respect to hospital payments. Provides for the use of estimated costs rather than average charges in establishing weighting factors for diagnosis-related groups under the inpatient hospital prospective payment system.

Revises requirements for exceptions to the prohibition against certain physician self-referrals to specialty hospitals in which a physician has invested.

Exempts from the limitation on such referrals, and any liability for criminal penalties, specified arrangements between hospitals and physicians.
A bill to amend title XVIII of the Social Security Act to make improvements in payments to hospitals under the medicare program, and for other purposes.